From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
If you’re searching for strength, look no further than commodities!
With risk assets coming under increasing pressure, the strength from commodities and commodity-related stocks stands out that much more. Except for rates, it’s the only thing the bulls have left.
When we look beneath the surface, so far, the story centers around energy – whether we’re talking about crude oil printing fresh seven-year highs or Chevron Corp. $CVX breaking out of a multi-year base to new all-time highs.
Energy is — and has been — re-asserting itself as the next dominant leadership group.
But unlike the stock market — where energy is the only group working — we’re seeing broad participation within the commodities market.
In fact, there are still plenty of pockets of strength we want to be buying.
Today, we’re going to highlight one of those areas by outlining a trade setup in soybean oil.
Let’s dive in!
Here we have a chart of the March contract of soybean oil $ZLH2:
Like many commodities and cyclical assets, soybean oil peaked late last spring and has consolidated in a nice base since. During this time, it has worked off a three-peak bearish divergence in momentum and is now registering its first overbought reading in eight months.
This bodes well for an upside resolution, as it’s always bullish to see momentum lead price back to new highs. We want to be buying this base breakout on strength if and when we get it.
As of this writing, the march contract of soybean oil is reclaiming its former 2021 highs of 64.68. We want to be long if and only if we’re above that level with an initial target around 73.70. If price falls back below there, we’re out.
If this breakout sticks, it could kick off the next leg higher in bean oil, and we could easily see prices in the mid-80s this spring. But let’s see how we make out with our first target before we get ahead of ourselves.
As always, we’ll be sure to follow up when the time comes.
That’s it for this week.
Stay tuned! We’ll keep you updated on developing opportunities and areas of emerging strength within the commodity space.
And be sure to check out our new Trade of the Week below, where we’ll highlight a trade setup each week in the commodity space. It could be a futures contract, a commodity ETF, or an individual stock from our Natural Resource and Oil & Gas scans!
COT Heatmap Highlights
- Australian Dollar: Commercials added 1,911 contracts to their long position, approaching record levels.
- Orange Juice: Commercial hedgers are less than 2% away from a three-year-record short position.
- Palladium: Commercials’ long positioning dropped by more than 1,000 contracts after hitting a historic extreme earlier last month.
- US Dollar Index: Commercial hedgers added to their net short position as they remain near three-year extremes.
Trade of the Week
First of all, make sure you check out our new stock lists at the end of the Commodity Report each week from now on (link below).
This is what our Oil & Gas Stocks list looks like:
There are a lot of great names on here, so let’s talk about how we do this quickly.
In order to find the strongest names, we sort the list by proximity to 52-week highs.
We also include the percentage change from the 2018 highs. We want to know if stocks are above or below this level because that’s when most risk assets peaked around the world during the last cycle. Basically, the commodity stocks that are above their 2018 highs are the leaders.
Today, we’re outlining a stock from our Oil & Gas list that’s well above the 2018 highs. This is Canadian Natural Resources $CNQ:
We’re buyers of CNQ, but only on strength above its pre-GFC highs around 54. If and when we get the breakout we’re looking for, we’re long with a target of 83.50 over the next 2-4 months.
We also recently outlined a long idea in the Canadian Natural Resources stock listed on the Toronto Stock Exchange. You can read that here.
Thanks for reading! And please let us know what you think.
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