Friday, February 5, 2010

Commodities Crash or Opportunity?

Today saw a couple of articles from Mish and Zero Hedge on upcoming doom and gloom in the commodity markets. While short term weakness has given to a more protracted intermediate down phase (potentially lasting up to 6 months), it doesn't mean this is the end for commodities.

Unlike equities markets which enjoyed stellar secular growth from the early eighties, gold and commodities in general, had been languishing up until late 2002 / early 2003 when new secular bull trends kicked off. For gold markets the trend has been obvious:

Oil prices have had a more erratic start to their secular bull market, dropping to the bargain basement price of $30 in late 2008 after a parabolic price surge.

Even Soybean prices have managed to sustain a break of 800 following an earlier failed attempt in 2004.

So while commodities are enjoying a secular bull run this doesn't mean they are immune to cyclical bear markets. Commodities peak in 2008 marked the start of new cyclical bear markets, which will keep sustainable commodity rallies curtailed until 2012-2013. It is clear the recent counter-rally hadn't the juice to challenge former highs so a lengthy trading range is likely to emerge as commodities find their 'fair price', but this shouldn't be viewed as a doom-and-gloom scenario.

Taking Gold as an example, we have seen the 15-month trend crack as it entered an intermediate down trend with the potential to last up to 6 months (assuming this is nothing more than an intermediate-term correction). On a simple count-back we are looking at a downtrend which started 2 months ago and has the legs to last longer. If the trend proves to be on the short-side in terms of time then defined support at $1,025 looks the best place for a reaction low. If the downtrend extends to 6-months (give or take) then a thick band of support, termed the "Value Buyer Zone", between $725 and $850 is a possible catch point.

Irrespective of what happens over the coming 6 months, the prospects for commodity markets over the next next 10-20 years would appear to be brighter than they are for equities, stuck half-way as they are in a secular bear market. The only grey area will be the performance of commodity-based equities? Will they offer the best value of all?

How can you avail of these opportunities? With both commodity and stock prices you can use Zignals Stock Alerts to trigger when certain price points are breached. For example - if you want an alert for when gold gets to $1.025 you can set an alert to trigger on a price cross below $1,026 (GldUSD is the symbol for Gold prices in Zignals). You can apply the same logic for gold prices dropping to $850/oz.

Alternatively, you can create a trading system to take advantage of bullish commodity prices and sell it in the Zignals Trading Strategy MarketPlace (free during Beta).

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