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Commodities as a leading indicator


Mercury

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I don't know about you but my studies of past market movements and comments from industry experts lead me to believe (correctly or not!) that most major Bear markets seem to begin with commodities and that commodities also lead out of the Bear into the next Bull.  Does that resonate with anyone?

 

Take the Credit Crunch Bear for example: High Grade Copper turned in May/June 2008, Brent Crude in July, whereas the S&P500 turned in October 08.

 

For the current market Oil and Copper peaked in Spring 2011, whereas main indices turned only last year in May 2015.  Of course there is still some doubt as to whether we are in a Bear market for stocks yet and I believe we would already be if not for central bank interference (arguable, they can't impact commodities much).

 

If all that is true then it makes sense to watch commodities, even if you don't trade them.  I have posted on both Oil and Copper elsewhere and Shell Oil as a proxy for Oil generally.  On both Oil and High Grade Copper (AKA Dr. Copper), which incidentally many commentators say is THE leasing indicator on this, my analysis suggest another leg down is indicated (many commentators think we may have seen the bottom of both and we may have but I doubt it...).

 

Take Rio Tinto as an example of a proxy for metals (BHP is another interesting one but has about 20% of its business in Oil so is a bit distorted whereas Rio is a good all around miner (excl precious metals).  For predominantly copper Antofagasta is a decent player).  All these are FTSE 100s (no wonder the FTSE is more distorted than the other indices...).  Anyway Rio, using EW counts, Fibonacci retrace lines and Tramlines supported by Momentum I have the following views:

  • On the Weekly chart we can see the sharp 2008 drop followed by a 1-5 retrace rally (could also be an A-B-C), which hit almost exactly on the 76.4% Fib with a Neg Mom Div.  Since then we have seen a complicated Triangle pattern culminating in a Wy in Feb 2014.  This is all part of a large A-B-C (could be a strung out 1-5 yet but let's see.  From Feb 2014 I think we are in a run down to Wc (Purple label) in a 1-5 pattern (currently completing W4 of this).
  • Convergence of the 2008 bottom and the lower tramline comes in Autumn this year (maybe August even).  That is a decent target for the end of the whole move at this stage
  • Looking at the Daily for a bit more granularity: I have a strong tramline pair off the Green W2 (2 March 15), a good count down to the Blue W3 with strong Pos Mom Div on the rally back too the top tram.  Here it gets interesting, there is a possible A-B-C to a W4 on the top tram but no Neg Mom Div.  Ideally I like to see large scale tramlines run on the large EW count (i.e. Blue W2 to Blue W4).  Also ideally one would like a clear Fib hit and the 38% has not yet been attained.  Therefore the market could run up another leg to the Fib 50% even and the recent turn could be a Wa.  Alternatively if we have had the W4 then we could get a strong pullback in W1-2 form to the Red Tram before the final leg down.
  • The Hourly shows the possible A-B-C with a marginal Neg Mom Div between the Green A-C but also a Pos Mom Div on the current move down (W1).  In the coming days we should see if this develops into a strong move back up to a new high (W4) or turns at the tram.

I'm not trading Rio at present, I'll wait for the final shoe to drop and then consider a long term investment rather than a trade (probably both...) but for now I'll be watching this plus Dr. Copper itself for signs of recovery or a final leg down, which would presage a wider stock market crash in my view.  Add Oil and we have a plan...

 

Enjoy the extra days off!

 

here are the charts:



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All true but the only thing that will stop oil soaring again is a new fuel source!  A lot of chatter about new tech emergence is out there and maybe it will come off but for now it is science fiction.  In the medium term (next few years) I expect oil to soar again because it is fundamentally a scarce resource but also expensive to get out of the ground.  Once the weak companies are killed off the remainder will drive the price back to profitability levels for them and there after speculation will take over...

 

The issue for me right now is whether we have seen oil (and metals) bottom yet or not.  My current take is no, based on classic EW analysis techniques and the fact that the wider markets have not yet followed commodities down.  I believe this has to happen before commodities bottom out and signal a major turn.  If you look at the last 2 major cycles (2000/02 & 2007/8) you can see this trend.

 

I'm not smart enough nor do I have sufficient data to make judgements on Oil or metals from fundamentals so I look for a narrative, based on history, that supports my technical analysis and I think I have found several that support my bearish views in the medium term.

