See It, Market: Brace for More Commodity Volatility

stock market, stock chart, technical analysis, investingFueled by easy soft dollars and a recovering global economy, the commodity sector has been the place to be for much of the past 2 years.  But, as most bull markets are apt to do, commodities got a bit ahead of themselves… dare I say, a little bubbly.  Some commodities, take Silver and Sugar for example, necessitated trader bibs for some, and depends for others.  Volatility, which is standard fare for commodity markets, can be a traders paradise, but without solid risk management, sweet dreams can quickly turn into night terrors.

Following the recent stealth move lower across commodityland, many individual commodities have found support and are using newfound breathing room to hold critical trendline support or muster enough energy to backtest broken support.

In today’s annotated chart column, I will focus on two commodity charts of particular interest to investors:  Gold, using the SPDR Gold Shares (GLD) and Copper, using the iPath DJ-UBS Copper sub index (JJC).  Gold, namely because of its significance as it relates to the war between money printing/inflation (Read: QE2) and debt destruction/deflation (Read: Sovereign Debt Crisis).  And Copper, because it tends to front run the global economy and has struggled since peaking in February.  But before we wax intellectual on those two power metals, it would be good to start with a high level look at the PowerShares DB Commodity Index (DBC) to get a feel for where the sector is at.

Looking at DBC, the recent break lower left an island top on heavy volume.  This bearish formation is given further credence by the 28-30 level price churn.  Until the 50 Day Moving Average (DMA) is recouped (close and hold), rallies will be sold.  And assuming resistance holds at the 50 DMA, an ABC correction may produce a buying opportunity in the 25-27 range.

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Gold, Gold, Gold… George Soros out, and Doug Kass scribing about a mystery gold buyerin.  No doubt, QE2 and global government purchases have kept the fundamental backdrop strong.  But with QE2 expiring soon, many have asked when/if QE3 will start.   Doug Kass eluded to a possible fed bank as the mystery futures buyer.  So, what do global bankers/officials know that we don’t?  QE3?  Additional European QE?  European Union bust?  Doomsday on the brain has become commonplace and I caution those that already know the results:  Balance your fundamental analysis with technical analysis.

That said, in the face of recent headwinds, Gold has held up reasonably well and has two levels of intermediate support beneath.  A breach of either and gold bugs will be put on notice.  Current and new owners would be wise to place a protective stop just below the 50 DMA.  Note that the top of the bull channel is around 158-160 and rising, so there is still room above should a rally come a calling.

Copper calls the shots, though.  No, seriously, I’m not joking… ok, maybe a little.  But, Copper is an economically sensitive metal and often serves as a domestic and global barometer for economic activity.  Further, it would be unwise to lose sight of this metal and the importance of its recent high volume stealth drop.  The copper index (JJC) is gathering support above the important 50 level.  A break below 50 and investors and fed officials alike will swap yellow flags for red ones.  Either way, the chart is broken, and any backtest of the trend break should offer a good risk reward setup on the short side.

If the “Sell in May” adage proves correct, commodity volatility could carryover into the summertime.  And with QE2 ending and the Sovereign Debt Crisis making headlines in Europe, I have a feeling June and July are going to be quite interesting.  Keep an eye on Gold and Copper.  And be careful out there.


Previously published as a blog by Minyanville.


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No positions in any of the securities mentioned at time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.