From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
It’s been a routine hurricane season down here so far this year. Things have picked up lately, and we’ve had a few close calls over the past week.
But storms aren’t just brewing in the Atlantic...
It’s also beginning to look dicey in the commodities market, with lots of “close calls” these days.
Strong headwinds such as the rising dollar have hit some of the most important procyclical assets this week. Apparently, there’s some geopolitical stuff going on, too. Then again, when isn’t there?
Let’s discuss what we’re seeing and try to determine just how likely these winds could evolve into a major storm for commodities.
Energy, base metals, precious metals, and ags have either pulled back from recent highs or have broken critical levels of support.
Given that many areas have experienced near parabolic advances during the past year, a corrective phase would be a healthy and welcome development. It makes total sense for commodities to digest their monster gains at current levels. And remember, sideways is always an option.
But headwinds have become stiff as bonds have caught a bid, and the US Dollar Index broke to new 10-month highs yesterday. We’re watching closely to see if this breakout for DXY sticks, though.
The shift in the market environment toward more risk-averse behavior is signaling increasing odds of a deeper correction for risk assets. With that in mind, let’s check in on two of the most important and closely watched procyclical commodities and identify key levels of potential support we’re watching in case these recent breakdowns are valid ones...
First, we have a chart of crude oil futures: Earlier this week, crude oil closed below a crucial area of former resistance turned support around 66.
The 66 level had been respected numerous times during the past three years, making this week’s breakdown a significant development in the near term.
If we’re below this level of interest, the risk is to the downside for crude. We’re focused on the March lows around 57.25 as the next potential support level.
If price breaks below 57.25, the corrective action we’re currently experiencing could turn into a full-fledged trend reversal.
Further weakness would not bode well for energy or risk assets.
Next, let’s look at the daily chart of copper: This sure looks like distribution to me. Yesterday, copper broke to 4-month lows, as price continues to correct since hitting new all-time highs in early May.
As we’re doing with crude oil, we want to monitor any sign of continued weakness, as it could lead to a change in the ongoing uptrend.
We have our eye on the March lows near 3.85 for now.
A decisive close below 3.85 would signal the possibility of a deeper correction and a potential change in the primary trend.
Again, some digestion would be normal based on the explosive moves in commodities during the past year. It also makes sense from a cyclical and seasonal perspective.
But if two of the most economically sensitive commodities continue to slide lower, it could put a major dent in the global growth and reflation narrative.
Forecasting the movements of a major storm with complete precision is difficult--ask a meteorologist. The winds can change in a split second. And, when they do, we can change our minds. We must remain flexible during these choppy summer months, especially during market environments as mixed as the one we’re experiencing right now.
