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Commodities Blow Gas through Tight Resistance

For the last five years, the proven place for procuring the most prodigious investment profits was in equities.  We heard a lot about a commodities ‘super cycle’ during that time, a lot about gold and silver, and from some of the more washed out corners of the nebula those voices are still sounding.  But the truth is clear to all who care to look – as a group, equities have outperformed commodities hands down.

 

Here’s a chart of the S&P 500 against the Power Shares DB Commodity Index Tracking Fund (NYSE:DBC) since the bottom was put in for both indices back in March 2009 –

 

OTE 1

 

 

There’s no denying the truth pictured here.

 

You can quibble about DBC not being a ‘true’ measure of the commodities as an asset class, and you may, indeed, have a point.  There are any number of indices that purport to be truer to the essence of the broad market in commodities – some giving more weight to energy futures, others emphasizing foodstuffs, while another pushes more industrially aligned items like copper, iron ore, and coal among the metals and minerals, as well as lumber for the builders.

 

However you slice it, though, the argument is more a matter of emphasis than essence.  That is, the truth of the commodities is well, the truth, and the above chart is as representative as any on a gross scale when it comes to comparing the Apples of the stock market with futures in orange juice.

 

OTE 2

And what exactly does the chart say?

 

Quite simply, that a buck invested in commodities in March 2009 is now worth $1.30, while an equity investment is worth two bucks.

 

And that’s an appreciable difference.

 

But perhaps more importantly, it also indicates that since May of 2011, a bet on the commodities has also been a losing proposition (black arrow on chart).

 

For a full two and a half years, prices have been falling for that asset class, though there may have been brighter spots here and there – oil being the most profound among them.

 

But Will that Trend Continue?

 

Our belief is that the intermediate to long term direction of the commodities remains down – with individual exceptions – but that over the short term, we could see a meaningful jump in prices.

 

We’re looking at current indications for both RSI and MACD on the weekly chart, above, as well as reasonably strong support found at DBC $25 as evidence for such a bounce.

 

A closer look at the weekly chart for last two years trade will help clarify our outlook –

OTE 3

 

First, look at the share movement itself,.  As of last day’s trade, price has moved marginally above both the 274 week moving average and the shorter-term MA, the latter of which has apparently ‘scooped’ price and, depending on the next few sessions, could bring significant technical buying from traders in the near term if the ‘scoop’ continues.

 

Next, as pointed out above, we have both RSI and MACD nearing their respective waterlines.  Any bump by both above that level would bring a significant cohort of buyers into the stock.

 

We also saw a spike in share volume three weeks ago as DBC made a retracement bottom – a development that also gives us hope for a near term reversal.

 

Sad to say

 

On the other side of the coin, all moving averages are trending lower, with the all important 137 day MA now gathering momentum in that direction.  It’s our firm belief that any move higher in the near-term would be capped like a sperm whale’s blow-hole by the descending 137 DMA, and that precisely when price touches that all-important line of resistance, all the lusty force of shorting hell will be unleashed on DBC.

 

That makes for a relatively narrow window of a rise – from roughly $26 to maybe $28 to play a bullish move in the shares.

 

Now look at the daily chart for DBC –

 

OTE 4

 

Here, too, we see technical signs of a potential turn higher.

 

RSI and MACD have diverged nicely from price from at least April of this year, and both are at, or within a day or two of surfacing above their respective waterlines, a clearly bullish portent.

 

We also see a complex head and shoulders bottom on the chart that – depending upon how you slice the head from the shoulders – could have an upside count that brings the shares to anywhere between $28 and $28.50.

 

OTE 5

 

That said, it’s not the broad commodities complex that we’re going to be trading today, but rather, a single component, Natural Gas.

 

We’re doing so because despite the tremendous decline in price in natural gas over the last half decade, the commodity has always been buoyed by generally rising commodities prices.  When commodities fell, to be sure, natural gas numbers went into the dumper.  But we’re betting on similar price support in the coming weeks ahead as commodities start to percolate.

 

But we also like natural gas on its own terms.

 

Consider –

 

  • Gas drilling activity fell off a cliff over the last few years as shale gas production became all the rage and residential power demand flatlined.  See here:

 

OTE 6

 

but

 

  • New regulatory pressures on coal use and increasing economic activity are likely to push demand higher for gas in the near term, particularly because we’re now sitting on near record low inventories and a flattening supply.

 

 

OTE 7

 

Not to mention we’re entering the winter heating season.

 

It all bodes well for the gas lover in us.

 

And yet it’s the chart of gas that speaks most convincingly of higher prices.

 

Look here –

 

 

OTE 8

 

 

MACD has just pulled above its waterline, confirming a similar RSI move just a few weeks back.

 

Price action has forged northward powerfully, to the tune of 30% in just two months, and now sits on the high side of the long term moving average, in yellow.

 

Should we get just another 2% on the move we’ll crack the neckline, and from there we should see some acrobatics.

 

We say it will happen on the back of a broad but short-lived rebound in the commodities – coming very soon.

 

And we’re playing it as such –

 

Options Trader Elite recommends initiating a PUT spread on UNG, selling the November 19 PUTs for $0.49 and buying the November 17.50 PUTs for $0.07, for a total credit of $.42 per pair initiated.

 

Maximum loss per pair is $150.

 

With kind regards,

 

Hugh L. O’Haynew

 

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