HardAssetsInvestor

Written by Brad Zigler  |

September 07, 2010

This Week's Most Overbought (Oversold) Commodities

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Okay, all you bulls and bears. Get out your pads and pencils to take note of this week's most overbought commodities.

• Palladium - Yeah, I know. Palladium prices have advanced more than $130 an ounce in the past few months. There's nothing, in fact, wrong with the metal's uptrend. It's just being bid up by overzealous hands now. Palladium hasn't yet reached April's overbought levels that set up a $180 tumble. As of now, the overheated bidding's more like that seen in August when spot prices fell $23. That's the good news and the bad news about palladium—its volatility. That, and its illiquidity. It's a thinly traded commodity, so the in-and-out capital flows in futures and through the ETFS Physical Palladium Shares (NYSE Arca: PALL) create plenty of buying and selling opportunities for dexterous traders. Savvy buyers, for example, are looking for a pullback in spot prices to the $505 level as a load-in point after settling at the $531 level on Friday. For PALL investors, that corresponds to awaiting a $3 fall in share prices to the area around $49.70.

• Wheat - Another volatile market, but certainly not illiquid. Wheat's exhibited symptoms of panic-buying in the wake of the Russian drought and export ban. The buying goes far beyond the fundamentals of the U.S. wheat market—that is, the fundamentals we know. The trouble with wheat is the persistency of its overbought conditions. Wheat was controlled by bidders for three months in the summer and fall of 2007 before prices finally broke down in October. If, and when, spot wheat drills a deep enough hole to fall through the $7-a-bushel level, a fallout effect is likely to be felt by other grains and oilseeds. In particular, the iPath Dow Jones-UBS Grains Total Return Subindex ETN (NYSE Arca: JJG) is vulnerable.

• Coffee - Speaking of ETNs, the iPath Dow Jones-UBS Coffee Total Return Subindex ETN (NYSE Arca: JO) could take a hit if spot coffee prices break below $1.7865 a pound. Coffee's fundamentals still point toward higher prices, so any weakness is likely to be viewed as a speculative buying opportunity. Relief for coffee jitters is spelled V-O-L-A-T-I-L-I-T-Y.

Don't get me wrong. It's not all about markets topping out now. There's one standout commodity that's actually oversold—natural gas. Spot prices have bounced off the $3.75/mmBTU level and are headed, it seems, into a seasonal uptrend. We've examined the commodity's post-Labor Day tendencies in past editions of the Desktop, most recently in December ("Natural Gas/Crude Oil Spread Wins Again"). We'll revisit this topic in a future article, but for now, investors might want to reconnoiter the buying landscape for the United States Natural Gas Fund (NYSE Arca: UNG) and the United States 12-Month Natural Gas Fund (NYSE Arca: UNL).