The Wild West

Looking down at a basket of commodities, currencies and other instruments.

Introduction

This originally began as a much smaller piece on currencies, but it started to throw up a few other questions and made the writing seem incomplete. Instead I decided to turn it into a three part mini-series of writings that will aim to gauge how we might properly position ourselves for the end of the year or where some future opportunities may be and what we should avoid. A conclusion if you will of the year so far. I feel somehow I owe it to my new all time high follower count of 10,000 on StockTwits, Inc. Thank you greatly and I hope you enjoy part one of this analysis.

Part 1: No Noise, Please.

Around here I don’t like talking too much about interest rates, central banker policy or much “funnymental” data at all. What we do like, however, is charts.

While I would love to jump straight into it, I must briefly touch on my introductory statement about “funnymentals” — a term coined by Robert Edwards in the book Technical Analysis of Trends written by John Magee and the aforementioned.

The below excerpt is a great example of how I interpret markets without any(much) fundamental data at all.

Robert Edwards — Technical Analysis of Trends.

I shan’t bore you with a horrendous explanations on how interest rates affect currencies, stocks or bonds or what the outcome of a negative NFP or earnings report brings to a normal day in the markets. I will just mention that while the charts are all I need, these types of things do add to the sentiment of price; It is how we filter this fundamental layer and others so as not to cloud our so easily tricked minds.

“To know value is to comprehend the meaning of movements in markets.”

— Charles Dow

If you can accurately predict moves in markets based off what you think the market is thinking, then all the best to you. I have the above Charles Dow quote stuck to the top of my monitor and it reminds me to include and understand that there are more to market movements than one single chart, CPI number, rate rise or CFTC report and rig count.

A guy called Tom Daily once told me that; “The price moves and it is only after that fact, that the news is created.” — I am not sure if this is a re-quote but it stood out to me. Markets know all.

The counter argument to all of this of course is that our chart patterns, Fibonacci retracements or indicators may not always work, or show us the best most actionable results. — It would be remiss of me to deny this. But it can be countered again with that any analysis of markets is subject only to speculation or informed decision from years of research and experience. Unless you are throwing around some serious money, your participation in the movements of markets is minimal.

The market is out to get you and there is always someone out there with more knowledge and a bigger line to swing. Spotting trends early and adapting to price accordingly is key. (That is for another blog)

Looking at it all.

While others may deem it needless to look at anything and everything, some even have their eyes glued to one market only. It really doesn’t hurt and it has certainly aided in me getting to grips with the market as a whole.

Without anymore noise from me, let’s get to the charts.

Commodities: Sticks, Stones and Oil

First up is Gold; Now I don’t want to offend anyone as I know the gold bugs love to fight for yellow metal, so I will just touch on how I think gold is going nowhere fast, and how it hasn’t for a long time.

/GC (Gold — continuous contract) Weekly candles

We can see here on the Gold weekly that we’ve seen no real movement in almost 5 years. 1,400 is an obvious upside target for many I am sure but I believe Gold is going to be stuck range bound until at least years end and maybe a bit into 2018.

Downside levels right now I’d say are 1,270-1,250 to 1,235 and 1,215 with 1,170 being a fairly stable base.

To the upside: total capture and confirmation of the hold is needed over 1,300 — from there 1,350 to 1,378 and 1,400

/GCZ17 — Gold Dec-17 contract, Daily candle

Some rocks that are actually making moves. Copper.

Taking a look at a continuous contract of copper we see a nice move out of a 7 year downtrend. Meeting prior resistance at 2013/14 levels. Putting in a Shooting Star on the weekly (as of 10/20/17 close)I think we may see distribution into years end with possible upward continuation late in 2017 or early 2018.

Copper — continuous contract, weekly candles

Upside is pretty open and any type of real overhead worry would be those 2011 highs (also the 161.8% fib from 2016 lows. Thus, an upside target of 4.08.

To the downside, which I do not doubt we may see: Immediate support at 3.150 below this and I believe 3.050–2.97 is possible. Loss of these levels would most likely lead to 2.90–2.70 where a possible base could be formed.

