While we usually focus on individual commodity markets in this column, the Bloomberg Commodity Index has an impressive downtrend in place that is worth discussing. The Bloomberg Commodity Index is a broadly diversified commodity index comprised of 22 individual futures contracts across seven sectors. No one sector comprises less than 2% or more than 15% of the index. The index has been in a persistent downtrend dating back to May of 2018, and last week, it hit the lowest level since February 2016. Encouragingly, as last week's price action plumbed new lows, momentum indicators turned higher, and actually diverged from the underlying contract. While this by itself is not enough reason to move to a full bullish policy, it is a signal to watch for confirmation of this possible bullish divergence with price. To confirm, we would need to see strength back above a prior corrective high such as the 77.70 level from Aug. 13 at a bare minimum, but preferably something like the highs from July 24 or July 31.
The Bloomberg Commodity Index is weighted two thirds by volume traded and one third by world production and weight caps. Therefore, it makes sense to take a look at crude oil's underlying price action as a larger driver of the overall index. Crude oil has been in a downtrend since April of this year with several corrective bounces failing to stem the overall bearish narrative. On Aug. 7, crude oil made fresh eight-month lows, keeping in place the falling wedge pattern. Unlike the larger index, momentum indicators are not giving off bullish divergence signals. From a weekly perspective, crude oil has downtrend resistance dating back to October 2018 with current prices in the bottom one-third of the entire $42.36 to $76.90 per barrel price range. Unfortunately, spot prices this close to the midpoint of the larger range can, and often do, produce aimless, whipsaw trade for months or even quarters. Inside this larger range, endless chop can leave both bulls and bears battered and bruised. An overall bearish policy remains employed toward the crude oil market, acknowledging the fact range-bound-to-slightly-lower trade is likely in the near term.
Another market comprising a large market share in the Bloomberg Commodity Index would be the natural gas contract. Similar to crude oil, natural gas remains in a persistent downtrend dating back to at least February, if not November of last year. The contract is below the 50-, 100- and 200-day moving averages and just off the lowest levels in 39 months. Natural gas does have a bit better complexion from a momentum perspective with the stochastic measure of momentum, making higher lows as price fell on Aug. 5. To confirm the bullish divergence in momentum, trade back above $2.333 per gallon (gal) price from Aug. 1 would be needed. However, until bullish price action back above July 10 corrective highs at $2.489/gal is achieved, strength can only be labeled as corrective ahead of a resumption of the overall downtrend. A bearish policy must be applied in the natural gas market until the downtrend can be broken, placing some of the near-record short position held by managed funds at risk. Natural gas is the only energy contract in which managed funds hold a net-short position with net longs in place on crude oil, RBOB gasoline, heating oil and ethanol futures.
Tregg Cronin can be reached at email@example.com
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Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grains and grain futures involve substantial risk and are not suitable for everyone.
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