While everyone was paying attention to the FOMC, gold and silver, and the Treasury yields, it appears the recent commodity rally trend took a big hit on Thursday, March 18, 2021. Our guess is that the FOMC statement did nothing to support the continued commodity price rally, as the U.S. Fed continued with near-zero interest rates and economic support through 2023. The rally in commodities was likely based on expectations of a much stronger economic recovery as the COVID vaccines take the pressure off economic shutdowns and further restrictive economic conditions, but that may not be the case.
Commodities Rollover May Be Misleading Traders
The rollover in commodities suggests the markets are reacting to renewed expectations, post-FOMC. They may continue to consolidate near support (near $16.30) before attempting to move higher as traders digest the Fed comments and fall back into economic recovery expectations. Any move below $16.00 as seen on the chart below may likely prompt a consolidation phase within historical support channels (see the Weekly DBC chart below).
Commodities Attempting To Base Near Support
The following weekly Invesco DB Commodity Index Tracking Fund (NYSE:DBC) chart shows how the COVID-19 event collapsed commodity prices and how they've just recently rallied back to levels above the pre-COVID price range – above $15.00. When we start to look at longer-term trends, we start to see a number of key price levels that become important technical factors related to future trends. The support levels that setup in 2019, pre-COVID, are still very valid current support levels for commodities. If a continued economic recovery takes place, DBC will likely find support above $15 and then begin another rally phase targeting prices above $19 to $20. This current rollover in commodity prices may be nothing more than a pause in price before another rally starts.
Commodities Break Major Monthly Price Channel
Lastly, looking at the monthly DBC chart, below, highlights the very long-term price trends and what becomes immediately evident is that price has recently broken above the RED downward sloping price channel line. The momentum of the price rally that recently broke this downward price channel was strong enough to pierce this downward sloping channel – and it would not be uncommon for price to pause after this price breach. The YELLOW support levels, from the weekly DBC chart, continue to confirm the $15 to $16 as active support. Any price rotation or pause near this level will likely hold within this support range before attempting another move higher.
We targeted price lows from 2012~2014 as a potential upside price target if the rally phase continues. After breaking the major downward sloping price trend, it is very likely that once DBC prices rally above $18.50, a continued rally phase may target the $25 price level with an extended run over many months.
Historically, a rally in commodities does not always prompt a rally in the U.S. major indexes. In 2007-08, commodities rallied extensively, while the U.S. stock market collapsed. In 2010-11, commodities rallied as the U.S. stock market rallied more than 27%. In 2016-2018, commodities rallied as the U.S. stock market rallied more than 62%. The current breakout above the RED longer-term price channel suggests we may see a stock market rally aligned with a commodity price rally based on the recent comments by the U.S. Fed. Unless a major credit market or other catastrophic event takes place, we believe this upward trend in commodities may prompt an extended recovery rally in both commodities and the U.S. stock market.