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Hi Condor,

 

There is a watch out!  Much as I am bearish on this I am not sure on the timings.  There are 2 possible scenarios (other than the - we've hit the bottom one).  One suggests we have completed an A-B-C and now should drop to a lower low to hit bottom.  The other that we have only had a Wa and will get a strong Wc after a reasonably chunky pullback.  While I am short Oil (and Shell Oil) I have close and BE stops in place and will be watching this one carefully.  I will probably employ a split bet strategy here and take profits on at least have my positions, holding the highest ones only at BE against the latter scenario.  The beauty of this approach is that you cash in some to keep your account ticking over and can always top up if the market does indeed turn down, while stops at BE on the rest avoid any losses - always a good plan.  

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Thanks  , I've not gone large in my position and accept the options could expire & be worthless.  Interestingly Barclays have joined UBS in predicting a early thirties price of oil.  I also intend to open a have a hold share position in RDS at some point soon for the yield / long term price gain possibility.  My best scenario is Oil falls( I Close Options position) and then recovers by year end when I have accumulated RDS equity position in dips.  Thst's my plan at present time.

Will look forward to your Oil & RDS price charts as we go along, of course all trade decisions are my own and nothing you are saying is 'advice' :) ....mutual disclaimer and all that blurb, C

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LOL!  Yeah I don't give advice, just share what I'm thinking and doing to see if anyone will shoot it down with a better idea...

 

Question, why do you take options instead of just trading the DFB on spreadbetting platform?  Just curious.

 

My bottom of oil target is closer to $20 (Brent) but no real justification for that, just where I think it is trending.  I think Morgan Stanley also forecast $20 a while ago.  I'm not much bothered how low it goes at present, just that it will make fresh lows.  But, plan for the worst and hope for the best is my motto...

 

I'm liking the shape of the current price action on Oil for a turning point down with lower lows and lower highs after a number of bear indicators.

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re Options: I'm trying to express my position / view on what is likely to happen, be disciplined in what I'm doing & limit risk.  At the moment Buy Call or Buy Put allows me to do that on a timeframe.  That way I'm thinking I can worry less about where I place stops ( and potentially get stopped out multiple times -  this could have easily happened over the last x months on the US500 looking at the price chart - each time it look like the top , it isn't).  Proof in the pudding will come over the next 7-12 weeks if this worked for me , watch this space.

Really hoping these Oil lows occur as per your post, seems mostly bearish noise/stories today re Oil.

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Yeah, It try to ignore the noise.  I can't tell you how many times I have exited a good position listening to noise...

 

So if I understand you correctly you are using options kinda like a Stop in working order?  Placing it below the current pricing at a point you feel comfortable the market will have turned? 

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Maybe to make things clearer here are my PUT Options on the US500, of course I can close the positions if they give a return I'm happy with ( potentially denying myself further profit if index falls further after my close - i.e. like the getting out of good positions point you make, but that's the hardest thing - knowing when to close a position).  Does that make sense...

US500-20160326-chart.png

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Building on my analysis of Brent Crude (see other thread) I had a look at the other key commodities this weekend and I think I may have found a correlation.  Just looking at the weekly charts it seems to me that most of the main commodities are in lock step and it even makes me wonder if Gold has yet reached it bottom as so many are suggesting.  Commitment of Trader (COT) data on Gold is at net 200,000+ to the Long position for managed money (i.e. hedge funds).  Since at least 2007, when COT data hits these levels a drop has ensued (sometimes just a retrace before a rally and often a major drop.  This does make me think that a more severe drop on Gold is imminent and maybe even a new lower low...

 

Looking at Dr Copper, Platinum and Silver as well I see similar trends.  If Oil does indeed drop to a new low and the rest of the commodities pack follow then the stock markets are likely to follow.

 

Here are some charts:

 

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  • 2 weeks later...

DonaldPrice post on Platinum triggered me to do something I have been wanting to do for a while but never had the time with everything else going on and that is to look at Silver.  It mirrors Gold but tends to be more spiky, running ahead and lagging gold at various times.  They also say that Gold trends are amplified in Silver.

