Are Commodities About To Turn Up?

• CRB Still Caught in a Trading Range
• Commodity/Bond Ratio Holding On By its Teeth
• Watch the Canadian Dollar for Clues

CRB Still Caught in a Trading Range

Back in May, I wrote an article entitled “Commodities: Down Now, Up Later?" in which I pointed out some of the long-term technical bullish potential for the commodity markets, as well as some of the near-term vulnerabilities. The thought was that prices would experience some near-term weakness, after which some of these bullish factors could come into play. As it turned out, the CRB Composite dropped about 10 points and subsequently regained 8 of them. As Chart 1 shows, all that has happened in the meantime is an extension of the 2016-19 trading range.

If the Index drops below its late 2018 monthly closing low of 170, that will complete a consolidation bearish head and shoulders. On the other hand, a close greater than 189 will place it above its 12- and 24-month MAs, as well as the 2008-19 secular downtrend line. Such action would likely push that 18-month ROC above its secular downtrend line as well. In many cases when an oscillator, such as this, cracks a very long-term momentum indicator, it flags a major trend reversal. That secular line also joins the head with the right shoulder of that potential head and shoulders. Since the top of that shoulder is below 189, that would be additional evidence pointing to its bearish demise. I must stress that none of this bullish action has yet taken place and price is still locked in that trading range, so let’s not jump the gun in either direction.

Chart 1

Indeed, Chart 2 indicates that the 50-day net new high commodity oscillator has started to decline from an overbought condition. The red arrows point up similar situations and, in most instances, we saw a 1-to-2-week decline. Since the Index is also running into its green resistance trend line and the 200-day MA, a test of the all-important 2016-19 uptrend line cannot be ruled out.

Chart 2

Commodity/Bond Ratio Holding On By its Teeth

The ultimate inflation/deflation relationship is that between commodities and bonds. In Chart 3, we use the CRB Composite for commodities and the iShares 7-10-year Trust for bonds ($CRB/IEF). A rising line favors inflation-sensitive assets, while a falling one favors their deflationary counterparts. Since early last fall, the ratio has been in a deflationary mode, signaled by the joint trend line break by both the Special K and the Index itself. Not surprisingly, deflation-sensitive sectors, such as Utilities, Staples and REITS, have since out-performed their resource counterparts.

In the late spring, the ratio dropped below the 2016-19 uptrend line, suggesting that a new deflationary down leg was underway. In the intervening period, it bounced back to the extended trend line, holding out the possibility that the break will turn out to be false. The daily KST in the bottom window argues in favor of that possibility, as it is in a rising mode and is by no means overextended. If so, I would expect to see the Special K rally above its green downtrend line, pushing the ratio itself above its red breakdown trend line as well as the 2018-19 green down trend line and 200-day MA.

Chart 3

Watch the Canadian Dollar for Clues

Chart 4 compares the resource-based Canadian Dollar with the CRB Composite over the last 25 years. The green and red trend lines show that major swings in commodities are also experienced by the Canadian buck. Since Canada only produces a fraction of global commodities, we can be sure that it is commodity prices that influence the currency rather than the other way around.

Chart 4

The arrows in Chart 5 all slant slightly to the right, as they connect seven major turning points where the currency led the commodity index. That doesn’t happen in every cycle, of course. However, if we could point to a major turning point in the Dollar, that would strongly suggest that a turning point, in this case a bottom, would not be that far off.

Chart 5

Chart 6 shows the long-term picture, with a Coppock Curve in the lower window of the chart. Last month’s action took the dollar back above its 12-month MA and multi-year downtrend line. The Coppock has also gone bullish by crossing above its 6-month MA. Previous sub-zero crossovers have been flagged by the arrows; solid ones represent success and dashed ones failure. This indicator’s record is not as good as it is for equity markets, so I have inserted a moving average into the equation to try and filter out whipsaws. However, a rising Coppock, in conjunction with last month's trend line and MA crossover, combine to give us an overall strong bullish signal.

Chart 6

Chart 7 adds to the idea that the dollar is in the process of reversing to the upside. It’s true that it has yet to cross above its downtrend line and 65-week EMA. However, both the short- and intermediate-term KSTs are in a bullish mode and neither is overextended. Given the currency’s leading tendency against commodities, a decisive breakout would not necessarily translate into an immediate commodity advance. What it would do, based on its previous relationship, is put us on notice that a commodity bull market is probably lying around the corner.

Chart 7

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.