From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
It’s been impossible to ignore the strength in commodities this year.
The CRB Index is up more than 50% over the trailing 52 weeks. During this same period, the S&P 500 is up 32%, and bonds ($TLT) are down more than 8%.
Commodities are the clear leaders.
With breakouts from some of the most commonly observed contracts -- crude oil, copper, and natural gas -- more investors are coming around to the idea that commodities are a viable asset class.
Now that the buzz surrounding this once-forgotten corner of the market is growing, we’re seeing many commodities run into overhead supply zones. We think it would make sense for these contracts to consolidate here. Following such explosive moves off last year’s lows, some sideways action at resistance would be normal behavior.
Let’s look at a few charts that are at logical levels to digest gains.
First up is natural gas futures:
This has been a face-ripper, rallying more than 90% in the last six months. We think natural gas is a prime candidate for a correction after this vertical move and those 2010 and 2014 highs just above 6 is a very logical place for it to occur.
The big question for natural gas and the following charts is whether we will see a correction through price or time. We’ll be monitoring this closely and looking out for signs of any meaningful deterioration in trend.
For now, it’s best to stay away until demand can absorb all the overhead supply around 6.
Next, we have Brent crude futures:
While most of the energy space has broken above its 2018 highs, Brent is finally back at the scene of the crime.
We don’t expect it to rip right through those former highs, but it most certainly could. It wouldn’t be the first time price has ignored our levels.
Our bias is neutral until we get a decisive close above 86.45. If and when it happens, we want to be long with a target of 115.50.
And we can't forget copper futures:
Last week, copper tried to break out of a five-month consolidation only to find resistance at its highs from earlier in the year.
Our structural outlook remains bullish as price is simply correcting within an ongoing uptrend.
But from a tactical perspective, we could certainly see more consolidation here. Bulls want to see copper break to new all-time highs around 4.89. Above there and we’re targeting 6.33.
Softs are another area of the commodities market turning lower after reaching a key level:
Like energy, softs came into Q4 as a leadership group largely due to the vertical moves in coffee and cotton.
But our equal-weight index suggests a corrective period is likely in the coming weeks, maybe even months.
Finally, we have oat futures:
Oats are another great example of an explosive rally running into resistance at a logical level. At the same time, when we zoom out and focus on the 12-year base breakout, this chart highlights that many of these primary trends appear to be just getting started.
For now, our bias is neutral, as oats just reached our target of 682. If and when price reclaims this level, we want to buy on strength with a target of 998.
Oat futures are a no-touch until we get a decisive breakout to new all-time highs.
Indeed, there are a handful of commodity contracts that are simply off limits over the near term.
Many continue to digest gains from earlier in the year, while others are just beginning to correct below critical areas of overhead supply.
It's no wonder energy contracts are capturing all the limelight these days. Crude oil, heating oil, and gasoline are all above their respective risk levels, and each is up more than 10% during the trailing month.
Though this is incredibly constructive on longer timeframes, we believe commodities as a whole could see more chop in the coming weeks and months.
That's it for this week!
COT Heatmap Highlights
- Minneapolis Wheat: Commercial hedgers continue to add to their shorts, as they're the most net short in history for the second week in a row.
- Heating Oil: Commercials reduced their short position by 1,082 contracts the previous week. Last week, that increased to 15,086 contracts, signaling a possible capitulation.
- Sugar: Commercial hedgers reduced their short exposure by almost 56,000 contracts -- an unwind in positioning may be underway.
- Coffee: Commercials have slightly reduced their shorts but remain less than 4% away from their three-year short positioning extreme.
As always, let us know what you think. We love hearing from you.
Thanks for reading, and be sure to download our Commodity Report below!
