Commodity ETF Alert January 2012 Issue

| January 10, 2012 | 0 Comments

A TECHNICAL TRADE TO KICK OFF THE NEW YEAR

Europe’s debt problems have been a major source of investor worry since last summer.

As I’m sure you remember, the main bout of market panic started in late July 2011. Fears of an imminent Greek default sent stock and commodity markets plunging.

The sudden burst of uncertainty and volatility caused plenty of damage to commodity markets.

Even commodities with strongly bullish supply/demand fundamentals fell hard… simply because investors were raising cash to protect their portfolios.

Oil and copper, two of the most economically sensitive commodities, were crushed within a two-week span.

But as you know, we called the market’s bluff on oil.  We bought oil at the height of the panic when it plunged down to $80 a barrel.

Now we’re up over 20% on that trade.  Oil’s global supply/demand metrics were way too bullish for it to trade at $80 a barrel.

The copper market is now in a similar situation…

The red metal’s still down substantially from the July 2011 highs of $4.50 a pound.  But copper’s fundamentals remain decidedly bullish.

In fact, many analysts are now concerned global supplies will grow slimmer in 2012 due to recent mining slowdowns.

Where are these slowdowns?

Chile is the world’s largest copper-producing country.  But a series of weak years has hurt production at some of the country’s biggest mines.  In fact, analysts at Macquarie Research say Chile’s copper output has fallen by 730,000 tons over the last decade.

But that’s not all…

A three month strike at the world’s second largest copper mine, Freeport McMoran’s Grasberg mine in Indonesia, is also slowing global production.  Since mid-September, workers have been striking over low pay and poor working conditions.

Clearly, production slowdowns are not what copper producers want to see.  But the slowdowns have the potential to move copper prices higher.  That’s exactly what investors like us can take advantage of.

And let’s not forget about the demand side of the equation…

For most of 2011, metals analysts were befuddled by China.  Most industry experts thought China was about to embark on a major copper buying spree and prices were about to rise as a result.

But Europe’s debt problems, along with fears of an economic slowdown in China, sent copper prices down before it could happen.  As you know, copper prices fell hard in September 2011.

However, today’s low prices are finally spurring the Chinese into buying…

Recent trade data suggests China is finally jumping back into the copper market in a big way.  Chinese copper imports surged to 452,000 tons in November 2011.  That’s the highest figure since June 2009! 

And since copper prices are still holding in the same $3.30 to $3.60 range, analysts expect China to keep buying in coming months.

Aside from the already bullish fundamentals, here’s the most interesting thing about the copper market right now…

A high probability technical pattern has developed in the copper market over the past few months.  Take a look…

copper11012
The blue lines converging in the chart above means copper’s consolidating into a triangle pattern.  These technical formations usually result in an explosive price move. And since copper’s fundamentals are strong and China’s buying heavily in recent months, I think the next move is UP.

Technical analysts look for triangle formations in stock and commodity markets for trade opportunities.  And that’s exactly how we’re going to treat this copper trade… as a short-term technical trading opportunity.

Why?

Copper’s fundamentals were strong in mid 2011, yet prices fell hard due to global economic uncertainty.  We want to get long copper due to the metal’s bullish fundamentals, but we also want to protect against a fall to lower levels.  In other words, we want to treat the copper market carefully as it has already proven how quickly it can move to the downside.

The triangle pattern will help us do just that. Here’s how we’re going to do it…

ABOUT COPPER

We’re getting long copper via the iPath Dow Jones-UBS Copper (JJC) ETN.  As you may know, this is the same ETN we’ve used in the past to get long copper.

TECHNICALLY SPEAKING

jjc11012

If copper breaks higher, it’s likely to do so very quickly.  So go ahead and buy JJC right here, right now.  If copper prices rally in coming weeks, JJC could rise back above $52.50 very quickly.

However, if I’m wrong and copper falls in coming weeks, JJC is likely to drop well below $35.  We don’t want to ride JJC down that far.  So here’s what we’ll do… if JJC trades below $40 in coming weeks, close the trade for a small loss.

 WHAT TO DO NOW:

iPath Dow Jones-UBS Copper (JJC) is trading at $43.74.
Buy JJC up to $46.00 per share.
Our profit target is $55.00 or more.
Don’t forget your position sizing.

Commodity Review
 

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $19.67 $19.77    -0.5%
Grains JJG $45.33 $41.23   +9.9%
Industrial Metals JJM $35.37 $34.90   +1.3%
Precious Metals JJP $86.97 $91.23   -4.7%
Softs JJS $69.40 $68.49   +1.3%
Livestock COW $29.45 $29.57   -0.4%
All Commodities DJP $42.87 $42.06   +1.9%

ENERGY COMMODITIES

Iran’s saber rattling over closing the Strait of Hormuz is escalating.  And that’s pushing oil prices well over $100 a barrel.

