Commodities Countdown

The Commodities Index ($CRB) Is Near 4 Month Lows - Panic Time?

The foreign markets have been breaking out this week while the Commodity markets are trying to find direction. After making a new 3-month low, it is hard to be bullish. Even after the Commodity rally off the lows last year, we were unable to trigger a bull market signal on the weekly RSI chart. For a bull market to be starting we want it to rally up to the 70 level. Even then the RSI signal can fail, like in 2014, but we can see between 2002 and 2008 the RSI hit 70 and stayed above 40 for most of the 7 years. It never got down to 30 for those 7 years to trigger a bear market signal. Currently our last signal was a bear market signal (hitting 30 in 2014) and has not been able to rally to 70 to make a bull market signal.


Staying with the chart above, the red line represents the support level for Commodities over the last 45 years. In 2015, it broke that level. In 2016, we had three tests of this 182 level. Once again, we are back near the 182 level. So it held 3 times, should we count on a fourth? Charts are always changing and intermarket analysis can be helpful to understand changes around us in other asset areas. For Commodities, one thing I like to watch is the Emerging Markets and the Emerging Market Currencies. Let's look there to see if we might have some clues.

Emerging markets currencies and commodities usually tie together nicely. I picked up that gem from John Murphy way back in 2011 when he presented in NYC. Generally they trend in the same direction. As I mentioned in my Don't Ignore This Chart article on Friday, perhaps this will be the moment to get long Commodities. For the ChartWatchers article distributed on the weekend, I discussed more global markets starting to break out. All of this suggests paying attention as it could be one of the best opportunities to get long some of the Commodities in the coming weeks. 

Let's review the Emerging Market Currency ETF (CEW) first. The price trend has been down from 2011- 2016. I put a ZigZag overlay that changes direction if the price moves more than 5%. The recent price move off the low is up 5%. There are a few other interesting things to note on the chart.

The RSI has been in a bear market trend (below 65) since 2011, with a brief false signal into early April 2013. Remembering we are in late March 2017, perhaps seasonality could come into play and we roll over again. It is something to be aware of that could give us a false breakout here as it tests the July 2016 highs. We still have to be cautious as we have a lower annual highs and lows every year since 2014. So far, it looks like we have a higher low which coincides with the US Election bottom. It was in 2016 so that does not change our annual lows and annual highs trend yet.

If we compare GLD to the CEW we can see a pretty consistent positive correlation in the lower panel until recently. The red box shows GLD substantially lower than the GLD 2016 high whereas the CEW is almost at the 2016 highs. If GLD was going to play catchup, this could be a meaningful surge.

One other chart that correlates nicely is the Metals and Mining ETF (XME). The correlation was very high except for the last year. Multiple steel tariffs were implemented in 2016, which may have skewed the chart recently. 

The Steel ETF (SLX) has also been climbing. It looks similar to the XME.

Here is the CEW compared to Copper (JJC). The message is the same on all of these industrial and precious metal charts.

The chart below compares Silver with the CEW


The bottom line is the EEM chart is breaking out on the Don't Ignore This Chart article referred to. The CEW Emerging Market Currency chart shown above is breaking out. India (INDA) is breaking out.

Looking at the US Dollar ($USD), it appears to be at an important major inflection point ... again...!! First of all, it has broken the recent up trend. Currently, we are at 100 on the $USD Index marked by a red arrow.

Looking at the $USD Index on a weekly chart, there is more data. We can see how important the 100 level is.

If the $USD breaks down, it will probably support a rally in Commodities as well. 


For the educational segment, I want to discuss the points on the chart where the data may cross above or below the other line.

Let me use the CEW chart reflecting currencies with the Silver ETF (SLW) in the background

Because the two charts are laid over each other, some might think the crossover points on a chart with this setting are important. However, because the scales are different, the crossing points are irrelevant. To cover this off in more detail, the Silver scale on the left goes from $10 to $46. The CEW scale on the right goes from $16.25 to $22.25. Because the purpose of charting something is to fill the chart, The StockCharts.com charting engine with plot both scales independently based on the high and low so where they cross is a random point. One of these ticker symbols has a chart range of 350%, the other a chart range of 40%.

Stay tuned, its about to get very interesting in the commodity space after breaking to 4-month lows. I like the Gold market around the end of the month. That makes this week particularly interesting. 

Good trading,
Greg Schnell, CMT, MFTA.

 
 
 

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