I last posted on the Spec Trading page on December 12 that it was the Worst Time To Buy Stocks. Of course, the stock market continued higher until Friday when stocks had its first down day in 12 days. Good timing on my part, right?
The message I meant to convey is that this is actually the best time to buy commodities. There are signs everywhere that after bottoming a year ago in a 3 year cycle low that this will be a good year for commodities. We have gone years in a down cycle when compared to the stock market. This 15 year chart of the CRB index shows that commodities have not experienced any significant price inflation except for crude oil in 2008 which caused the great recession. Since then, the price of most commodities has been abysmal.
For the past 4 years, there has been virtually no price inflation with commodities. The stock market functions on 4 year cycles but the commodity cycle is actually a bit shorter at 3.5 years. The previous 3.5 year low with commodities was in January of 2016. The most recent 3.5 year cycle low was just in April of 2019. We have since seen the stabilization of many commodities we like to trade such as energy an metals.
We even got a golden cross confirmation that commodities should be moving higher a couple weeks ago.
What this all means is that for the next year or two, we should expect futures trading to become a lot smoother. We should be braver in terms of accepting risk. In particular, as you suspect I am extremely bullish on the metals. I am also bullish many of the agricultural commodities and I am bullish energy
At the beginning of intermediate cycles, traders need to control their anxiety. Because recency bias conditions us to become bearish, it is difficult for us to immediately turn bullish, but it is at these turns where risk is easiest to manage and where gains are maximized. We need to enter positions early and keep stops lose so that we do not lose a good position. Later as the cycle improves we need to control our greed. We will tighten up stops more and be satisfied with "making enough".
So with that said, gold is nearing a point of long term resistance going back 8 years.
Zooming in closer, you can see we have a bit of a resistance zone between 1520 and 1525.
I believe that for the next couple of weeks, the price of gold will consolidate along this resistance zone much in the same way gold consolidated along the 1525 area in a similar fashion to gold in June when it consolidated along the 1550 area.
We need to be managing our emotions and not allow them to dictate our common sense. Looking at your commodity account hourly when this is happening can be very excruciating when the price pulls back. The pull back is not a place to be exiting our positions. It is a place to anticipate a drop and add to our existing position. We want to be building these positions on trending moves to make more money than your mind can comprehend.
The stock market will probably be making a new high today. If we put money into stocks, we could very well make money. I could have written this post a week or two ago. The thing a rational trader needs to understand is that tradeable assets do not stay in an extreme overbought state forever. Assets always revert to their natural state...… back to their average.
Lets take a look at the stock market. Stocks right now are at what I would call an extreme level. In fact, if you look at how stretched the stock market is above the 200 day moving average, we are now at the highest level since January 2018 which ended very badly. In fact, even levels that were much milder than where we are today ended badly.
The 5 year weekly chart would also show that we are at such a point as previous extreme tops.
The timing is the difficult thing to factor in but eventually, we will certainly go from a level of extreme overbought levels back to what one could consider average. It always does eventually. Who is buying stocks at these levels? Dumb money traders. We really don't want to be dumb money traders.
Medium term risk levels for stocks are high according to Sentiment Trader.
Moore's Research had several buy stock recommendations back in October and November, but they do not have any for the month of December. We could see stocks move higher however through the end of the year into the beginning of January. It is a suckers bet however to be pouring money into the stock market.
I am not recommending that we short stocks. Shorting the stock market can be very difficult. If you wanted to short stocks, I would recommend buying puts instead. Probably the more sensible thing to do would be to keep our eyes on assets that have tremendous potential from levels considered much closer to average such as Bonds and Gold which should rebound once stocks drop.
Just today, the 30 year bonds have reached the 200 day moving average. There is not any sort of buy signal yet, but we are much closer.
The weekly bond chart shows that bonds could drift a bit lower, perhaps as low as 153 where the 200 week moving average is. Weekly RSI and Stochastic readings are just now reaching oversold levels.
A word of warning here is that there is a strong negative seasonal correlation ahead with bonds. Bonds perform the worst in Feb, March and April. We would want to lock in a profit quickly with a stop.
Gold can and does go up when stocks go up but gold has also declined since August while stocks went up. Gold can certainly catch a good bounce once stocks begin their decline. I believe gold completed its intermediate cycle decline back in November and is enduring a difficult bottoming process. Once gold breaks higher out of this coil we should be back to 1560 in no time. Once we have a true break above the red colored IC Trend line, we will have confirmation that a new Intermediate Cycle began on November 12.
Gold has already satisfied requirements to be considered a new IC according to previous ICL's.
So the time between now and the end of the year will be crucial. I am not sure the positions we are already in will move until the new year starts but once they go, they will go big. In the mean time, it is important that we keep our heads and not do anything dumb and preserve capital.
If you are in Platinum now as I am, there are danger signs ahead, The latest commitments of Traders report was released, covering positions through last Tuesday. The report shows that smart money hedgers have moved to a multi-year short position against platinum. When this group of traders held more than 50,000 contracts net short over the past 8 years, platinum declined over the next 2-3 months every time, and the average loss was 9-13%.
Commercial Hedgers - Commonly believed to be the "smart money", are the traders who are involved in the day-to-day operations of each commodity. They have an excellent handle on the underlying market, and it typically pays to follow their positions when they reach an extreme.
So if you are wondering what this all means, I say it is a great thing in the larger picture. My expectation is that we get a drop to a support area near the 3028 which was the previous all time high back in July. We will want to buy this, but this dip. It would be the second daily cycle since the October 1 Intermediate Cycle Low. I would anticipate that a left translated second daily cycle will be necessary to bring us back to the Intermediate Cycle Trend Line down in the 3000 area. A break in that line will give confirmation that a new ICL is about to begin. The 200 day moving average will also be present near there, so that just seems to be a logical level to me.
So why would we want to buy this next daily cycle low? A bounce off the 3128 would probably trigger a short term buying frenzy. The problem is that sentiment would probably not be extreme enough to take us back to all time highs. We would keep stops tighter than I usually would so that we can guarantee a bit of money. A further drop into an ICL will cleanse the sentiment from the market and set the stage for the next intermediate rally.
The Speculation page is used for educational purposes and to talk about current trades we are in. The Pit is where we post new trade recommendations. This is also a blog page where you can ask questions, post your thoughts or ask for help. Be sure to use an anonymous name as you may not want your neighbor knowing what you are up to.