From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
Rotation is the lifeblood of any bull market.
If a sustained uptrend is going to persist, then we need to have broadening participation... or at least some healthy rotation.
And that’s exactly what we're seeing within commodities right now.
As the energy group chops sideways and base metals hang tough, we’re starting to see signs of strength from one of the worst-performing areas over the past year.
Softs.
Like livestock last week, it appears this group of commodities are ready to play catch-up as they turn the corner and head higher.
Considering the fact that other groups are simply consolidating or correcting through time instead of price, we'd argue that this looks more like an expansion in participation rather than rotation. But it's really just semantics. It's all bullish at the end of the day. Let's dive in.
Here’s a chart of our Equal-Weight Softs Index, which includes Cotton, Coffee, Cocoa, and Sugar:
The Softs index violated a 7-year downtrend line late last year when commodities really began to pick up steam. This was the first step in what's now morphed into a structural bear-bull reversal for this index.
Now it’s closing in on its 2014 highs, as this small pocket of commodities begins to gain traction.
Let’s look at a couple of components from our index that are currently offering favorable trade setups.
First up is Cotton futures:
Cotton has been on our radar for a while now. We’ve been watching it consolidate just below the breakout level of an 8-year base since late February.
Yesterday, cotton broke above its April pivot highs after resolving higher from a short-term consolidation pattern. The path of least resistance is now higher, back toward those critical multi-year highs.
We want to be buyers of cotton futures on strength if and only if we're above 97.50 with an upside objective of 127.50 over the next 2-4 months.
Another chart we really like right now is Sugar:
After a big base breakout last year, sugar is pouring it on, as it just cleared a key retracement level around 18.50.
As long as we’re above that key level, sugar looks pretty sweet here and we want to be long with a 2-4 month objective at the 2016 highs near 24.
On the flip side, this trade starts to sour below 18.50. If that's the case, we want nothing to do with it. There are plenty of opportunities elsewhere.
Though softs are setting up some clean trading opportunities, the main takeaway is the rotation and/or broadening of participation that we’re seeing within commodities markets.
The continual trading opportunities and breakouts occurring in the commodities complex speaks to a healthy risk appetite among market participants. Basically, this is exactly the kind of price behavior we'd expect in a bull market. It also supports our thesis that we're likely still in the earlier innings of a larger structural uptrend.
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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