/HGZ17 — CopperDec-17 contract, Daily candle

Not too long a go I was banging the table on the agricultural commodities. Well there was egg on my face. If we take a look at a long term look of BCOMAGTR— Bloomberg’s Agriculture total return subindex. I had some expectations that the RSI divergence had played out and the relief rally would begin shortly. This was just before the 110 level. Prices remain around the mid 90s as of 10/20/17

Bloomberg Agriculture total return subindex, weekly, log scale.

Let’s breakdown some ags and find out why down is the mote likely path for this basket.

JJA — BCOMAG ETN Is heavily weighted in Corn so we’ll start with a continuous contract of corn on a weekly basis. Nice base at that 325 level that I think we could see by years end. It is difficult to be optimistic on con after it pulled my strings a lot last year so my upside targets are very conservative at 375–400 if and when that level is held I’d expect to see gradual rise through 425–450. Note very large window mid 2013.

Corn — continuous contract, weekly candle.

Soybeans up next and while naturally a similar look to corn we see it gaining a bit of an edge on this secondary downtrend line from 2012 highs. As this is a clear bear market though, and any rally must be treated as a relief rally until the correct reversal signals are in place it is again with a cautious mind I dwell on upside targets.

Soybean — continuous contract, weekly candle

To the downside: 970 looks likely to be on deck from here if a loss of this level occurs I would expect to see 959–952 to 948–935 area for a possible bounce.

To the upside: a break over 1,000 is needed for any real resolution higher. onto 1,010 and 1,030 Then and only then does the door open for something higher.

Soybean — continuous contract, daily candle

Wheat is taking a big hit lately, breaking down once more, this time with a bit more conviction than prior candles in the small uptrend that began beginning Oct 2016 to start of 2017.

Wheat — continuous contract, weekly candle

Immediate support at 420–415. Any lower and Wheat might get washed away until the next level of support around 400–390. (2016 bottom)

For upside targets, again i’d be careful as this is a downtrend (bear market) relief rally’s are most likely limited to the 470 area of overhead.

Weekly and daily closes below the 23.6% fib are also confirming a continuation lower.

Wheat — continuous contract, daily candle

Before we move onto Lumber, I just want to briefly ask you readers a question. Sugar has been getting caned recently… it is down 30% year to date.

Sugar — March 2018 contract, daily candle

I’d love to know what you guys make of this daily set up in sugar. I think what we see here is almost bearish pennant in form and will resolve lower. Let me know on StockTwits or Twitter @alistair_chart

Please join me tomorrow (10/22/17) for part 2 where I will finish off talking about commodities. Do not hesitate to contact me with questions or any corrections you think should be made.

End of Part 1.


We continue with commodities in part two, opening up with some soft products like Cocoa, Lumber and animals before we end out with some currencies. (Correction: currencies will be included in part.3 as will Oil/Brent)

How much wood would a woodchuck chuck if a woodchuck could chuck wood?

Some people may remember as far back as January 2017 I was looking at contracts for Random Length Lumber. It has been very profitable and has been one of my biggest gains this year at just over 21% real return from January.

Random Length Lumber — continuous contract, weekly candle

You can see on the chart above that prices made great moves from the 2015 lows, RSI got out of oversold readings quickly. Some textbook trend reversal, consolidation through 2016 and on to the 161.8% fib extension. My 2017 target. Now there is generally nothing notably bearish about new highs, but for me, when targets are hit it is time to start scaling in and closing positions. With that being said, I still like lumber to the upside so here are some levels for the coming year.

To the upside I see 465 (2003 highs) as a probable target and 490 level made back in 92 — any move over this is a new all time highas far as my data goes back.

To the downside I see 406–400 as immediate levels, 395–370 below that— before year end we could even see a retest of the July consolidation levels around and possibly January highs of 345, forming a potential base.

Random Length Lumber — November 17 contract, daily candle

Quick side note: When lumber ratios are made to such products as Gold or various real estate instruments, it starts to show us some angles of intermarket strength and weakness, economic conditions and can react accordingly and swiftly to issues in the housing market. This is best left for another post that I may follow up with, although it is heavily documented on most reputable sites. Some of Charlie Bilello’s work with Pension Partners focuses on such matters with much detail.

