From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Earlier this month, we discussed our outlook for a post-harvest rally, highlighting corn and soybean oil contracts. 

Here’s what we had to say: 

Cotton and coffee continue to rip. Crude oil and the energy space are grinding higher. Live cattle are breaking out. Even precious metals are starting to catch a bid.

Fast forward to today, and Ags have emerged as the clear leaders over the near term. They’ve been ripping higher while the majority of the commodity space retests critical levels of former resistance and continues to consolidate.

The fact that grains, softs, and livestock are marching higher while their peers are under pressure, tells us this is an area we should focus on for long opportunities. It’s where the relative strength is right now.

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

We’ve pounded the table on the weakness in energy these past few days, so why stop now? When we find ourselves hammering the same topic time and again, there’s usually a very good reason.

As far as energy goes, there’s been a lot of damage done to the space this week.

Breadth fell off a cliff and was not supporting the new highs for energy stocks.

The relative trends have gotten clobbered, as energy has been among the worst-performing sectors over the near term.

And, just today, we’re seeing failed breakouts in energy sector ETFs across the board.

Since we’ve already written about these themes, let’s dive in and see what energy futures themselves have to say about the situation.

Are futures resilient despite these bearish developments? 

Or are there cautionary signs in the commodities market that are confirming the weakness in the stock market?

Let’s find out.

First up is crude oil:

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Commodities are streaking higher, providing plenty of alpha across the entire space to anyone who can pry their eyes away from their altcoin charts.

Cotton and coffee continue to rip. Crude oil and the energy space are grinding higher. Live cattle are breaking out. Even precious metals are starting to catch a bid.

But what about the grain market? Last week, we pointed out that our Minneapolis Wheat position had hit our target and that it was time to feed the ducks.

Today, we’re going to highlight a couple of grain contracts we want to keep on our radar for buying opportunities in the coming weeks and months.

Let’s dive in!

First up is the March 2022 corn contract:

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

The best opportunities are the ones with the most clearly defined risk characteristics and most favorable risk/rewards.  

This summer, Minneapolis Spring Wheat was offering us a trade set-up with both these qualities. Price had just resolved higher from a near decade-long base and was trading at its highest level in 8 years. We were buying the breakout.

Fast forward to today and our initial profit target has been met and we’re locking in gains.

In today’s post, we’ll take a step back, review our trade, pinpoint current levels of interest, and discuss how we’re managing the position moving forward.

First, let’s look at the weekly chart of Minneapolis Wheat futures:

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley      

Procyclical commodities have attracted all the attention this year as inflation and rising rates have driven prices considerably higher.

But, as we pointed out last week, many of these contracts -- Brent crude, natural gas, copper -- are running into areas of overhead supply or are already in the process of correcting.

With that as our backdrop, let’s switch gears and focus on an area of the commodity space we haven’t talked about in months.

That’s right... precious metals!

While we’re seeing many leading commodities pause at logical levels of resistance, gold and silver have finally stopped going down and are rebounding off support. Despite trending lower since last summer, they're still holding above the lower bounds of their trading ranges. We think this basket of shiny rocks is ripe for review.

Let’s take a look around the precious metals complex and see what’s new.

First, we have a chart of gold futures:

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

It’s been impossible to ignore the strength in commodities this year.

The CRB Index is up more than 50% over the trailing 52 weeks. During this same period, the S&P 500 is up 32%, and bonds ($TLT) are down more than 8%.

Commodities are the clear leaders.

With breakouts from some of the most commonly observed contracts -- crude oil, copper, and natural gas -- more investors are coming around to the idea that commodities are a viable asset class.

Now that the buzz surrounding this once-forgotten corner of the market is growing, we’re seeing many commodities run into overhead supply zones. We think it would make sense for these contracts to consolidate here. Following such explosive moves off last year’s lows, some sideways action at resistance would be normal behavior.

Let’s look at a few charts that are at logical levels to digest gains.

First up is natural gas futures:

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Copper was a critical piece missing from the intermarket puzzle heading into the fourth quarter.

Just last week, copper was testing year-to-date lows and looking vulnerable for a downside break. Meanwhile, energy futures and interest rates were rising, and cyclical and value stocks were getting back in gear.

The mixed signals were impossible to ignore. It’s not likely that the recent breakouts in crude oil and the US 10-year yield would hold in an environment where copper is breaking down.

Dr. Copper is a great leading economic indicator and critical to the global growth narrative. Let’s see what it’s saying.

Here are two ways we were looking at the copper chart:

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Commodities have been on an absolute tear, with our Equal-Weight Commodity Index up almost 40% over the trailing year. 

But ever since Q2, the vast majority of the space has been chopping sideways along with most cyclical assets. 

Sounds a lot like stocks, doesn’t it? And while we’re still yet to see any major resolutions from equities, we have seen some bullish developments in the commodities market of late.

Energy asserted itself as the new leadership group with a series of major breakouts. Both crude and heating oil broke to new six-year highs, while gasoline futures completed a seven-year base. 

Then there’s natural gas, which gained more than 25% during the trailing month and tested its 2014 highs just above 6.

The emerging leadership from energy comes as no surprise, as we noticed signs of relative strength last month.  

Now that it’s here, what are the implications for the rest of the commodity space and global risk assets?

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Energy is the clear leader in the commodity markets right now. Our equally-weighted energy index is up 13.76% over the trailing month and 6.58% in the last five days.

The emerging strength from this group is supported by a rising rate environment that could be just getting started.

So, crude oil to 100 dollars and natural gas to 9?

Maybe! But before we get ahead of ourselves, there are still plenty of mixed signals and divergences that need to be resolved.

One that stands out is the lack of confirming price action between economically sensitive commodities. Let’s take a look!

Here’s a chart of Crude Oil futures, Copper futures, and Copper Miners $COPX:

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Whether we’re talking about stocks, commodities, currencies, or even the bond market, things have been a total mess. It’s no secret, and you’re probably tired of hearing it by now.

Trust me, we’re just as tired of seeing it.

So, as these choppy conditions test our patience and discipline, why not use this opportunity to take a step back and examine where we’ve come from, where we are now, and where we’re likely headed.

In today’s post, we’re going to do just that by revisiting and analyzing some of our favorite breadth indicators and discussing what some of them are suggesting for commodities over the long run.

Let’s dig into it!

First, we need to understand that a breadth thrust isn’t a singular event. It’s a process that builds upon itself as a new bull cycle unfolds.

These thrusts in participation don’t all just happen overnight. Instead, they develop over shorter time frames at first and eventually culminate with a broad expansion in new longer-term highs.

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Risk assets have been getting hit for the past two weeks. Stocks have been under pressure, and commodities have been struggling.

Meanwhile, we never saw any real follow-through lower in the Dollar, as DXY has bounced right back to the upper bounds of its year-to-date range.

But, as usual, we continue to see pockets of strength in the commodities complex.

Last week, we wrote about the resilience from base metals, such as Steel, Nickel, and Aluminum.

More recently, we're seeing relative strength from the Energy complex. That's what we're going to talk about today...

Energy is actually the only sector that's positive over the trailing two weeks. And Energy futures haven't been looking too shabby, either.

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Industrial metals have been one of the strongest subgroups within the commodity complex over the trailing year. 

The parabolic advance in Steel futures off last year’s lows is an excellent illustration of this.

But lately, we see more and more commodities shift toward sideways trends in the intermediate-term. And lots of them are doing so trapped beneath overhead supply. 

A quick glance at charts like crude oil or copper tells this story well -- the last four months have been a chop fest for most.