Commodities – Movers and Shakers

April 30, 2021No Comments

Let’s talk about commodities

The reason I would like to talk about commodities is because they had been on fire for the past eight months or so. Anybody who reads my blogs on a regular basis will be familiar with the fact that we were recommending commodities at ValueTrend when everybody else hated them last summer. Now they’ve skyrocketed.

What’s next for commodities? Well, I’d like to get right into it and go into some charts because I’m going to flip through several dominant commodities. And what you will find is that there are some commodities that are quite overbought and possibly worth paring back on. If you have a position, in fact, we’ve done that ourselves at ValueTrend. I haven’t made substantial profits on some of these commodity-orientated trades, but there are also some commodity trades that are up and comers.

I’m going to go right to the commodity index. This is the I-Shares commodity global commodity index. And it’s basically just a compilation of all the different major commodities, which includes materials, the softs, (agricultures, energy trades, whatnot). This chart shows you that from when I was recommending commodities on this blog, back in September of last year, the commodity trade has been a pretty good place to be. The only issue that we need to keep in mind is that long-term resistance, I mean, going way back to 2017, you can see that this index has had some, some pushback in and around the let’s call it 17 level on this index. So there’s going to be a bit of push back, coming up on the commodity trade. But remember, this is a compilation of a whole bunch of commodities. So, we really should look at them individually.

I’m going to just randomly cycle through some of the major commodities here. And I’d like to start with one of those commodities that does not look like the chart we just looked at. Do you remember Sesame Street? “One of these charts is not like the other”. I don’t think they said charts. They used to say, “one of these things is not like the other”.

This chart is coffee, the Bloomberg coffee index, and it is not coming into any level of overhead resistance. In fact, quite the opposite it is doing what many of the commodities were doing last June, July, August. It’s basing. Coffee has been basing really since 2019, and it needs to break around 11 and a half $12. Okay. I’m not going to predict when that’s going to happen. But what I will say is that if you’ve ever read my book Sideways, I talk about the four phases of the market. This is a classic base formation. If let’s call it, twelve dollars is broken with conviction, you have virtually no overhead resistance coming up for quite some time, no significant resistance. And it could be close to a double, but that hasn’t happened yet. I’m not saying buy coffee right now because coffee, beyond drinking it for your pleasure, coffee as a commodity trade isn’t ready to percolate.

This is a chart that shows you a different view than the coffee view we just looked at. Again, that that index we first started off with is a compilation of all these different commodities. So, you really can see saying the word commodities is like saying ice cream. There are so many flavours.

This is palladium and palladium is one of the important elements in creating electric automobiles batteries. What you’re looking at here is obviously since the Biden election, a real pop on palladium. In fact, it’s just on the verge, if not already having broken out through its old highs from early 2020. So palladium actually is a very bullish looking chart. It might be temporarily overbought could always pull back. You know, my rule about how much a stock is or a commodity is over its 200 day moving average. It looks to me like this is substantially over its moving average, probably about 20% or more. But eventually even with the small pullback, I would be interested in palladium and it may not pull back. This is a very bullish looking chart overall.

Another interesting looking chart is platinum. Now not to be confused with palladium, platinum is not used so much in electric vehicle batteries, the lithium batteries, it has some applications in electronics, but it is not as much of a pure-play on that whole EV movement. Nevertheless, it’s a very good-looking chart and it’s had a strong run it’s well past its old resistance and it’s just consolidating for now. Really not a bad looking chart and a breakout of that consolidation could mean another strong leg up. You can see stocks sometimes go up, fall back a little bit and then move up where they consolidated a little bit like there, this one is doing right now and then move up again. I would expect that platinum will have some upside in the coming year or so. So, this is one to keep an eye on. You can buy on the breakout if you want to be extra safe, because it may consolidate for a while, or you could just possibly consider looking at buying it in the consolidation, knowing that if it breaks say 105, it’s broken the consolidation and that would be a sell signal.

Here’s another basing commodity and this is sugar. Once again, when you look at some of these metals like palladium and platinum, they’ve gone very high. We’re looking at some of the food, agricultural commodities, like sugar that are in the process of basing. Sugar, it looks to be just on the verge of breaking out and if it does, so then there’s quite a bit of upside. Now, there will be a little bit of noise here coming around the $30. And it’s close to that right now, but you can get through that the upside, you know, might be a good, a 50% upside. We’ll see that it really has to break out, but it’s again something to keep an eye on because basing stocks when they break out can be very powerful movers. This is same idea, basing commodities, very powerful movements. That is how we caught the oil trade last year. And we’ll get to oil in a minute.

Now, a lot of people ask me about precious metals. This is silver. We own one position in a silver mining company. We eliminated most of our golds a while ago. Gold went quite bearish. We’ll talk about that in a minute. But silver is basing just like, and a couple of the other commodities we just looked at, it had a nice run and now it’s just moving sideways. It’s not a bearish looking chart. The last low was lower than the law. And then the most recent one. So, we have a higher, low, but we don’t have any rising peaks really. So this is just a basing stock or basing commodity in this case. And my view is that eventually it will break out if it doesn’t and it breaks this support level down here around 21, it’s probably a cause for getting out of the trade, but it doesn’t seem to be doing that. So it’s one for people that were very patient. You can look at, look at silver as a potential inflation hedge.

