From the Desk of Ian Culley @IanCulley

Survey says… 

Buy commodities!

The multi-year secular uptrend in commodities remains intact on absolute and relative terms. Commodities are outperforming the S&P 500 and US Treasury bonds. And cattle, sugar, cocoa, and orange juice are all ripping.

While some of these explosive rallies pause, other areas of the commodity space are forming tactical reversal patterns.

Let’s check out one of my favorites,…

Corn.

Here’s the December corn contract carving out a ten-week base:

I bought yesterday’s close above 500’0. That’s our risk level. As long as corn trades above that level, I like it long toward the July high at approximately 570’0.

However, during today's session, I was abruptly stopped out of my position.

I’ll give December corn another shot in the coming weeks. But only if it’s trading above our risk level.

Commodities are working. I imagine corn futures and...

From the Desk of Ian Culley @IanCulley

Price must hold above key support levels when defining a range or uptrend.

It might sound simple. Yet investors often sideline these crucial levels in favor of the latest headline.

I read the news daily and support journalists fighting the good fight. However, I don’t incorporate what I read in the papers into my market analysis. 

Instead, I focus on price and the critical areas seared into the collective memory bank – support and resistance.

Perhaps you can guess my response when a reader recently asked, “What will it take for crude oil to break down?”

Price must undercut support!

Check out the daily crude oil chart:

The principle of polarity unfolds as former resistance turns support at approximately 83.25. That’s the level.

It’s difficult to...

From the Desk of Ian Culley @IanCulley

Each commodity market has unique supply and demand dynamics.

The result is a diverse set of assets offering a steady flow of trading opportunities.

Today, I’ll outline two promising trade setups – one long, one short.

Let’s start with a fan favorite…

Natty Gas!

Natural gas futures gained over 6% on Thursday, taking out a key pivot high.

Here’s the continuation chart posting its highest level since March:

Notice natty gas is finding support above a former resistance zone at roughly 2.835. 

On Wednesday’s "What the FICC?" I mentioned trading against Tuesday’s low based on this near-term support.

Price has ripped higher since, taking out a shelf of pivot highs and filling a downside gap from early September.

I’m now long the November contract with an initial...

From the Desk of Ian Culley @IanCulley

I need to set the record straight.

Earlier in spring, I wrote a note highlighting wheat’s tendency to lead crude oil at key inflection points.  

While this statement is mostly true, it needs clarification.

Chicago wheat does have a tendency to lead crude oil at significant market tops. But crude leads at critical troughs.

Check out the crude oil overlaid with Chicago wheat futures:

Notice crude bottomed in Q1 of  2009, 2016, and earlier this year. Chicago wheat followed roughly six to nine months later, marking critical turning points in late Q3 of 2009 and 2016.

Will wheat do the same in 2023? 

I don’t know. But strong seasonal trends are clearly at work in both markets. 

And if crude oil’s rally provides any indication, I have to lean toward "yes." 

Here are crude oil futures breaking out of a multi-month base...

From the Desk of Ian Culley @IanCulley

Markets are adjusting to rising rates as investors weigh the possibility of “higher for longer.”

Bonds are breaking down to fresh lows. The major US stock market indexes are chopping within a range (perfectly normal from a seasonal and cyclical perspective). And commodities are kicking back into gear. 

All of these intermarket pieces fall neatly into a dynamic puzzle. Nothing appears out of place.

But the best information comes from markets presenting atypical behavior or defying expectations.

One commodity is doing just that as we head into the weekend...

Silver!

Did silver not get a copy of the FOMC press release? Or perhaps silver ignored it altogether… 

Silver should sell off as the 10-year yield hits a new sixteen-year high and the US dollar heads toward its...

From the Desk of Ian Culley @IanCulley

Stock market bears and tech bros are whining in the corner as energy outperforms.

Haters can hate all they want…

Energy marks the spot when it comes to stocks.

Spencer and I discussed it on Wednesday’s “What the FICC?” episode, highlighting the absolute and relative uptrends across the space.

Energy is clearly resuming a leadership role in stock and commodity markets. But crude oil isn’t the only commodity exhibiting strength.

Cattle are ripping higher, too!

Check out the daily chart of live cattle futures:

Live cattle are breaking out of a multi-month consolidation, printing new all-time highs.

The path of least resistance leads higher toward 202 as long as price holds above 184.

I highlight longer-term upside objectives in today’s...

From the Desk of Ian Culley @IanCulley

I recently outlined five reasons to bet on energy.

