From mid-2020 to mid-2022, the Invesco DB Agriculture Fund (DBA) enjoyed a massive boom.
This ETF invests in a broad range of agricultural commodities (like cocoa, live cattle, coffee, corn, wheat, and pork). And during that time, it rallied a massive 76%.
Since then, however, DBA has been stuck in a highly volatile sideways pattern.
That kind of volatility might put some people off. But today I want to show how to trade it.
In particular, let’s look at how to profit when DBA is trading at the upper extreme of its range…
Trading at Its Outer Range
The 20-day Moving Average (MA, orange line) in the chart below shows how volatile DBA has been.
Even when it was gradually rising from March to November, the 20-day MA had a high number of swings.
But the biggest swing came just after that when DBA gave up most of its 2023 gains…
Invesco DB Agriculture Fund (DBA)
Source: eSignal
Around the 20-day MA are the upper and lower Bollinger Bands – the two blue lines.
These typically show two standard deviations. In simple terms, that means around 95% of the price action occurs within these two lines.
So this shows when a stock or index is trading at its outer range and could be vulnerable to a reversal.
Yet using Bollinger Bands in isolation is a low-probability way to trade.
When a stock is trending in one direction, it tends to hug the upper or lower blue line.
You can see where that happened when DBA was rallying in March, June, and September last year.
Had you shorted DBA simply because it was tracking along the upper blue line, you would have lost money.
So another indicator, the Relative Strength Index (RSI), helps broaden the picture.
If a stock is trading at the extremes of its range and we see a change of momentum, we greatly enhance the odds of identifying when a stock is about to change direction.
We saw how to apply this when we checked in on DBA back in November (red arrow).
Take another look:
Invesco DB Agriculture Fund (DBA)
Source: eSignal
As we predicted, the RSI formed an inverse ‘V’ (right red circle) as DBA moved along the upper Bollinger Band. That set up DBA for a reversal (as we saw with previous red circles).
But after that down move, DBA has rallied again.
So where am I expecting it to go from here?
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A Reversal Pattern
When DBA previously reversed, it coincided with the RSI forming an inverse ‘V’ and tracking back down towards support (green line).
That pattern repeated last month when DBA peaked on February 12.
Yet after bouncing just above support, the RSI has rallied again. That sent DBA up to a fresh high.
This time, though, another reversal pattern is playing out. The RSI is making lower highs (lower red line) while DBA is making higher highs (upper red line).
All the while, DBA is pressed right up against the upper Bollinger line.
If the RSI continues to track lower from here, that could set DBA up for a fall…
And that would provide the setup for a potential short trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict