From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Here we are on Friday, and it's been yet another eventful week for the commodity complex.
Steel futures ripped higher. Corn was limit-up on Thursday. Lumber continues to digest its gains with the same volatile fashion it made them in, giving back another 10% on the week.
And then of course there's Dr. Copper which appears to have successfully defended former resistance turned support at its all-time highs from 2011. It's impossible to overstate the importance of how this massive base in Copper resolves.
Bulls definitely don't want this move to evolve into a failed breakout... The 4.50-4.60 zone is the line in the sand.
As for Energy Markets... Crude Oil making its highest daily close since October 2018 might be the biggest development of all.
We’ve talked a lot about Crude over the past few months as it's consolidated beneath a handful of key prior highs for the better part of the year. And now that it looks poised to breakout, we'd be remiss not to discuss it again today!
After being stuck below the 2019 highs near 66 for more than two years, we think there's a good chance demand has finally absorbed all the overhead supply at this crucial level of interest. As you'll see in the chart below, it just barely cut above those former highs in March but was soon rejected.
Fast forward to today, and it's mustered up the strength to take another shot at this critical resistance zone.
Here’s the chart, zoomed-out about 7-years.
The first thing that stands out when looking at this chart is that 66 is clearly a battleground between buyers and sellers, and buyers have clearly gotten more and more aggressive, as evidenced by the frequency of retests. I mean, how much overhead supply could even be left at this point...?
I believe the saying goes, “The more times a level is tested, the more likely it is to break.”
So, will this third retest be the charm?
It's definitely possible.
As long as we’re above 66, we're buyers of Crude Oil futures with a short-term target of 76.
But if we fall back below 66, it's off-limits. Let it be someone else's problem.
Under this scenario, things can get dicey fast. Here's our alternate view of Crude which shows why we believe this is the case:
We have a potential failed breakdown in the making as price just barely breached its March high this week. It did so by less than a dollar on a closing basis, so take that for what it's worth...
On top of that, momentum has waned significantly in recent months. Not only did the daily RSI-14 print a potential bearish divergence at this week's highs, but making matters worse it couldn't even get overbought to confirm the new highs. In fact, it was barely able to print a reading above 60!
None of these are common characteristics of a chart that is about to break out. But hey, we've seen stranger things in markets... especially in Crude Oil for that matter!
Given that so many risk-assets are currently running into and consolidating at our upside objectives and logical levels of supply, just think about the implications of a valid breakout in Crude for the broader Commodities Market.
Could the reflation trade already be back on after such a short breather?
We think a breakout in Crude would suggest it is.
And if Crude is headed to 76 we have to imagine we’re in an environment where energy stocks, other cyclical areas of the market, and risk-assets in general, are catching a bid.
Thanks for reading. As always, let us know what you think, and be sure to download this week’s Commodity Report below!
