It's been a tricky year to be a commodity investor.
Commodity prices have been all over the place lately. In the last 12 months, big commodity groups ranging from gold to oil to the ags have seen their prices swing wildly, pushed around by macro forces ranging from the Fed to the speculation over policies coming from the Trump White House. Meanwhile, the broad stock market has been moving up and to the right, making equities a no-brainer for anybody who hasn't felt compelled to figure out what's happening in metals and energy.
But now that commodity prices have been underperforming for the last six months and nobody wants to own anything commodity-centric anymore, maybe it's time to give these beaten-down stocks a second look. From a technical standpoint, some of these stocks are really finally starting to turn the corner -- and they could be ready to make up for lost time.
To find the commodity stocks that look best positioned for a reversal higher this month, we're turning to the charts for a closer look at four stocks showing buyable technical trading patterns.
In case you're unfamiliar with technical analysis, here's the executive summary: technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, here's a rundown of four technical setups that are showing solid trading potential right now.
Energy Transfer Equity
One of the strongest corners of the energy sector right now is in the midstream space. With less direct exposure to oil and gas prices, these energy infrastructure trades are pulling away from the rest of the pack in 2017. Case in point: Energy Transfer Equity (ETE) . While the rest of the energy sector is up around 2% in the last six months, ETE has charged 11% higher. And a classic technical price pattern is pointing towards more upside ahead.
ETE is currently forming an ascending triangle pattern, a bullish continuation setup that bodes well for ETE shareholders. The pattern is formed by horizontal resistance up above shares at $19.50, alongside uptrending support to the downside. Basically, as ETE pinballs in between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakout through $19.50. As soon as that $19.50 breakout happens, we've got a new buy signal in Energy Transfer Equity.
Relative strength, measured by the indicator down at the bottom of ETE's price chart, adds some extra confidence to upside in shares. That's because ETE's relative strength line has been in an uptrend of its own since last summer, an indication that this stock isn't just beating the rest of the sector -- it's beating the rest of the broad market in the long run.
As long as that uptrend in relative strength stays intact, ETE is predisposed to outperform the S&P.
We're seeing the exact same price setup right now in shares of commodity chemical manufacturer NewMarket (NEU) - Get Report. NewMarket may be a high-priced stock, but the mechanics of the price pattern work exactly the same here. For NewMarket, the breakout level to watch is $442.50, a price mark that the stock crossed on Monday.
What makes $442.50 the key price level to watch here? It all boils down to buyers and sellers. Price patterns, like this ascending triangle setup, are a good quick way to identify what's going on in the price action, but they're not the ultimate reason shares look attractive here. Instead, the "why" is driven by basic supply and demand for NewMarket's shares themselves.
The $442.50 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy.
That's what makes the breakout above $442.50 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Shares flirted with $442.50 a handful of times in the last month, but the close at $444.47 on Monday broke through that level. Crossing $442.50 triggers a buy.
You don't need to be a trading whiz to figure out what's been happening in shares of steel giant ArcelorMittal (MT) - Get Report lately. Instead, the price action in this big commodity stock is about as straightforward as it gets. ArcelorMittal has been in a textbook uptrend reaching back to last summer. The key now is that it's still a "buy the dips stock" in 2017.
ArcelorMittal's uptrend is formed by a pair of parallel trendlines that have corralled most of this stock's price action for the last year. Put simply, every test of trendline support so far has been met with a bounce higher. That makes those support bounces low-risk, high-reward buying opportunities as ArcelorMittal stock continues to rally. Shares are bouncing off of support for the sixth time this week. Monday's 5.7% pop is a buy signal.
Actually waiting for that bounce is important for two key reasons: it's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring ArcelorMittal can actually still catch a bid along that line before you put your money on shares.
Finally, gold producer Newmont Mining (NEM) - Get Reporthasn't been a particularly attractive stock to own in the last half-dozen months. Since peaking back in August, Newmont has shed about 28% of its market capitalization, backsliding as spot gold prices retreated. But Newmont shareholders could be in for a reprieve this spring. Shares are looking "bottomy" in the very long term.
Newmont has been forming an inverse head and shoulders pattern since the beginning of the fall. The inverse head and shoulders is a technical reversal setup that indicates exhaustion among sellers. You can spot this price pattern by looking for two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal comes on a move through Newmont's neckline -- that's currently at the $38 level. Getting back to $38 will require a little patience, but it comes with considerable upside room once buyers muster the strength to push shares above that price tag.
As in any technical trade, risk management is critical for anyone who's thinking about buying Newmont here. In fact, it's even more critical, considering the fact that this big gold stock hasn't broken free of its downtrend yet. Remember, this pattern doesn't trigger until Newmont actually trades back above $38, not before.
At the time of publication, author had no positions in the stocks mentioned.