Since bottoming out at the start of the year, the Invesco DB Agriculture Fund (DBA) has been slowly grinding higher.
This ETF invests in a wide range of agricultural commodities. The goods include wheat, cotton, corn, coffee, and cocoa. And DBA is now up around 16.5% for the year.
We checked out DBA last month (red arrow in the chart below). At that time, the swings during DBA’s rally provided the best opportunities to profit.
The key is to use Bollinger Bands as an extra tool to help pick these price reversals.
And with DBA on the verge of another move, let’s see how things might play out from here…
More Chance of Reversal
The 20-day moving average (MA, red line) on the chart below shows DBA’s uptrend since the start of the year.
But the high number of swings in the 20-day MA shows just how choppy DBA’s rally has been:
Invesco DB Agriculture Fund (DBA)
Source: e-Signal
Above and below the 20-day MA are two blue lines that represent the upper and lower Bollinger Bands.
These bands are set two standard deviations of data away from the 20-day MA. That means around 95% of the action occurs within these two blue lines.
You can see how often the price has touched these blue lines without penetrating further.
That’s where Bollinger Bands can be useful – especially with a mean reversion strategy.
They help identify when a stock (or index) is trading at the extreme of its range.
But Bollinger Bands in isolation aren’t enough to determine a reversal.
In the rally from March to April and again in June, the chart shows how DBA kept rallying despite being right up against the upper blue line.
That’s where the RSI fits in.
If we can combine a change in momentum (RSI) with a stock trading at its extremes (Bollinger Bands), then we greatly improve our chances of picking a reversal.
And that leads to a greater chance of trading success.
Take another look:
Invesco DB Agriculture Fund (DBA)
Source: e-Signal
After we looked at DBA in October, the RSI reversed and started trending higher. This led to DBA rallying off the bottom blue line, which was something we’d looked for at the time.
Now that rally has taken DBA right across its trading range, and it’s pushing up against the upper blue line.
The RSI is also quickly closing in on overbought territory (upper gray dashed line). So what am I looking for next?
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A Potential Reversal?
With DBA trading right up against the upper Bollinger Band, we have our first part of the equation.
Yet as we’ve seen with the previous reversals (orange circles), the RSI trading in overbought territory isn’t enough to consider a short trade.
In each of those previous cases, the RSI reversed firmly (inverse “V”). Then, when it started tracking lower, it caused the DBA to fall.
And that’s the setup I’ll be looking for around here.
As always, though, we need to remember that there are no guarantees.
Yet if we can combine an RSI reversal and a stock trading at the edge of its trading range, it puts the odds more firmly in our favor.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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Do you think we’ll see another sharp reversal? Let us know at [email protected].