From the Desk of Ian Culley @Ianculley

Don’t catch falling knives!

It sounds simple enough. But in reality, traders continue to lose fingers as they reach for downtrending assets.

Diving after downtrends isn’t one of my many afflictions. But I do have a theory…

Traders and investors don’t realize they're catching a falling knife in the moment. They believe they’re bargain-hunting.

So if you’re one of the many investors out there mending fresh wounds this week, I want to make one thing clear…

Bonds are a falling knife.

Check out the chart of the 30-year T-bond:

Do you really want to buy this chart?

Sure, the downtrend is stretched and ripe for some mean reversion. But as long as it’s below 127’23 we’re short with a target of 116. 

It’s the same story with $TLT:

From the Desk of Ian Culley @IanCulley

One of the most valuable tactics I’ve learned in my career is the ability to capture a strong trend as it’s trending. 

I’m not talking about FOMO buying or blindly chasing breakouts.

In my experience, buying strong trends requires patience and discipline. 

Today, exercising these two key traits is especially necessary if you're trading the explosive US dollar. 

Navigating the latter stages of the dollar rally presents challenges, particularly in dealing with heightened volatility. However, it doesn’t mean we can’t join in on this trend responsibly as it barrels down the tracks... or, in this case, up them.

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

If you can pry your eyes from the UK gilt and Credit Suisse articles, you’ll find it’s not all doom and gloom across the bond market – especially high-yield debt in the US.

A quick warning before we continue: You probably won’t see a similar message on the financial news. It’s just too optimistic for the current environment. It wouldn't get enough clicks.

But facts are facts. And right now, high-yield bonds are hooking higher, while stocks are also rising.

Check out the dual-pane chart of the Fallen Angel High-Yield Bond ETF $ANGL and the S&P 500 $SPX: 

From the Desk of Ian Culley @IanCulley

The US dollar has been under pressure for the past five days, and investors are dancing in the streets.    

I get it. A weaker dollar sits at the top of every stock market bull’s wish list. When the dollar goes down, stocks tend to go up. But don’t forget – betting against the dollar has only brought pain this year.

So, instead of joining the celebrations, I nailed down a clear-cut strategy for selling dollar weakness. 

Spoiler Alert: Early sell signals are already starting to fire!

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

Don’t let credit spreads fool you. 

High-yield debt hasn’t blown out relative to Treasuries. Regardless, the largest markets in the world are buckling under pressure.

You have to look outside the US and beyond high-yield corporate bonds to see the stress. Here are three cautionary data points to consider: European sovereign spreads, US bond market volatility, and the steep decline in investment-grade bonds.

When you weigh the evidence, it’s clear risks are rising for US markets. 

Let’s look at the charts!

First, here's a look at European sovereign spreads:

From the Desk of Ian Culley @IanCulley

The calls for a dollar top are growing louder as analysts claim the advance is overextended. 

They’re right. But pushing further into overbought territory is exactly what parabolic rallies do. And many of the technical tools supporting the thesis that the dollar is topping do not apply. 

In practice, mean reversion tools such as oversold/overbought conditions, price exceeding the upper bounds of a Bollinger Band, or the percentage gain above the moving average du jour are best used in trendless markets. 

Does the dollar look trendless? Absolutely not! 

Don’t let these data points distract you. Let’s instead put the current DXY advance into perspective by focusing on historical price action. 

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

On Wednesday afternoon, the Federal Reserve announced another 75-basis-point rate hike following its September policy meeting. 

Yields across the curve ripped, and Treasury bonds dipped.

What else is new?

An aggressive hiking regime has been the Fed’s modus operandi since March. And it's made clear its intent to stay the course.

But what does the rest of the market think about the rise in rates?

Let’s look at our intermarket ratios to gain some insight.

First, we have a triple-pane chart of regional banks versus REITs, the copper/gold ratio, and the US 10-year yield:

These key intermarket ratios tend to peak and trough with interest rates. Notice all three peaked in 2018.

From the Desk of Ian Culley @IanCulley

The US Dollar Index $DXY is on cruise control with nothing ahead but an open road.

The few obstacles that stood in its way are falling to the wayside. That’s right – the handful of commodity currencies that have refused to roll over during the past six months are beginning to slip.

Before we get to these fresh breakdowns, let’s set the scene with two currencies that have been anything but resilient – the euro and the British pound.

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.