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Broken Commodities Continue To Crush Investors
Since breaking key support 1 year ago, commodities have continued to drop, setting a 13-year low today.
This post is not one that is going to spotlight a current potential investment opportunity. In fact, it actually shines the spotlight on a development we highlighted over a year ago. And no, it is not a “told-you-so” or a back-slapper of a post. Consider it more of A) an update and B) a public service announcement.
On October 30, 2014, we posted a piece entitled “It’s Make Or Break Time For Commodities”. In the post, we included a chart (as always) that detailed what we deemed to be a major area of support for the Thomson Reuters CoreCommodity CRB Index (CRB) around 266. It was so major that we suggested it was a “make or break” spot for the key commodity index. Specifically, a “make” could produce a “substantial and durable” bounce and even potentially usher in “a resumption of the post-2001 commodity bull market”. On the other hand, a “break” would “open the index up to further (perhaps significant) weakness” and maybe even “cast a doubt on the likelihood of resuming the commodity bull market any time soon.”
Here is that chart from over a year ago:
Just a few weeks later, the CRB registered a “break”, dropping below that key support level – and it has not looked back since. The break did indeed produce “further (perhaps significant) weakness” as the CRB would lose 25% of its value in just 2 months. Furthermore, the index has continued to drop for another full year which has definitively “cast a doubt on the likelihood of resuming the commodity bull market any time soon”
Here is the update as of today:
We actually expanded the chart back another 9 years to include the post-1999 UP trendline that just happened to intersect the 2 lines of support in the original chart. As you can see, the CRB closed at a new 13-year low today, around 180. The index has now lost one third of its value since violating the “make or break” level that we highlighted over a year ago.
Now, again, this post is not meant to pat ourselves on the back. In fact, it is more about identifying the point at which we would know we are wrong. If you read the post from last October, you’ll see that we actually saw ample evidence to support a bounce in the CRB from that key level. However, we also recognized that, should such a bounce not materialize and the CRB fail to hold that key level, then the index was likely broken.
While our strategy is almost always to buy “relative strength”, i.e., things that are in strong uptrends, there are times when we will take stabs at mean-reversion, knife-catching type plays. However, we will only attempt such trades at what we consider to be major, longer-term support levels. That 266 level in the CRB would have been one of those levels.
That said, in the event that that major level was broken to the downside, we knew it would be time to cut bait on the trade and move on. In our view, that is an important lesson to keep in mind. It is OK to attempt to catch a falling knife at a level you deem to be of utmost significance on the chart. If you are wrong, at least you know where to cut your losses and move on. At worst, you come away with one small knife cut.
The worst thing you can do is to continuously attempt to catch the falling knife. When something is in free-fall, realize that it is normally for a good reason. Trends tend to persist so expect that something that is plummeting to continue to plummet. Just remember that there will be just 1 bottom. In the event of a multi-year collapse in a security or commodity, etc., the odds of picking the “bottom” day out of possibly hundreds of possibilities are slim. If you repeatedly try, the odds are all you will come away with are a multitude of knife holes in your hands – and your portfolio.
Take the CRB, for example. Since breaking that key level a year ago, the index has made no less than 51 new 52-week lows. If you’ve been trying to catch the knife that whole time, your portfolio looks like swiss cheese right now. By the way, if you think that’s far-fetched because commodities sentiment was not too bad until just recently, think again. Remember that we wrote in our post last year that commodities were already despised then. They have undergone over a year of declines since then and they are still dropping.
The point is, if you are going to attempt to catch a proverbial falling knife on a chart, at least do so only at a point you deem to be a “make or break” type level. Whether or not you can likely accurately identify a “make or break” level is another matter. The point is that, should that level fail, like it did on the CRB Index a year ago, you know the security is broken and it is time to walk away.
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The system will be reset and all of the instruments used to commit financial terrorism, will be gone....but at least you will have dem nice shiny bitcoins boss in dat big fat cloud wallet, yes siree!
http://beforeitsnews.com/conspiracy-theories/2015/12/road-to-ww3-time-to...
Why do charts like that always make me want to go to www.providentmetals.com ?
Wow an article with only technical analysis bs.
