We called for a short-term rally in commodity markets but have retained medium-term bearish views on most of them. Now we try to determine when the rally phase will end and declines resume. There are some turns due this week in several commodities and this is the first opportunity that these markets will have to ‘stall’. This applies to stock markets too and there has been some continued connection between the two asset classes recently – a tendency for both to rally.
Commodity turns are due to occur today and through tomorrow (see July 2nd edition for details) and so we will watch for additional reasons to sell strength. The ideal trigger would be a top extension signal but this seems unlikely in any of the grains as only a rising market can generate top extensions and prices have already dropped a bit in the last two sessions. We wait.
Crude oil has already made a top extension, as reported in the July 11th edition and this was joined by another in Rbob gasoline on Friday:
This second extension comes as we enter the period where we expect turns in energy too and this coincidence of top extensions with turns strengthens our bearish inclinations. We would keep selling little rallies (in crude) but please watch out for a bit more ‘churning’ before prices have a chance to drop. ‘Spike’ tops are not unknown but they are rare and so it seems unlikely that a sudden decline will start immediately. This may take a little patience. There are no new signals in copper but we expect declines to resume there soon.
There are also turns due in Stocks this week, as reported on the 11th July. Although this is a big turn the timing is a bit diffuse and it covers three days from tomorrow, Tuesday 16th through Thursday 18th with a peak on the middle day, Wednesday 17th. There are bonds turns due this week that form a slight cluster, also on Wednesday and so this looks like the most probable day for the turn to occur in both stocks and bonds.
We advised selling some equity markets short on the last turn day, which was July 8th. Our suggestion was to sell the weaker European markets but we selected France as the favourite. It has risen a bit since then while our more usual choices of Spain and Italy have dropped. Red arrows show the date of the recommended short-sales:
This choice of France was obviously our mistake and reflects the continued puzzle inside the Euro zone – France has troubles that are similar to those of the other Mediterranean countries and yet its stock and bond markets are priced almost as high as Germany’s. When the turn down comes (perhaps at the turn event due this week) then Spain and Italy will undoubtedly fall more than any other tradable European markets but we still cannot know whether the cracks in France will then also cause it to drop precipitately. For now, resume selling rallies in Spain and Italy, for reasons often given here. If still short France, try staying short with a stop a little above last week's highs or switch shorts to Spain or Italy.
More soon,
RE
