Monday, July 14, 2008

Commodity Stocks Look Terrible Technically, But Is It Smart to Short Them?

Here are the major indices. There isn't a whole lot to say here. Until they get above these channels and short-term moving averages, there is no point to even think about buying stocks. It will happen someday, hopefully soon, but we need to wait until it actually does happen, not try to guess when it will happen. By the way, the main ratio on my Market Monitor that I've been waiting for to hit a buy signal still hasn't gotten to those extremes.

Major Indices

Here are the two shorts I took today. I will keep my stop loss levels tight on these though. With GOOG's earnings coming up, I may take profits early on BIDU if I get any - I will have to see how some of the early reports come in.


Here are a few inverse ETF's that are piquing my interest. DUG and SMN might be a safer way to play commodities short, and both have pulled back nicely after spiking last week.


I am not seeing many shorts at all outside of the commodity or manufacturing sector. Here are a few that look to be in possible shorting position. It is risky to short here but until we get some signs of a trend change in the overall market, it is the only play out there.


Here are some of the commodity stocks I was talking about in my earlier post. Technically, these look like garbage. You can see the patterns in the charts below. Nonetheless, I am torn. If the dollar keeps falling, (which it looks like it will) I don't see how oil prices fall, and how the other commodity sectors don't attract dip buyers. It is a hard call right now.

Up first are some steel stocks, which out of all the groups look worse.


Here are the oils. I am seeing a lot of head and shoulders patterns that have broken through their neckline, and now have rallied back up close to that neckline on very weak volume. Again, that is a technically perfect setup. I have to decide the chances of crude oil and the oil stocks trading in different directions, independent from each other. My hunch is that crude will stay in this area or move higher. But the charts say that the oil stocks should head lower.


Here are the coal stocks, which also technically look like they should fall soon, but who knows? The volume on these bounces is what stands out to me - it is very weak for the most part. I am also watching JRCC and FDG.

All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

What attracts me to these stocks is the amount of room they still have to fall. My hunch is that if we get some really, really heavy selling in the form of capitulation (right now, that's seems to be a really big "if") the hot money still in these stocks will sell quickly and these could collapse again, falling 15-20% from where they are now. They are high reward shorts, and since most are close to a clear stop loss level, most are low risk, I guess.

At the same time, I know there is still a lot of bullishness in these stocks, so dip buyers are hanging around, probably those people that missed the party on their big run-ups. People are looking to put money somewhere and this remains an area of focus, regardless of how ugly the charts are. Basically, I will have to decide if it is worth messing with this area - I have tried unsuccessfully before to short these and other hot sectors. I would probably be better off if I just stayed away, and I still might, but because of the charts, I know it's going to be hard to do.

Since there aren't many shorts out there right now outside of the commodities, and since we haven't broken above any short-term upside resistance on the indices, there really isn't a whole lot to do right now beside sit and be patient. I will continue to manage my current positions and we'll see if I try the commodity shorts again. Quite an interesting market we have on our hands here, and with so much happening this week, I am guessing it will continue to be quite crazy. Best of luck Tuesday.


Gio said...

Hey Mac... I closed a lot of my commodity/energy/ag positions today. I'm rotating out of them and shorting them. USO trading at the top of its channel, and I think it will head back down on "quiet trade"... not much oil news for now, except hurricanes.

Gio said...

.. I'm looking at your charts, I think another $5 drop in oil will give you what you want. I figure "dollar drop in oil x 2.5 = % drop of energy/commodity/ag momentum stocks." Therefore, all these would be affected in that ratio...


to a lesser ratio...

... don't ask me how I came up with that equation. LoL!

Mac said...

I will probably end up taking a shot on one or two of them. I get the feeling it's going to be one of those "darned if you do, darned if you don't" situations, where if I don't short them, they will crash, and if I do, they'll keep rallying.

Overall, though, they are in low risk positions where I can just get out with small losses if they keep moving higher.

Gio said...

Been going over your charts a bit more... I think SMN and DUG really are telling us to sell commodities. I think I would enter here and average in.

The steel stocks need more timing for me. Take a look at the shippers again (TBSI, DRYS, EXM, DSX)... they are deeper into their bear patterns than coal, oil and steel. I alluded to this pattern back in February when I pointed out "panic buying and selling"... well, we're through that stage, and I think the next leg down starts on the retest of its current supports. Just something to think of. I've been just waiting and waiting for a rally to short them. hehe.

Mac said...

SMN and DUG are sitting on their 20 day moving average, so I might bite here.