From the Desk of Ian Culley @IanCulley

The commodity markets never lack action. 

Since it’s such a diverse asset class, we’ll always have contracts we want to buy, some that we want to short, and others we want to avoid.

Today, I’m going to outline one of each. Let’s dive in!

The Breakout

According to the latest reports, Hurricane Ian (strong name, terrible storm) may have cut the Florida orange crop in half.

Whether it’s true doesn’t matter. I’m more concerned with a well-defined level to trade against. Check out the daily chart of orange juice futures:

The chart looks good to me! A five-month base breakout to fresh five-year highs is the kind of strength I like to buy.

From the Desk of Ian Culley @IanCulley

I love it when a pattern carries both bullish and bearish implications. It could break out or break down. Either direction works for me.

That’s the beauty of the setup. 

For traders, the directional move doesn't matter. We can prepare for both outcomes. And, lucky for us, sugar futures look ready to swing either way.

Check out the weekly continuation chart of sugar:

Sugar posted a big base breakout followed by a year-long consolidation. This chart looks similar to gasoline, crude oil, and copper – which have all broken down to retest their respective 2018 highs.

It’s reasonable to imagine sugar futures do the same. But we have to see the move before we can take action.

From the Desk of Ian Culley @IanCulley

After months of selling pressure, the most widely followed commodity contracts are testing critical potential support levels.

More importantly, these support levels are the prior-cycle highs marked by the 2018 peaks. If there was ever a place where the bulls needed to step in and repair the damage this is it!

But, if these levels fail, we’ll have to rethink the structural uptrend in commodities.

Let’s run through the charts.

First, we have our commodity index that equal-weights the top 33 contracts in our universe:

From the Desk of Ian Culley @IanCulley

It’s not all doom and gloom out there… 

I know the market’s ugly right now. Risk assets are getting crushed across the board. 

But, believe it or not, greener pastures do exist in this market.

And, on days like these, I choose to focus on areas that aren’t free-falling into the fiery depths of hell.

Last week, I discussed the relative strength of the less economically sensitive grain complex. These contracts are more defensive in nature and are currently escaping the broad selling pressure.

That’s a relief!

When it comes to today’s trade ideas, I’m sticking to the individual contracts with the highest volume heading into the fall. Those are the charts and levels of the most importance.

Do the levels on the continuation charts come into consideration?

Absolutely!

Premium members can reference our Commodity Chartbook below for our structural outlook and reach out at info@allstarcharts.com with further questions.

From the Desk of Ian Culley @IanCulley

The big news in commodities this week is gold breaking down to its lowest level since early 2020.

I recently outlined what a downside resolution for the shiny yellow rock could mean for inflation and the entire commodity space.

Spoiler alert: a fresh leg lower from gold doesn’t bode well for raw materials or the prospects of sustained inflation.

Nevertheless, inflation hasn’t gone anywhere, at least not yet. 

As long as that’s the case, we expect commodities to see further upside, albeit not in unison. The broad rally witnessed at the end of 2020 into 2021 is unlikely to be repeated in the near future.

Regardless, stellar buying opportunities will present themselves.

We aren't going to let the bifurcated nature of commodity markets stop us from catching the next explosive rally.

In other words, the supply and demand dynamics for copper don't affect our decision to trade soybeans or wheat.

From the Desk of Ian Culley @IanCulley

Gold has been a terrible inflation hedge over the trailing 24 months. It’s gone nowhere since the summer of 2020, while every other commodities have experienced rip-roaring rallies.

The truth is, the "inflation hedge" narrative is just that – a narrative. And I believe it’s false.

But, more importantly, so does price.

I prefer to lean on John Murphy’s observation that gold has a tendency to sniff out inflation, leading to major bull runs in commodities.

And, with gold futures on the verge of breaking down to fresh two-year lows, I think it’s a good time to revisit this often misunderstood metal.

Remember, gold was the first commodity to rally in 2019 – a full year ahead of the rest of the rest of the space.

