From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Overhead supply is a theme we're seeing all over these days. And this isn't just true for the stock market, but it's also dominating the commodity landscape.
Crude Oil reached our objective of 76 and turned lower. Copper remains stuck below its former 2011 highs. And Gold has been an absolute mess since peaking last August.
Even the few commodities that have recently broken above resistance zones -- such as Gasoline and Heating Oil -- have yet to follow through and confirm their new highs in any meaningful way.
Remember, commodities have enjoyed some explosive moves over the past year. Now, many are at logical levels to pause and digest recent gains. This is healthy stuff. Normal market behavior.
And when we consider the recent US dollar strength as an added headwind, it makes plenty of sense to see commodities continue to cool off and correct.
But even under these choppy and mixed conditions, we have found a favorable risk/reward opportunity.
Let’s take a look…
Here’s a weekly chart of Lean Hogs:
We love our big base breakouts and lean hog futures are a perfect example of just that.
Last March, hogs resolved upward from a 6-year basing pattern and immediately ripped higher. In the meantime, price has pulled back to check in on the breakout level near 97.75, offering investors an ideal opportunity to re-enter a long position.
And what a gift the market is giving us here as we couldn't ask for a cleaner setup with risk-reward so heavily skewed in our favor. We'd be foolish not to take a shot at this one.
Our risk level becomes clear when we drill down on the daily chart.
We're buying lean hog futures as long as we’re above the June pivot low near 96.50 with an upside target of ~133-135.
If you want to give the trade a little more room, we can move the stop to the lower boundary of the preceding gap near 91.75. But given the choppy market conditions across all asset classes, we'd prefer to play it close with a tighter risk level of 96.50.
If we're wrong, our loss is capped at ~$3. We're out right away and can move on to other opportunities. Life's too short to sit around monitoring losing trades in assets that aren't trending.
It’s important to remember that commodities are a diverse asset class. There are procyclical groups found in base metals and energy, defensive areas within precious metals, and less economically sensitive pockets in grains and livestock.
With all this diversity, there should always be trending areas and favorable setups somewhere!
As always, let us know what you think. We love hearing from you.
Thanks for reading, and be sure to download this week’s Commodity Report below!
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