This technical analysis bs has given me over a 400% capital gain since May (it was 600% but i made a few errors >.>). That being said, if you are familiar with elliot wave analysis, you'll recognize that there is a near-term bottom in crude approaching. I am not promoting any website or subscription, but you should check out Daneric's Elliot Waves blog at the far left (Zero Hedge Reads in the left-hand webpage margin). IMHO, elliotwave analysis is not perfect and allows for multiple interpretations, but there is large benefit in fractal analysis coupled with elliotwave/technical analysis. Looking to go long UWTI next week.
Edit: "Since breaking key support 1 year ago, commodities have continued to drop, setting a 13-year low today." - 13 is a fibonacci number. LONG COMMODITIES, BITCHEZ!! (and gold)
Agree.
Technical analysis 101 - In a systemic breakdown and freefall in any financial instrument, including the CRB, DO NOT try to catch the falling knife. That is proven day after day just like not shorting an uptrending market should be your discipline. You want to go with the trend until the trend breaks. You will know there is a bottom when the instrument starts basing, meaning trading sideways for awhile (several months at least). Watch to see whether it breaks down further or holds the flatline. Watch the attempts to rally - there will usually be a couple of failed moves up on low volume, and several attempted moves down on low volume. The overall pattern will be sideways. This is often where ACCUMULATION by big institutions is occurring, and they won't let it break to the upside until they have loaded up the tank.
When the 'tutes have loaded up they'll break the market to the upside on HUGE VOLUME. The volume on the breakout will be the key that it's safe to go long again. This CRB chart hasn't even started the basing process so I would stay away until it does so.
The same works on the upside. If you look at the major equity averages you will see that most of them have run up huge for 6 years, but are now trading sideways and failing to make a break out to new highs. I believe there is a case to be made that the equity markets have topped out here and DISTRIBUTION (the opposite of ACCUMULATION) is occurring - institutions are offloading equities at the highs and unless there is a big volume breakout to the upside here I wouldn't touch stocks on the long side.
One other thing - many of the basic materials stocks have gotten slaughtered. Many look like they are attempting to stabilize and base after massive losses in share price. Its premature, but I'd start looking at my favorites here and see if they base.
The above is basic TA according to William O'Neil, the founder of Investors Business Daily. Personally, I happen to think the guy is a fucking douchebag as a human being, but his TA does have merit.
One other thing - when the bottom is in bad news won't take it down further because it's already been factored into the price.
The same applies at the highs - no amount of GOOD news will break the market to new highs.
I appreciate reading these types of articles though much is over my head since I don't have the academic background [which I don't doubt would show all the more if I tried commenting more].
There's certainly a major place for technical analysis without handholding but I do think it would be useful to sort of give "idiot's guide" level overviews a la investopedia definition pages so that people who are more or less just trying to make some money can more readily get the gist.
Again - its not on zh or any other financial blog to do so, but a quick "basically this is what this article is saying" preamble can do wonders to reading with better understanding, and then someone like me can use the intertubes to look up stuff they still don't understand.
Anyway I take it you disagree with the "random walk" hypothesis. My understanding is that economists debate the merits of the EW stuff - what's the best evidence that it is predictive to any reasonable extent?
When you see articles loaded with specious dogshit such as this: "The worst thing you can do is to continuously attempt to catch the falling knife..." there's not much point in making sense out of it. There's no way to practically appy this advice since one never knows in advance where the bottom is.
I totally disagree with the random walk hypothesis, but welcome any comments that may shed insight into why random walk is good.
The only financial background I have is watching Trading Places (With Eddie Murphy and Dan Akroyd), and getting 0.5%/yr in interest from my financial institution (thank you Bernanke). I am almost completely financially illiterate otherwise. In 2009, I frequented Marketwatch and always read the comments section, and enjoyed the caustic (and real) comments people displayed, until they started moderating them and requesting membership to read them.
In the comment sections of Marketwatch, I recall a gentleman posted a link to you tubes "money masters of the universe" and that kind of opened my eyes. Someone else posted a link to Zero Hedge and I've not looked back since. In a quest to beat the system, I subscribed to various programs, but in the end have stuck to elliot wave analysis.
I suppose the best evidence that is predictive, in terms of elliot wave analysis, is that the market makes the news, not the other way around. The hypothesis is that it is the market is reflective of sociological and psychological phenomenon. That is why most traders sell at the bottom (they are disappointed) and buy at the top (they are excited). Traders are happy at the top, and disappointed at the bottom. E.g. when you see articles popping up all over the place about how bad commodities are doing, it may be time to consider buying. Some feel that negative social mood is at it's peak at the end of a downturn.
