From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Commodities have been on a tear to start the year.
The CRB Index is up almost 16% year to ate, while our equal-weight commodity index is up 9.5%.
But, with such explosive moves over the past few months, we think it might be time for some corrective action.
Our commodity indexes and a handful of individual contracts are now testing potential resistance levels.
Though we still think this bull market has plenty left in the tank, it’s starting to look like commodities are due for a break over the short term.
Let’s discuss some of these charts now.
First up is the CRB Index:
The benchmark commodity index is running into an area of former support at the 2012 and 2014 lows, coinciding with a key Fibonacci retracement level measured from the 2011 peak to the 2020 lows.
The CRB Index has been on a tear, posting 10 straight weeks of higher closes. Following such a strong run, it would make sense for the index to digest its recent gains at this potential level of overhead supply.
While the CRB Index is dominated by crude oil, we’re seeing a similar story when we remove the heavy weighting toward energy from the equation.
Here is our equal-weight commodity index nearing a key extension level:
Like the CRB Index, our equal-weight index has rallied aggressively since resolving higher from its range late last year.
Price is nearing a key Fibonacci extension level, making for a logical area for some consolidation. This strengthens our conviction that commodities could begin to enter a corrective phase.
When we drill down to the individual contracts we notice the same theme.
Here’s a chart of crude oil futures:
Crude kissed the 100 level yesterday, peaking just three cents above our target of 100.51. But this key psychological level was fleeting, and prices gave back seven dollars before settling at 93 with a small gain on the day.
Here’s a closer look at this reversal action:
Sellers came in and took control after price achieved our objective.
This is illustrated by the long upper wick on yesterday’s candle. We’re looking for downside follow-through in the next few sessions for confirmation that this was a near-term top in crude.
For crude to pause and consolidate below the 100 level would make sense.
This doesn’t mean the uptrend is coming to an end, it just means some corrective action is likely to take place before prices resume higher. We’re watching 85 as the first line of support.
Speaking of reversals, gold also ripped higher this week before being faded:
Gold is still working through an overwhelming amount of price memory and overhead supply at those former 2011 highs around 1,924.
After a brief surge above 1,975 yesterday, sellers took control and we’re back beneath those highs to close the week.
Gold led the charge of the current bull run in commodities and was the first to hit new all-time highs. We’re still constructive gold and believe we ultimately resolve higher.
But this trade needs more time to develop.
Another example is cotton futures:
Like crude oil and the commodity indexes, cotton is at a logical resistance level at the 161.8% Fibonacci extension around 127.60.
Some digestion of its recent gains below this key level would be healthy and allow the trend to build momentum for another leg higher.
Here’s the weekly chart of Minneapolis wheat:
After gaining more than 100% off its 2020 lows, wheat is challenging key former highs.
The trend has lost momentum since running into an overwhelming amount of overhead supply at this resistance zone. Similar to the charts before it, this is a logical level to take some profits in anticipation of a consolidation phase.
While most commodities appear to be finding resistance at logical levels of overhead supply, that’s not the case for all of them.
Here's aluminum futures, bucking the trend and ripping to new all-time highs:
As many commodities are slowing down and losing momentum, aluminum and other base metals such as tin and nickel stand out as they are printing fresh highs.
We can remain long these leaders even if we are entering a period of sideways action at the index level.
And that's really the story for commodities. After some monster moves in recent months, a lot of these contracts are ripe for consolidation.
Not only are a lot of charts hitting our objectives and running into resistance, but we experienced some blow-off type moves on the heels of the Russia/Ukraine news this week.
News-driven volatility like this often marks key tops and bottoms.
While we don’t think this is a long-term top for commodities as a group, we do think it is likely some form of a top for many of them.
Whether it lasts a few weeks, a few months, or even longer -- we’ll just have to wait and see.
For now, we want to focus on the contracts that are showing strength and making fresh highs, such as aluminum.
As for those commodities that are at resistance levels, we think this is a good time to feed the ducks and be patient until we have clear signs of a next leg higher.
Stay tuned!
And be sure to check out our weekly trade idea from our natural resources and commodity-related scans below.
COT Heatmap Highlights
- Australian Dollar: Commercial long positioning dropped by more than 3,200 contracts as extreme positioning begins to unwind.
- Soybean Meal: Commercial hedgers are less than 1% away from their three-year-record short position.
- Coffee: Commercials reduced their historic net short position by more than 3,000 contracts last week.
- US Dollar Index: Commercial hedgers' short positioning is 4% away from its record three-year extremes.
Click here to download the All Star Charts COT Heatmap.
Trade of the Week
Today we’re highlighting Alpha Metallurgical Resources $AMR, a 1.6B mining stock from our Natural Resources list:
AMR is a leading coking and thermal coal supplier and thus offers exposure to both the energy and industrial metals theme.
Earlier in the month, it reclaimed its former 2018 highs, completing a multi-year base. It's remained in a bullish regime since the summer of 2020 and registered an overbought reading to confirm the recent breakout.
With momentum on its side, we want to own AMR as long as it’s above those former highs around 80 with a target of 129.50 over the coming 2-4 months.
Thanks for reading! As always, please let us know what you think.
Be sure to download this week’s Commodity Report below!
