CRB Commodity Price Analysis and DBA Price Logic Trade Example

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This chart is the CRB commodity index with a weekly time frame showing the RSI.  Notice that the weekly RSI is oversold for the last few weeks.  Also notice the last time in early 2012 that a weekly oversold reading occurred, commodities rallied in extreme fashion in the coming few months.

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The is the CRB on a daily time frame.  Notice the RSI not moving above the 50 level during this decline.  However there is a building divergence in the RSI, which, if followed by a move in the RSI above 50, would be a likely sign of a breakout to the upside in my opinion.

Additionally, there are many commodities with either record net long commercial/smart money positions, and some with bullish divergence in the commercial/smart money net positions.  Coupled with the current oversold condition and daily time frame divergences across the board, I am suggesting to prepare for a major commodity board advance in coming months.

I have recently taken a position in DBA based upon a price logic set-up and a non-confirmation of DBA with the broad commodities.  So DBA recently made a higher bottom last week as the CRB was making a lower low.  This hints at strength in this index (DBA).

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This is the hourly DBA chart.   I entered at 25.52 with the original stop at 25.22.  The stop has now been moved up to 25.30.  If the price rally happens to retace above the Oct high in less time than the recent decline took to form, then I will hold the position and trail the stop on a daily time frame.  If price rally more slowly I will exit at any hourly divergence that forms at a lower high below the Oct high.  And obviously as I trail the stop up, it is possible that the position gets stopped out in the interim.

So we will see how this develops, but the general dual time frame set-up here with weekly over sold, daily bullish divergence, and a non confirmation from DBA all suggest a quality opportunity.  So I have just entered on the hourly chart for a position that could be a daily or weekly time frame hold.  Assuming prices rally, a simple scale out can be used, but I like to incorporate the price logic analysis into the trade follow through so that if a strong new trend occurs, I don't exit part of the trade on the smaller time frame.  That is why I plan to hold and use the daily chart trailing stop method if price rally quickly above the Oct high.

Pete

DBA Call Option and Technical Analysis

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This is an hourly chart of DBA, which is the PowerShares Agriculture fund.  I purchased some call options near the close of today's session.  I bought the Sept 26 calls for 0.50 a contract.  The spread was about 0.05 which is 10%, but given the possibility of a 100% + move in the options over the near term I settled for it.

The chart above shows a beautiful bullish divergence on the momentum as it hit today's lows.  But I would suggest looking at the multiple time frame set-up as well.  The daily MACD and momentum are showing classic bullish divergence as well between the two major lows visible on the chart above.  Additionally, the weekly stochastics is over sold and with some mild bullish divergence.  So it appear that today could be the trough of a potential multi time frame turn higher.

Looking at the last portion down of the chart above I have labeled a nice looking Elliott wave style 5 wave impulse.  So at this point given the obvious loss of momentum and the possible failed break below the July 11th low, it appears likely that we see at least a partial retracement of the last move down over the last couple weeks.  From looking at the daily chart, it seems that a move back up to the 27.00 level could be quite likely.

If prices do indeed rally here, and completely retrace the last two weeks downward move in LESS time than the decline took to form, I believe the logic would be that a new upward pattern was at play, and that we could probably expect prices to rally well above 27.00 in coming weeks.  The pink vertical lines show the current forward time projection as August 29th the date prices would need to move above 27.00 by in order to confirm this.

So given that possibility I just bought the Sept expiration calls anticipating a quick rally to 27.00, with possibly a move well above that.

My current exit plan is to simply maintain the option with no stop loss and am willing to hold until expiration even if it results in 100% loss.  That is factored into the amount risked/put into the trade.  I currently plan to exit half the contracts at 100% gain if prices rally modestly from here.  HOWEVER, if prices rally very swiftly (3-4 days) back above 27.00, then I will opt for holding all the contracts and use the daily chart as a possible exit indicator prior to expiration if a divergence develops.

So part of the logic is that a rapid retracement of this last decline would suggest a likely new pattern occurring, and with the 26 strike option, it would seems likely that the option would expire in the money and that the 26 level would be a significant support level.  And so I would like the opportunity to make a larger gain on the whole position if everything develops in ideal fashion.

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This chart is a daily chart with two projections up from this low that simply project the 2 prior significant rallies visible the chart up from today's low.  In both instances we see it would be likely that the option could expire in the money and probably make 100% gain along the way.  But if we see a significant rally even close to the green projection line, then a 400-500% gain on the option would be possible.  So while I don't EXPECT that, I want to plan for the scenario that makes the big money and maximize it by holding the whole position if price explode up from current levels indicating a possible intermediate low is in place.

Pete