Commodity Inflation is Hitting Speed Bump

Inflation has become a popular buzzword (and concern for investors), and the broad commodity rally is a big part of the inflation narrative. 

The headlines below reflect how the media sees the commodity/inflation development:

  • Commodity prices drive WPI inflation to 27-month high – Economic Times
  • Commodities hit highest since 2013 amid inflation concern – Bloomberg
  • Strategists pick commodities as a favorite way to play reflation – Bloomberg
  • Surging commodities feed concern over inflation – Business Insider
  • Investors should be prepared for biggest inflation scare since 1980s – Business Standard

Interestingly, whenever a rally has been strong enough to become a main story is also about the time when the rally tends to pause.

The March 14, 2021 Profit Radar Report included the following analysis regarding the commodity rally:

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The long-term CRB Reuters/Jeffries Commodity Index chart shows that the commodity complex is approaching a significant resistance cluster.

The short-term chart of the Invesco Commodity Index ETF (DBC), the corresponding ETF, outlines short-term support/resistance. According to Elliott Wave Theory, it’s possible to count the rally from the March 2020 low as 5 waves with an extended fifth wave. The RSI-35 divergence would fit. 

As mentioned previously, we expect the trend of rising commodities, due to shortages, to continue. A wave 2 pullback (once this smaller degree wave 5 is completed) would offer a welcome opportunity to buy. It may even be worth to short DBC as it moves closer to 18 (and if it maintains the bearish RSI-35 divergence). There are no good short commodity ETFs. DB Agriculture Short ETN (ADZ) captures agricultural commodities but is thinly traded.

Since the above analysis was published in the March 14 Profit Radar Report, DBC has already fallen as much as 6%.

Continuous updates are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. 

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Key Commodity Index at Major Inflection Point May Provide Clues for Oil

As MVP of the commodity sector, oil is usually in the spotlight (especially after a dizzying 60% drop) while most of the other commodities operate in the shadow.

The Reuters/Jefferies CRB Commodity Index, the Granddaddy of broad commodity indexes, sports an interesting chart right now.

The index has reached the lower end of a trend channel that’s defined a multi-year down trend.

Is that a buying opportunity? Is oil near a low?

First we should look at the composition of the Reuters/Jefferies CRB Commodity Index.

In 2005, the index was revised from an equal weighted to a 4-tiered grouping system, designed to reflect the significance of each commodity. Here is the group weighting:

  • Agriculture: 41%
  • Energy: 39%
  • Base/Industrial metals: 13%
  • Precious metals: 7%

Crude oil makes up 23%. The next biggest components are gold, natural gas, corn, soybeans, aluminum, copper and live cattle with 6% each. Silver accounts for only 1%.

Since oil is the heavy weight of the Reuters/Jefferies CRB Commodity Index, trend channel support should be watched carefully for anyone fishing for an oil bottom.

Under normal circumstances this would be a low-risk opportunity to buy the Reuters/Jefferies CRB Commodity Index (trend channel could be used to manage risk).

However, there is no Reuters/Jefferies CRB Commodity ETF.

Broad based commodity ETFs include the PowerShares DB Commodity Tracking ETF (NYSEArca: DBC) and iShares GSCI Commodity ETN (NYSEArca: GSG).

DBC has a strong correlation to the Reuters/Jefferies CRB Commodity Index, but the actual chart paints a different story.

DBC already dropped below trend channel support and is near its all-time low. Aside from a Fibonacci projection level at 14.13, there is no technical chart support.

This makes it hard to manage risk effectively. Traders looking to bottom pick should probably use the Reuters/Jefferies CRB Commodity Index trend channel as stop-loss for any long positions. Oil ETFs include the United States Oil ETF (NYSEArca: USO) and iPath Oil ETN (NYSEArca: OIL).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Oil Flash Crash Erases 3.8% in 4 Minutes – Is This a Sell Signal?

Wall Street traders returning from lunch saw one of the most pronounced mini flash crashes in history. Within a matter of 4 minutes (between 1:51 –  1:54 pm EST) crude oil prices dropped 3.9%. The day’s trading range was 4.9%.

The swings were equally dramatic in oil related ETFs like the United States Oil ETF (USO) and iPath S&P GSCI Crude Oil ETN (OIL). The ripple effects were also felt in the broader PowerShares DB Commodity Index ETF (DBC) and iShares S&P GSCI Commodity Index ETF (GSG).

What caused this mini flash crash and is this a sell signal for oil?

What Caused the Sudden Drop?

Traders, analysts and regulators are still fishing for reasons, but there are only speculations thus far. An incorrectly entered trade (“fat finger error”) or rumors of a possible release of oil by the United States strategic reserves are possible suspects.

Is this A sell Signal?

Oil is not one of the asset classes regularly covered by the Profit Radar Report, but we can apply the same technical analysis methods used for the S&P 500, gold, silver, currency and Treasuries to oil.

The chart below plots crude oil futures prices against the 20 and 200-day moving average, prior support/resistance levels and a largely unknown but effective indicator called percentR.

We see that Monday’s quick dip pulled oil prices briefly below the 20 and 200-day SMA, which converged at around 96.50. Prices found support at 95 (green line), which is an area that buoyed oil prices several times before.

In addition, Monday’s drop triggered a bullish percentR low-risk entry. Only a close below 94.65 would negate the bullish low-risk entry.

Obviously, most asset classes are overbought due to last week’s Federal Reserve induced price pop and due for a correction. However, as long as oil prices stay above support at 94.65 – 95 any correction will have to wait.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.