- New Science in old markets -

Equities and commodities – moving in a crowd?

There is a similar situation developing in both stock and (some) commodity markets. As reported on Monday 5th October we think the line of least resistance in stocks is now upward, for reasons given in that edition. We also have three outstanding 'long' recommendations in commodities (all agricultural) that are up to 12 days old, all of which are currently profitable so may survive the normal trade 'time-outs' that start on the 12th October.

This bullish posture in these two important asset classes may now get a boost. We have seen new compression signals in some European indices, as shown next. This began with a single signal in the MDax contract last Friday, which has since broken upward and has been followed by a few others which have yet to break conclusively - we show the Eurostoxx and the FTSE.

Various European compressions

As ever when compressions occur, we cannot predict which way they will break, only that a sharp increase in price range is due. We suspect that this is a 'rolling compression' in which related indices compress and break in turn as the move develops - in this case upward. We still advise buying a dip (if there is one) rather than chasing strength. Any dip will do, even intra-day, if it is sufficiently large: 1-2% as recommended on Monday 5th October

Something similar is happening in commodities. There is a gradual uptrend at the moment in the grains, cotton, sugar etc and now we have a fresh compression in soya beans that has yet to break - see first chart below. If it breaks upward, this will mark an acceleration of the upmove; a steepening of the uptrend. If it breaks downward we will think again. There are some clues from other non-agricultural commodity markets. Gold compressed and broke (just) upward and crude oil has done the same. Both can be bought but our portfolio is full up to the three-position limit with the existing long trades in soya, corn and cotton so we will have to wait for some space before taking these trades or indeed the short copper trade mentioned in the October 1st edition.

beans gold crude

It is tempting to include Copper in this bullish analysis but it is still the odd-man-out. We reported in that October 1st edition that the market had rallied up against the levels of a recent compression that had originally broken downward. Here is a refreshed picture:

Copper comp update

This compression spans the entire 10 cent price range from 2.37 to 2.47 and the rally could stall at any point in this range. If copper turns out to be part of the trend of generally rising commodity prices that we suspect is developing here, then it will of course push through the highs of this compressed area and we will then think again. Until then, it is worth 'selling against' this resistance with stops just above it.