Every now and then you come across a chart that goes against your bias or your previous assumptions. And oftentimes these charts are particularly worth paying attention to.
I previously presented a bullish case for commodities, and continue to hold a bullish bias for a couple of reasons, but I wanted to share the chart that is making me doubt that view.
Despite my preconceived ideas, I felt the chart was so important that it made it into the more fundamental focused Weekly Macro Themes report that I do. See chart below.
A Warning Sign For Commodities?
What it shows is the broad commodities index (S&P GSCI Light Energy Index – often the key benchmark for commodities as an asset class), against its 200 day moving average breadth.
The key signal is the bearish divergence: higher highs on price and lower highs on breadth.
Divergences, particularly breadth divergences, can produce powerful signals – often times flagging a major turning point. For example I used this chart along with its companion 50-day moving average breadth chart to pick the bottom in commodities in 2016, based largely on bullish breadth divergence.
To be fair, most of the time when you get a technical signal like this you want to look for a fundamental catalyst. As I noted in the Weekly Macro Themes, this could come in the form of a policy mistake in either China or America – both plausible at this stage of the cycle.
So the risk is, indeed “the warning sign”, that this bearish breadth divergence is flagging a potential renewed bear market in commodities. That will create its own risks and opportunities, but due to the impact of commodities on the overall global macro environment if it were to happen it would have wider reaching implications.