Is It Time For a Commodity Rally?

Commodities have been badly beaten up in the last few months, but no market goes down for ever, so it's natural to ask the question of whether it's time for an upside reversal. The evidence for that is not conclusive yet, but there are some very promising signs.

One of these can be traced back to the recent firming of the gold market. Using the benefit of hindsight, the shaded areas in Chart 1 show extended rallies in the CRB Composite. Note that most bottoms (i.e. the start of the shading) are preceded by a dashed green arrow under the gold price. That combination indicates that investors in the yellow metal consistently discount future commodity price inflation. There are a couple of examples when both series reverse simultaneously, but they are by far the exception.

Gold prices bottomed in the middle of last year and have been in an uptrend ever since. However, commodities have been moving in the opposite direction to set up the largest positive divergence in the 50-year history of the chart. That does not mean that commodities will rally right away, as the divergence could get more pronounced, but it does suggest that players in the gold market are looking through current weakness and expecting commodity prices to firm up.

Chart 1

Chart 2 compares the CRB to my inflation/deflation ratio. This is a relationship that is calculated by dividing an inflation-sensitive index (Pring Inflation Index, !PRII) by one comprising interest-sensitive and defensive issues (Pring Deflation Index, !PRDI). The idea behind this relationship is to see if the stock market, as represented by these two opposing forces, is voting in favor of inflation or deflation. A comparison of the two series shows that the ratio usually moves in the same direction as the CRB Composite. In most situations, the dashed arrows that join the various peaks and troughs slant to the right, thereby indicating that the inflation/deflation ratio is usually the leader. Recently, the CRB sank to a new low, but the ratio broke decisively above its 2016-2020 down trendline, triggering a long-term KST buy signal favoring inflationary sectors. If those leading tendencies again prove prescient, expect commodities to come to life in the not-too-distant future.

Chart 2

Commodity Indexes May be Forming a Double/Triple Bottom

Chart 3 takes a closer look by featuring the Bloomberg Commodity ETN (DJP), which looks as if it may have successfully tested its bear market lows. That seems to be confirmed with today's decisive penetration of its 2020 down trendline. The real tip that a bottom is in place would come from a decisive break that can hold above the horizontal solid line at $17.50. Note that the net new high indicator in the lower panel appears to have diverged positively with the price. We will have to wait for a couple more sessions to be sure, but the situation is definitely encouraging.

Chart 3

The DB Commodity ETF (DBC) has been behaving slightly differently, but is also showing some promise, as the April down trendline has already been violated. If the break turns out to be valid, that should also result in the violation of the down trendline for the 14-day RSI and push the short-term KST into a bullish mode.

Chart 4

Energy Could Be the Key

Both the DJP and DBC have a high weighting in energy, so if we can show that energy has likely bottomed, that will definitely influence the commodity indexes. In this respect, Chart 5 could be explosive. It compares the price of West Texas Intermediate with the oil VIX. The arrows point up that peaks in the VIX have typically been followed by a rally of some kind in the oil price. As a rough guide, the higher the level from which the VIX reversal takes place, the longer the bottom holds. It recently traced out two extreme peaks, both for the VIX itself and its 10-week ROC. There is nothing stopping it from moving higher, but that certainly looks unlikely at this point.

Chart 5

Individual Sectors

If commodities are to turn around, this should be evident in some of the sub-indexes. We certainly see that with the DB Agriculture Fund (DBA), with a break above the April/May down trendline for the price and an even stronger breakout for the RSI.

Chart 6

The Base Metal Fund (DBB) has also broken to the upside, but needs to take out its 50-day MA and dashed green trendline in order to offer a stronger signal.

Chart 7

The Energy Fund (DBE) is right at its 2020 down trendline, as is the 9-day RSI. That one should be watched closely, since it is likely to be the tipping point behind a good rally and additional price erosion/base building.

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 Groupof Walnut Creek or its affiliates.