A number of agricultural exchange-traded funds (ETFs) rallied in late June and early July, but bulls shouldn’t get too excited just yet. While each commodity trades differently, the overall sector remains under downward pressure, and the recent rallies have only served to push prices into resistance areas. Those resistance areas have typically done a good job of sending prices lower.
The PowerShares DB Agriculture ETF (DBA) holds a wide range of commodities. The ETF has been in a major downtrend since 2008, although there have been significant rallies (lasting less than one year) since the major decline began. One of those significant rallies occurred in the first half of 2016, but since June 2016, the price has been steadily declining. The June 2017 rally has stalled out near a descending trendline extending back to the start of the year. Traders should watch for $20 to $20.40 to act as resistance, with a decline back below $19.85 helping to signal that the price is moving lower again. When the price declines, it has gravitated toward a trendline along the swing lows, indicating a downside price target of $18.90. A spike above $20.40 would indicate that another sharp move could be commencing, but beware the false upside breakout. If the price tries to pop above $20.40 but quickly fails, the ensuing decline is likely to be swift (see May 2017). (For more, check out: Technical Indicators Suggest Agriculture Commodities Are Headed Lower.)
The Teucrium Wheat ETF (WEAT) rose very sharply in late June, moving up more than 25% off the April low. On a short-term chart, this may look like an upside reversal, but the price has had a number of aggressive pops like this over the past few years, and none of them have been able to reverse the long-term downtrend. Ultimately, the price spiked and then collapsed to new lows. In 2012, the price surged more than 35% before stalling and then collapsing. In 2014, the price rallied more than 25% twice, but it then collapsed to new lows each time. In 2015, the price rallied more than 20% and then collapsed to new lows. While the 2017 move could be different, the long-term downtrend favors the price dropping back to $6.60 or below over the next several months. (See also: Major Resistance Levels Suggest Commodities Are Headed Lower.)
The Teucrium Corn ETF (CORN) has had more of a ranging tendency since late 2016, but the June and July rally has brought the price right to range resistance. On July 12, the price dropped more than 3%, indicating a reversal off resistance and a move back toward the $18.50 region. If traders are looking to buy, a price near the bottom of the range ($18.50 or even $18) is a better entry point. However, given the overall weakness in the sector and an even longer-term downtrend, the odds still do not favorable the bulls. (See also: Should You Ride the Momentum in Grain ETFs?)
The iPath Bloomberg Sugar ETN (SGG) staged a big surge, within a longer-term downtrend, between mid-2015 and late 2016. Since that September high, nearly all of those gains have been erased by a swift downtrend. Rallies since March have been short lived, moving up only about 10% (or less) before declining to new lows. The June and early July (2017) rally saw prices rise more than 12%, but a strong down day on July 10 signaled that the short-term rally could be over as well. It is definitely possible that the price could trickle higher, as July is historically a good month for sugar, but given the downtrend, rallies should be viewed as selling or shorting or opportunities, not buying opportunities.
The Bottom Line
These agricultural commodity ETFs are still weak technically, despite recent rallies. The rallies have only served to push them into resistance areas, which historically have swatted the prices back down. It would be wise to tread carefully on the long side, and whether long or short, traders should risk only a small portion of account capital on any single trade. (For additional reading, see: Top 3 Agriculture ETFs for 2017.)
Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the ETFs mentioned.