By C. Theodore Hicks II, CFP, CKA, CMT
1/ Inflation Sensitive
2/ Commodities
3/ Natural Gas
4/ Copper Miners
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1/
Inflation Sensitive
Our first chart for today is a weekly Relative Rotation Graph. If you have been reading these pages for long, you are familiar with the RRGs. For newer readers, you can find an Investopedia article on RRGs here.
The RRG above shows the eleven main sectors of the S&P 500 with the S&P 500 itself being the comparison index. I’ve also added a commodity index. In particular, this RRG confirms what we discussed in yesterday’s article: commodities and energy have indeed gained a lot of strength. Both (DJCI and XLE) are in the “Improving” (blue) quadrant and both have nice long tails indicating strong momentum. This RRG gives us a clue as to where we should investigate next.
2/
Commodities
Given the strength of commodities and energy, we should investigate opportunities in those spaces. Chart 2 is a weekly RRG for a number of different commodity related ETFs. Notice the vast majority of them have strong tails with a northwest heading. That is what we want to see.
We will examine two options; FCG and COPX.
3/
Natural Gas
Here we have a weekly candle chart for a natural gas related ETF, FCG. A close examination of this chart shows that FCG got hot and moved higher nine weeks in a row resulting in a minor breakout from a multi-year base. Then, on April 11th, it began to cool off. (Sorry, I could not resist the temptation to add a heating related pun.)
The most recent candle represents the current week, so only one day of trading. But notice that Monday’s trading took the ETF back to these multi-year highs. For swing traders, one could enter here and use last week’s lows as their stop. If commodities are going to remain strong, this recovery from a pullback could offer a relatively low-risk entry.
4/
Copper Miners
Our final chart for today is a daily candle chart for a copper miners ETF, COPX. If we were to look at a weekly chart, we would see a similar multi-year basing formation for COPX. Personally, I like the looks of FCG’s base more than COPX, but both are attractive. One reason I like FCG’s chart a little more is that it sports a 200-day moving average that has been curling up a bit longer; whereas COPX’s 200-day has only recently turned up due to the massive rally that we’ve seen in copper recently. So, COPX may be due for a bit of consolidation.
Based on the RRGs that we examined, it appears that active traders need to be looking for opportunities in the energy and commodity spaces. Part of our macro-thesis is that we are quite possibly in a secular bear market that is just experiencing a cyclical bull phase. The fact that inflation is not going away contributes to this thesis. Note that this thesis does not have to be correct in order for these trades to work. However, if inflation is not going away, then it stands to reason that inflation sensitive sectors might do well. We just need to wait for the proper low-risk set-ups. In my view, FCG’s set up is a bit cleaner.
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Originally posted 23rd April, 2024
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