From the Desk of Ian Culley @IanCulley

Back in early July, we were looking to buy a bounce in natural gas. Let's just say it was a success, as our target was hit within weeks.

But you have to remember the environment back then. Commodities had experienced a broad sell-off. And natural gas and agricultural contracts such as wheat and cotton had recently experienced drawdowns exceeding 40%.

It might have seemed like a tough call at the time, but for us it was clear. The risk/reward was in our favor as natty pulled back to test a key level. It was that simple.

Fast forward almost two months, and we’re back for more. Our risk is well-defined, and cyclical areas of the market are assuming leadership.

Today, I’ll share how we’re gearing up for a fresh leg higher in natty gas.

First, let’s take a look at the weekly chart of natural gas futures.

Regardless of the...

From the Desk of Ian Culley @IanCulley

Markets constantly provide valuable information. But it’s up to us to listen.

Of course, it’s easy to get caught in a narrative or bias surrounding a particular market. It’s part of the human condition.

And it’s almost a prerequisite. 

In order to step up to the line and assume risk, we need to have a certain level of conviction. At the same time, we must remain open-minded and flexible, willing to receive new information and update our priors.

It’s a balancing act.

And energy is one area of the commodity market that’s keeping us on our toes.

Heading into Q3, we were looking for energy to follow the vast majority of other commodities lower, including base and industrial metals.

So far, that hasn’t been the case. 

The chart below highlights how closely the two procyclical commodities groups have trailed each other heading into 2022:

This relationship began to...

From the Desk of Ian Culley @IanCulley

It doesn’t matter where you look: Commodities are digging in, finding support, and reclaiming key levels.

Grains, softs, base metals, and energy have all stopped going down. Even gold is bouncing off critical levels of former support.

But it’s not just the fact the commodity correction is hitting the pause button that’s important.

It’s where it's happening.

Let’s take a look at a few charts.

First we have cotton futures:

Cotton completed a monster base, breaking to fresh 10-year highs last October. A strong advance took hold during the following months.

But it was answered by a near-vertical decline back into its prior range.

After falling more than 45% from its May peak, cotton is reclaiming a key level of former resistance marked by its 2014, 2018, and 2021 highs.

That shelf of former highs kept a lid on cotton prices for almost a decade. And the 2018 highs...

From the Desk of Ian Culley @IanCulley  

Energy futures are beginning to crack under pressure.

Crude oil and gasoline are breaking down to their lowest levels since February. And heating oil isn’t far behind, as it’s challenging the lower bounds of a similar distribution pattern.

It appears that the bears have finally come for energy.

Since we already laid out our short idea for crude oil futures in a recent post, today, our focus is on the energy sector and the implications these breakdowns carry for energy-related stocks.

Here’s a chart of the Energy Sector ETF $XLE:

When it comes to XLE, 80 is our level. It coincides with a shelf of former highs and an area of overwhelming supply. If it’s below those former highs, the energy sector represents downside risk and opportunity cost.

These are two things we do our best to avoid.

Remember, when we buy stocks, ETFs, or commodities, we prefer to buy high and sell higher. The idea is to buy...

From the Desk of Ian Culley @IanCulley

The past two years of sideways chop on the gold chart has been a game of perseverance and pain. 

Gold is a honey badger, attacking a beehive face-first, digging for larvae, and somehow persevering through a thousand bee stings.

That can’t be fun, especially as other areas of the market have experienced explosive trends. But it works for the honey badger.

And it's worked for gold.

Now that commodities and stocks have come under increased selling pressure, the data continues to mount in favor of declining gold prices. 

Precious metals are looking weak. Gold stocks are breaking down on absolute and relative bases. And signs of risk appetite are nowhere to be seen.

But gold doesn’t care.

Before we get into the absolute weakness in gold and other precious metals, let’s review the relative weakness in the mining space.

Here’s a dual-pane chart of the Gold Miners ETF $GDX versus the Gold ETF $GLD and...

From the desk of Ian Culley @IanCulley

Commodities have been on the ropes for more than a month. As for commodity stocks, they’ve been under pressure since the start of Q2.

But the steep decline in these inflationary assets is beginning to slow – and it couldn’t happen at a more logical place.

The CRB Index and numerous bellwether commodity stocks are digging in and finding support at key levels. Whether these levels hold is anyone’s guess.

But the first step of the base building process is to stop going down. 

Let’s take a look.

First up is the CRB Index:

After a meteoric rise off the pandemic lows, commodities are experiencing their first significant correction in two years.