Let’s look at natural gas. I actually had a person write a comment on one of my blogs asking me about natural gas. And I noted that natural gas is not yet finished its downtrend. You can see there is a higher, low, just like we looked at in the silver a minute ago, but there’s no higher high. The downtrend is still in place. There’s no real signs of this stock breaking out of a base. Hasn’t happened yet. One to keep an eye on for sure, but it’s not there yet. We don’t own any.

Now we do own oil. We just peeled back some of our exposure. As I mentioned before, it was one of the trades we got in on very early back in September. So back here, it’s moved up quite nicely. This is the USO. It’s an ETF. It doesn’t look exactly like the WTI chart, but it’s close enough and you can see there’s a ton of upside on oil. I really do think that oil’s going to be a pretty good mover over the next year, but it’s consolidating. And that’s for that reason, we took a little bit of profit off our sheets.  The other was probably about three weeks ago. We were, I think, somewhere around 15% oil and we moved it down to closer to 10. We’re still exposed, but underexposed, I guess we would buy back. We think that the, the sector is a great place to be and it’s just consolidating. And probably sometime this summer, it’s going to be a great place to go back into. We still have some exposure. I must point out for those who own exposure and are overexposed. Well, I’d probably continue holding it. As long as it does not break this this consolidation, you know what to do. If it breaks consolidation, do the downtrend. You have to sell, you have to exercise the discipline. But if it if it breaks out sometime in the summer, then you probably are looking at another big move to the upside. We’ll see what happens there.

Here is another interesting basing chart. Now this one’s controversial. I’ve written about this. If you go to my blog and type in the word coal, you’ll see a few blogs I’ve written on the subject. This is the base. This is the breakout. This is the test of that neckline breakout right here on coal. This is the Dow Jones, coal index. My thoughts are that we will not see coal get back to the good old days of, you know, on this index about 400 and change. I don’t think that’s going to happen. The demand for coal is shrinking here in North America. We know that, but that’s not news. That’s old news. However, in Asia, India developing nations coal is used extensively for their power and they have made it clear. They don’t plan on changing that anytime soon as their economies expand as their populations expand, you will see a market for coal. And because it’s looks relatively undervalued from a technical perspective, I think there’s a little bit of upside on coal. It would only be a trade that I would do in an aggressive strategy. So, we don’t hold coal in our conservative strategy, but we have a little bit of exposure in our aggressive strategy, understanding the risks.  Interesting chart.

Next, we have corn. Now, remember we were just talking about a couple of commodities. We talked about coffee, we talked about sugar, these were basing. Well, corn looks, nothing like that. So perhaps something to do with the ethanol use in gasoline perhaps, just as a staple, I am not familiar with the fundamentals behind the trade other than the chart. And this chart has gone parabolic. Now you can see this red candle on the right-hand side means that it’s had a rough week. And that makes sense because when anything is this overbought, this is the 200-day moving average at 15, and this was this commodity price fund went to 20. And that to me spells the 33% or so over the 200 day moving average. And that’s dangerous. You are probably going to see a decent pullback on corn, but nevertheless, it doesn’t look too bad technically in the longer run. I just feel that it’s super overbought and I would not be too aggressively moving into corn at this point.

I didn’t print the lumber chart, but the lumber chart looks a lot like that by the way. Another chart that we’ll look at is copper. You know, I personally do have exposure to copper through a couple of mining positions, but like oil. I mentioned a minute ago, we recently cut a chunk of our copper and materials exposure for the same reason. It’s overbought, great chart, wonderful uptrend can’t argue – overbought. So in the short term, we think that these reflation stocks like the metals, materials, energy, might just move sideways for a while, pull back a bit in the metals cases, but eventually they’ll break out again. So we took some off the table and we would not hesitate to rebuy that amount. We still have exposure. We did not eliminate the position like oil. We still have an exposure, but we took some off the table because it’s overbought. So this is part of our discipline is we will take profits. I’m going to look at the gold chart now. And really this is a downtrend. If you ever saw one, it was in a very nice uptrend. It’s in a trend channel right now. It’s at the top of the trend channel. My feeling is that you might see it move down again over the summer. Probably be a good time to buy it at the seasonal time sometime around July, August. And that might just be when it pulls back on the next leg, down in this downtrend channel. Yes, gold bugs eventually it will find a base. I don’t know when that’s going to be. So for the time being the chart is a chart it’s in a downtrend for now. We’re out of that trade largely.

And that is about it. Looking at the commodity index chart. And you can see that that chart is quite different from some of the individual components. Now, again, I neglected to post the lumber chart, but you’ve probably seen lumber charts before you know, that they look like this. So just below, try to visualize that and understand that. I think that lumber too is a bit overbought and do a pullback. It’s not a bearish chart. It’s just an overbought chart.

Thank you for watching and tune in next week, I’ll be posting every week, a new video with hopefully subject matter, that interests all my blog readers and anyone else interested in technical analysis. If you have any questions, you can reach out to at [email protected] I encourage you to read our blog valuetrend.ca it’s on the front page, subscribe to our newsletter.

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