From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
The rally in some commodities has been near-vertical this year.
And we’re seeing this strength across the entire complex -- from energy contracts like crude oil to base metals such as tin and even grain markets like wheat.
While these kinds of moves are bullish over longer time frames, when things get too hot (like they have), it’s often not sustainable on a tactical basis.
This is the situation right now for a lot of commodities. We think a period of well-deserved digestion is underway for the broader asset class.
But this doesn’t mean there won’t be fresh up-legs taking place in some individual contracts.
As this new secular bull market matures, pockets of strength will rotate across the space. Our only job is to find the emerging leadership.
Today, energy and base metals are correcting after explosive rallies while strength emerges from the agricultural complex -- especially grains.
Not only are grains showing strength. They’re also carving out some massive bases.
This is an area we want to rotate into right now. Let’s talk about why!
Here’s a chart of our Equal-Weight Grain Index:
The strong uptrend in grains is evident as our index recently completed a massive base and rallied to its highest level in more than a decade.
As for the individual grains contracts, we can segregate them into two groups based on their chart formations.
There are those that have already broken out, and there are those that are on the verge of breaking out.
Either way, the fact that so many nice bases are materializing in this subgroup right now is a bullish development.
Let’s start by looking at a couple of contracts that have already broken out.
First up we have soybean oil futures:
Following a historic rally last year, soybean oil is back on track. It’s taking out a key extension level as it prints new all-time highs.
As long as it's above 82.50 our bias is to the upside, targeting near 118.35.
We have another major breakout in Minneapolis wheat:
It’s also resolving higher from a decade-long bottoming formation, taking out the 2012 highs.
We want to be long if and only if it's above those former highs around 1,036 with an upside objective of 1,380. Minneapolis wheat is a no-touch on any action back below our risk level.
The strength in Minneapolis wheat and soybean oil bodes well for other grain contracts that are approaching similar breakout levels.
Here’s corn, breaking to its highest level in 10 years:
Our initial objective in corn around 643 was hit in February. Now that it has broken above our former target we want to be long with a new upside objective near the 2012 highs around 848.
If and when it breaks above those former highs, we're targeting near 1180. Based on the recent price action from its peer contracts, it’s likely to happen any day now.
Next is soybeans:
Soybean futures flashed a buy signal when they broke above a key retracement level around 1,407. After a nice rally, they started coiling in a tight continuation pattern back in early March.
We’re anticipating an upside resolution. If and when we get it, we’re long above 1,790 with a target of 2,400.
Last but not least, we have Chicago wheat:
Chicago wheat just barely made new all-time highs recently only to come crashing back down. If and when it reclaims the 1295 level and completes this 14-year base, we're targeting 1850.
For now, our outlook is neutral until a decisive breakout happens.
We have no idea whether these bases will break out next week or next month.
What we do know is that these are some of the most bullish patterns the market offers us. When they resolve higher, we want to be involved.
And, judging by the fact that some have already resolved higher, the weight of the evidence is suggesting the others will soon follow.
Given the bull market in commodities and the strength we’re seeing in grains we think it’s more a matter of when, not if these bases resolve higher.
When they do, we'll be ready. Stay tuned!
The All Star Charts Team is at the annual CMT Symposium this week, so there is no ASC Commitment of Traders heatmap and report. We'll be back to our regular schedule next week.
Thanks for reading! As always, please let us know what you think. And be sure to download this week’s Commodity Report below!
