Have you heard about China?

Chinese stocks just had their best week in history, following the People's Bank of China's (PBOC) announcement of rate cuts, among other stimulative actions.

In July, we talked about Copper and its base and industrial metal peers showing broad weakness. But that seems to be changing...

China is the world's largest consumer of refined copper, so base and industrial metals have benefited from the recent pivot from the PBOC.

Chinese stocks and copper futures have been positively correlated for years:

It has been over 1,600 days since Crude Oil futures traded below zero in 2020, which preceded one of its best 2-year bull markets in history.

Since the peak in early 2022, energy has been a tough trade for those with trend-following strategies and a favorable one for mean-reversion strategies.

Crude Oil futures are at the lower bound of a multi-year range, and the Energy Sector SPDR $XLE has the fewest percent of stocks above their 200-day moving average out of all 11 sectors. 

Energy has been a laggard recently.

However, it's important to remember where energy has come from. Crude Oil futures went from below 0 to 130 in less than two years, and the XLE is the second best-performing sector since Covid, lagging only Technology $XLK:

We've been obnoxiously talking about soft commodities lately.

But, it's for a good reason! And it all comes down to relative strength.

Aside from a few pockets of strength, the trends have been a mess in the broader commodity complex.

Products like Natural gas and precious metals have been hard to ignore if you're involved in the commodities markets.

There's more though. 

Orange Juice futures made a new all-time high this week and look primed to begin a new leg higher.

Let's talk about how we're playing it:

First, some context: 

With fall approaching us, things are beginning to change.

The weather is perfect for golfing, the Kansas City Chiefs are back to dominating the NFL, and it's the best time of the year for Natural Gas futures.

In July, we outlined asymmetric risk/reward setups in Natural Gas futures and 4 natural gas stocks.

As we expected, it has taken some time for these setups to come to fruition. 

However, the cleanest fossil fuel has carved out a textbook reversal pattern and looks poised to blast off any day now.

Here's the average monthly performance for Natural Gas futures over the past 3 decades:

If you're like me, you probably spend too much money on coffee every morning.

And that's not likely to change... but that's okay!

We can profit from an upside move in the commodity and hedge our exposure.

We've had tremendous success trading Cocoa futures in the last several years. 

We're also close to buying Cotton futures as they look to trap the bears below a key polarity zone.

There's a trend here: soft commodities keep rewarding us for owning them.

We think Coffee is next.

It has paid to pick our spots wisely in the commodities complex as it's been a very bifurcated asset class this cycle.

Live and Feeder Cattle are carving out distribution patterns.

Energy has been a rangebound mess.

Meanwhile, the relative strength has been in the soft commodities and precious metals.

Gold recently put the finishing touches on a multi-decade accumulation pattern.

Cocoa has resolved a 12-year base and rallied over 400% to new all-time highs.

Coffee is flirting with new multi-decade highs after completing a tactical reversal pattern.

And we're betting that Cotton will participate to the upside with the rest of the soft complex soon. The soft and fluffy commodity is on the verge of trapping the bears below a key level of polarity.

We want to continue leaning into the relative strength in soft commodities.

From the Desk of Steve Strazza @Sstrazza

The price action from commodities has been lackluster, at best, this year. Our equal-weight commodity index is at its lowest level since early 2021.

Despite the broad weakness, gold continues to shine. The 79th element closed this week at its highest price in history.

Here’s a look at gold futures, trading at our first objective measured from the multi-decade base that resolved higher back in Q1:

As long as this breakout sticks, the bias remains higher for the yellow metal. 

On a more tactical note, gold has just completed a multi-month continuation pattern and is in the early stages of a fresh leg up:

From the Desk of Ian Culley @IanCulley

Stocks aren’t the only risk assets falling this week.

Rebar, Corn, and Cotton are posting multi-year lows. Dr.Copper is slipping below four bucks. And our short cattle trades are working.  

But as most commodities slide, one area (aside from precious metals) is finding its feet.

Notice the CRB Index is carving out a two-year base while our equal-weight index hits its lowest level since early 2021:

The disparity between the two indexes comes down to their construction. 

We weigh 33 commodities equally for our index, so rebar futures carry the same weight as crude oil. 

On the other hand, crude comprises almost a quarter of the CRB Index.

These stark contrasts reveal two pertinent themes: broadening weakness among commodities and emerging relative strength from energy.

From the Desk of Ian Culley @IanCulley

Aside from gold’s new all-time highs, commodities look rough.

Natty gas is falling below two bucks. Copper is retesting four. And corn is rolling to its lowest level since 2020.

But of all the vulnerable commodities contracts, only one area stands out as a viable short: cattle.

Feeder cattle futures closed below 250 this afternoon, triggering a sell signal:

Notice the 14-day RSI led price by registering a new multi-month low ahead of today’s breakdown. The waning momentum speaks to weakening demand and the possibility of a swift move lower.  

From the Desks of Ian Culley @IanCulley and Sam Gatlin @Sam_Gatlin

It’s time to buy natty gas.

A bullish momentum swing is on the verge of flashing green. And seasonal tailwinds are due to pick up as price pulls back. 

Plus, the dominant four-year cycle is approaching the next expansion phase.

Buckle up!

Check out the monthly natty gas chart with a MAC-D momentum indicator in the lower pane:

The monthly MAC-D is nearing a bullish crossover at extreme oversold conditions. This long-term momentum setup occurs after cyclical lows, marking critical inflection points in 2012, 2016, and 2020.  

Also, all three previous natty gas cycles hit bottom in the spring and ripped higher toward the end of summer – the start of the best three months of the year (August- October).

From the Desk of Ian Culley @IanCulley

Risk assets are taking a hit.

The major equity indexes are seeing red. Crude oil is slipping below eighty bucks. And gold is failing at new all-time highs.

Perhaps the markets are navigating the summertime blues – a tune base and industrial metal investors have been humming for months.

Remember copper’s failed breakout in May:

Oof!

Dr. Copper is living up to the trading adage that from failed moves come fast moves in the opposite direction.

The futures continue to fall – down almost 8 percent this week. 

Meanwhile, track the 4.16 level for potential support:

From the Desk of Ian Culley @IanCulley

Today’s analyst meeting was one broken record after another as we ripped through the most important charts on the market.

Not a top, never hit oversold…

Not a top, never hit oversold…

There’s a raging bull market on Wall Street right now. 

But the fun and games will come to a screeching halt if the following chart rolls over.

Check out the economically sensitive Home Construction ETF $ITB:

ITB checks both boxes.  It never hit oversold levels and is only a top if it breaks below 97. 

Plus, it’s ripping! 

Of course, we need a decisive resolution above the March high of 116.34 to confirm our bullish bias. 

But if the next bull run has legs, ITB will post new all-time highs. 

That also means lumber futures have to stop falling.