Seeding a Short Play

 | Jan 30, 2012 | 9:00 AM EST
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If you study the PowerShares DB Agriculture Fund (DBA) chart, you'll have to admit the pattern hasn't been encouraging: In the bigger picture, the fund has produced a bearish series of lower lows and lower highs.

As a matter of fact, the recent high was made around the confluence of at least five Fibonacci price relationships between $29.46 and $29.82, with $29.53 having been the actual high. One of the price relationships in this zone was the 100% projection of a prior rally swing, for a decline of $1.96. The swing from the Dec. 16 low to this recent high on Jan. 26 also came to an exact $1.96 drop, which is similar to another downward swing of $1.89.

That price area did offer natural resistance, and at least a short-term sell trigger has materialized against the zone. The maximum risk on any shorts in DBA, therefore, should be defined as above the Fibonacci price cluster zone of $29.46 to $29.82 area. If this high proves to be more important, the downside potential is at $27.04 and $26.36.

DBA -- Daily
Source: Dynamic Trader

Looking at some of my commodity charts, however, I have to wonder whether the larger bearish trend will, in fact, continue generating new lows. When using Fibonacci price analysis, we always have to take it from one price decision to the next. The recent decision, or key price level, told us to look at resistance and a sell entry. As the fund continues its decline, the next in-focus level will be $28.55 to $28.83.

DBA -- Daily
Source: Dynamic Trader

That price area comes from the fund's action since the Dec. 16 low. A pattern of higher highs and lows has followed that low, and it's actually creating a buy setup just a bit below the current price -- between $28.55 and $28.89. Now, this certainly conflicts with the sell setup that has been triggered against the resistance -- so what do you do with that?

This is the way that I'd play it: I would watch the fund as it moves into this key support area, and first see whether the price holds. If it doesn't, then I would stay with the short side and look for a continued decline, perhaps down towards my target for the trade. If it does hold, and triggers a buy entry, I would exit my short position and even consider turning it around for a trade, with the maximum risk for any long positions defined as being below the $28.34 swing low.

If you need any help with trade triggers, please refer to my prior informational piece on the subject.

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