Trading Week: Commodities rout

trading week globe world

by Chris Becker

It only takes one data print to reverse a correction, and the one we all love to hate, the US Non-farm payrolls is the corker! Friday’s print dragged unemployment below the 6% level and dragged stocks up by the coat-tails arresting a very mild, but much talked about dip. But is buy the dip back here in Australia?

This report is one I compile each week for my own trading decisions, and does not constitute investment advice. I may have positions, long or short, on multiple time frames (intraday, daily or longer term) in any or all of the markets discussed below.

Please seek independent investment advice from a licensed advisor before considering any investment decisions.

I always start with the bond markets, where yields in the US 10 year T-Note fell sharply again last week and are heading for medium term support at 2.3%:

tnxx

The falls were replicated in the 30 year T-Bond yield and a possible sub 3% target towards the end of the QE Taper, as the monthly long term downtrend in yields (an epic bonds bubble) continues:

tyx

Now to currencies, with King Dollar USD as measured by the US Dollar Index (DXY) finishing flat for the week, and still remaining bubblish on the weekly charts. Please note that during the last major US stock market bubble, the USD climbed with the Nasdaq to the moon in the mid nineties, so there could be a lot more froth overhead:

dxyy

This continues to translate into weakness for the euro, which fell over 1% last week on the back of ECB dilly-dallying. I still maintain that the 1.21 level is on the cards but the euro is considerably oversold and as I said previously a small bounce or range at support at 1.27 to 1.28 area is possible on a pause in coming weeks before resuming falls:

eurcocci

Pound Sterling has now capitulated and my target at 1.54 is in sight, as the juncture on the weekly chart broke, falling nearly 2% last week:

cable

As I said last week, the short term view (and trade) was a roll over of support on the dailies:

cable daily

It doesnt come much easier than trading the Aussie on the weeklies at the moment. Perhaps it’s now the du jour currency to hate and that could spark a bid, but the positioning is very easy – sitting at four year support, a break through here is daylight to 85 or 81 below:

AUDWW

I’ll speak more about Aussie later today as its faces a triple crunch this week, absorbing the US NFP fallout from Friday in a quiet Monday session, RBA meeting on Tuesday and local unemployment on Thursday

And finally to gold (USD) – which fell right through the $1200 level on Friday night and sits precariously on the recent lows on the weekly chart:

GOLDW

I was wrong about a short term bounce to the $1230 level, but I warned “that on the hourly/30min intraday charts (not shown) this gets smashed back every time by the short crowd” and that’s what happens when you try to pick long bids in an established short trend.

The commodity complex and the associated falls in the proxy AUD should have bulls worried and economists confused about the global economy. More evidence this week across the spectrum that prices continue to fall amid deflationary (read: low or zero demand growth) pressures. This is not just speculative steam coming out of a bubble.

The five year weekly chart of the DJ-UBS Commodity Index (with AUDUSD in green) shows that levels are back to preQE2 prices in a continued deflationary downtrend:

djusb

Oils look weak on increased US production, even with volatility in the Middle East with ICE Brent crude collapsing nearly 5% last week and remaining on track to the 91 handle target I suggested:

ICE

And NYMEX WTI finally joined the bear party, slumping 4% last week and breaking through tenous support at $92USD per barrel – now on track to hit the pre QE2 low at $80USD per barrel:

nymex

Dr Copper is not faring any better either as it tried to recently break its two year plus downtrend, it gapped down last week through support with a possible pause at the 6500 level. Any further falls below that level will scream a global correction:

drcopper

Finally let’s look at stocks. I keep saying the US S&P500 seemingly can do no wrong. Again, the buy the dip crowd stepped up and arrested what was a fairly anemic technical correction, although it had everyone in a spin, probably on the back of the Ebola hysteria:

spxw

The major trendline is still intact, even though its was breached intraweek. Trying to break the large psychological level at 2000 points coincides with the end of October QE program, so I’ve drawn a tentative top on that weekly chart. Very tentative. I still maintain it will take a large shock to move anywhere more than 5-10% down intra-month.

A move down to 1900 would not be out of the question this month, in a normal market, but the S&P is far from normal.

And to local stocks, where the ASX200 (XJO) is in the midst of a three-week long correction that has definitely broke the two year long uptrend:

XJO

But as I said last week “this does not necessarily mean we are heading straight down into a new bear market, but rather support at 5,100 points beckons and a distribution range until the end of the year. “

If you examine the major composition of the ASX200 – the ASX8 (four banks and four miners) – the Financials (XXJ) and Materials (XMJ) sub indices, it’s a different picture:

XMJ
XXJ

There has been no broken trend on the financials, which move into reporting and ex-dividend season (except CBA) which should see some buying support but the catalyst of a falling AUD could derail. The Materials are altogether different – a clear break of support and further downside.

So unless we see some epic bidding of AUD-exposed industrials and/or continued buying support for the banks and a possible, but now improbable restocking of iron ore in China, the best probability for the ASX200 for the rest of the year is sideways with a bearish bias.

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