Trouble Looming for Commodities ETFs

November 1st at 1:27pm by Tom Lydon

An already rocky year for commodities exchange traded funds could get even more tumultuous as the charts for some commodities are weakening.

The $6.1 billion PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) is down 7.3% this year, which does not sound compared to the bear market losses for gold, silver and several soft commodities. However, DBC is facing a potentially ominous technical situation of its own. [Commodity ETFs Slump Amid Fed Speculation]

“Many key commodities are breaking support, ranging from the CRB Index, Crude Oil, Commodities ETF (DBC) and Gasoline futures. This has my attention, due to this…the majority of the time Crude Oil & Gasoline have been soft, it may have been good for prices at the pump, yet it wasn’t good for stock prices,” said Chris Kimble of Kimble Charting Solutions.

October, usually a dour month for gold, was untypically kind to the yellow metal despite Thursday’s declines and November is the second-best month of the year for bullion. [Gold ETFs Can't Wait for November]

However, the DBIQ Optimum Yield Diversified Commodity Index, DBC’s underlying index, devotes less than 8% of its combined weight to gold and silver futures, so even if those commodities rally, the impact on DBC is likely to be slight.

Problematic for DBC, rival funds and commodities bulls in general is weakness on the charts of the CRB Index, West Texas Intermediate and gasoline futures combined with a decent chart for the U.S. dollar. Commodities are dollar-denominated and thus have an inverse relationship to the greenback. WTI crude and RBOB gasoline futures combine for over 28% of DBC’s weight.

The ETF’s 14.1% weight to Brent crude is a plus at a time when Brent/WTI spreads are widening due to supply disruptions in OPEC states Libya and Nigeria. However, that may not be enough to stem the slide for commodities if the PowerShares DB US Dollar Index Bullish (NYSEArca: UUP) breaks resistance at $21.80.

“At the same time some of the key macro commodities are breaking down, the U.S. Dollar is bouncing off support and breaking above a bullish falling wedge,” said Kimble.

PowerShares DB Commodity Index Tracking Fund

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Tickers

DBC UUP