- New Science in old markets -

Commodities – tops appear

We wrote bullishly about commodities several times recently. In the February 12th edition we pointed out that these prices rarely turn around from bear to bull markets before a period of 'bumping along the bottom' and that we thought this was now happening. Accordingly, we did not expect sustained rallies in commodities (as a group) and so profits on long positions should be taken before long. We have now seen a series of top extensions in grain markets (and cocoa, which we had not mentioned individually) that indicate it is time to sell:

Wheat, meal, soy top exts

Now the Cocoa signal and a chart of soya oil, which has not generated any signal:

Cocoa top ext & soy oil

As we have pointed out before, the main cause of soya bean demand is the meal that is made by crushing it, mainly for animal feed. This has become more and more in demand as the poorer parts of the world get richer and eat more meat. It has had the odd side effect of reducing the status of soya oil (previously the important other product of crushing) to that of a secondary output - almost a 'by-product'. This means that it rarely joins in a bull move and is therefore a good candidate for selling short when the time comes to choose grains markets to sell. Like now.

It is generally too risky to sell markets short the moment that they generate top extensions, because there may need to be some 'churning' before they have a chance to drop, but this soy meal vs. oil oddity changes the game. Sell soya oil short now and wait for some chance to sell another grain (probably wheat) later.

All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com