BALTIMORE (Stockpickr) -- No sector has taken a beating in recent months like the commodities sectors have. I'm talking about stock groups like basic materials and energy, which have been pummeled by a rallying U.S. dollar and sinking global commodity demand.
Sometimes, it's the stocks that have shown investors the most frustrating price action that have the most upside on offer. Case in point: the rebound that energy stocks have undertaken in the last two weeks.
At this point, it's a little early to say that commodity-linked stocks are due for a reversal. But that's just fine, because zoom beyond the sectors, and the individual stocks are starting to look imminently tradable. Today, we're taking a closer look at five beaten-down commodity stocks to trade for gains.
For the unfamiliar, 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, let's take a look at five technical setups worth trading now.
First on our list of beaten-down commodity stocks is $16 billion mining company ArcelorMittal (MT - Get Report). If you've owned MT for the last year now, you're probably not thrilled with this stock's performance. That's because, while the S&P 500 has made its way 12.3% higher over the last 12 months, MT has shed 28% of its market value over that same stretch. But long-suffering shareholders could be in for a reprieve this spring.
ArcelorMittal is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (in this case at $11.30) and uptrending support to the downside. Basically, as MT bounces between those two technically important price levels, it's been getting squeezed closer and closer to a breakout above our $11.30 price ceiling. When that happens, we've got our buy signal.
Momentum, measured by 14-day RSI, adds some extra upside confidence to this setup. Our momentum gauge has been in an uptrend since the ascending triangle started forming in MT, signaling that buying pressure is building here.
That said, it's critical to wait for $11.30 to get taken out before jumping into this trade. It's not a high-probability setup until that happens.
We're seeing the exact same price setup in another big commodity-linked stock right now: $197 billion oil and gas supermajor Chevron (CVX - Get Report). Just like MT, Chevron has been forming an ascending triangle pattern after spending most of the last year moving lower. The breakout level to watch in CVX is $112.50.
Why all of that significance at that $112.50 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle pattern in Chevron, 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 Chevron's stock.
The $112.50 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 a breakout above $112.50 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for shares to catch a bid above $112.50 before you buy CVX.
While most commodity-linked names have been tumbling in recent months, Kinder Morgan (KMI - Get Report) has been the exception. That's because, while this $88 billion pipeline company transports oil and gas through its infrastructure, it has limited exposure to the prices of those commodities. And even though KMI has spent the last few months tracking sideways, shares are within grabbing distance of a big buy signal in April.
The sideways action in Kinder Morgan is called a "rectangle" pattern. The rectangle pattern gets its name because the pattern basically boxes-in shares between a pair of parallel support and resistance lines. For KMI, the levels to watch are resistance up at $42.50 and support at $40. It pays to be reactionary with this price chart, after all, rectangles are "if/then patterns." Put a different way, if Kinder Morgan breaks out through resistance at $42.50, then traders have a buy signal. Otherwise, if the stock violates support at $40, then the high-probability trade is a sell.
Because KMI's trend prior to the rectangle was up, shares are more likely to resolve with a move above our $42.50 level. Relative Strength, down at the bottom of the chart, adds some extra evidence to the upside in this stock. That's because relative strength has been in an uptrend of its own since October, which indicates that KMI is outperforming the rest of the market despite the commodity correction. As long as that relative strength uptrend remains intact, KMI should keep stomping the S&P.
Canadian oil and gas stock Imperial Oil (IMO - Get Report) is another large-cap energy name that's been selling off lately. In fact, since last summer, this stock has been cut down by a quarter of its market value. But IMO is starting to look "bottomy" this month – and shares are within cents of their breakout level this week.
Imperial Oil is currently forming a double bottom pattern, a bullish reversal pattern that looks just like it sounds. The double bottom is formed by a pair of swing lows that find support at approximately the same price level. The buy signal comes on a breakout through the peak that separates though two troughs – for IMO, that's the $41 breakout level.
The 50-day moving average has been a good proxy for IMO's downtrend in the last year or so – the fact that we're above it is a positive. If shares can hold above $41, then that 50-day moving average makes a logical place to park a protective stop.
Finally, there's BP (BP - Get Report). This $120 billion London-based energy stock is another big equity that's down about 24% since last summer, and it's also another one that's just starting to show some strength again.
BP is currently forming an inverse head and shoulders pattern. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the pattern's "neckline" level. That's the $42 level in BP. The fact that BP's momentum didn't make a lower level when the pattern formed its head is an extra piece of bullish evidence.
It's important to remember that there's a difference between saying BP is carving out a bottom and saying that BP has bottomed. Until shares close above $42, this isn't a high-probability trade. That said, the long-term size of this trading pattern comes with equally long-term trading implications once a breakout happens. That's good reason to keep a close eye on BP's $42 neckline this month.