Keep an Eye on These Commodity ETFs

On Oct. 2, the main stock market indices pulled back to finish the week perfectly at support of their 50-day moving averages. As the 50-day moving average is a popular indicator of the intermediate-term trend, mutual funds, hedge funds and other institutions frequently use pullbacks to the 50-day moving average as a logical place to enter new positions in the broad market. Indeed, that's what appears to have happened this week. As of Thursday, the major indices have rallied all the way back to just below their prior swing highs from late September.

The good news about the market's swift recovery back to its prior highs is that it indicates that buying interest remains. The potentially bad news is that there's a lot of overhead supply left behind in the wake of the recent correction that stocks must contend with. As such, I'm taking a rather cautious approach to buying new ETFs at current levels. This is especially true of ETFs just now breaking out above resistance, as breakouts that lag the broad market often have a higher rate of failure. As such, the best play over the next week may be to look for pullback buy entries on strong ETFs that are leading the market. If the S&P 500, Nasdaq and DJIA pull back for a few days, or perhaps consolidate in a tight, sideways range, the ETFs with relative strength should provide the lowest-risk buying opportunities at that time, so let's take a look at two such ETFs to keep on your pullback watch list.

We'll start with PowerShares DB Base Metals (DBB - commentary - Trade Now).

PowerShares Base Metals (DBB) -- Daily Source: TradeStation

Yesterday, the DBB broke out above a level of horizontal price resistance that is propelling it to a new 52-week high. I originally bought the DBB on Sept. 15, when it undercut its 20-day exponential moving average while holding within the confines of a bullish, seven-week price consolidation. Because it continued to move in a sideways range for several more weeks, however, the DBB apparently wasn't ready to break out above its lengthy base yet. Finally, on Oct. 2 and Oct. 5, the DBB undercut (and held) more significant support of its 50-day moving average. Such a shakeout below the 50-day moving average gave the DBB the momentum to finally break out above its consolidation and start making another leg higher.

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At the time of publication, Wagner was long long DBB and FCG.

Deron Wagner is the founder and head trader of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his trading methodology with The Wagner Daily, The MTG Stalk Sheet, and The Wagner Weekly newsletters.