The Commodities Rally Has Reversed

Chart 1: Commodity rally is in reversal, as CCI trades below 200 MA… 

Continuous Commodity Index vs 200 MA Source: Short Side of Long

The rally that started at the beginning of this year is quickly reversing. While not all of the gains have been given back (yet), the truth is that the current price conditions are not looking that good for commodities. Continuous Commodity Index has now fallen below its 200 day moving average, something that rarely happened during 2001-08 and 2009-11 bull markets. The more common CRB Index is also not too far off either. Let us study at some of the individual commodities that represent four major sub sector: energy, industrial metals, grains and softs.

We start with the grand daddy of all commodities and a barometer of global economy… Crude Oil. Personally, I prefer to use Brent Crude Oil, as it represents global demand and supply story a lot better. As you may recall from a few weeks back, we were discussing a technical breakout in Brent Crude Oil out of its multi-year triangular consolidation pattern (see Chart 2).

Chart 2: The grand daddy of all commodities has now sharply reversed!

Brent Crude COT Source: Short Side of Long

Normally a tradable pattern for me, I hesitated to trade this setup as risk and reward did not look good to me. Oil was breaking out on Iraq issues (I never like following the herd in euphoria), while WTI contracts remained in backwardation (signal of a coming decline) and volatility at multi-year lows.

Interestingly, the recent break out turned out to be a false move on the upside, sucking in remaining bulls, as they chased the price higher. A sharp reversal has now followed, as Brent Crude Oil breaks the triangle on the downside. Usually, a fake move like this leads to a more powerful correction in the opposite direction, so do not be surprised if oil droops rapidly in coming months.

Chart 3: Can metals like Copper continue higher with selling pressure?

Copper COT Source: Short Side of Long

Brent Crude wasn’t the only commodity staging a breakout at the time. We have also been watching the overall metals sector wake up a bit too. In particular, Copper made a run above its 3 year downtrend, just as majority of hedge funds were holding huge amount of shorts. Now that the short squeeze has run its course and funds have turned net long… the question is whether or not metals like Copper can continue rallying higher with the ongoing commodity selling pressure?

Disclosure: For those that subscribe to the newsletter, I am now in process of closing all of my recent metals trades, including CEF and RJZ. I admit, it doesn’t say much about my recent call on the metals sector.

Chart 4: Grains have been slaughtered, with Wheat making 4 year lows

Wheat COT Source: Short Side of Long

Agriculture is currently taking the biggest beating within the commodity sector and is the main reason for CC Index to drop below 200 day MA. Grains have been thrown out together with the kitchen sink, while some softs like Cotton are also experiencing large price drops. For a recent write up on the grains sell off, I would urge you to read the previous post titled “Agriculture Thrown Out The Window” post on the blog only several days ago (that way I do not repeat the same old stuff).

Chart 5: Cotton has crashed all the way back to middle of 2012 lows… 

Cotton COT Source: Short Side of Long

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