Commodities Turn Up the Heat

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Commodities are making a fresh leg higher, and energy is leading the way.

Crude oil is back above our risk level around 76. And the energy-heavy CRB Index is at its highest level in more than seven years.

But it’s not just energy contracts that are working right now. We’re seeing strength across all areas of the commodity complex.

This broadening participation is evident in our equal-weight commodity index, which just hit new highs after consolidating for the past two quarters.

This chart shows the CRB Index and our equal-weight index side by side:

Both are printing new highs after some consolidation and corrective action last year. You can see the bullish continuation pattern very clearly in the equal-weight index.

Also, notice how both of these charts are sporting strong underlying uptrends. 

These are all common things to see when looking through commodity charts these days.

There's also a major difference between this year and last year when you look at these two indexes together.

Our equal-weight index was chopping sideways for most of 2021, failing to confirm the series of new highs in the CRB Index. This time around, they're breaking out together.

The confirmation we’re seeing in our equal-weight index as it breaks to fresh highs is a critical difference between last quarter and today. We think raw materials are about to rip. 

If commodities are going to enjoy a fresh leg higher, we want to be long the strongest contracts.

Right now, a lot of those contracts are in the energy space.

Here's heating oil futures flashing a buy signal:

Heating oil just completed a multi-year base following a failed breakout last October. It’s now back above those critical highs from 2018. 

We want to be buyers of heating oil futures if we’re above 2.44 with a target of 3.33 over the next 2-4 months. 

All bets are off if it slips back below those former highs from 2018.

Next we have Brent crude futures:

Brent is still carving out a seven-year base below its former 2018 highs. This is the same pattern as heating oil, and it’s likely to resolve higher in the same manner.

We want to be prepared for a big base breakout as buyers continue to absorb overhead supply at this key resistance level.

If and when we get an upside resolution, we want to buy on strength above 86.50 with a target of 115.50. Our timeframe is about 2-4 months.

As we kick off the new year, we’re in an environment that’s rewarding commodity buyers. It was also that way for most of last year. 

After months of false breakouts and trendless chop, the entire asset class appears to be back on track, as both the CRB Index and our equal-weight commodity index are at fresh highs.

Today, we’re highlighting a couple of energy contracts, as this area is currently showing leadership.

In the coming weeks and months, we expect plenty of buying opportunities to emerge throughout the remainder of the commodity space.

Stay tuned.

COT Heatmap Highlights

• Australian Dollar: Commercials added more than a thousand contracts to their long position as they approach record levels. 
• US 10y T-Note: Commercial hedgers are less than 5% away from a three-year-record long position.
• Palladium: Commercials' long positioning remains near record levels after hitting a historic extreme earlier last month.  
• US Dollar Index: Commercial hedgers lightened their net short position but remain near the three-year extreme.

Click here to download the All Star Charts COT Heatmap.

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Be sure to download this week’s Commodity Report below!