Can these high prices be sustained?

If tensions ease with Iran in coming weeks, oil may ease slightly as well.  But don’t expect prices to fall too much.  Barring a breakdown in Europe’s debt-related progress, oil prices are highly likely to stay above $98 for the foreseeable future.

Why?

For starters, the US economy is looking better and better.  Manufacturing is showing expansion in multiple regions.  What’s more, jobless claims and unemployment are dropping in recent weeks.  Those are all bullish signals for the economy… and oil.

Our position in USL is up over 20%.  But I don’t think we should take profits on this trade just yet…

The downside price risks for oil are low relative to the upside potential.  In other words, oil may drop a little in coming weeks, but it could explode higher if the Iranian situation escalates.

Let’s keep holding USL just in case things get out of hand in the Strait of Hormuz…

GRAIN COMMODITIES

Unusual weather is starting to play a role in the grain markets.  A La Nina weather pattern is creating unusually dry weather in South America, namely Argentina and Brazil.  This drought has the potential to create some problems for global corn trade.

Analysts are now expecting heavier exports from the US due to an impending corn supply shortfall in South America.  As a result, corn prices are rising a bit in recent trading.

What’s more, that same unusual weather pattern is showing up here in the US. Unusually mild temperatures are present throughout the northern part of the country. Snow pack levels are well below average for this time of year.  And that means we could be heading for a very dry spring and summer in 2012.

If this weather pattern doesn’t change, it will likely be the bullish catalyst to send grain prices higher in 2012.  But at this point, going long grains is still too speculative of a trade to consider for our portfolio.

I’m keeping an eye on this situation for coming issues…

INDUSTRIAL METALS

Palladium is still stuck in the same trading range from late last summer.  The $675 – $575 area has been the predominant area of trade for months now.  But given the bullish long-term fundamentals, odds favor palladium prices breaking higher in the near future.

If you haven’t already, use the current weakness in PALL as a buying opportunity.  You can buy up to $65.10.

PRECIOUS METALS

It may have been tempting for you to bail out of our gold and silver positions over the past few weeks.  Both metals dropped substantially due to the recent rise in the US dollar.

But you need to keep your emotions at bay and hold your ground.  Here’s why…

gold11012
As you can see from this multi-year chart, gold prices are just now returning to a long-term uptrend line (blue line).  Unless gold breaks below $1,500 an ounce in coming weeks (which I don’t think it will), the long-term uptrend should continue.

That means now’s a prime, long-term buying opportunity for the yellow metal.

Remember, we still have a solid 19% profit in IAU.  But our recent addition of PHYS is currently underwater by 7%.  Keep holding IAU for higher prices and use gold’s recent weakness to buy PHYS up to $15.

But we also have to respect gold’s recent fall…

If gold falls below $1,500 an ounce in coming weeks, we will close both of our open gold positions.  That way, we’ll be free to buy gold at even lower prices in coming months.  But like I said earlier, I doubt we’ll get that chance.

On the other hand, silver remains a buy- no matter what.  Clearly, we’re down in our SLV trade.  But selling now is the wrong thing to do.  Here’s why…

silver11012

Like gold, silver’s approaching its long-term uptrend line.  And that means buyers will likely be chomping at the bit to buy at the $25 level.  Given the bullish fundamentals and technical picture, these price levels are a great buying opportunity for patient silver investors.

Today’s prices will seem like a distant memory when silver’s well over $50 in coming years.  If you don’t yet own SLV in your portfolio, you can buy it up to $33.

SOFTS

Softs haven’t been so hot over the past few weeks.  Coffee prices failed to go on their seasonal end-of year run and sugar remains stuck in a trading range.

But cotton is a different story…

A recent report suggests Indian farmers are withholding cotton from the market in order to attain higher prices.  They may see somewhat higher prices in coming weeks but I don’t foresee cotton surging like it did in early 2011.

No new trades in softs for now…

LIVESTOCK

Live cattle prices are stuck at the $1.20 per pound level.  As a result, our position in COW has been stuck in a trading range between $29.25 and $30.35 in recent weeks.

All the fundamental signs are still pointing towards higher cattle prices in 2012, so let’s keep holding COW.  If you don’t yet own COW in your portfolio, buy the iPath Dow Jones–UBS Livestock Subindex (COW) up to $30.50.

Portfolio Changes

  • This month we’re adding copper (JJC) to the portfolio.  See above for all the details.

Category: Commodity Trading

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.