From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
In recent weeks, we’ve been diving into individual commodity groups to size up the structural trend and to get a better idea of where we’re likely headed in the new year.
Last week, we highlighted energy contracts and the fact that many are still grappling with overhead supply. And earlier in the month we covered the worst-performing area of the commodity markets - precious metals.
Today, we’re going to turn our attention back to metals and review the base metals group.
Even with the S&P 500 printing record highs, trading ranges and overhead supply stole the show in 2021 and those dominant themes are evident when we look at base metals.
Notice the strong relationship between our equal-weight base metals index and blue-chip international equities in the Global Dow Index $DGT.
This chart captures the range-bound nature of both the commodity market and stocks in the US and abroad.
Here it is again in a monthly chart with Copper:
While the tactical trends in risk assets are sideways, it’s important to zoom out like this to put things in the perspective of the structural trend. And when we do, we’re seeing a lot of continuation patterns within the context of strong primary uptrends.
And that’s really the situation for base metals as a group these days. While there are pockets of strength in contracts like Tin, most of the space is simply consolidating.
When we dig into the individual metals, Lead is an excellent example of the range-bound nature of commodities.
Like most commodities, lead has been trendless during the second half of the year. When we zoom out it is in a massive decade-long trading range. Price is still trapped beneath significant overhead supply at the 2011 and 2018 highs.
As for zinc, it’s trying to break out above those 2018 highs right now. Here’s a look:
As long as we’re above 3,239 the bias is higher and we can be long with a target of 4,596 over the next 2-4 months.
The true stand-out in the base metals group these past two years is Tin. In our industry, this is what we call a face-ripper:
It’s hard to be bearish of base metals and commodities in general when tin futures continue to print new all-time highs.
Our outlook is bullish as long as we're above the former 2011 highs near 33,121. We’re targeting 44,767 but the risk/reward is not currently in our favor as Tin is already more than halfway to our objective.
So far, lead is a hot mess, zinc is trying to resolve higher from a multi-year base, and Tin is going parabolic. There are contracts we want to buy, and contracts we want to stay away from. It’s really a mixed bag. But at least none of these commodities are in downtrends. That’s information.
Somewhere between the leaders and the laggards, we have the most prominent base metal of all. Here’s Dr. Copper:
When it comes to procyclical commodities, most investors keep their eyes on crude oil and copper. Both have been a range-bound mess for most of the year but had stellar advances off the 2020 lows.
Like our custom base metals index, copper futures have gone nowhere since May of this year. It looked like price was going to break out in mid-October but it failed and reversed at its former highs from the spring. It looks like we’re in for further consolidation for now.
We want to be long above 4.80 with a target of 6.33 if and when we get an upside resolution. In the meantime, our outlook is neutral as copper presents nothing but opportunity cost until it reclaims its year-to-date highs.
One last thing we’d be remiss not to mention is the bullish continuation pattern and fresh 6-month highs in Freeport-McMoRan $FCX:
Seeing this copper mining bellwether resolve higher could be an early indication of what to expect from base metals…
Now that FCX has reclaimed a critical level of interest, we can be long above 39.25 with a target near 61.25.
To be clear, we can't hold FCX below that key level as risk is to the downside.
That is just about all you need to know about base metals as we head into the new year. After strong rallies off the 2020 lows, most are consolidating and digesting gains in their year-to-date ranges. Many contracts are still beneath critical levels of overhead supply as well.
But the most important takeaway is that the structural trends are higher. Therefore, we’re giving these continuation patterns the benefit of the doubt and anticipating some upside resolutions in 2022.
COT Heatmap Highlights
Due to the New Year's Holiday the COT data is from the previous week as of December 21, 2021.
- Australian Dollar: Commercials slightly decreased long positioning but are still near historical extremes.
- Platinum: Commercial hedgers' long exposure nears its 3-year highs.
- Palladium: Commercials' net long position is stretched after hitting a historic extreme earlier this month.
- US Dollar Index: Commercial hedgers extended their net short position by more than 3,000 contracts.
Click here to download the All Star Charts COT Heatmap.
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And be sure to download this week’s Commodity Report below!