It’s not surprising the index stopped going up at a shelf of former highs from 2012 and 2014. There’s obviously a significant amount of resistance at those levels.

Now, the question is whether demand will come in at this critical shelf of...

From the desk of Ian Culley @IanCulley

Sellers are in the driver's seat when it comes to commodities these days.

Besides natural gas and livestock contracts, few commodities present buying opportunities that we like. In reality, most have either broken down or are on the verge of breaking down. 

As the latest bout of selling pressure shows little signs of easing, we’re likely to experience more damage in the coming days and weeks.

Copper, one of the most economically sensitive and widely followed commodities in the world, is a great example of recent weakness. It can’t stop falling.

Given the downside volatility raw materials have experienced since the start of the summer, many trends are stretched. We don’t want to be too bearish here. We want to let the dust settle.

With that said, it’s hard not to imagine where the bears will strike next.

And when we scroll through our charts, it looks like they have crude oil in their sights.

Let’s take a look.

Here’s a chart of crude...

From the desk of Ian Culley @IanCulley  

Don’t let the numbers fool you.

Despite positive returns at the index level for Q2, commodities have been in full retreat for the past month or more. We broke the damage down in last week’s post.

However you want to slice it, commodities are under increased selling pressure. The strongest areas aren’t breaking out; they’re trying to hold support.

That’s simply how raw materials are performing in the current environment. Yet we’re still finding levels we want to trade against from the long side.

Believe it or not, one of these situations is popping up in one of our favorite energy contracts…

Natty gas!

Here’s a weekly continuation chart of natural gas futures:

After completing a monster 14-year base in April, it reached our initial target of 9.05 in less than two...

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

So far, 2022 has been a historic year. That theme intensified during the second quarter, which is now in the books.

The bond market is working on one of its worst years on record. The S&P 500 just posted its worst quarterly return since 1970 with the index down more than 16% from January through March.

Bitcoin finished the quarter with its second-worst return in its short history. And now the energy sector – the market’s leader this year – just posted its third-worst monthly return since the 1990s.

The operative words here are “worst” and “return.”

That’s 2022 in a nutshell. The bears are in complete control.

However, one area that has held up through all this is commodities. It was the best-performing asset class in 2021, and it’s the only one to close the first half of 2022 in the green.

Let’s note that the first quarter of 2022 was far different from the second. And before we go running to commodities for safety, let’s put the group’s recent performance in perspective.

First, we have a bubble chart of the CRB Commodity Index and our...

Dr. Copper is in the hot seat again this week!

I know we just covered copper and the copper/gold ratio. But this is a major development, so let’s dive in a little deeper.

When one of the most important procyclical assets breaks to fresh 52-week lows, it takes center stage. It also has major implications across a variety of markets.

But what about energy? What about grains and softs and the rest of the commodity space?

Well, most of those contracts have already been in correction mode.

And, based on the recent selloff in energy and other commodity-related stocks, a much deeper correction could be in store for these raw materials.

It’s definitely something we’re monitoring. And that’s where copper and today’s chart in focus come into play.  

Let’s take a look.

Here’s an overlay chart of copper futures and the five-year breakeven inflation rate:

These two charts look almost identical. That's because copper and commodities, in...

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

One of the most important risk ratios and easily the biggest snooze fest from the past year is finally starting to move. 

That’s right – after going nowhere for more than a year, the Copper/Gold ratio is making a directional move! And believe it or not, it’s resolving in the opposite direction of interest rates.

Instead of following rates higher, Copper/Gold is rolling over to the downside and raising questions regarding risk appetite and overall market health.

And from the looks of today’s price action, Dr. Copper is breaking down on an absolute basis as well.

We can’t emphasize the importance of these developments enough. We’ve been awaiting resolutions of these ranges since early last year, and it’s finally happening.

Let’s talk about it.

Here’s an overlay chart of the Copper/Gold ratio and Copper futures:

...

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Don’t fight trends. It never ends well.

Learning to go with the flow often comes with age and experience. Lucky for us, we have plenty of both at All Star Charts as the current cycle isn’t our first rodeo.

We’ve been pounding the table on the energy trade, gracefully accepting all of this inflation and the outrageous prices at the pump.

What can we do about it? 

We can own the strongest commodities that continue to benefit from this inflationary environment. It’s really that simple. 

Let’s take a look at one of them now.

Here’s a zoomed-out chart of live cattle futures:

Last August, we covered live cattle, anticipating a breakout from a multi-year consolidation. Price chopped around the upper bounds of its range for a few months but ultimately resolved higher, completing a large basing pattern.