Sector Watch: Let The “Waves” Guide You Towards Profits On Oil, Natural Gas, & Gold
Monday, August 25, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Not to steal the show from my colleague and commodities expert Lee Lowell, but I want to take a moment to chat about oil, natural gas, and gold.
Of course, I do things slightly differently, looking at the ETFs that represent these markets, rather than the more direct futures market.
In my last column, I pointed out that the U.S. Oil (AMEX: USO) ETF and natural gas ETF, U.S. Natural Gas (AMEX: UNG), were in the process of tracing out at least an A-B-C correction to the downside.
Click this link to check out the chart from two weeks ago. Since then, USO has rallied enough to qualify for the “B” wave rally. From here, there are basically two scenarios…
- 1. If the “C” decline has already begun, the stock should trade down to at least the $86.50 area.
- 2. If the “B” wave rally is not yet complete, and USO trades above last week’s highs, the next resistance level is around $100.95.
Either way, USO should make new correction lows before a sustainable rally could unfold.
Gas Still In The “A” Wave
The natural gas market has performed more weakly than crude oil, and made new lows again last Friday. This means that UNG is still in the “A” wave decline and alert investors could have an opportunity to short the stock on the first decent rally, which would be the “B” wave.
Aside from that, most commodities have endured heavy selling pressure since topping out in early July. We’ve seen oil trade below $112 a barrel and gold dip below $800 an ounce before both rebounded last week.
Part of the rebound came as a result of a pullback for the U.S. dollar. So since commodities are strongly correlated to the dollar - and that appeared to be the focus of many traders last week - I’m going to take a look at a couple of the most active and interesting-looking charts this week…
This PowerShares ETF Is Powering Down
The chart below shows the daily performance of the PowerShares DB Commodity Index Tracking Fund (AMEX: DBC). As you can see, it looks very similar to the USO chart.
In mid July, DBC triggered a sell signal - and based on the chart pattern, it appears to be in the “B” wave of at least and A-B-C decline.
If DBC and all of the ETFs mentioned above have put in major, long-term tops, these three wave (A-B-C) declines could actually turn out to be longer-term, five-wave declines. However, it’s too early to determine if that’s the case yet, so we’ll stick with what we know for now.
So if the “B” wave on DBC is complete, the stock should trade down to the $35 area before a sustainable rally could get underway.
When Three Waves Becomes Five Waves
This next chart caught my eye because it traded down to its long-term trendline last week and has so far held above it.
Because the commodity futures create more accurate charts, while the ETFs just follow their lead, I’m going to break with tradition a little bit and use a weekly chart of the December Gold futures (GCZ8) for analysis here, rather than the SPDR Gold Shares (NYSE: GLD) chart.
The trendline on this chart goes all the way back to July 2005 and you can see that it was tested when the futures price traded down to $778 on August 15. Since that low, gold has rallied by about $55, but we still haven’t seen any significant buy signals get triggered so far - something that would tell us that the correction is complete.
However, this development spilled into GLD, as the stock posted an equivalent low of $76.61 on August 15. This was also around the same time that the dollar peaked.
The sharp dollar rally was a mirror image of the drop in GLD and usually after this type of action, the odds are that these markets could consolidate before making their next major move.
The Next Moves
The price action over the next week or so should be a good indicator of where GLD is headed next. If GLD begins to consolidate in the $80-86 area for a while, there’s a good chance that once the consolidation is complete, the next move will be down - especially since DBC still looks bearish.
If GLD and the December Gold futures make new correction lows, the selling could intensify, as we’re not the only folks watching the long-term trendline. However, if GLD begins to rally strongly on heavier volume, and closes above $88.50, the correction may be over.
According to the trading model used in my 1-2-3 Trader service, we could see buy signals triggered on GLD prior to reaching the $88.50 area, so I’ll keep you posted on the situation right here.
Until next time…
Jim Stanton
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