The tools I use to make money are elliot wave analysis, coupled with MACD and RSI divergence. I ALWAYS use 20, 50, 100, and 200 SMA indicators to give me a visual clue about where the market is going. But you have to use what works for you.
FYI - I like Zero Hedge because it gives me an alternative to the official story.
Edit: I recommend a good Jeff Beck jam while reading Zero Hedge ;-)
https://www.youtube.com/watch?v=Yy_9Unnnduc
IMHO the best aspect of ta (for lumpeninvestors such as myself) is that it mandates exit points.
The crash in commodities is due to the phony baloney FED pumped non-economy.
Commodities are the only tangible things with any form of valuation left.
Buy Stocks? May as well buy air in a bag.
US dollar essentially @ 13 year highs.
The USD is losing the race to the bottom. The euro and yen are winning for now. The EM currencies are also collapsing.
time to walk away from commodities, or time to double down? just sayin' . . .
Well, for 7 years solid ZH has been saying the stock market will crash. How's that worked out for them?
The commodities market has already crashed if you haven't noticed.
BTFC - buy the fuckin crash
Charts don't mean shit in rigged markets. Neither will paper assets when the derivative dominos start to fall.
When an index breaks so definitively, don't walk away, go short. Then you're riding the falling knife, not trying to catch it.
"...riding the falling knife...." might not be the best analogy to instill comfort?
Like Slim Pickens riding the falling H-bomb at the end of Dr. Strangelove.
This concept is too over-analyzed. Commodities are priced relative to a currency. Currency "gains" value, commodities have to go down. All we have to ask ourselves is, some years from now, will said currency be more "valuable" than it is now? No? Then buy commodities. Silver and gold, silver and gold...
-Argenta
You mean the buy and hold strategy?
Great advice if you can wait 10-20 years for returns. WTI was $148 in 2008. When will it get there again? Gold took 20 years to get back to 1980's prices. I suppose you can buy land and build oil storage tanks and wait it out.
IMO for prices to wring out all the debt that has accumulated since the creation of the Federal Reserve, they would have to drop somewhere to the level of that time. That means tons of bankruptcies and defaults like we've never seen nor can imagine.
I've tried catchingMLPs, do not DO IT!!!!!! Protect all capital
IMO, it makes no sense to gather all the commodities into a single index and then make that index into a vehicle for speculation. Some commodities are sujbject to weather variation, others are prone to heavy manipulation by government and others, and the final piece can be used as an economic indicator, but only if followed in isolation. These last would be limited to the industrial metals and, perhaps, lumber.
It's a fucking cancer. NZD & AUD are ripping. Last gasp?
Probly.
When the shit is this deep, No individual can possibly understand.
Same as it has ever been.....
well, commods have had a rough 2 yrs. I think they are out in front of rate policy. Oil has been all messed up for 2 years going, with 3 weeks left. its down about $4, already a pretty fat bar for this price area. a $7 monthly bar would be pretty damn big, and leave oil around 38, with 2 yrs of red in the rear view mirror, and even if the fed hikes, there is still a massive amount of money supply that wont dry up anytime soon. If the fed splits the hike in 1/8 increments, this could blow oil up to 50 in the blink of an eye. We have a lot of negative news flying all over the place but the paradigm shifts. it's possible if isis oil sales (1/2 price to the market) are cut off this can support the prices, but maybe the big thing is for oil producers to turn off the spigot. it is probably too early for the fed res note to die, so, again, with 4x the debt above what it was in 2009 and prices at the same place, as things cool off in the ME, even though oil is pretty flabby here, i tend to think larger players are in the mood to get long.
maybe first we need another flush job below current lows to wipe out anybody 'trying' to buy, and then cover all those shorts. Sellers are gonna have to let go to realize profit. they cant sit there forever. i admire these guys how they know how to ride it and then get out at the perfect moment.
I have oil trading no worse than 35 no better than 65 in 2016. I have a hard time believing oil will be negative 3 yrs in a row. A low close for DEC would be like a total miracle and too easy to buy, so i think a DEC rally is highly likely.