ETF In Focus: A Technical Look At The iPath Grains ETN (JJG)

Scott Pluschau:  Commodities are a hot topic lately.  Let’s take a look at the iPath DJ-UBS Grains TR Sub-Idx ETN (NYSE:JJG), on a weekly chart. For most of 2009 and into 2010, JJG formed a triangle pattern with three points of contact on each support and resistance trend line which I have drawn on the chart. When JJG had a breakdown of the triangle it was no doubt a bearish signal, but failed signals are also the strongest.  In the classic “bear trap”, the short sellers believe the market well decline, and as the market reverses the short sellers are trapped and have to buy back at rising prices helping to fuel a rally. The only thing wrong with being wrong on any trade is staying wrong. The grains soon rallied across the triangle with enough momentum to breakout to the upside on confirming volume.  Quickly exiting your trade when there was no follow through price action to the downside keeps you in the game for opportunities like this very next breakout. From an auction market perspective JJG entered a phase of vertical development on that breakout of the triangle, where the market was clearly seeking new value at higher levels. In other words demand is overwhelming supply, and until the supply meets the demand, it pays to sit back and do nothing but look to add to your position. These two trades are the epitome of cutting your losses short and letting your winners ride.

Now let’s look at the recent price action and volume. What appears to be shaping up is a bull flag continuation pattern. Looking at JJG since early 2011 to present, and from an auction market perspective, we are currently in a phase of horizontal development that is forming the flag. This balance area has also formed on tremendous volume. The market has currently found value on the weekly time frame with the enormous trade facilitation taking place at these levels. The next initiative move from the flag or balance area has potential to enter vertical development again seeking value at much higher or lower levels. I would not want to be on the wrong side of this market initially if resistance or support fails. In full disclosure I do not have a position in JJG. The best approach for me at this time is one of patience. A breakdown of the flag may have short term bearish implications as there are a lot of buyers who will most likely feel trapped at these higher levels and they could be looking to exit, fuelling the downside pressure.

The most favorable trade in my opinion is always with the prior trend. There is tremendous reward to risk ratio using “swing rule” to set a profit target as the length of the flag pole. The flag flies at half mast in technical analysis. Above the flag, there is no recent resistance level over head, while there are some areas of support and consolidation below such as at the $47.50 area where the most recent sharp selloff was met with strong demand. That particular week that tested $47.50 had the single largest volume on the weekly chart. When the market finally makes its move I will react accordingly. I believe the probabilities of the breakout being strong are favorable due to the combustion chamber of high volume and tightening consolidation. Taking these types of trades with great reward to risk ratios and combined with the favorable probabilities of being correct gives me an edge. Over time these setups that are followed through with discipline and consistency along with the proper money management and position sizing leads to a trading system with positive expectancy.

This is Scott Pluschau for the ETFDigest.com. I can be reached at [email protected]

Written By Scott Pluschau, A Technical Trading Associate At ETF Digest

ETF Digest writes a subscription newsletter focused on technical analysis of exchange-traded funds. ETF Digest was founded in 2001 and was among the very first to see the need for a publication that provided individual investors with information and advice on ETF investing.  Even if you’re not a fan of chart analysis, ETF Digest provides insight and commentary into which global markets are “working” and why.

Leave a Reply

Your email address will not be published. Required fields are marked *