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Commodities Downbound with DBC

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We’re starting off this week’s letter with a quick word on an open trade that’s starting to smell a bit ratty.

It was just two weeks ago that we recommended you purchase the AllianzGI Convertible & Income Fund (NYSE:NCV), then selling for $9.23.

The stock is now just pennies lower, but we don’t like the way it’s behaving – particularly on days when the market is strong, junk is strong and this particular fund should be acting strongly as well.

There are also a few technical indications that are nagging us, including its price dropping below the short term moving average and RSI dropping below its waterline (not pictured here).  While neither of these indicators are necessarily the death knell for NCV, as we said above we don’t have a good feeling about the stock, and we’re cutting are losses before something weird happens.

 

WSE02251311

 

NCV last closed at $9.15, giving us an eight cent loss on the trade – $8 for every hundred shares traded.

Sell.

Is There a Problem Here?

For those who have been following, we’ve been spotlighting the precious metals here for at least a month.  We’ve warned in particular about the dangers of owning gold and silver and the miners of those metals, and last week’s action in all three has confirmed our outlook.

At this point, yes, gold is oversold.  A look at its proxy, the SPDR Gold Trust ETF (NYSE:GLD) shows that the metal has fallen too far, too fast, and it would be reasonable to expect a bump higher at this point.  Have a look at the chart.

 

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Technically, there’s evidence of at least a near term bottom in place for gold.  Had the volume figures been more significant we might consider calling it an intermediate bottom.  But it’s not the case.

And while RSI has dipped below 20, we say the momentum appears still to be downward for gold, so we won’t confuse a few weeks of constructive upward action with the beginning of a new bull move.  At least not yet.  If you want to play the retracement, we wish you look.  To us, it appears the trend is still down.

Why?

As we showed in our last dispatch of Options Trader Elite, entitled Silver Takes Another Bullet, silver’s technicals on the daily, weekly and monthly charts were all looking bearish as of early last week, and the same is now true for gold.

Here are both the weekly and monthly charts for gold.

 

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In brief, the picture is awful.  All technicals point overwhelmingly toward gold heading into the crapper.

Weekly, we have a bearish MACD confirmation of RSI’s dive below its waterline (blue squares at top), and monthly, we see a break below support at the short term moving average (black oval at bottom) and RSI about to dunk below its own waterline (blue square at bottom).

Again, the question for gold investors (and silver, which we believe is only at the beginning of its decline) is whether the recent oversold bottom reading from the daily RSI means the decline is over altogether and a new bullish leg-up is about to begin, or we can expect some sideways action now to work off the oversold condition before another decline ensues.

Our take is like this.

Precious Metals Leads the Commodities

It was once a fairly widely understood principle among technical analysts and those who study intermarket analysis, that gold leads the commodities.  Whether this is still the common wisdom today is an open question.

For our part, we’ve always found it difficult to work tradeable information out of intermarket analysis.  The lag time between market turns in bonds, stocks and commodities (and a number of the sub-groups between which intermarket analysis claims to see relationships) is too elastic to determine whether a true turn has come on the trailing asset.  The general pattern may work with enough time given to examine the relationships in retrospect, but real life trading requires one to operate in the ‘now’.

That said, we see the commodities today in a similar light to that of gold just over a year ago – an asset class that’s getting ready to give up the ghost.

Have a look at the charts.

Here’s the PowerShares DB Commodity Index ETF (NYSE:DBC) for the last two years.

 

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As you can see, there are two distinct ways to read the technicals here.

The bulls might see a reverse head and shoulders bottom in the making over the last eighteen months (in red), while the bears will see a staircase descent, with lower highs and lower lows for nearly two full years (black circles).  The blue line at $30 will be understood as a neckline for the bulls, and as a double top for the bears.

The question marks at the right ask whether it will be a right shoulder (in red) that forms above the last bottom at $24, or a descent below $24 (in black) that signals a continuation of the bear.  Looks like either way we should see a decline.

Hmmm…

For our part, we side with the latter.  We’re leaning on recent action in the RSI and MACD indicators (in blue, at bottom) to support our contention that money will be made on the short side of the commodities trade over the next three to twelve months.

RSI dove below its waterline last Tuesday, while the MACD could confirm as early as this Wednesday.  If and when that occurs, we’ll see the slide begin in earnest.

It Makes Sense

The same arguments we’ve been offering for the rise in the stock market and decline in bonds holds true for commodities.  There’s simply too much money in the system ready to chase the latest hot asset class, which today is stocks.  Every other asset class must see cash flowing to the exits as the equity bull picks up steam and Dow 15,000, 16,000 and 17,000 start making headlines everywhere.

We expect commodities to be the next group to take a pounding (alongside continuing carnage in the bonds), and we’re recommending a trade today to exploit it.

 

Wall Street Elite recommends buying the October DBC 24 PUTS for $0.55 and (optional) selling the DBC July 29 CALLS for $0.40.  If you sell the CALLS your total debit is $0.15.

 

With kind regards,

Hugh L. O’Haynew, Senior Analyst, Oakshire Financial

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Comments

6 Comments on "Commodities Downbound with DBC"

  1. Venkatesh Jankiraman on Mon, 25th Feb 2013 5:50 PM 

    If DOW is going to go to 17000, won’t that mean global economy is doing well? Is it not then more commodity will be used?

    If commodity means only Gold, then what you mention makes sense. But DBC has basic materials and Oil also. Those will go up as DOW goes up. If not, please give more insight on the inverse correlation of DBC to DOW you are saying.

    Thanks.

  2. Hugh O'Haynew on Tue, 26th Feb 2013 5:59 AM 

    Hi Venkatesh,
    For you and others who may be joining us anew, this rally has nothing to do with fundamentals or economics or earnings. It has to do with liquidity and the inevitability of all that central bank pumping to lead to asset inflation.
    The global economy may pick up – or it may not. Either way, stocks are on the rise.
    All the best,
    Hugh

  3. vernonallport on Tue, 26th Feb 2013 1:27 PM 

    Admit you are WRONG on your short IYT bumble-guess; don’t be such a coward by sliding a non-committal “maybe you should get out” as your only response to one of your reader’s comments on 2/22.

  4. Dana Fogt on Tue, 26th Feb 2013 3:17 PM 

    If the Nov 2012 low of 27.08 is taken out it should complete a weekly 3-wave down pattern for DBC. As long as the Nov 2011 low of 25.19 is not exceeded, I think a good case can be made for a successful completion of an inverted H&S pattern. I am long the DXY via UUP calls, so the path of least resistance for DBC should be lower for now, but if the buck weakens,the commodities could rally again. It hardly appears imminent though.

    Dana Fogt

  5. Ron Umberger on Wed, 27th Feb 2013 4:16 PM 

    Wall Street Elite recommends buying the October DBC 24 PUTS for $0.50 and (optional) selling the DBC July 29 CALLS for $0.30. If you sell the CALLS your total debit is $0.20.

    I would like to hear comments from you in the coming weeks on this trade.

    I got in a little high I think.
    DBC 100 OCT 13 25 PUT
    DBC 50 0.6 0.75 3,375.00 0.00 3,716.00

  6. vernon allport on Thu, 28th Feb 2013 2:12 PM 

    And ANOTHER NEW HIGH on the IYT. WOW – you look like quite a moron shorting it at 101.


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