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Nibble on some agriculture
Commentary: Low levels could make some commodities tasty
By Michael Kahn
Last Update: 12:01 AM ET Nov 3, 2008
NEW YORK (MarketWatch) -- Take a look at the PowerShares DB Agriculture Fund exchange-traded fund. On the surface, it looks pretty rotten, having fallen from over $42 in June to last month's low under $24.
But as with other commodities, there is intrinsic value in real and necessary things, for lack of a better term. Paper assets such as stocks and bonds are merely promises and not everybody needs a new iPhone from Apple AAPL (Don't try telling your kids that, however). But everybody has to eat and the Agriculture ETF DBA seems to have moved down to a price level that is very attractive. (See Chart 1)
Granted, there is not a lot of history on this ETF for a thorough long-term analysis so let's take a look at some of its four component commodities -- corn, soybeans, wheat and sugar. When we do, we'll see that last year's ethanol-driven bubble has been deflated.
Let's start with wheat. (See Chart 2) This is a technical analyst's dream chart as the ubiquitous head-and-shoulders pattern is clearly visible. Of course, technical analysts dream like Picasso, as the pattern is supposed to resemble a head surrounded by a pair of shoulders.
So let's suspend anatomy for a moment and see the left shoulder, or preliminary rally peak, in September 2007. The head, or final peak, was in March of this year and the right shoulder, or failed rally peak, was in June. Support for the pattern, called the neck line, is a horizontal line connecting the interim lows between the peaks and it is also clear. When the price of wheat dipped below $7.40, the ensuing decline was steep.
From high to low, wheat has lost 61.8%, a percentage not lost on advanced chart analysts as an important retracement level. Coupled with price performance during the last week of October, the risk/reward here looks rather inviting for the bulls.
Corn, the chief ethanol villain, is another component commodity that has gotten pummeled this year. (See Chart 3) After getting cut by more than half down to levels not seen in over a year, the market has fallen all the way to the bottom of its bear market trend channel. A trend channel is simply a pair of parallel trendlines drawn through significant tops and bottoms during a move that act as support and resistance.
Short-term analysis shows another pattern called a double bottom, which is just a pair of twin lows that define a potential price floor. If the market can move above the top of the small trading range formed by the pattern, we will know that the buyers are back in control, at least for a short while.
We can see similar bullish factors in both sugar and soybeans so the case for a short-term rally in the agricultural sectors of the commodities world is good. Admittedly, there are plenty of hurdles ahead including the slowing global economy's overhanging weight. And since commodities are priced in dollars, the potential for a continuing US dollar rally against world currencies must be watched. A rising dollar, thanks to economic weakness overseas catching "down" to what we have seen at home, can act as a drag on any commodities rally.
However, for investors seeking exposure to a diverse array of assets, dipping a toe back in the commodities world via the agricultural ETF seems to be a good bet.
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