Are Commodities Losing their Mojo?

Commodities have been on a tear since their lows set in the spring of 2020, but every news outlet you tune into these days is talking about inflation, gasoline in particular. That does not mean that prices cannot go higher. Over the long-term, that's probably a realistic scenario. However, on pure contrary grounds, it's important to examine the technical structure, in order to see if there is any justification for at least some temporary relief from higher commodity prices. We should not overlook the old adage that says "whenever everyone thinks alike, its probably time for a change."

Confidence in the Balance

A lot of it comes down to confidence, or lack thereof. In that respect, Chart 1 compares the CRB Composite to the ratio between the iBoxx High Yield and iShares 7-10-year Treasury (HYG/IEF). A rising relationship indicates growing confidence, as investors are happy to accept the higher-yielding junk over the less risky and lower-yielding government paper. The reason is that they are downplaying the possibility of a weaker economy and a high level of defaults. The arrows show that rising confidence goes hand in hand with buoyant commodity prices and vice versa.

For the last year and a half, the ratio has been moving sideways in the face of advancing prices. However, it is now very close to the lower boundary of that 2021-2022 trading range. Given its past relationship with commodity price swings, a drop would not only be bearish for commodities, but the economy itself. It's something worth keeping an eye on. Remember, you can update the chart in future by simply clicking on it.

Chart 1

The Canadian and Australian Dollars Do Not Believe the Commodity Bull Market

The Canadian and Australian dollars, because of their natural resource base, are sensitive to commodity prices, as is evident in Charts 2 and 3 respectively. Chart 2 compares the Canadian buck to the CRB Composite. Note the arrows marking the peaks and troughs mostly slant to the right, thereby demonstrating that the currency usually leads. Recently, the CRB has been rallying sharply and the dollar has not, all of which argues in favor of the CRB soon weakening.

Chart 2

Chart 3 takes this a step further, with the Aussie dollar by showing that joint trendline breaks have reliably signaled commodity reversals in both directions. Once again, we see a set of negative divergences between the two series that have been developing since mid-2021. Sell signals for the currency's long-term KST have been quite helpful in signaling commodity reversals. One false negative developed in 2004. The current CRB trend is upward. However, a drop below the sharp 2020-2022 up trendline, which is currently at 275, would confirm the negative divergence between the Index and the currency, with clear bearish implications for commodity prices.

Chart 3

Commodities are Way Overextended

Chart 4 features the CRB Spot Raw Industrials together with an 18-month ROC. This Index is useful because it only has one weather-driven component, cotton. Furthermore, it does not include many commodities traded on a public exchange. A lot of speculative activity, which often causes prices to overshoot, is therefore filtered out. The arrows indicate when the ROC peaks from, or very close to, the overstretched line at around +30%. Only once, in 2004, did this approach fail to identify a peak in the Raw Industrials. Consequently, the tentative 12-month MA crossover and the obvious topping-out action of the ROC argue for a bear move developing in the period ahead.

Chart 4

That's also the impression we get from the CRB Composite, which has a large energy, as well as an agricultural component not included in the Raw Industrials. It is featured in Chart 5, where a recent post-1958 record momentum high has recently been seen. There is nothing in the rule book says it can't move higher, but the odds don't favor such a scenario this side of a mini-bear market or extended correction. It's also worth noting that the Index itself has run into resistance at its 2014 high, which could also impede further gains.

Chart 5

Copper usually swings in a similar direction to the CRB Spot Index, so it is worth corroborating what is going on with the Index. The price of the red metal, along with its Special K, is shown in Chart 6. Both series have completed tops and look headed lower.

Chart 6

Chart 7 compares the long-term KST of copper to that for crude oil. The arrows tell us that, in most cycles, copper is the leader. It is currently on track to repeat this sequence again.

Chart 7

Chart 8 features a similar Special K setup as that for copper. In this instance, both series are in a confirmed uptrend. The chart is also indicating that crude has experienced a slight penetration of its 2021-2022 up trendline, so it's not unreasonable to expect a challenge of the bull market trendline and 200-day MA around $91.

Chart 8

Finally, Chart 9 indicates the technical position for the DB Commodity ETF (DBC) is looking shaky. That's because volume has been expanding on the downside since the June peak. Rising volume and falling prices is often a characteristic of a primary bear market. Note also that the price recently experienced a false upside breakout, an event that is typically followed by an above-average price move in the opposite direction to the break. With the vast majority of traders looking up, an above-average move to the downside is not an improbable scenario!

Chart 9

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.

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