Getting Technical With Commodities: An Interview

February 13, 2009

HAI

Bruce Zaro, chief technical strategist at Delta Global Advisors, says what's hot and what's not from a technical perspective in the commodities market.

  • Gold at the top of its trend
  • Ags look good from here
  • Why oil is a no-go

Bruce Zaro is chief technical strategist at Delta Global Advisors, which manages $1.2 billion in assets for institutional and high net worth investors. Before joining the Huntington Beach, Calif.-based firm, he worked at Fidelity Investments. The Boston-based analyst is a 25-year veteran of the financial services industry and is a frequently quoted analyst on oil futures and basic resources.

 

HardAssetsInvestor.com (HAI): How do you see this recent rebound playing out in natural resources?

Bruce Zaro, chief technical strategist, Delta Global Advisors (Zaro): There are pockets of strength. Those happen to be Precious Metals and Agricultural Commodities. One of the ways we've gained access to Precious Metals is through the SPDR Gold Shares (NYSE: GLD) exchange-traded fund. But since reaching its November low of $69 per share, it has soared and now trades in the $93 range. At this price, we're very cautious since it's at the top of its 40-day trading range. It's significant to note that GLD has shown a recent pattern of trading in the low-$70s to the low-$90 per-share range. A strategy of buying in the low $70s and scaling back in the $90s worked throughout 2008. We're still thinking that's going to be the appropriate response in 2009 with GLD.

HAI: What about silver?

Zaro: You certainly could put the iShares Silver Trust (NYSE: SLV) in the same technical basket as GLD at the moment. SLV is also at the top of its trading range, at around $13.25 per share. I'd wait for a pullback to around $11 per share before jumping in. But objectively, looking at the two, GLD might have more upside potential at this point. Again, however, I'd be cautious with both right now.

HAI: What about Agriculture?

Zaro: Agricultural commodities are actually my favorite right now given the run-up in gold. We like the Market Vectors Agribusiness ETF (NYSE: MOO). It's currently trading in the $29-per-share range. We're expecting it to move into the mid-$30 range before running into any real interference. Beyond that, we see this ETF potentially running into the upper-$30 per-share range before meeting additional resistance. I would personally put a stop on it at $25 per share. But it's definitely a buy on our lists and one of our top choices.

HAI: Is MOO consolidating those gains now?

Zaro: Yes, but let's review its recent history. The ETF bottomed late last year at $28.50 per share. That was down from a $66 high in June 2008. It has since built a strong base and staged a breakout to the upside in January at $29.50. Since then, it has had some consolidation. But we like to look at ETFs that have broken out after a consolidation period and then pulled back. That's when we like to initiate our positions – during the pullback. That seems to provide a better risk/reward for investors.

HAI: But isn't there a chance that MOO can fall more during this consolidation period?

Zaro: Certainly. But the strong base it has built around $26 seems fairly stable. If MOO fell below that level – again, we're putting stops at $25 a share - then we'd be concerned. Right now, the consolidation pattern looks fairly healthy. So we think it's a good time to buy MOO at the moment.

HAI: What is the basis for the move-up by MOO lately?

Zaro: We're seeing a brighter outlook for Agricultural stocks in general in terms of corporate earnings. Particularly, we're very optimistic about prospects for companies involved in Agricultural chemicals. MOO has as its top holding Potash Corp. (NYSE: POT). In a nutshell, that stock's technicals look very similar to those of MOO. This highly volatile stock bottomed at $49 in November 2008, and as of last week had virtually doubled. This week, it pulled back to $81 per share. Again, we think the stock itself is showing a healthy consolidation and presents a good entry point in the low-$80 range. I'd put a stop at $72 per share on Potash, and we see it possibly running to about $107 per share. That's the top of its current trading range.

HAI: Are you investing in Oil yet?

Zaro: No, it's still a bit early. We haven't seen much demand return to the market on a consistent basis yet. I'd like to see oil break out and trade in the low $50-per-barrel range before getting involved with that market again. We've been completely out of Oil funds since August 2008.

HAI: What oil ETFs are currently on your radar?

Zaro: One we're keeping an eye on is the iShares Dow Jones US Energy (NYSE: IYE). That has been undergoing a consolidation period since September 2008 in the high $20-per-share range. We're watching for a breakout above $31.50 per share. So it has a long way to go before we'd become more enthusiastic about that ETF.

 

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