I am in Ketchican, Alaska this morning. The sunrise is a glow as the sky is low, light rain is falling and a morning fog has enveloped the town. This town is charming and is known for it's salmon fishing which brings an abundance of revenue when the salmon are here.
There are a lot of similarities to the commodities markets right now. The charts are all gloomy and pointing down, and commodity traders want to buy the lows knowing there will be another run someday in the markets.
As a technical trader, the right thing for me to do is to wait for some signals to start appearing before trying to harvest near the lows.
Let's use the Copper Miners ETF (COPX) for some clues on how to approach the trade.
First of all the SCTR is at 0.4. That suggests it is the poster child of underperformance right now as the worst ETF. The Relative Strength area chart in purple is pointed down. Looking left on the chart, there is very little correlation with a positive long trade and a down sloping relative performance so this is a signal to stay away.
Using the price chart, there is currently no base setting up. In my work I have noticed a big down candle with high volume does not mean the bottom is in. It might give you a brief trade, but it does not suggest the final low is in. A look left suggests high volume candles are not a simple trade signal but high volume may aid in a setup. Lastly, the PPO is pointed down and negative as it is below zero. As George Lane said "Momentum slows before it changes direction." We need to see some change before a long setup is here.
With all of that information, waiting a few weeks for a better chart shape would make the trade setup better. I am looking for a trade setup, then counting down into my entry. Currently the oversold nature of commodities is an intriguing setup, but it is not an entry for me until some of these indicators give signals. I presented how to approach charts in downtrends for signals in my ChartCon 2018 presentation.
Don't forget Chartcon 2018. You can still get access to watch all the recordings of the presenters and the question period. I have heard great feedback from investors and portfolio managers who took the time to watch the ChartCon 2018 presentations. The diversity of ideas filled the spectrum of investing styles. Here are some other videos for you to peruse.
The Final Bar.
This Commodities Countdown video that walks through the concerns in the index set up right now.
If you are missing intermarket signals in the market, follow me on Twitter and check out my Vimeo Channel often. Bookmark it for easy access!
Greg Schnell, CMT, MFTA
Senior Technical Analyst, StockCharts.com
Author, Stock Charts for Dummies