From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Despite taking a hit in recent weeks, commodities have remained resilient.
Buyers are working to absorb overhead supply at some key levels. We’re seeing this kind of action in commodities across the board -- from industrial and precious metals to energy and even agriculture. We’re seeing prolonged consolidations in some of the most important contracts, such as crude oil, copper, gold, and soybean oil.
The point is simply that most commodities are correcting through either price or time. Some are digesting gains around former areas of resistance, and others have failed to sustain their breakouts.
Regardless of where they came from, most commodities are stuck in a range right now. That’s critical information supporting our messy outlook for risk assets.
Despite the recent bout of selling pressure, the primary uptrend is intact. Even the weakest commodities (like thermal coal) are finding support. Lumber is bouncing back above its former 2018 highs and has actually been a leader over short and intermediate time frames.
As for the major procyclical contracts, crude oil just dug in at support and has rebounded nicely this week. Meanwhile, copper continues to chop sideways within the context of a primary uptrend.
Rather than looking for areas to sell, we want to identify pockets of strength for long opportunities.
One area commanding our attention right now is the clean energy/electric vehicle (EV) space. Think copper, cobalt, nickel, lithium, and rare-earth metals.
Let’s look at a couple of commodities that are critical inputs for this emerging growth industry.
First up is cobalt futures:
Cobalt is one of the key ingredients for EV batteries, along with lithium and graphite. As the electric vehicle industry grows, demand for this blue metal will only increase. We’re already seeing it in the lithium market, as the LIT ETF is in a strong uptrend.
Demand is beginning to pick up in cobalt. Just take a look at the strong rally higher since this summer. Unlike many of its peers which are stuck in sideways ranges, cobalt prices are trending steadily higher. These are the types of markets we want to be buying right now.
We want to be long cobalt futures above 68,265 with a target at the 2018 highs around 94,660 over the next 2-4 months.
To be clear, we’re only buyers above the 61.8% retracement level, as risk is not in our favor below it.
Another critical component of the clean energy revolution is nickel:
Although nickel plays a lesser role in lithium-ion battery production than cobalt, it’s also a key element in geothermal and wind technologies. So this one actually has a handful of catalysts behind it in the form of being involved in these emerging trends. When we step back and look at the weekly chart, we see it carving out a beautiful multi-year base with a well-defined breakout level.
These are the type of accumulation patterns -- or smiley faces -- we want to catch on a breakout.
We want to buy strength above 19,930 with a 3-6 month objective near the 2011 highs around 29,103.
The trade is only valid if we’re above the breakout level. There’s no reason to be long if it slips back in its former range.
The best course of action for most commodities -- and risk assets in general -- is to sit on our hands and wait. Clearly, it’s still a mess out there.
But there are still some pockets of strength that we want to be buying. The EV space is one of those, and cobalt and nickel are two contracts with well-defined risk and risk/reward profiles that are heavily skewed in our favor right now.
That’s just how we like it!
COT Heatmap Highlights
Australian Dollar: Commercials extend their long position by more than 3,000 contracts as they near historical extremes.
Coffee: Commercial hedgers remain net short, bordering on three-year extremes.
Palladium: Commercials are only a few hundred contracts shy of their historic long position.
US Dollar Index: Commercial hedgers' net short positioning lingers near extreme levels.