While I stand by my line of reasoning, I did manage to leave out one overarching theme. And it’s an important one!

It’s a market theme that’s played out for almost three years, extending beyond energy to encompass commodities as an asset class.

I’m talking about the commodity-bond ratio…

Commodities relative to bonds was the most impactful high-level chart headed into 2021.

A major trend reversal favoring raw materials over US treasuries signaled a new, wild world on the horizon – a world characterized by inflation and rising interest rates. 

This shift in relative strength caught many investors off guard as commodities also outpaced stocks for the first time in over a decade.

Shockingly, commodities were back in the conversation as analysts struggled to deem the energy space a viable investment. (As if the price charts didn’t provide ample evidence.) 

Meanwhile, energy stocks...

From the Desk of Ian Culley @IanCulley

Seasonality is not the most heavily-weighted data point in my analysis.

It doesn’t even make the top three: price, price, and price.

Nevertheless, tracking seasonal patterns has proven quite valuable in past experiences, especially regarding commodities. (We discussed it today on What the FICC, outlining three strong seasonal tailwinds heading into the fall. Check it out below.)

Raw materials are clearly affected by the earth’s rotation around the sun. 

And while these trends fail to produce explicit entry or exit signals, they do provide insight into potential market conditions (not unlike sentiment or COT positioning). 

I use seasonality to help guide my focus to those areas of the market that deserve additional attention. Areas such as…

Sugar!

I’ve been watching sugar futures since the beginning of the year, waiting for a breakout. 

And boy, did it deliver!

From the Desk of Ian Culley @IanCulley 

“Looks like cocoa and sugar are poised to break out.” 

That’s the first message I saw on my phone this morning as traders across the US were preparing for the upcoming session.

But I wasn’t ready to get behind a tactical move in either cocoa or sugar.

Instead, my full attention rests with one commodity on the precipice of an explosive rally…

Cotton.

Check out the weekly continuation chart of cotton futures:

My eyes have been fixated on cotton since early February.

Buyers were challenging a critical retracement level at approximately 89 to open the year. And they continue to do so, slowly absorbing overhead supply as momentum steadily improves.

Prolonged periods of contraction often lead to explosive expansions in price. Cotton is in the midst of the contraction phase. 

So when will...

From the Desk of Ian Culley @IanCulley 

We like buying energy.

Who doesn’t? 

Energy stocks are resolving higher and holding their breakouts, something few market areas can claim this quarter.

It makes sense.

Interest rates are rising across the curve as the US 10- and 30-year yields eclipse last year’s high.

Procyclical commodities and value-oriented stocks are responding as they tend to benefit the most as yields climb.

And when we add a dash of stock market rotation – bam! 

Energy-related assets are making contact!

But while rates continue to rise and energy names are ripping, crude oil has not been able to break out…

Check out the daily chart of crude oil futures sliding back within its prior range:

...

From the Desk of Ian Culley @IanCulley

Energy contracts are breaking out.

Crude oil and gasoline futures are completing major reversal patterns.

Heating oil is ripping higher.

Natty gas has traders on the edge of their seats (what’s new?) as it heads into a seasonally favorable stretch.

But what about the rest of the commodity space?

Check out the overlay chart of our equal-weight energy index and our equal-weight broad commodity index:

Both averages have followed the same path since the 2020 lows despite a mere 15% weighting toward energy in our broad commodity index. 

But energy is pulling away. Oil and gas names are taking on a leadership role among US equities as their underlying commodities confirm by digging in and resolving higher.

I like buying energy – stocks and commodities. And I outline two new trade ideas from the energy space at the end of today’s post.

I love a good trade setup as much as anyone....

From the Desk of Ian Culley @IanCulley

It’s commodities over bonds.

In fact, we’re now in an everything-over-bonds environment as rates continue to rise. 

Looking for an uptrend?

Just place US Treasury bonds or the Japanese yen in the denominator, and voila!  

I consider the commodity-versus-bonds ratio one of if not the most important high-level intermarket ratio in our deck.

Why? Because it reveals the inflationary backdrop that colors the entire market,  determining secular leadership between asset classes and US stocks. 

And it’s hinting at the next trend in relative strength…

Check out the commodity-versus-bond ratio, as measured by the relationship between the CRB Index and 30-year Treasury bond futures:

Notice the ratio peaked in 2008 during the Global Financial Crisis and turned lower until the pandemic selloff of 2020. 

Disinflation...