Published: October 11, 2010

In February 2010, I told my readers copper was doomed. I saw huge supplies of copper in China, waiting for demand to heat up again. Back then, the idea that China's manufacturers would get rolling again didn't seem likely.

I was right on the copper price... in the short run. The red metal fell -20% from April to June. But China's economy got on track, which caused the red metal to rally this summer. Today, it's at its highest price since July 2008.

This kind of "boom and bust" behavior is common for commodities...

Sometimes, high prices will spur producers to flood the market with supply. Sometimes, like we saw in 2008 and 2009, demand will simply dry up. Both situations cause commodity prices to fall.

On the other hand, sometimes we'll see demand for a commodity outpace production by a huge margin (like oil did through the last decade). Or sometimes a natural disaster will diminish supplies. Both situations will cause prices to soar.

As I mentioned, the Chinese economy looks healthy, which is great news for commodities. And I think we're seeing a legitimate uptrend. In a moment, I'll tell you my favorite spots to take advantage of what I think will be a long climb higher in commodities prices. But first, let me explain what I'm seeing right now...

To get a feel for commodity trends, I use the 200-day moving average. The 200-DMA simply takes the closing prices over the last 200 days and averages them together. That smoothes out the daily "noise" and shows us what's really happening. Analysts use the 200-DMA as a kind of "signpost" for bull and bear trends.

In short, when a commodity trades above its 200-DMA, it's in a bull market. When it drops below, it's in a bear market.

I don't use a lot of "technical analysis" or chart reading when I make my investment decisions. But buying into a commodity downtrend is a great way to lose money. Regardless of the quality of the stock, you'll get killed on the way down.

That's why I advised caution early this summer. The benchmark commodities index had dropped below its 200-DMA, and I figured we were in for a rough patch... particularly in oil stocks and base-metal stocks, which had been selling off heavily.

Both the giant oil producer ExxonMobil (NYSE: XOM) and the giant copper producer Freeport-McMoRan (NYSE: FCX) put in lower lows after my essay. But things have changed. Take a look...
 

As you can see, commodities broke out above their 200-DMA in September... and haven't looked back.

Commodities in general (and silver, gold, uranium, oil, and copper, in particular) are up big since July. And I think this trend is here to stay. As commodity guru Jim Rogers recently explained, if the economy slows and the government dumps more stimulus dollars on the market, "real stuff" - like commodities - will go up in value. If the economy recovers, increased demand will push commodity prices higher.

In other words, just about any commodity bets can look forward to a strong tailwind.

A word of caution, though... Many commodities have run up so far, so fast, a pullback is almost inevitable. Momentum traders can pile in here and try to catch another leg higher. But more cautious investors should consider waiting for a "relief" correction before getting in on the new commodities bull market.

--Matt Badiali
Editor
Growth Stock Wire
 

Note: This article originally appeared on Daily Wealth