Commodities: On Your Mark, Get Set, Go?

• Long-term picture at a critical juncture point
• Global commodities poised for an upside breakout
• What about commodities against other assets?
• If commodities break out so will yields?

Long-term picture at a critical juncture point

Chart 1 shows the long-term technical position of the CRB Composite ($CRB), where you can see that the Index broke down from a multi-year trading range last December. Since then, the price has rebounded and is now marginally above its breakdown point and back above its 12-month MA. The arrows show that long-term KST signals have typically been followed by a primary trend advance. That’s not always true, as the two dashed arrows in 1976 and 2014 testify. Still 10:2 in favor of valid signals since 1972 look to be pretty good odds to me. If so, that would indicate that the 2015 downside break will turn out to be a whipsaw, just as the January 1975 break did. This long-term Chart shows that the price is currently around an extremely important pivot point in the form of the red trendline, so the question relating to whether it holds or folds becomes pretty crucial. To obtain an answer, we need to examine some of the shorter-term charts. The charts, I’ll warn you, are also at critical juncture points.

Chart 1

Global commodities poised for an upside breakout

Charts 2, 3, and 4 all show the CRB Composite ($CRB) expressed in different major currencies, together with a short-term and long-term KST. They reveal that commodities in dollars are just as crucially positioned as those in euro or yen. I am using the long-term series to gain primary trend perspective, and short-term momentum to provide clues as to what is likely to happen in the next couple of weeks or so. As you can see, the dollar-based series, in Chart 2, is right at the neckline of a 2 ½-year potential reverse head and shoulders. The long-term KST, as we saw from Chart 1, is bullish, but its short-term counterpart has now started to rally. That suggests, that if a breakout is going to materialize, it should happen pretty soon.

By the same token, the other interpretation of the chart says that the Index is currently in the terminal phase of completing a head and shoulders top, the neckline of which is represented by the red horizontal trendline. That would be completed with a drop below the 178 level. Note that the 200-day MA is also at 178, so this level currently represents very important support. At the moment the two positive KSTs suggest that the odds strongly favor an upside breakout. I’ll be watching closely.

Chart 2

What is intriguing is that the $CRB expressed in euro and yen is in a very similar technical position. These are shown in Charts 3 and 4 respectively. Note that in the case of the euro index the bearish red potential neckline is a rising one, as is the case for the yen series. The basic point of all this is to demonstrate that commodities in a global sense are poised for a broad-based upside breakout and that we are likely to find out pretty soon.

Chart 3

Chart 4

What about commodities against other assets?

The key asset connection, as far as I am concerned, is the ultimate inflation/deflation relationship i.e. that between commodities and bonds. A rising ratio obviously implies that both investors and traders should be emphasizing commodities over bonds, but it’s much broader than that. It suggests that inflation-sensitive sectors such as energy, mines, and basic materials should be generally favored over deflationary or defensive ones, such as utilities, consumer staples and so forth. When commodities are running, the emerging markets which are resource based, tend to do well. Brazil, Russia, South Africa, and Indonesia come to mind. Canada, Australia, and energy producer Norway also have above average resource exposure. Finally, rising commodities in their early phase imply a healthy economy.  Junk bonds, where the risk of credit default dissipates, also perform better than their higher quality government counterparts in the early phase.

There are many ways to express the commodity/bond relationship but perhaps the greatest extreme is attained by dividing the $CRB Composite by the longest maturity government bond, the 30-year price in the form of the $USB. This series actually broke to the upside on Monday as it cleared the three resistance trendlines. The ratio is also above the 200-day MA. The short-term KST, in the bottom window, is in a bullish mode. Note how the Special K has completed a base, experienced a series of rising peaks and troughs and is positively placed above its red signal line. It doesn’t get much clearer than that.

Chart 5

Chart 6 also shows that the stock market agrees.The ratio of a resource based ETF to a defensive ETF (IGE/XLP), has also completed a reverse head and shoulders. Note also that the DB Commodity ETF (DBC) has already violated its green dashed down trendline, though it has yet to clear the horizontal solid one.

Chart 6

Commodities also look as though they may be turning around against stocks but this has not yet been proven technically. Chart 7 certainly shows that momentum is positive because the Special K has violated its (dashed) bear market trendline favoring equities. It has also set up a series of rising peaks and troughs. The SPK is above its signal line which is bullish confirmation. However, the ratio itself still has to clear its 2015-16 down trendline in order to complete the base. A rising ratio does not mean that stocks will decline and commodities rally. All it tells us is that commodities are likely to outperform and that could mean that both rally, in which case commodities would advance faster.

Chart 7

If commodities break out so will yields?

Historically there are periods in the cycle when both commodity prices and yields advance simultaneously. Chart 8 tells us that if commodities do break to the upside they will likely be supported by yields, at least at the long-end. The chart features the 30-year yield, together with its Special K. The yield itself is in a neutral trading range, which could well turn out to be a reverse head and shoulders if completed. It, like the $CRB, is right at a (dashed) down trendline. Unlike the commodities chart, the 30-year yield ($TYX) is still below its 200-day MA.  The Special K is offering a mixed picture since it is above its bear market trendline and has started to trace out a series of ascending peaks and troughs. It does, though, remain below the red signal line. Some corrective activity could well take place in the next few sessions since the short-term KST in the bottom window is in a bearish mode. Eventually, though, the positive trend in the SPK should enable the yield to push above its (solid) green, potential inverse-head-and-shoulder neckline.

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.