From the Desk of Ian Culley @IanCulley
The commodity markets never lack action.
Since it’s such a diverse asset class, we’ll always have contracts we want to buy, some that we want to short, and others we want to avoid.
Today, I’m going to outline one of each. Let’s dive in!
The Breakout
According to the latest reports, Hurricane Ian (strong name, terrible storm) may have cut the Florida orange crop in half.
Whether it’s true doesn’t matter. I’m more concerned with a well-defined level to trade against. Check out the daily chart of orange juice futures:
The chart looks good to me! A five-month base breakout to fresh five-year highs is the kind of strength I like to buy.
The line in the sand is 191. You can get long above this level with an initial target of 220 and a secondary objective of 242.50.
Remember, OJ futures are thinly traded. You need to adjust your position size and protective stop accordingly.
Will we get some freshly squeezed OJ?
Maybe. But I don’t want to make that bet below 191.
The Breakdown
The potential failed breakdown in gold last month is starting to look more like a false start:
Gold futures are a short as long as they trade below 1,675. You could also wait until it takes out last month’s pivot low of 1,622.
Getting short on a decisive resumption of the topping pattern is good enough for me. I’m short, targeting 1,450.
On the other hand, I’ll walk away if it breaks back above 1,675. I’m not interested in getting chopped up around a former support level.
I’ll just have to sit back and wait for a better opportunity to develop. I’d rather not force a trade or feed bad habits. There’s always another opportunity right around the corner.
The Consolidation
Coffee futures have cooled. But are we ready to pour this cold brew over ice?
Here's a chart of the most actively traded contract (December '22):
Some might find this chart downright ugly. I get it. But there’s also plenty going on here.
Aside from the overwhelming supply at 243, momentum has shifted into the bear camp. Notice the bullish momentum regime that supported the rally heading into its Feb. peak. The 14-day RSI failed to register below 42 for almost a year.
Yet, the absence of an overbought reading at the contract highs was an early warning that the uptrend was losing steam. In fact, it printed a bearish divergence that led to a 14-day RSI below 40 within weeks.
Momentum now oscillates in a bearish regime.
A break below 192.75 as momentum hits oversold conditions would present a strong sell signal. I like selling the breakdown with a target of 161.50 while looking to momentum for confirmation.
To be clear, there’s no reason to be short above the July pivot low.
The sooner a trade doesn’t work, the better. That way, we can move on to the next setup.
That’s it for today. No grand thesis from me, just a few trade ideas.
Not much has changed. Risk assets are still under pressure. Structural trends remain intact. And we need to keep our eyes on the dollar.
Stay tuned!
COT Heatmap Highlights
- Commercial hedgers continue to cut their long exposure to crude oil and are now more than 10% away from three-year extremes.
- The unwind is underway in gold as commercials reduced their long position by 3,000 contracts this week.
- And commercials like the Canadian dollar, coming within 6% of their largest long position in three years.
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!
