From the desk of Ian Culley @IanCulley
Sellers are in the driver's seat when it comes to commodities these days.
Besides natural gas and livestock contracts, few commodities present buying opportunities that we like. In reality, most have either broken down or are on the verge of breaking down.
As the latest bout of selling pressure shows little signs of easing, we’re likely to experience more damage in the coming days and weeks.
Copper, one of the most economically sensitive and widely followed commodities in the world, is a great example of recent weakness. It can’t stop falling.
Given the downside volatility raw materials have experienced since the start of the summer, many trends are stretched. We don’t want to be too bearish here. We want to let the dust settle.
With that said, it’s hard not to imagine where the bears will strike next.
And when we scroll through our charts, it looks like they have crude oil in their sights.
Let’s take a look.
Here’s a chart of crude oil futures:
The bears have been pounding at the lower bounds of the current range. Prices even slipped to fresh four-month lows during Thursday’s session but quickly recovered.
Though the bulls may have won the day, it’s important to remember the more times a level is tested, the higher the likelihood it will break.
With each additional challenge of this support zone, crude oil looks increasingly vulnerable to a decisive downside resolution.
If and when we get a decisive breakdown below 94.25, we can get short with a measured target toward 62.50. This also coincides nicely with a shelf of former lows from last year.
Wait, what? We want to short crude with a target of 62.50!?
Hang with us…
Not only does it look ready to resolve lower. It’s also at a logical level to stop leading the rest of the commodity space.
Here’s a chart of crude versus the CRB Index:
On relative terms, crude is running into resistance at a shelf of former highs from 2013 and 2018. It just so happens these prior peaks versus the CRB Index preceded significant tops for crude on an absolute basis as well.
To be clear, we’re not calling for a major top in crude oil today. We're just pointing out that, at current levels, it would make perfect sense to see crude pull back on relative and absolute terms.
With so many other commodities rolling over and completing topping formations, why should we think crude oil will be any different?
These are the facts…
There's broad weakness across the asset class – check!
Crude is a former leader, but it's showing weakness on absolute and relative terms – check!
We have a potential topping pattern and a clearly defined level to define our risk – check!
And, of course, the risk/reward profile is skewed heavily in our favor – check!
Forget about the geopolitical headlines and CPI print for a minute and just look at the charts.
And, remember, when it comes to commodities, sellers are in charge these days.
If and when crude decisively breaks below 94.25, we’re short. That’s our line in the sand. If we’re above that level, risk is to the upside, and we have no business being short.
It’s that simple.
As long as we know where we’re right, where we’re wrong, and where we’re feeding the ducks, we can’t ask for much more.
Stay tuned!
COT Heatmap Highlights
- Commercial hedgers in crude oil hold long exposure at a three-year extreme.
- Commercials' net long positioning in gold, silver, and platinum are all at three-year records for the second week running.
- While commercials were net buyers for the fourth week in a row in the US Dollar Index, they still hold a net short position within 11% of the three-year extreme.
Click here to download the All Star Charts COT Heatmap.
Thanks for reading! As always, please let us know what you think.
And be sure to download this week’s Commodity Report below!
