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5 Commodity-Driven Stocks to Trade for Gains - views
BALTIMORE (Stockpickr) -- With the breakneck rally in stock prices in 2013, it's been easy to ignore commodities (or even commodity-focused stocks). While the S&P 500 has climbed more than 25% since the start of the year, the iShares S&P GSCI Commodity Index ETF (GSG) has managed to lose around 3% since the start of the year.
So no, commodities haven't exactly been earning a place in most investors' portfolios. But that could be about to change. As I write, scores of commodity-centric names are getting close to some pretty meaningful breakout levels. The timing's pretty good too: These names are nearing key levels just as investors are starting to get antsy about stocks this December.
That's why we're taking a technical look at five commodity-driven names to trade this month.
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 up is a pretty unlikely name: Barrick Gold (ABX). The $19.9 billion gold miner has gotten shellacked in 2013, dropping more than 51% since the first trading session of the year. But shares could be in for a turnaround thanks to a bullish setup that's showing its face in ABX right now.
Barrick is currently forming an ascending triangle bottom, a price pattern that's formed by a horizontal resistance level above shares at $21 and uptrending support to the downside. Basically, as ABX bounces in between those two technically important price levels, it's getting squeezed closer and closer to a breakout above $21. When that happens, it's time to be a buyer.
Just to be clear, what's going on in Barrick isn't going on in spot gold. Gold miners such as ABX are prone to diverge from the metal itself, and that's what's happening here. Spot prices haven't broken their downtrend yet this year, but Barrick has. I still think that gold looks in store for more long-term downside. But that doesn't mean Barrick can't make a short-term move higher.
Spectra Energy Partners
Gas pipeline company Spectra Energy Partners (SEP) is showing traders the exact same setup right now -- albeit slightly more textbook than Barrick's. Spectra is another ascending triangle with resistance at $46. A breakout above the $46 level is the signal that it's time to be a buyer in this nat gas transporter.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Triangles and other pattern names are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That $46 resistance level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Don't be early on this trade.
It doesn't get any more straightforward than what's going on in shares of industrial gas supplier Praxair (PX). Praxair has been bouncing higher in an uptrending price channel since all the way back in April, which is creating a buyable opportunity in shares this week.
The uptrending channel in Praxair has done a good job of defining the high-probability range for shares since that time. Logically, then, it makes sense to become a buyer as close to trendline support as possible; in short, you want to "buy the bounce." And shares are certainly bouncing now.
Buying off a support bounce makes sense for two big reasons: it's the spot where shares have the furthest 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 you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring PX can actually still catch a bid along that line.
The 50-day moving average has been a good proxy for support lately, so it's a solid place to put a protective stop if you decide to be a buyer at this point.
Even though 2013 started off pretty slow, things are finally heating up for aluminum giant Alcoa (AA) -- the $10 billion firm is up close to 20% in the last three months alone. But even if you missed the recent run in Alcoa, it may not be too late. This stock looks primed for a breakout move in the next week or two.
Alcoa is currently forming an inverse head and shoulders pattern, a bullish pattern that indicates exhaustion among sellers. The pattern is formed by two swing lows that bottom around the same level (the shoulders), separated by a deeper low (the head). The buy signal comes on a move through the neckline, which is right at $9.80. While the setup in Alcoa is far from textbook (this setup is typically a reversal setup that comes at the end of a selloff), the trading implications are all the same on a move through $9.80.
I mentioned that Alcoa's been showing some strong buying lately. That's quantifiable on the lower subchart of relative strength -- the higher lows in that performance gauge are a very bullish indicator. In fact, positive relative strength trends are historically likely to be followed up by more outperformance over the next 3-to-10 months. That's good reason to pay attention to a $9.80 breakout in AA.
Globe Specialty Metals
Last up is Globe Specialty Metals (GSM), a chart that may look somewhat similar to the Alcoa chart at first glance. Both stocks have rallied hard lately -- GSM is up more than 50% in the last six months, in fact. But there's are some key differences that make GSM look "toppy." Shareholders may want to start thinking about taking gains.
GSM is currently forming a double top, a bearish reversal pattern that's formed by two swing highs that top out around the same price level. The sell signal comes on a break below the trough that separates the two tops. For GSM, that support level comes into play at $16.50. If shares slip below that $16.50 level, we've got a sell signal.
Momentum, measured by 14-day RSI, adds some extra confidence to the downside in GSM -- the momentum gauge has been showing a negative divergence with price since back in September. That means that even though the second top hit the same price level as the first, momentum has bled off considerably. Buyer beware.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji