Commodities on the Verge of an Upside Breakout, But Participation Will Likely Narrow
Chart 1 shows that the Invesco DB Commodity Tracking Fund could be on the verge of breaking out from a 3-month consolidation pattern. It also points out that the number of commodities participating in the rally has been narrowing of late. That's because the indicator monitoring a universe of commodities registering net new highs over a 50-day lookback period has been shrinking since the pattern began forming in early March. Such narrowing is typical of the internal battle typically fought at the end of most commodity bull markets, as industrial commodities in general begin to lose upside momentum ahead of energy.
That relationship is best demonstrated by comparing a smoothed long-term momentum indicator for copper, our proxy for non-energy industrial commodities, against that for crude oil. In Chart 2, the green arrows show that the KSTfor the copper price leads that for oil in virtually every cycle. When copper momentum peaks, it tells us two things: first, the technical position of the red metal has begun to deteriorate, and second, that the commodity bull market is in its late stage and likely to be narrowing in participation.
Chart 3 tells us that the ratio between oil and copper has reached a crucial chart point, just slightly above its secular down trendline and the 2018 high. Don't forget this is not an end-of-the-month plot yet. It's obviously a bit overextended on the upside, but an examination of the technical picture of its two components suggests that energy is destined to ultimately win the battle.
Copper Looks Weak
Note that the copper price, in the upper window of chart 2, has already failed at massive resistance in the form of the multi-year horizontal trendline. It has also dropped below its 12-month MA. In addition, Chart 4 indicates that copper has completed a top formation. Note that the Special K, which you can read about here, has also peaked for the cycle and completed a top of its own.
More negative proof arises from Chart 5, where the relative line between copper and the CRB Composite has violated a 17-year up trendline and experienced a long-term KST sell signal. The breaking of the up trendline is particularly egregious, since it confirms that the early 2021 high for relative performance was a false breakout. Whipsaw signals such as this are typically followed by an above-average decline. Some kind of a bounce is overdue, especially as the ratio has reached support. However, the long-term bearish overhang remains.
Chart 6, comparing the broader energy with base metals, confirms this continuing energy emergence.
Energy Ready to Break to the Upside Again?
Crude oil broke above its secular down trendline very late last year and has now reached resistance in the form of the solid green trendline in Chart 7. Its RS line against the CRB Composite is also at resistance in the form of the 2013-2022 horizontal trendline. Both series are being supported by bullish, albeit overextended, KSTs, which brings us down to two important charts. The first is a daily one featuring the US Oil Fund (USO), which indicates that the price is edging through important resistance. Bearing in mind the critical status of the long-term technical position as indicated in the previous chart, we need to follow this one very closely to see if a decisive breakout follows.
Chart 8 argues that it will, since the NYSE Oil Index has just broken out from a 14-year consolidation pattern. Oil equities and the oil price do not move on a tick-by-tick basis, but the completion of such a pattern does suggest that energy prices themselves have further to go on the upside.
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.
