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.
Despite an overall trendless market, we’ve seen pockets of strength from a diverse array of contracts. Steel isn’t the only one. In recent months, we’ve covered breakouts in Coffee, Sugar, Livestock -- and just last week, Uranium, to name a few.
And, of course, we continue to see plenty of strength from base metals.
But some of the more recent data suggest we should approach these contracts with more caution.
Let’s dive in and examine a few charts presenting mixed signals from this economically sensitive commodity space.
Notice how one contract doesn’t quite look like the others: Iron Ore futures have dramatically rolled over in recent weeks, falling by nearly $100 even while most of its peers remain resilient.
Could this be an indication of coming weakness for base metals more broadly?
Or, is Iron Ore just an anomaly and eventually catches higher along with the likes of Steel and Tin.
In our opinion, considering the slingshot rallies higher that many of these contracts have enjoyed since last year, some digestion here would be healthy.
At the same time, it’s hard to be too bearish as Iron Ore is only one data point.
Strong uptrends and big base breakouts continue to be the norm throughout the industrial and base metals group.
Just look at a chart of Aluminum futures: Aluminum hit new 10-year highs this week, providing a great example of the type of price action that has taken place within industrial metals this year...and it’s continuing to take place.
The fact is, we can’t ignore big base breakouts to multi-year highs because of one data point.
For instance, here’s another example. This is a chart of Nickel futures: We’re buying this kind of rounding bottom reversal pattern every day of the week, regardless of what other markets are doing.
Buying strength on a chart that’s breaking out to new 7-year highs is the type of action we’re here for. We want to be long -- if and only if --Nickel futures are above 19,930 with a target at the former 2011 highs ~29,100.
The risk/reward is heavily skewed in our favor and well-defined at the former 2014 highs. We’d be foolish not to take a shot.
At the same time, those old highs are our line in the sand. It’s someone else’s problem below there.
Who remembers earlier in the year when Copper failed to hold above its former all-time highs, but the rest of the base metals complex was completely unphased?
Let’s apply that same scenario to the weakness in Iron Ore now.
While the price action certainly deserves our attention, it’s no reason to panic.
We will continue to monitor for signs of rotation within this leadership group.
