Stoking the Commodities (DBC)


Executive Lounge, Options Trader Elite / Thursday, April 12th, 2018

Stoking the Commodities (DBC)

Last fall, we suggested that by year end America would either be engaged in military hostilities of some sort with North Korea or would come away embarrassed, chastened and looking every part the fool.

It didn’t happen, of course, because a back channel for negotiations was eventually set up, and North Korea is now openly suggesting it would give up its nuclear program under the right conditions.

Is it a victory for the bombastic ones in the administration, who threatened and cajoled and all the while turned up the temperature on North Korea?

Time will tell. It’s hard to say at this point who was bluffing, who was buying time, and who’s truly ready to follow through.

What’s important to us, however, is that amid all the blather of war and the tit for tat twitter spat, the market shot heavenward in unprecedented fashion.

And then…

Following that, it was the so-called “trade war” with China that captured everyone’s interest. Again, the threats ensued, followed by an incremental ping-pong imposition of tariffs and levies amid growing concern that the world economy would be devastated and a new shooting war might even begin.

Yet here, too, it appears that, in the end, the “enemy” capitulated, admitting earlier this week that they (the Chinese) are now examining –

“…a number of policy changes, including lower import tariffs for automobiles and other products, increased market access for foreign investors, strengthening protection of intellectual property rights, and creating a more attractive investment environment for foreign investors.”

Again, who’s the bluffer and who’s buying time, etc., etc.

Yet the market loved it.

In fact, as the war of words between the two countries whirred and sizzled overhead, the market also felt the heat, and during the most incendiary of the twitter twaddle managed to put on an additional 1000 points. It’s too early to suggest a breakout to new highs at this point – though technically it’s equally probable that things could move in that direction.

And Now Syria

All of which brings us to the latest case of abject bellicosity, between Russia, the current minders of war-torn Syria, and America and its western allies.

The background is similar in form to that which led up to the North Korean and China confrontations, though here it takes place against a backdrop of a real shooting war that has persisted for years and cost hundreds of thousands of lives. More than that, there have already been a number of documented skirmishes between Russian and American forces or their proxies that ended in casualties.

And the question is: with France, Britain and America almost in position to launch what’s being termed as we go to press an “imminent” military operation, will the markets smile or frown?

[Civilian aircraft have been put on notice.]

Whether this confrontation (if, indeed, it happens) topples the whole deck of equity cards or just sends it reeling for a few more weeks, is hard to say. But if it serves to distract the market from a buying frenzy that’s about to begin – as the two conflicts discussed above have done – then we want to be prepared for that eventuality, too.

And we’re now going to turn to a few charts that will help us in that preparation.

We start with the following paste-up of oil, as represented by the United States Oil Fund (NYSE:USO), a proxy for NYMEX crude.

It makes intuitive sense to begin with oil, since any conflict in that part of the world, whether localized or broad-based, could quickly lead to significant disruptions in supply. And the chart itself is proof positive that precisely that concern is on the mind of oil investors.

After close to three months of banging up against resistance at $13.25, USO just yesterday broke higher from an ascending triangle pattern (in red), whose rough count should bring the shares toward $14.75, if not higher. All the major moving averages are also trending higher and should very shortly be fully unwound. Nor is there anything in the volume figures or RSI or MACD to suggest we’re overbought.

All things considered, very bullish.

Now consider Gold –

This is a chart of the SPDR Gold Trust (NYSE:GLD), a proxy for bullion and the largest such exchange traded vehicle on the planet.

The indications here are also modestly bullish, with RSI and MACD above their respective waterlines (in green) and all the salient moving averages unfurled.

Like oil, gold is also contending with three month resistance, and currently sits just one percent below the breakout mark (in red).

Will She? Won’t She?

A look at the long term, monthly chart, however, is thoroughly energizing. This is GLD since it topped out in the fall of 2011 –

As you can see, a series of three waves lower (in red) marks a technical end to the grinding, six year bear market in bullion. What remains now is overcoming that same, stubborn multi-year resistance line (in blue) at roughly $130.

What’s promising is:

  1. the three year ascending triangle formation (in blue), a pattern that’s always bullish, and
  2. RSI and MACD indications (in green), the latter of which surfaced in December, indicating we’re now long term bullish again.

All that remains is a break north of $130 to send a flurry of technical buyers lunging into the market again.

And that brings us to our trade for the week.

Broadly Based

We don’t know when either gold or oil will begin their ascent in earnest, but other commodities – particularly base metals – have seen tremendous action of late. And we, therefore, believe the best play is a general bullish call on commodities, as represented by the PowerShares Deutsche Bank Commodity Index Tracking Fund (NYSE:DBC).

Here’s the chart for the last year –

Both RSI and MACD are super-waterline bullish again (in green) and price looks well situated for further gains, sitting in the middle of its long term trend channel (in green).

So we’re playing it like this –

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Many happy returns,

Matt McAbby

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