From the desk of Ian Culley @IanCulley
Commodities have been on the ropes for more than a month. As for commodity stocks, they’ve been under pressure since the start of Q2.
But the steep decline in these inflationary assets is beginning to slow – and it couldn’t happen at a more logical place.
The CRB Index and numerous bellwether commodity stocks are digging in and finding support at key levels. Whether these levels hold is anyone’s guess.
But the first step of the base building process is to stop going down.
Let’s take a look.
First up is the CRB Index:
After a meteoric rise off the pandemic lows, commodities are experiencing their first significant correction in two years.
It’s not surprising the index stopped going up at a shelf of former highs from 2012 and 2014. There’s obviously a significant amount of resistance at those levels.
Now, the question is whether demand will come in at this critical shelf of former lows and key retracement level around 265.
For the moment, the answer is “yes.”
Whether the CRB Index holds above this critical support level will have a significant impact on commodities and commodity-related assets in the coming weeks and months.
We can say the same for numerous bellwether stocks.
Here we have the oil and gas giant Chevron $CVX:
CVX has pulled back to prior cycle highs near 134 for a successful retest. This is where we would expect the bulls to step in and support higher prices. They have!
For now, the trading range in Chevron is 134 to 185, as long as the bulls can keep price above the former 2018 highs.
Newmont Corp. $NEM is another commodity bellwether digging in at a potential support level.
Like gold, NEM is pounding the lower bounds of a multi-year range. Both look vulnerable to a downside resolution, as the more times a level is tested, the more likely it is to break.
Gold and gold stocks haven’t been the most popular assets as they have been perennial underperformers since Gold peaked two years ago.
Regardless, we have to remember that Gold led the commodity rally in 2019, and reached new all-time highs well before many commodity rallies began. It’s still an important inflationary asset despite being a poor hedge over the past couple years.
Either way, NEM breaking down to fresh multi-year lows doesn’t bode well for commodities. Period.
That’s all we need to know.
Switching gears, one of the world’s largest commodity traders is testing a crucial level as well. Here is Glencore PLC $GLEN:
After breaking out of an eight-year base earlier this year, GLEN is back at the breakout level of 4. This level acted as resistance for almost a decade and is now coming back into play as support.
This is the polarity principle in action. And it’s a logical level for buyers to jump in on this breakout if they missed it five months ago.
Our last chart highlights two agricultural names holding at critical levels, Archer Daniels Midland $ADM and Deere & Co. $DE:
ADM is revisiting last year’s highs and an extension level around 70. DE is pulling back to a key extension level near 290. Both have stopped going down at these respective support levels.
If these two stocks can carve out a tradeable low and start to catch higher, it would be constructive for an area of the commodity space that has experienced intense selling pressure in recent weeks and months.
Commodity bulls want to see the CRB Index and these commodity bellwethers dig in here.
Damage has been done to the short and intermediate trends. If buyers don’t step in and repair it soon, the underlying uptrend is at risk of a significant reversal.
We have to imagine if CVX and the CRB Index aren’t holding their respective support levels, neither is crude oil. And if Glencore is back below 4, is copper holding above its former 2018 highs?
If commodities continue to fall, I’d argue risk assets experience another bout of broad selling pressure. That includes stocks.
For now, those critical support levels are holding. But will they act as a floor?
COT Heatmap Highlights
- Commercial hedgers in crude oil continue to hold long exposure near multi-year extremes.
- Commercials’ net long positioning in gold and silver are all at three-year records.
- And commercials are only 3,000 contracts from their largest long position for cocoa in three years.
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