Commodity Market Insights
Equity markets and some commodities started looking a little shaky last week. A string of poor economic data can certainly be penciled in as a catalyst for the weakness. Manufacturing surveys from the New York and Philly Fed came in weak on the headline number and appeared even weaker when digging into the details of the data. Jobless claims rose again and may point to another potential poor showing in the employment data early next month. Chinese economic data pointed to a slowdown in growth pushing Crude Oil, Gold, Silver and Copper futures to plow through trend line support and post larger meltdowns than did the equities indexes last week. Recently, in the 03/02/13 Wire, I discussed the divergence that had been building between the typically correlated markets of Copper and the S&P 500. Copper fell sharply throughout February and has continued to do so as the Dollar climbed against a basket of major foreign currencies. Yet, the equities markets continued to plug along higher. I penned, “Is “Doctor Copper” prescribing some bad news?”… “If these trends continue, it may be difficult for equities to sustain the rallies seen over recent months.” Now, copper has fallen through, what I interpret as, a three-year old trend line that also served as the neck line of a large head and shoulders top formation (seen best from a weekly continuous chart) which opens up the possibility for the metal to cut its price in half over the coming months. If so, what does that mean for stocks? Equity markets were shaken up early in the week, in part, because of the breakdown in the Metals markets and the weak economic reports. Chicago, Richmond and Kansas City Fed district report their manufacturing survey results next week. I will be monitoring these sets of data closely for further indications of economic slowdown. Microsoft and Google saved the day for equities on Friday. But, will the real market mover, Apple, be able to post a good number next week or will a miss take a bite out of the indices? Stay tuned…
Implied Volatilities on many closely watched commodities are at or above their three-month highs. The “Pctl” column on the far right of the table below, points out that 10 of the commodities markets we follow now have Implied Volatility (IV) measurements in the 99th percentile of the range over the last three months. One important conclusion from this list is the make-up of Metal and Energy markets. While the Current IV levels are elevated, none (except for Cocoa) have a higher IV than the actual market volatility (Statistical Volatility). I interpret this as a sign that the recent large price swings seen over the past few weeks may be here to stay for a while. Covered option writing strategies may potentially offer favorable risk/reward setups over the short term. For examples or assistance in creating such strategies in these markets, feel free to contact a Kingsview Financial team member to review trades that may fit your risk tolerance.
In the 04/06/13 Wire I penned about Crude Oil’s price, “In my opinion, with last Monday’s high testing and failing at a down trend line drawn from the September 12 and January 13 highs, an ABCDE correction may have been completed and the continuation of a larger degree wave count to the down side, that began on March 12th, is beginning…Early next week, a correction that might bring May futures back to the $94.85 level could be expected. $94.85 is the 50 percent retracement of the decline and the extreme of the fourth wave of the decline. Any price action above $97.80 (the March 31st high) would negate the analysis and likely lead to higher price action. Otherwise, I am looking for further downward pressure over the short term that targets longer term trend line support near the $80.00 area.” After rebounding to $94.82 on 04/10/13, Crude Oil futures have dropped convincingly through support and have traded as low as $85.61. Futures may be a bit over-extended over the short term picture, so another small correction may be in order. For the current analysis to remain valid however, any rebound should remain under $91.91 on the front month contract. In my opinion, the most likely area for the rebound to play out will be $89.12 – $90.21. These are the 38.2% & 50% retracements of the drop from 04/10/13. Afterwards, I am looking for a drop below $85.61 to complete the short term pattern. The general weakness in commodities, as a whole, should continue to support further downside in Crude Oil and strength in the U.S. Dollar versus other major foreign currencies.
It’s been a few months since I reviewed the technicals on Gold futures and now with the big break to the down side last week I would like to revisit this analysis. In the 02/16/13 Wire I penned, ”While last week’s deluge may have Gold futures a little overextended on the Daily charts, I would look for the down trend to continue to mature over the coming months. Rebounds into the $1640-$1660 area may offer those with a bearish bias an opportunity to consider establishing short positions. In my opinion, resistance lies at the 200 day moving average ($1663.5) and the downward sloping 20 & 50 day moving averages are currently at the same level. Look for price action above $1700 as confirmation that Bull’s may have regained control; otherwise the next major downside target should be the support shelf that held up in late 2011 and early 2012 near $1525.” The $1525 level has been a battle between the bulls and bears on three previous occasions since September 2011, all of which were won by the bulls. Each time this level was reached it rebounded back to $1800. This time the bears were able to punch through the $1525 level and futures have accelerated lower, reaching a low of $1321.5 this past Tuesday. In my opinion, this should be the initial move of a more protracted extension to the downside over the coming months that may potentially target a move toward the low $1000 area. Looking at the shorter term picture, the move lower as measured from the 04/09/13 high of $1590.1 to Tuesday’s low of $1321.5 seems to be a bit oversold on the daily continuous chart even though futures have already retraced as much as 38.2% of the drop. This tells me that the potential correction that may be trying to unfold could zigzag for several days or weeks and possibly extend closer to the 50% retracement level at $1455.8. Once this break in the action has completed, look for another forceful move that could take out the $1300 level and work its way down toward $1150.