Commodities: Down Now, Up Later?

• Two Key Commodity Benchmarks Violated Trend Lines
• Commodity Sector ETFs Breaking as Well
• Longer-Term Picture May be Reversing

In early April, I tacked on a couple of commodity charts at the end of an article that commented on global equities breaking out. There, I noticed that some commodity indexes were flirting with their 200-day MAs and said that I would get back with another article later in the week if some potential breakouts developed. As it turned out, there was no article as there were no breakouts; indeed, prices began to drift lower. My longer-term work suggests that commodities may well be in the process of forming a base that will eventually serve as a platform for higher prices. In the meantime, though, we have to look across the valley as prices continue to look vulnerable in the short-term.

Two Key Commodity Benchmarks Violated Trend Lines

Chart 1, for instance, shows that the DB Commodity ETF (DBC) had a real problem surpassing its 200-day MA; it subsequently backed off and dropped below its 2019 uptrend line. To add insult to injury, the KST has triggered a sell signal and the RSI has had its February/April negative divergence confirmed.

Chart 1

Chart 2 shows that the Bloomberg Commodity ETN actually did move decisively above its 200-day line, but, once again, failed to hold above it, not unlike last October’s action. It has now broken below the red support trend line.

Chart 2

Commodity Sector ETFs Breaking as Well

The commodity sector leader, at least on the downside, has been agriculture, as represented by the DB Agriculture ETF (DBA). DBA is shown in Chart 3 together with its 13-week ROC. The ETF has been in a clear-cut downtrend since 2014, though the actual peak was established in 2011. The violation of the green downtrend line at $17.50 would be a big deal, since it is a lengthy line and is also intersecting with the 65-week EMA; those lines have the habit of reinforcing each other as a resistance zone.

Just under that level is the purple horizontal trend line, which marks the top of a potential broadening formation with a flat top. This can be a really powerful formation, packing a punch well beyond anything expected from its size and depth. It’s true that the September rally took the price above the upper range of the pattern. It’s obviously cleaner if it doesn’t, but with these patterns we are trying to identify an environment that is becoming more and more unstable - that is, with the line joining the progressively lower lows. It’s important to stress that this is a potential, not an actual, formation; it needs to be completed with a break above that $17-17.50 area before we can make any bullish projections. However, beating that level would almost certainly result in a violation of the 2014-2019 downtrend line.

Chart 3

Chart 4 shows the more recent picture and reveals that Wednesday’s price action formed a bullish Pinocchio bar. These one-day reversal patterns develop when the intraday action pushes the price through a support or resistance area, but neither the open nor the close follow suit. In effect, a Pinocchio offers a false sense of an upside or downside breakout. In the case of Wednesday’s action, the DBA temporarily fell below the red support trend line, but, by the close, was trading back above it. To be sure, if valid, such one day phenomena are only expected to have an effect for between five to ten sessions. In this case, with a deeply oversold RSI and moderately oversold and bearish KST, it’s possible that the Pinocchio could be positioned as a kind of reverse domino. Absolutely no guarantees here, but, with the possibility of a breakthrough in trade talks, who knows?

Chart 4

The DB Energy ETF (DBE) is starting to break below its 200-day MA and has also ruptured its 2019 uptrend line. Wednesday’s KST sell signal suggests that there is further downside to come.

Chart 5

Base metals in Chart 6 were well above their 200-day MA, but the price is now right at that mark. That’s pretty important since the solid thick arrows show that the three of the last four penetrations were followed by worthwhile moves. The latest February crossover has yet to be proven one way or another. However, the dashed arrows point up that this MA has acted as a super support/resistance level, having turned back eight rallies or reactions in the last three years. We will have to see how the current test will play out. However, if the MA is violated, that would revive the possibility that the price action since late 2016 is a head-and-shoulders top. On the other hand, a break above the green horizontal trend line at $17 would suggest substantially higher prices.

Chart 6

Longer-Term Picture May be Reversing

Chart 7 indicates that the CRB Composite may be in the process of forming a double bottom. That’s speculative at this point, because it has not yet been completed with a break above the green horizontal line. One encouraging sign comes from the KST, which has started to go flat.  However, the 5/15 PPO, an early bird indicator, has been rising for several months. The arrows show that it always leads the KST, so its reversal is a necessary condition for a KST buy signal. That said, a price is paid for that sensitivity in the form of false signals, such as the periods enclosed in the ellipses.

Chart 7

Chart 8 shows that, once the current short-term sell-off is completed, the possibility exists for an important reversal, since the Index is very close to its 2013-2019 bear trend line and the 12- and 24-month MAs. The stakes could be quite high, as the 18-month ROC has been falling for 11 years and is not that far from an upward penetration. If penetrated on the upside, that would represent a very powerful long-term bull signal.

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 of Walnut Creek or its affiliates.