- New Science in old markets -

Commodity index and copper extend, US stocks & $ compress

The commodity index that we follow most closely has made a bottom extension, and so has copper:

This comes soon after the bottom extensions in gold, silver, platinum and energy that we reported earlier in the week which all lends weight to the idea of a bounce in these commodity markets from hereabouts. Commodities are in a bear market and rallies in bear markets can be savage. Whether they are tradable is another matter. We think they are, so would attempt purchases in some – copper, crude oil (or other energy*) and even some of the grains. Wheat seems to be the best bet as it is still in the same support from old weekly-scale compressions that we reported in the March 20th edition.

Commodities are priced partly on expectation, partly on real current demand and the current demand component of that is weak. Equities are almost entirely priced on expectation (and currently on cheap money) which has led to some divergence between the two. The week-to-week wiggles still correlate but equities have not (yet) embarked on the downtrends that have occurred in commodities. If there is to be a bounce in commodities, there will probably be one in equities too and we have a couple of bottom extensions to support this view although admittedly only in the commodity-intensive economies of South Africa and Canada (reported in April 16th edition). Nonetheless, it seems probable that although we expect eventual greater weakness in US and European equity markets, there may still be yet another rally from around here.

We get some help from further compression signals in the US. Both the Philadelphia semiconductor index and the Nasdaq composite have just made daily-scale compressions:

These supersede the old Nasdaq compressions that we have been discussing recently and a break of these new ones should indicate the direction of the next immediate trend. Bear in mind that the last bar includes 3 hours of today’s price action, so we do not yet know if either will break. If that break turns out to be upward, by all means follow it, but don’t stay long for too much time. If downward, the rally probably won’t happen and it will be time to adopt some longer-term short positions. If you are already long from our advice to buy dips (for trading positions only) then use these compressions to place stops.

There has been another important compression too – in the $ index. Here it is next to the weekly chart for context:

This is a good opportunity to change tactics, as it says in the chart text. We have two separate outstanding recommendations in currencies – to buy both the Yen and the £ against the dollar. We had thought that the $ index would go down to visit those weekly-scale compressions shown here. Now that we have this new daily-scale compression, it opens up the possibility that the $ uptrend may simply resume without any further dip. Tighten stops, at least.

*On the subject of energy, we mentioned in the March 26th edition that all the main energy contracts were short-sale candidates but that we thought that natural gas was the best. This was the worst possible advice as all the others have fallen except for that one. Sorry. If you sensibly agreed about the short but (also sensibly) disagreed about the contract and sold crude, say or heating oil instead, then obviously we think you should now cover and try a long position for the expected bounce.