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!
First, we have our commodity index that equal-weights the top 33 contracts in our universe:
Earlier this week, the index completed an 18-month top and broke to its lowest level since April 2021. This highlights the broad selling pressure across the commodity space and the need for a quick reversal.
As it stands, risks are to the downside. Whether the index continues lower depends on how individual contracts react to their former 2018 highs.
Crude oil futures are a great example:
After peaking in the spring, crude oil entered a steady decline. That descent is now testing its prior cycle highs near 76.
It’s impossible to overstate the importance of this level.
There is an abundance of price memory at the 2018 highs. If we break below that level, downside risks increase dramatically.
Gasoline will likely follow crude. They look almost identical on a weekly time frame:
For gasoline, 2.25 is the line in the sand. It’s hard to maintain a bullish outlook if it’s below this level – at least from a structural perspective.
If crude and gasoline are back below their respective 2018 highs, we must imagine the commodity space is on the ropes.
Energy stocks will also be under pressure in this scenario. Whether commodity bulls can do their part by supporting a bid will impact the direction of energy and commodity-related stocks.
Dr. Copper tests a similar inflection point. It’s revisiting its 2018 highs for the second time in two months:
The more times a level is tested, the higher the likelihood it breaks. Two retests in two months isn’t a good look for copper.
Commodity and stock market bulls do not want to see one of the most economically sensitive assets back below their prior cycle highs. If Dr. Copper lays down within its previous range, the bull market argument for commodities grows thin.
It’s the same story with gold, just different levels.
While gold trades well above its 2018 highs, it's been unable to find a floor:
It recently broke to fresh two-year lows, completing a significant topping pattern.
As long as gold is below 1,675, our bias is lower. Earlier in the month, we outlined the broader implications of a sustained breakdown in gold.
Goldbugs need to show themselves and drive prices higher – or inflationary assets could endure a far deeper correction.
Last but not least, there’s lumber:
Lumber futures are down more than 70% from their March highs. More importantly, lumber is back below 500, where we have a shelf of former highs that date back to the early 1990s.
This does not bode well for commodities as a whole.
Price action like this is what the rest of the space wants to avoid. Economists and analysts also view lumber as a leading economic indicator, much like copper.
Is lumber providing a valuable warning sign? Or just reverting back to the mean?
Only time will tell.
Suppose copper, crude oil, and gold can dig in and find support at current levels. Commodities and their related assets likely carve out tradeable lows in that scenario.
On the other hand, the bull run in commodities is probably on hold if more contracts start to look like lumber. Cyclical value sectors of the stock market are most likely under pressure and underperforming if that's the case.
We remain focused on the 2018 highs. Those are our guideposts. How prices react at these critical levels will provide clarity heading into year’s end.
Stay tuned!
COT Heatmap Highlights
Commercial hedgers hold long exposure just shy of three-year extremes in crude oil.
Commercials continue to buy gold, as they carry their largest long positions in three years for the second week in a row.
And commercials added another 6,000 contracts to their long cocoa positions, reaching a three-year extreme for the third consecutive week.