 

Overall Silver has seen the same turn and rally as Gold in recent times and traced out a similar pattern on the Weekly, with a long drawn out ending Triangle.  Now it looks to me like the first wave of the rally is over (or soon to be over) and we could get a fairly serious retrace here.  Back to the 62% Fib on the daily is likely and maybe even all the way back to the Daily Triangle for another kiss?

 

On the Hourly a 1-5 could have been completed already OR maybe 1 more leg up to the possible Daily Triangle top (really not sure but the turn must be soon if not already).  Lots of bearish indicator action across the board.

 

Question, if Silver has indeed turned what does that mean for Gold?  There is a conceivable mirror set up in Gold so perhaps what I thought was a complex W4 on Gold is actually a retrace beginning?  Got watch these two closely to figure it out...

 

Charts:

 

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Hy Mercury, always great to to hear your comments as well as your detailed comprehensive charts, i had not seen the platinum chart for quite some time and noticed 2 days ago that it had prety much been on a bull run since february and one always questions as most, how long is this going to last, also noticed key fib levels as well as pivot point support and resistant points being approached, but having patience is key and waiting for those breakouts along with other trading tools can help aid your decision immensely. 

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We've had a Five Up so How about a Three Down (A-B-C) to follow...78% retracement would go down to $31 which is great for my June PUT at $32 thats currently in the red - should be blue tomorrow. Another entry point in this scenario will be at the end of the B..get on the C down to $31-ish.  Wadayathink, C



 

 

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What is also very interesting is the following quote from that Bloomberg article on Silver:

 

“We’ve seen some good fund buying that triggered stops through the recent highs in silver, which eventually spilt over into gold as the move gained momentum,” said David Govett, head of precious metals at broker Marex Spectron Group in London by e-mail. “Will silver continue to outperform gold? If stock markets stay firm or move up then yes, if they slump, then no.”

 

Buying due to short covering is often associated with a final end stage of a rally and Silver looks like it has had a 1-5 up of a final large time frame Wave 5.  A retrace drop could well be in the offing and what does that mean for stock indices?

 



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SILVER:  markets are getting softer & Silver has Neg Mom Divergence.  Also the price has fallen below the moving average off.  Could yesterday (2/5) noon at 1801 have been the peak and a retrace now occuring? thats what I'm thinking.

On the 'leading indicator' point re Silver maybe it's a slight laggard of the markets e.g. FTSE in that the industrial applications mentioned above do apply to silver and a contracting world economy lessens demand.  Make sense to me but from a TA approach I should ignore and look at the price chart - which says down to me.  C

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You may be right  and I was targeting the 1800 area for the end of the current move but I'm not sure we have seen the top yet.  Even of we have I suspect this will be a retrace move before another stronger rally, especially if other markets continue to weaken.  Despite its industrial uses Silver is still a precious metal and may act more so in times of economic difficulty. 

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As I mentioned Dr. Copper in my recent post on the FTSE100 I thought I would share my recent analysis on that market and it is interesting I think.

 

From the Daily chart you can see a major turn has occurred, which I luckily got in Short on (trick market this, very lucrative if you get it right but very costly when you are wrong).  Nice A-B-C retrace to the upper Triangle line, which had good prior touches and prior pivots (i.e. a reliable line) plus neg Mom Div and followed up by a 1-2 down and again a touches on the upper line and now a break of the lower triangle line.  On the hourly you can see a strong wave 3 down, nearing completion I think, after which a reasonable shallow retrace, maybe for a kiss on the Daily Triangle and then down to complete the Wave 5 but how low can it go?

 

Looking at the Weekly I am not sure of this is a big picture 3-4 retrace of a smaller wave.  There is Neg Mom (but not a Divergence) (also on RSI/Stochastic) on the Weekly and the EW count could mean we still have a big picture 3-4 retrace to go before the final drop.  Either way this appears to be heading back to the lower tramline on the Weekly and then we can reassess.  If this all lines up with the stock markets then a drop followed by a retrace and drop again is distinctly possible.  I am forecasting Copper to go as low as 15000 before all of this is over and maybe even down to 10000...  That would be some Bear, to rival even Oil!

 

Charts:

 

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  • 2 weeks later...
  • 2 weeks later...

luckily i didnt stop watching Silver and noted momentum divergence and went long at 16.02.  I nearly made 2nd entry was waiting for further pullback in the 16.40 area but it didn't happen and took off for the moon.... I think this is only the start of the silver story..



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