Three Charts Point To Higher Commodity Prices

January 19, 2020

From the desk of Tom Bruni @BruniCharting

In late August we started to see some signs of a potential bottom forming in Commodities as they approached long-term support with momentum diverging and in October we finally got a breakout.

Today that breakout in the Thomson Reuters CRB Commodity Continuous Index remains intact and the trend in Commodities as an asset class has shifted from one we want to be selling rips to one that we're buying dips.

From an intermarket perspective, there are a lot of signals we've discussed that support higher Commodity prices such as the AUD/USD and CAD/USD breakouts, and today I want to share three more data points that have shown up in the last few weeks.

Here's the CRB Commodity Continuous Index chart showing the breakout we're referring to. From our perspective, as long as prices are above long-term support at 375 then the bias is sideways to higher.

Below that, things get dicey.

Click on chart to enlarge view.

Moving into the intermarket signals I referenced above, here are Canadian Equities (USD terms) breaking out from a decade-plus long downtrend line and pushing towards their 2018 highs. As long as prices are above 29, this breakout is intact and targets 32.50 in the near-term and the all-time highs set in 2007-2008 in the coming years.

Australia is also breaking out of a similar downtrend, albeit it's much farther from its 2007-2008 highs than Australia. As long as prices are above 22.50 then the bias is higher in Australian stocks.

These commodity-levered markets/economies have already made new all-time highs in local currency terms, but to see breakouts happening in US Dollar terms is a positive change of character for sure.

The third thing we're watching is Treasury Inflation-Protected Securities pressing up against all-time highs on an absolute basis. Market participants likely aren't buying TIPS because they expect inflation to collapse, although they could be well-bid at least partially because the entire Bond market has stabilized and is trying to work its way higher (Rates lower).

To help identify the real "inflation expectations" message, we're going to compare the performance of TIPS relative to Treasuries of a similar duration. We saw this ratio bottom in August and it's slowly been working its way higher, but needs to clear the year-to-date highs decisively to confirm that this trend change is intact. If inflation expectations are truly picking up, then we'd be seeing sustained outperformance from TIPS. We're not there yet, but price and momentum characteristics remain constructive.

The evidence that Commodities as an asset class are back in vogue, at least on an absolute basis, has been building since August and continues to grow. If you're not paying attention to this theme, or are only paying attention to Precious Metals, then you're missing the bigger picture.

Take a look for yourself, I think you'll like what you see.

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Allstarcharts Team