The commodity markets were absolutely crushed Thursday afternoon, experiencing some extreme losses that I have not witnessed for quite some time. We saw -5% to -10% declines across the board. The Federal Reserve announced that they would start to raise interest rates next year as that sent the momentum to the downside as investors did not like to hear that information as higher rates are bearish commodity prices.
I have been trading these markets for around 30 years, and I have seen a sharp sell-off before as we may have gotten a little ahead of ourselves. However, I still believe you take advantage of massive sell-offs as the long-term secular bullish trends are still intact.
If you have been following my previous blogs, you understand that I try to risk around 2% of my account balance on any given trade, as this is an excellent theory. All you have to do is look at what happened over the last couple of days, especially in the metals and the grains, and if you do not follow that rule, you could lose a substantial amount quickly.
Sugar futures in the October contract settled last Friday in New York at 17.67 while currently trading at 16.76, down another 90 points continuing its bearish momentum as prices have now traded lower five out of the last six trading sessions. The commodity markets across the board are taking a beating this week because interest rates could rise in the coming year ahead.
I am not involved as I've kept a close eye on this market as I was looking at a bullish position. However, I will be patient as I think there could be further weakness ahead. I do not have any recommendations as a washout has occurred over the last several days. However, in my opinion, this was healthy over the long-term as I still believe sharply higher prices will continue despite this recent meltdown. Prices are now trading below their 20-day but still above their 100-day moving average as this trend is mixed, so be patient. I think there is a possibility that prices could trade as low as 16.00 in the coming days ahead.
Fundamentally speaking, futures are under pressure on the easing of the drought in Brazil, along with increased sugar production. Somar Meteorologia reported that rainfall in central Brazil was 15.2 mm last week, or 160% of the historical average. Also, Unica reported last Thursday that Brazil's Center-South sugar production in the second half of May rose to 2.62 MMT, above expectations of 2.52 MMT.
TREND: HIGHER - MIXED
CHART STRUCTURE: SOLID
Corn futures in the December contract were sharply lower for the trading week, down about 60 cents at 5.50 a bushel. Improving weather conditions in the Midwestern part of the United States is to blame for the price weakness.
I do not have any grain recommendations as I was stopped out of the soybean trade as these markets remain extremely choppy with violent price swings daily. That situation is not going to change anytime soon. I will wait for the chart structure and the volatility to settle down before entering into a bullish position. I have no idea where prices are going here in the short term.
Corn prices are trading below their 20-day but still above their 100-day moving average, possibly looking to retest the 5.00 level, which was just touched a couple of weeks ago. Additionally, if you look at the 10-day weather forecast, it has milder temperatures coupled with average rainfall, which should help develop the corn crop. Still, it is a long growing season, and that situation could change very quickly, so sit on the sidelines as this market is too risky.
CHART STRUCTURE: POOR
Soybean futures in the November contract are currently trading at 12.97 a bushel as prices have hit a 2 month low after settling last Friday at 14.38, down about a $1.40 for the week.
I had been recommending a bullish position from around the 13.60 level getting stopped out today around the 13.25 area as this market has absolutely cratered over the last couple of days, so now it's time to sit on the sidelines. Moderate temperatures over the next 7 - 10 day forecast coupled with adequate rain have pushed prices lower over the last week. Additionally, the entire commodity sector has plummeted over the last couple of days because the Federal Reserve looks like it will start to raise interest rates possibly later next year.
The U.S. dollar hit a 2 month high today as that is a bearish fundamental speaking towards all prices as this is just a massive liquidation that has taken place in all sectors, including crude oil, which has been the strongest member to the upside. So sit on the sidelines and wait for the volatility to settle down while waiting for the chart structure to improve as this market remains very unpredictable.
CHART STRUCTURE: POOR
Coffee futures in the September contract was sharply lower this week in New York, down 900 points at 150.75 a pound as prices have now hit a 3 week low.
I am not involved, but I will be looking at a possible bullish position if prices trade down to the 145.00 level in the coming days ahead as the commodity markets look weak. However, I think the best situation is to sit on the sidelines and wait for this meltdown to end.
Coffee prices are trading below their 20-day but still above their 100-day moving average as the trend is mixed, and if you take a look at the daily chart, the uptrend line also has been broken.
After the National Federation of Coffee Growers said that the removal of blockades in Colombia has allowed coffee to move to ports and exports to resume, coffee has been under pressure. Colombia's May coffee exports fell -52% y/y to 427,000 bags after roadblocks prevented producers from sending their beans to ports. The protests were against the Colombian government's new tax reform bill announced in April. Colombia is the world's second-largest grower of arabica.
Coffee prices are also weighed down after above-normal rain in Brazil eased drought concerns. Somar Meteorologia reported that rainfall in Minas Gerais, Brazil's largest arabica growing region, was 15.2 mm last week, or 160% of the historical average.
CHART STRUCTURE: IMPROVING
I used a version of this exact strategy to win the 2019 U.S. Investing Championship and have been teaching it to my students for a decade.
Cotton futures in the December contract is currently trading at 85.06, down nearly 300 points for the week as prices are hovering right near a 2 week low.
I have been recommending a bullish position over the last several days from around the 84.71 level, and if you took that trade, continue to place the stop loss on a closing basis only at 75.34, which is still quite a distance away. I want to get this trade some room due to the high volatility.
The commodity markets across the board were hammered this week because it looks like interest rates will rise possibly as early as next year as that spooked the markets big time as every single sector is down significantly as today is a massive risk-off day.
Cotton prices are still trading under their 20-day but still above their 100-day moving average as the trend is higher. Weather conditions in the southern part of the United States are still spotty. However, it is a very long growing season, and I still see no reason to be short as I think cotton has held up relatively well especially compared to the grain market.
CHART STRUCTURE: IMPROVING
Silver futures in the July contract fell out of bed this week down $1.89 or 6.78% while currently trading at 26.39 an ounce as prices are right at major support while touching a 2 ½ month low.
Many markets were absolutely crushed this week due to expectations of higher interest rates coming next year, sending investors running as a massive panic has occurred.
I had been recommending a bullish trade over the last couple of months, getting stopped out in yesterday's trade. I will be looking at another possible bullish position once the chart structure and the volatility settle down. I think there is a remote chance prices could go all the way down to the 24 level as there might be further liquidation across the board. You have to remember commodities have had a tremendous rally before this last week.
The U.S. dollar has hit a 2 month high, and that is a bearish factor towards silver prices as gold was sharply as well this week as nobody wanted to own anything. However, in my opinion, I do not believe that the long-term secular bullish trend in silver is over as we're just experiencing a pause, so be patient as we could be involved soon.
CHART STRUCTURE: POOR
What do I mean when I talk about chart structure and why do I think it’s so important when deciding to enter or exit a trade? I define chart structure as a slow grinding up or down trend with low volatility and no chart gaps. Many of the great trends that develop have very good chart structure with many low percentage daily moves over a course of at least 4 weeks thus allowing you to enter a market allowing you to place a stop loss relatively close due to small moves thus reducing risk. Charts that have violent up and down swings are not considered to have solid chart structure as I like to place my stops at 10-day highs or 10-day lows and if the charts have a tight pattern that will allow the trader to minimize risk which is what trading is all about and if the chart has big swings your stop will be further away allowing the possibility of larger monetary loss.
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