Despite positive returns at the index level for Q2, commodities have been in full retreat for the past month or more. We broke the damage down in last week’s post.
However you want to slice it, commodities are under increased selling pressure. The strongest areas aren’t breaking out; they’re trying to hold support.
That’s simply how raw materials are performing in the current environment. Yet we’re still finding levels we want to trade against from the long side.
Believe it or not, one of these situations is popping up in one of our favorite energy contracts…
Here’s a weekly continuation chart of natural gas futures:
After completing a monster 14-year base in April, it reached our initial target of 9.05 in less than two months. That’s the beauty of breakouts in commodity markets: When they go, THEY GO!
Since then, natural gas has sold off aggressively along with the vast majority of commodities. One month of selling pressure has resulted in a 40% drawdown and quick retreat back into its multi-decade range.
But we think natural gas bulls have more in the tank.
Yesterday, futures were up almost 12%, challenging the former breakout level as well as an area of overhead supply that acted as resistance for more than a decade.
We want to position ourselves in the bulls' corner if and when they can manage to reclaim that critical level.
Here’s a daily continuation chart of natural gas, highlighting key levels of interest:
The October 2021 high around 6.45 is our line in the sand. It coincides with a significant area of overhead supply and acted as support during multiple retests last spring.
We want to buy strength on a break above that level, targeting the year-to-date highs near 9.66.
It’s simple.
If it’s above that level, we like it long.
If it’s below 6.45, we don’t want to carry the downside risks.
That’s it.
There’s no grand macro thesis here. Commodities are still under pressure.
When we flip through the Commodity Report chartbook this week, the market adage "escalator up, elevator down" rings true. The current correction among commodities is broad and steep.
But that’s not going to stop us from trading what’s in front of us.
Stay tuned!
COT Heatmap Highlights
Commercial hedgers in crude oil and gasoline continue to hold long exposure near multi-year extremes.
Commercials' net long positioning in gold, silver, and platinum are all at three-year records.
While commercials were net buyers this week, they still hold a net short position in the US Dollar Index near the three-year extreme.
