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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Last month’s inflation data showed annual food inflation running at 8.8%…
That’s above the overall inflation rate of 8.5% – already a 40-year high.
One reason prices are going up is due to the rising cost of agricultural commodities. Meats, poultry, cereals, and eggs are rising steadily each month.
When we last checked out the Invesco DB Agriculture Fund (DBA) in April (red arrow on the chart), we saw how this was playing out.
DBA rallied around 70% above its 2020 lows. However, that uptrend began to accelerate from the start of 2022.
From January 2022 to its mid-April peak, DBA rallied 17%.
But after topping out, DBA drifted lower over these past few weeks. And right now, DBA is on the brink of testing some technical indicators.
Today, I’m going to discuss how things could pan out.
Let’s look at the DBA chart…
Invesco DB Agriculture Fund (DBA)
Source: eSignal
The two moving averages (MA) show the strength of DBA’s rally that began in 2022.
The short-term 10-day MA (red line) rallied above and away from the 50-day MA (blue line). And the 50-day MA began to rise steeply.
The Relative Strength Index (RSI) was also showing bullish signals…
Since the start of 2022, the RSI has remained in the upper half of its range (above the green line). That means DBA has been in overbought territory since the beginning of the year.
However, with DBA retracing these past few weeks, both of these indicators are about to be tested. And, the 10-day MA could soon break down below the 50-day MA (a bearish signal).
Here’s how…
Late last month, the RSI broke below support and into the lower half of its band. Just last week, the RSI tested what is now resistance and failed to break higher.
This is also a bearish sign, because the RSI usually stays in the lower half of its range when a stock is in a downtrend.
So, with the MAs and RSI at critical levels, what am I looking for from here?
Let’s take another look…
Invesco DB Agriculture Fund (DBA)
Source: eSignal
For DBA to rally, it’ll first need to find support. The RSI will need to move higher so that it tracks on or above the green line.
In January, when the RSI tracked the RSI closely, DBA traded sideways before going on to rally higher. Each time the RSI tested and subsequently held support, DBA rallied.
For DBA to find support from which it can rally, we’ll need a similar pattern to unfold.
If the RSI fails to break through resistance and instead remains stuck in the lower half of its range, then it’ll show this down move has further to go.
The 10-day MA crossing down over the 50-day MA – and then accelerating further below it – would add to selling momentum. This would provide an opportunity to place a short trade.
The next test would then be around $21.40, which corresponds to DBA’s March lows.
After such a strong move higher, DBA’s pullback shows us that it’s right at the crossroads.
If this down move gains traction, then it’ll take some of the sting out of rising food prices.
But since the Fed started raising rates too late, overall inflation isn’t going away anytime soon.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Where do you think DBA is headed next? Will we see lower food prices?
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