Here’s a chart of gold futures overlaid with our equal-weight commodity index, highlighting the base breakouts:

From the Desk of Ian Culley @IanCulley

We’ve been loud about energy lately. And how can we not be?

Energy stocks were the most resilient during the H1 selloff and are by far the best-performing sector off the 2020 lows. Every afternoon, energy quietly leads the pack into the close, whether the market is green or red on the day.

But the recent rally in stocks has started to fizzle. And even energy is beginning to feel the downside pressure.

While everyone scrambles to label the recent rally, gearing up for the next leg higher, or preparing for the world's end, we want to focus on the leaders – energy!

If this leadership group starts to fall, it could be an early warning sign of broad selling on the horizon.

And, with Labor Day upon us, it just so happens the energy sector ETF $XLE is retesting a critical shelf of former highs.

Here’s a chart of XLE:

From the Desk of Ian Culley @IanCulley

Back in early July, we were looking to buy a bounce in natural gas. Let's just say it was a success, as our target was hit within weeks.

But you have to remember the environment back then. Commodities had experienced a broad sell-off. And natural gas and agricultural contracts such as wheat and cotton had recently experienced drawdowns exceeding 40%.

It might have seemed like a tough call at the time, but for us it was clear. The risk/reward was in our favor as natty pulled back to test a key level. It was that simple.

Fast forward almost two months, and we’re back for more. Our risk is well-defined, and cyclical areas of the market are assuming leadership.

Today, I’ll share how we’re gearing up for a fresh leg higher in natty gas.

First, let’s take a look at the weekly chart of natural gas futures.

From the Desk of Ian Culley @IanCulley

Markets constantly provide valuable information. But it’s up to us to listen.

Of course, it’s easy to get caught in a narrative or bias surrounding a particular market. It’s part of the human condition.

And it’s almost a prerequisite. 

In order to step up to the line and assume risk, we need to have a certain level of conviction. At the same time, we must remain open-minded and flexible, willing to receive new information and update our priors.

It’s a balancing act.

And energy is one area of the commodity market that’s keeping us on our toes.

Heading into Q3, we were looking for energy to follow the vast majority of other commodities lower, including base and industrial metals.

So far, that hasn’t been the case. 

The chart below highlights how closely the two procyclical commodities groups have trailed each other heading into 2022:

From the Desk of Ian Culley @IanCulley

It doesn’t matter where you look: Commodities are digging in, finding support, and reclaiming key levels.

Grains, softs, base metals, and energy have all stopped going down. Even gold is bouncing off critical levels of former support.

But it’s not just the fact the commodity correction is hitting the pause button that’s important.

It’s where it's happening.

Let’s take a look at a few charts.

First we have cotton futures:

Cotton completed a monster base, breaking to fresh 10-year highs last October. A strong advance took hold during the following months.

But it was answered by a near-vertical decline back into its prior range.

From the Desk of Ian Culley @IanCulley  

Energy futures are beginning to crack under pressure.

Crude oil and gasoline are breaking down to their lowest levels since February. And heating oil isn’t far behind, as it’s challenging the lower bounds of a similar distribution pattern.

It appears that the bears have finally come for energy.

Since we already laid out our short idea for crude oil futures in a recent post, today, our focus is on the energy sector and the implications these breakdowns carry for energy-related stocks.

Here’s a chart of the Energy Sector ETF $XLE:

From the Desk of Ian Culley @IanCulley

The past two years of sideways chop on the gold chart has been a game of perseverance and pain. 

Gold is a honey badger, attacking a beehive face-first, digging for larvae, and somehow persevering through a thousand bee stings.

That can’t be fun, especially as other areas of the market have experienced explosive trends. But it works for the honey badger.

And it's worked for gold.

Now that commodities and stocks have come under increased selling pressure, the data continues to mount in favor of declining gold prices. 

Precious metals are looking weak. Gold stocks are breaking down on absolute and relative bases. And signs of risk appetite are nowhere to be seen.

But gold doesn’t care.

Before we get into the absolute weakness in gold and other precious metals, let’s review the relative weakness in the mining space.