No End in Sight for Commodity Crash With Charts Sending Bear Signals

(Bloomberg) -- What’s next for commodities after a recent price collapse? It looks like more bad news, if the chart watchers are right.

The Bloomberg Commodity Index has tumbled about 10 percent from a high in May amid mounting concerns that a trade war could derail global growth, curbing demand for everything from aluminum to soybeans. Even gold, a traditional haven asset, failed to catch a bid as the dollar strengthened and the Federal Reserve signaled more increases in borrowing costs this year, curbing the investment appeal of the non-interest-bearing metal.

The sell-off in metals helped send the Bloomberg commodity gauge into oversold territory. While securities typically rebound after reaching those levels, that may not be the case this time, according to Gary Christie, the head of North American research at Trading Central in Ottawa.

The losses gathered steam as the index broke below the rising trendline on July 11, fueling the sell-off, Christie said. The lower panel of the chart above shows the gauge’s moving average convergence-divergence indicator, a measure of price momentum known as the MACD, staying below the so-called signal line. That suggests there is “no reversal sign as of yet,” and that the bearish trend is gaining momentum, Christie said.

Pressure Building

Copper, often viewed as a barometer of global economic growth, saw its 14-day relative strength index fall on July 2 below 30, considered by traders who study charts as a sign an asset is poised for a rebound. That hasn’t happened, with the metal losing about 9 percent this month. The so-called RSI reached 19.6 on July 11, the lowest since 2015, and has remained below 30 in each trading day this month.

The red metal, used in power grids, pipes, wires, cars and electronic gadgets, has slumped from this year’s high reached in early June as funds started closing their bullish bets and adding new bearish wagers, Oliver Nugent, a commodities strategist at ING Bank NV, said in a report Wednesday.

By July 10, money managers’ bearish wagers outnumbered their bullish bets on Comex copper for the first time since October 2016, according to U.S. Commodity Futures Trading Commission data.

While the bearish wagers could spur short-term price rebounds as funds cover short positions, prices will likely remain “largely depressed through the quarter,” Nugent said. Technical analysts agree.

“All metals are in oversold territory and there is no recovery in sight, as there appears to be no bullish divergence on MACD,” Christie said.

The energy sector remains a bright spot for commodities, as crude oil prices move higher.

On Thursday, Saudi Arabia dismissed concerns the kingdom will flood the oil market. Instead, the country’s liaison to OPEC, Adeeb Al-Aama, forecast stockpiles will decline in the second half of the year because of robust demand and seasonal increases in consumption.

Blue-Skies Boost

Crude oil isn’t alone. Efforts to clear the air in China may brighten the outlook for high-grade iron ore. The raw material may spike to $100 a metric ton as China intensifies a clampdown on pollution by restraining industrial activity, according to Wood Mackenzie Ltd. After sinking in March, top-quality ore with 65 percent iron content gained every month, trading above $91 a ton this week, and keeping it in positive territory this year even as global trade frictions mounted, according to Mysteel.com.

Still, oil and iron ore look to be exceptions. In addition to metals, agricultural products have been among the hardest hit in the commodities sell-off. U.S.-China trade tensions may push soybean stockpiles 51 percent higher next year than expected a month earlier, the U.S. Department of Agriculture said in a monthly global crop forecast July 12. Soybeans have taken center stage after China slapped tariffs on a swath of American farm goods.

While there’s a been a small rally recently in soybean futures for delivery in November, after the U.S harvest, prices have struggled to break back above the 15-day moving average. Failure to hold above that level could mean more losses are in store after the commodity dropped 16 percent last quarter, the most since 2016.

--With assistance from Grant Smith, Megan Durisin, Alan Bjerga and Krystal Chia.

To contact the reporter on this story: Luzi Ann Javier in New York at ljavier@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Joe Richter, Millie Munshi

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