You don't exactly need to be a close market watcher to know that commodity stocks have gotten hammered over the last few months. As the dollar has pushed higher, commodities have slid lower, dragging down any stocks with outsized commodity exposure in the process.
Gold miners, energy companies and basic materials producers are a few conspicuous examples of groups that have shed double-digit percentage points in the last 12 months. And investors have gotten the message too, selling these stocks off along the way.
But now that 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 five 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 five technical setups that are showing solid trading potential right now.
Agnico Eagle Mines
Up first on our list of commodity turnarounds is Agnico Eagle Mines (AEM) - Get Report . This $7.5 billion gold producer has actually been in rebound mode for a while now, exploding 29% since the start of 2016. But don't worry if you've missed the move in this big gold stock so far. Shares look likely to kick off a second leg higher in February thanks to a classic technical trading pattern that's breaking out this month.
Agnico Eagle spent the last few months forming an ascending triangle pattern, a bullish breakout setup that's formed by horizontal resistance up above shares (at $30 in this case) and uptrending support to the downside. Basically, as shares of AEP bounce in between those two technically significant price levels, this stock has been getting squeezed closer and closer to a breakout above our $30 price ceiling. We finally saw that breakout happen when the calendar flipped to February.
Relative strength, down at the bottom of Agnico Eagle's chart, adds some extra confidence that the breakout is likely to keep moving higher. Our relative strength line has been in an uptrend since this past August, indicating that Agnico Eagle is still outperforming the broad market in the long-term. As long as that relative strength uptrend remains intact, so does this stock's outperformance. If you decide to be a buyer here, it makes sense to wait for a slight pullback; on the flip-side, prior resistance at $30 is a logical place to park a stop loss order below.
We're seeing the same setup in $34 billion commodity chemical maker LyondellBasell Industries (LYB) - Get Report . Like Agnico Ealgle, LyondellBasell has been bouncing around in an ascending triangle pattern in recent months, in this case at the bottom of shares' recent range. Even though the ascending triangle pattern in LyondellBasell isn't exactly "textbook" (the ascending triangle is typically a continuation pattern, not a reversal setup), the trading implications are exactly the same here.
The buy signal comes on a breakout above $80 resistance.
Why all of that significance at the $80 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle pattern in LyondellBasell, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for LyondellBasell's shares.
The $80 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 a breakout above $80 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Remember to be reactionary here. Upside in LyondellBasell doesn't become a high-probability trade until shares are able to catch a bid materially above $80.
Companhia Siderurgica Nacional
Shares of $1.4 billion Brazilian steel maker Companhia Siderurgica Nacional (SID) - Get Report have been hit by a double-whammy from a macro standpoint. Not only does this stock suffer from the impact of a strong dollar on steel prices, but it also sees earnings reduced even more by the fact that it reports its performance in Brazilian reais. Despite the 37% rout shares have endured over the last 12 months, this steel stock is starting to look "bottomy" in the very long term.
Companhia Siderurgica Nacional has spent the last couple of quarters forming a double bottom pattern, a bullish reversal setup that looks just like it sounds. The double bottom in this stock is formed by a pair of price troughs that bottom out at approximately the same level. The buy signal comes on a push through the peak that separates those two swing lows; for Companhia Siderurgica, that's shares' long-term resistance level up at $1.60.
Momentum, measured by 14-day RSI at the top of Companhia Siderurgica's chart, is the side-indicator to watch in this stock. Our momentum gauge made slightly higher lows on each of the two price lows in shares, a bullish divergence that indicates buying pressure is quietly building beneath shares. If buyers can muster the strength to push shares back above $1.60, then we have our signal that buyers are back in control.
We're moving from small-cap to mega-cap now, with a look at $158 billion oil company Chevron (CVX) - Get Report , one of the biggest energy companies on the planet. There's two pieces of good news in Chevron right now: First, shares are pointing higher from a technical standpoint, and second, you don't need to be an expert technical trader to figure out why.
Since shares bottomed back in August, Chevron's stock price has been making its way higher in a well-defined uptrending channel. The uptrend in shares is formed by a pair of parallel trendlines that have identified the high probability range for shares to stay stuck within -- every test of trend line support has provided a low-risk, high-reward buying opportunity. And shares are bouncing off of support for a fifth time coming into this week. From here, it makes sense to buy the next bounce.
Actually waiting for this week's 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, and you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for a bounce to happen first, you're ensuring Chevron can actually still muster buying pressure along that line before you put your money on shares.
Last up on this week's list of potential commodity turnaround trades is another big energy stock, BP (BP) - Get Report . It's been a tough year to own shares of BP. In the last 12 months, this $91 billion integrated oil and gas stock has lost almost a third of its market value, trading lower alongside the rest of the industry. But a classic reversal pattern could spell a rebound in BP this winter, at least in the intermediate-term.
BP has been forming an inverse head and shoulders pattern since the beginning of December. 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 BP's neckline -- that's currently at the $32.50 level.
Like with any technical trade, risk-management is critical for anyone who's thinking about buying BP here. In fact, it's even more critical, considering the fact that this big stock is still in a downtrend long-term. Remember, this pattern doesn't trigger until BP actually trades back above $32.50, not before.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.