ChartBrief 133 – Commodities A Little Too Quiet…

I noticed something in the commodity charts, or perhaps you could say I noticed something that wasn’t in the commodity charts. In other words, commodities have been looking fairly quiet, a little too quiet.  After putting in a bearish breadth divergence signal breadth has washed around a bit, still at quite weak and indecisive levels.  Yet looking at the index itself (in this case the GSCI Light Energy Index), it appears to be trading in a triangle pattern – which represents a degree of indecision in the market, and sets out clear parameters for a breakout.

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At the same time, while there's been a relative lack of price volatility, or realized vol, implied volatility has likewise compressed, and it all just feels a little like the calm before the storm.  Technically speaking a triangle pattern can see a breakout either side, i.e. no bias until a breakout.  While implied volatility compressions tend more often to occur prior to a downward movement in price.  So when you think about the bull market correction thesis for the US dollar, perhaps that's a catalyst for lower commodities.  Either way, the lines in the sand are drawn, so watch and be ready.

Commodity market breadth looks weak, at least indecisive, while the commodities benchmark GSCI Light Energy Index is trading in a triangle pattern.  Breakouts from these patterns can be fast and furious, e.g. see copper which made a sharp upside breakout late last year.

Commodities

Price is clearly observably trading in a tight range, likewise commodity market implied volatility (average implied volatility index across the various commodities) has crunched back to the lows.  The old rule of thumb that high volatility is a good predictor of future lower volatility and vice versa is one to keep in mind for this.  Note how price moves off low volatility are often to the downside...

Commodities

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Top Down Charts
Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.