Big Four Macro Overview Part 3: Commodities:
I begin each year reviewing the long term technical positions of the "Big Four." 10 Year rates, SPX, Commodities, and the US Dollar. This is the third of the series. Granted, macro doesn’t typically impact shorter term (swing, daily and weekly) trading, but developing a broad framework to build understanding of market context and to help recognize change in the environment is important.
I think of commodities, particularly industrial commodities, as an economic lens. Granted, economic demand isn't the only driver of the commodity cycle, but its an important one. Since the collapse of the commodities super cycle in 2008, the Goldman Sachs Commodities index has traded in a broad range, bounded essentially by the low set during the financial crisis and the resultant 2011 high. It is also worth considering that the pandemic may be somewhat distorting normal interpretation in that at least a portion of the strength may be due to logistic constraints.
1. Price is currently in the (approximate) center of a 14 year range.
2. Lows at points 1, 2 and 3 were created by the great financial crisis in 2008, The oil glut in 2016, and the pandemic in 2020. Clearly this zone, while wide, provides a substantive support floor.
3. The most notable/useful current chart feature is the clear uptrend from the 2020 pandemic low. Until that uptrend is broken, the most immediate trend is to higher prices. In general higher commodities suggest continued economic growth.
4. A break of the uptrend would strongly suggest that economic demand was weakening or that supply constraints were loosening. I think economic demand is the stronger story.
5. It is notable that the MACD momentum oscillator is close to rolling over.
a. I divide MACD into four trend states/quadrants (which I promise to will cover in future posts). MACD for this index is currently in the upper right quadrant. This is the quadrant where bullish momentum is weakening.
6. The combination of the uptrend and the lateral support from the October 2018 high and the December 2021 low (504) should act as support. A violation of the support confluence would strongly suggest that, at least for now, the uptrend was complete. Particularly if MACD moved onto a pure sell signal.
7. There is also a break of the trend-line labeled as A-B. We will cover the proper drawing and use in future posts but often, trend lines and what they mean are as much art as science. In this case, while interesting, I don't view it as particularly important.
8. Commodities deserve to be broken down into industrial and energy verses agriculture and softs. The GSCI is 54% energy, 13% Industrial metals, and 28% agricultural. I tend to watch energy and industrial commodities for economic insight.
9. I have also included a chart of JJM. This is a Total Return ETN of industrial metals. I have highlighted the buying climax that occurred in October. The climax behavior offers a strong clue that the uptrend is likely over, at least for now. In future posts I will cover ending action/climax action in depth.
Commodities Bottom Line: The uptrend from the pandemic lows represents the economic recovery. But, while the trend higher is intact, it appears to be weakening. My sense of the economy is that the best growth has already occurred as the result of historically supportive fiscal and monetary. Now, both paths are turning restrictive (see the second part of this series for a more in depth discussion) and markets will likely reflect that reality. One of the expressions of that restriction will likely manifest in the form of weaker, particularly industrial, commodities.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
I think of commodities, particularly industrial commodities, as an economic lens. Granted, economic demand isn't the only driver of the commodity cycle, but its an important one. Since the collapse of the commodities super cycle in 2008, the Goldman Sachs Commodities index has traded in a broad range, bounded essentially by the low set during the financial crisis and the resultant 2011 high. It is also worth considering that the pandemic may be somewhat distorting normal interpretation in that at least a portion of the strength may be due to logistic constraints.
1. Price is currently in the (approximate) center of a 14 year range.
2. Lows at points 1, 2 and 3 were created by the great financial crisis in 2008, The oil glut in 2016, and the pandemic in 2020. Clearly this zone, while wide, provides a substantive support floor.
3. The most notable/useful current chart feature is the clear uptrend from the 2020 pandemic low. Until that uptrend is broken, the most immediate trend is to higher prices. In general higher commodities suggest continued economic growth.
4. A break of the uptrend would strongly suggest that economic demand was weakening or that supply constraints were loosening. I think economic demand is the stronger story.
5. It is notable that the MACD momentum oscillator is close to rolling over.
a. I divide MACD into four trend states/quadrants (which I promise to will cover in future posts). MACD for this index is currently in the upper right quadrant. This is the quadrant where bullish momentum is weakening.
6. The combination of the uptrend and the lateral support from the October 2018 high and the December 2021 low (504) should act as support. A violation of the support confluence would strongly suggest that, at least for now, the uptrend was complete. Particularly if MACD moved onto a pure sell signal.
7. There is also a break of the trend-line labeled as A-B. We will cover the proper drawing and use in future posts but often, trend lines and what they mean are as much art as science. In this case, while interesting, I don't view it as particularly important.
8. Commodities deserve to be broken down into industrial and energy verses agriculture and softs. The GSCI is 54% energy, 13% Industrial metals, and 28% agricultural. I tend to watch energy and industrial commodities for economic insight.
9. I have also included a chart of JJM. This is a Total Return ETN of industrial metals. I have highlighted the buying climax that occurred in October. The climax behavior offers a strong clue that the uptrend is likely over, at least for now. In future posts I will cover ending action/climax action in depth.
Commodities Bottom Line: The uptrend from the pandemic lows represents the economic recovery. But, while the trend higher is intact, it appears to be weakening. My sense of the economy is that the best growth has already occurred as the result of historically supportive fiscal and monetary. Now, both paths are turning restrictive (see the second part of this series for a more in depth discussion) and markets will likely reflect that reality. One of the expressions of that restriction will likely manifest in the form of weaker, particularly industrial, commodities.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
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