Commodities - Trick Or Treat?
- Two possible scenarios for commodities
- The primary trend picture
- Commodity breadth
- What’s the bond market saying?
Two possible scenarios for commodities
The last time I wrote about commodities my comments had a bullish slant. The CRB Composite ($CRB), having experienced an approximate 8-week correction involving a successful test of its 200-day MA, seemed to be embarking on a rally which I expected to lead to new bull market highs. That did not prove to be the case as the subsequent August rally (see Chart 1), failed to take out that June peak. Instead, it retraced a Fibonacci 61.8% of the summer correction. The ensuing 2-weeks have seen the Index drop back to its 200-day MA again, which throws up the possibility of a probing of the February bear market low. I titled this article with the "Trick or Treat" phrase because there are two chart points that will give us a vital clue as to the direction of the next important move.
Chart 1
For these two alternative possibilities, we need to turn to Charts 2 and 3. Chart 2 suggests that the $CRB price action since last May will turn out to be a bearish head and shoulders pattern. That would be completed with a decisive break below and hold below the 176 area.
Chart 2
Chart 3, on the other hand, offers a far more optimistic outlook of the $CRB since its hints that the whole trading activity since last year is one giant reverse head and shoulders pattern. Its completion would require a solid break that can hold above the June high at 196. So which scenario is the more likely, given the current technical state of affairs?
Chart 3
The primary trend picture
Chart 4 shows the really long-term picture. There are two points of note. First, the February rally resulted in the KST moving above its 9-month MA for its twelfth sub-zero positive cross since the early 1970’s. Only two turned out to be false positives. Both were triggered close to the equilibrium line, not even close to the recent reversal, which came from a 44-year record oversold reading. That really places high odds on the current signal being followed by a bull market of some kind.
The second point lies in the fact that earlier in the year, the price slipped below the 1976-2016 red support trendline. It did so very briefly in 1975 and fractionally in 1999. Moreover, the recent drop caused another penetration, to the extent that the Index is currently marginally below the line. All of this, of course, emphasizes the really fine state of technical balance. That’s because a further drop from here would confirm the breakdown from that multi-decade trading range.
Chart 4
One good relationship that has worked well over the years is that between commodity prices and capacity Utilization in the US. Of course, commodity prices are influenced by the interaction of global forces and not just the US. However, the connection between the two series in Chart 5 still seems to work pretty well. In this instance it compares the CRB Composite to a Percentage Price Oscillator (PPO) of the utilization numbers, using the 3/24 parameters. The green arrows show when it crosses above its 9-month MA from a position below zero. In other words, after the economy has slowed or contracted and has begun to show signs of strength. Only one of the previous ten signals could be interpreted as a failure, that of 1980. The 1968 signal was not followed by lower prices, but a trading range. The chart shows that the latest numbers, July, have resulted in an eleventh signal. This is a very positive factor given the indicator’s history.
Chart 5
Commodity breadth
There are two commodity net new high indicators included in the StockCharts database. The first calculates the number of commodities in a universe registering net new highs over a 10-day period (!PRNNHC10), the other makes a similar calculation, but this time over a 50-day interval (!PRNNHC50). This latter indicator is compared to the Bloomberg Commodity ETN (DJP) in Chart 6. In the case of the DJP, the price remains above its 200-day MA like the CRB Composite. However, it did experience what may well turn out to be a false breakdown through a head and shoulders neckline last Thursday. The DJP is now back above it to close out the week. You can also see that this lower bottom was not confirmed by the 50-day new high indicator, which though bearishly below its MA, has so far held well above its early August low. That suggests that fewer commodities are breaking down this time and is, of course, a positive factor.
Chart 6
Chart 7 compares the 10-day series to the DB Commodity ETF, the DBC. I have split the chart into two periods, a bear market and a bull market. Note that an oversold reading in the bear environment did not generate much in the way of a rally. However, the three solid arrows that developed from oversold conditions, during the bull move, did result in a rally of some kind. My point is that if the bull market is alive and well, which is my view, then the current oversold reading ought to provide a launching pad to a rally that takes the price back above the $16 level.
Chart 7
What’s the bond market saying?
When bond market investors gain in confidence that’s bullish for the economy and usually for commodity prices. Confidence can be expressed in many ways, but one of our favorites is by comparing junk bonds in the form of the iBoxx High Yield ETF, to the 7-10-year treasury ETF (HYG/IEF). As you can see, both series have been moving pretty closely in the last 3-years or so. The fact that the bond confidence ratio has moved to new highs recently, suggests that commodities will soon follow suit. They don’t have to, of course, but had the ratio reversed to the downside instead that would be a very discouraging factor for those looking for higher commodity prices.
Chart 8
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.