The next one up is Cocoa — It’s been a horrible time for Cocoa since Oct 2016. But what we are seeing now is the makings of a potential reversal. Prices rounding off and popping nicely into a bit of prior overhead supply. Only thing I am seeing here is that volume fades on relief rallies but has since been gaining gradually with price from late August.

Cocoa — continuous contract, daily candle

Levels to watch for the end of the year for the upside: First of all, prices need tackle this 2,150-2,200 level with conviction. This opens up possibilities of 2,225–2,250 onto 2,300 (December 2016 highs).

Do the downside we have a wide range to pick and choose potential levels. Max pain for Cocoa for now is at a maximum 1,750 — that 1,995 level (200 Day Moving Average) would also be appealing for a potential buy area.

Cocoa — December 17 contract, daily candle

We can make money in most things, coffee, chocolate, wood and even the weather. Earlier on in the year or maybe 2016, StockTwits asked its users what they think has some potential for the coming year. Most said tickers like NVDA, AMD, TSLA, SNAP (HA!) and so on and so forth. I had my reservations about it but nonetheless I said Lean Hogs and it’s up 43% from a year ago (only ~3% YTD though) So not quite your NVDA or TSLA but still a good one to watch for next year perhaps.

Bloomberg Lean Hogs subindex — Weekly, log scale

Levels to watch for the upside in December/January contracts are 68 area. After this we have some large windows and overhead at 71 — comfortably making it over 71 would open the door to much higher. 79, 84, 92

Lean Hog — Daily candle. Log scale

To the downside, I think we could see some levels like 61 to 59. Breakdown of these levels could give way to more pressure. 53 Is November 2015 lows and could act as support. (Also the .236 fib retracement from 2016 lows)

/LEZ17 — Lean Hog December 17 contract, daily candle, log scale

Live Cattle futures almost have a similar picture to Hogs, although the former has come in stronger and above a more stable belt-line that was started in late 2009, confirmed in 2013 lost through 2016 and held again as of August this year. Based on the Bloomberg Live Cattle Subindex.

Bloomberg Live Cattle subindex — weekly, log scale

Futures contracts for Decemeber are showing me higher might be on the cards with some overhead at the years high. I can’t say if we will get here before January 2018. But here is some levels to watch anyway.

Live Cattle — december 17 contract, OHLC daily, log scale

To the upside I’d like to see a clear break of the 119 level onto 120. A successful retest of 119 after such a move would be nice confirmation that the uptrend out back June highs is real. From here I will do a follow up post on where I think Livestock futures might be heading.

To the downside, we might see a rejection off this 119 level if and when we even get there. 113–114 are probably good levels to watch. Would most probably be meeting the 200DMA if we were to go this way. Max pain for 2017 I think is limited to ~106.50

I am going to close up part 2 early and keep Currencies and financial instruments to the final part. I want finish off this section on commodities with Orange Juice. It has taken an absolute beating, along with sugar, cocoa, coffee and vix futures. Once again I would like to know your thoughts on where OJ might be heading.

Since 1977, the price of an OJ contract has bounced off a 100/75 price range 160 never managing to hold it for more than a couple of years. Only recently making a new high in 2016 of ~235 — What do you see for Orange Juice now? Will we see another test of the favourable $80 price area, or can it make over 160 for good, in search of a new uptrend.

Orange Juice Futures — Weekly, Log scale, High only
Orange Juice — November 17 contract, daily candle

To the upside I could see higher prices making way if Octobers high is taken out around 165. Onto 170 (March highs) after that 187–200 level is on the cards for years end. To the downside I would wager a loss of the down-trending 200DMA being a pretty rough sign and could open the door to 145, 140 and 2017’s bottom at 126 area.

Orange Juice — weekly, candle. Log scale

Let me know you guys think about OJ right now and if you think there is a possibility of a future entry. As always, you can reach me on StockTwits or Twitter @alistair_chart

End of Part 2