Commodity ETF technicals show room for growth

INTERMEDIATE TERM SIGNALS & MARKET ANALYSIS

KEY TERMS

OVB:  Outside Vertical Bar
VRCB: Volatility Reduced Compression Bar
Core Position:
$50,000,000

PowerShares DB Agriculture (DBA):
08/17/2012 Closing Price: 29.76
INTERMEDIATE TERM (I.T.) SIGNAL
:
Intermediate Term Trend is bullish.
Current Position: SHORT @ 29.70 on 08/13/12; STOP @ 30.24
Break-Even: 28.96; Cover 10%
Current Downside Targets = 27.94 – 27.40
Projected Weekly Range: .54
Trading 185,000 Shares

I.T. ANALYSIS:

  • Initial trade risk was $138,750 or .28%. Current trade risk is $99,900 or .20%.
  • DBA is a comprehensive agricultural ETF. Holdings include fairly equally-weighted futures contracts in sugar #11, live cattle, corn, soybeans, cocoa, coffee, lean hogs, wheat, and cattle feeder.
  • Flat/slightly higher, stop = 30.24,
  • DBA has now formed three consecutive VRCBs, a pattern occurring less than .2% of the time. This is caused by a steady reduction in weekly ranges and extremely restricted volatility. VRCBs normally form at tops and bottoms, where buyers and sellers balance each other out. We view this as a change in directional movement; in the case of DBA, sellers have recently overpowered the bulls. This coming week should see flat or slightly higher movement although we doubt a large technical breakout will occur. Price action was bearish last week yet Friday’s rally and close above the weekly midrange are bullish indicators for this week’s trading.

iPath DJ-UBS Grains (JJG):
08/17/2012 Closing Price: 62.10
INTERMEDIATE TERM (I.T.) SIGNAL
:
Intermediate Term Trend is bullish.
Current Position: FLAT
Working Orders:
LONG @ 62.25; STOP @ 60.05
Current Upside Target = 70.95
Projected Weekly Range: 2.77
Trading 87,000 Shares

I.T. ANALYSIS:

  • JJG is concentrated in agricultural grain futures, holding 46% soybeans, 30% wheat and 24% corn.
  • Bull flag, long @ 62.25
  • JJG is in the fifth week of forming a bull flag, a pattern where weekly movement remains within a concentrated range following a significant upward move. The previous week’s OVB pattern failed to follow through with the low being exceeded before the high. After Tuesday violated the OVB low, JJG rallied higher, closing in the top 7% of the weekly range. The reduced weekly range resulted in a VRCB, a bar pattern that allows for low risk entries. Paired with the strong close and exceptionally strong bullish trend, we believe prices will move toward our upside target within the near trading term. We have placed a long entry at 62.25 and a stop order at 60.05.

SPDR Gold Shares (GLD):
08/17/2012 Closing Price: 156.72
INTERMEDIATE TERM (I.T.) SIGNAL:

Intermediate Term Trend is bearish.
Current Position: FLAT
Working Orders:
LONG @ 155.73; STOP @ 153.60
Break-Even Price: 157.86; Cover 20%
Current Upside Target = 165.88
Projected Weekly Range: 2.94
Trading 35,000 Shares

I.T. ANALYSIS:

  • Upcoming initial trade risk is $74,550 or .15%.
  • GLD’s single holding is gold bullion.
  • The sideways bear flag pattern continued last week. The previous 11 weeks have remained within the range of one week’s high and low, indicating very strong support around 148.50 and resistance near 158.50. Trading has been testing the 158 resistance level over the past seven weeks while falling just short of breaking through it. We strongly believe the next breakout will be to the upside because a 90% probability of trading 157.97 before 152.19 still exists. A weekly close above 159.20 indicates an I.T. higher bottom and will reverse the trend to bullish. This is significantly more likely to occur than retesting 2012 lows.

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