Base Metals Finding Support; Looking To Alcoa

The commodity spectrum has been under pressure over the past few weeks. Markets from energy to agriculture have all seen the spot prices of their underlying commodities head lower. Unfortunately, the selling pressure has been even more pronounced in the metals. Prices of the base metals. such as aluminum, zinc and copper, have all fallen significantly since notching a swing high early in the summer.

For the first time in weeks, the recent price action of the PowerShares DB Multi-Sector Commodity Trust — PowerShares DB Base Metals ETF (DBB ) is finding support near key support levels, which is suggesting that the base metals could be gearing up for some price support. (For related reading, check out: Using Base Metals as an Economic Indicator .)

PowerShares DB Base Metals ETF

As you can see from the chart below, the price of DBB has recently found support near its 200-day moving average. From a trading perspective, this is a great example of how a major level of resistance is expected to reverse its role and begin to act as a support level once the resistance level has been broken. Notice how the 200-day moving average prevented the price from heading higher in the past (shown by the red arrows). In a similar fashion, bullish traders would now expect this moving average to provide support. The tightening range near the moving average is confirming this thesis and bullish traders will likely add a position near current levels to maximize the risk/reward ratio of the trade. (For more on this topic, see: Support and Resistance Reversals .)

Taking a Look at Alcoa

Of all publicly traded companies, weak aluminum prices will impact Alcoa Inc. (AA ) more than any other. Its latest earnings announcement should give traders a detailed insight as to the impact of recent weakness, but more importantly, attention should be paid to the outlook given by management. (For more, see: How to Decode a Companys Earnings Reports .)

Based on the price of DBB shown above, it appears that the base metals market should be nearing support. The move toward the key long-term 200-day moving average suggests that the trend should remain upward and risk seeking investors would likely take a long position ahead of the earnings in hopes of a bounce higher. From a risk management perspective, we’d expect bullish traders to protect their positions by either buying a put option into earnings in case the weakness impacts earnings more than investors expect. Another option would be for traders to set their stop-loss orders below $13.71, which is where current level of the 200-day moving average. Strong earnings combined with a bullish MACD signal will be confirmation of a move higher and traders would likely use this information to start trading other commodities such as zinc and copper. (For more, see: Stop-Loss Strategy Video .)

The Bottom Line

Much of the commodity spectrum has been under pressure over the past several weeks, but few sectors have been hit as hard as the metals. Specifically, base metals have been the victim of selling pressure since notching a swing higher in early summer. Traders are watching for a bounce off of the 200-day moving average on the chart of the PowerShares DB Base Metals ETF to signal a short-term reversal. Of specific interest will be whether or not the price of Alcoa will be able to stay above its 200-day moving average following its Oct. 8 earnings release. Traders will want to pay specific attention to the market outlook from Alcoa’s management team and then determine whether the price is able to remain above the key support. Positive news will be used to confirm newly found support on the chart of DBB and then attention will likely flow to other commodities such as zinc and copper. (For more, check out: Investing in the Metals Markets .)