Agricultural Commodity Trade Drought Continues

The chart itself was the Invesco DB Agriculture Fund (DBA), but inverted! What we're actually seeing is prices meeting their long-term downside objective at the 161.8% Extension of its 2008-2011 base and momentum positively diverging.

Click on the chart to enlarge view.

So are we loading the boat here or what? Let's dive a bit deeper first.

Here's an Equally-Weighted custom index of the 10 Agricultural Commodities included in the CRB Index. Here we're also at a potential inflection point as prices test a support/resistance zone that's been intact since the 1970s. Notice how momentum is also diverging positively. If prices were to stage a rally, here would be a very logical level for it to begin.

But on a relative basis when we look at the Equally-Weighted Agricultural Commodities Index relative to the Equally-Weighted Thomson Reuters Commodity Continuous Index we see a classic "hot mess."

This chart does not suggest Agricultural Commodities will outperform as a group anytime soon.

The other problem with this analysis is that the ETF we're analyzing doesn't hold these Commodities in an equally-weighted fashion. Instead, here's how it's constructed.

So what would it take for this ETF to move sustainably higher? Let's perform the exact same exercise we did yesterday with Small-Caps and see what its top holdings are doing on a relative basis.

Given its top 6 holdings (Corn, Cocoa, Soybeans, Sugar, Live Cattle, Coffee) comprise over 70% over the weighting, we'd want to see these outperforming their peers...and unfortunately, they are not. Instead, we see a lot of "hot messes" that lack trend over any sort of intermediate/long-term perspective.

I've also taken a look at all of these holdings on an absolute basis across multiple timeframes and have come to the same conclusion: there's just not much there.

It sucks to do all this work and come to the conclusion that there's not much happening in the Agricultural Commodity space. But, at least this exercise gave us an idea of what we'd need to see from an index construction perspective for Agricultural Commodities to begin performing.

While we wouldn't be shorting the ETF (DBA) at current levels, that doesn't mean we're buying it either. If we want exposure in this space, we need to remain very selective and only take trades where the reward/risk justifies getting involved in a rangebound market.

The failed move and momentum divergence trade setup works well in these types of markets (see our Sugar trade), so we'll continue to focus on those as they come up.

Hope that helps make sense of this segment of the Commodity market.

As always, thanks for reading and please let us know if you have any questions!

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