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Commodity Report June 17th 2017

June 17, 2017

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Is this the end of the tech run?  How does the trouble brewing in the Nasdaq affect our beloved commodities?  The FED has spoken, what did they say and more importantly how does that affect the commodity space?  In addition to the aforementioned items, there is a spate of economic data this week that could cause some issues in the commodity world.  Lest we forget the greenback.  With all these forces at work, where will our commodities end up?   We will go over all of this and more in the week’s edition of the commodity report!

THIS WEEK’S PLAYBOOK

CommodityWeekly TrendDaily Trend
Crude OilBearish/ On SupportBearish/ On Support
Natural GasBearish/ Above Support
Neutral/ Above Support
GoldNeutral/  Below SupportBearish/ Near Support
SilverBearish/ Below SupportBearish/ Near Support

Crude Oil –

Crude oil is looking for a place to land.  After an extended rundown in price, crude oil is looking for that all important support level in which to form a base and reverse.  There are a number of fundamental issues currently preventing that from happening.  First, we have the increased production coming from the shale gas regions, namely the Permian basin.  The shale gas producers have thrown production into overdrive and this is causing an already bloated glut of supply to increase rapidly.  The rate at which the shale is producing oil is causing concern not only for many retail players but even for the smart money as well.  Eight hedge funds have reduced their exposure to the top shale oil companies by almost 400 million dollars in concern that the shale oil producers become their own worst enemy, meaning that if they continue on this current production pace that they could drive the price low enough to become unprofitable on a per barrel basis. Secondly, the rig count continues to climb and add to the aforementioned glut of supply.  Needless to say, this is putting an enormous amount of pressure on the price of crude. From the technical perspective, we have seen the CL price chart drop from 55 down to just above 44 in a matter of just a few short months.  Cl could form support here at the 44 level but it would seem more likely at the 43 level due to the fact that that was the price in which the last push up towards the 55 level started from there back in November of last year.  Should this level turn out to be support, then look for topside resistance at either the 45 or 47 level.

Natural Gas –

Just as we talked about support at the 3 level last week, NG decided to dip its toe in the sub-3 pool.  This drop was short lived as natural gas climbed back above the 3 level by the end of the week.  The rally comes to us in part from the better than expected numbers coming from the EIA.  The expectation was an addition of 88 billion cubic feet to the stockpile however, the number came in at an addition of only 78 billion cubic feet.  Last week we talked about the problems with Qatar and how the fundamentals of that situation may take some time to play out.  The boost that could be expected from quelling the production from one of the biggest players in the natural gas game did not come to fruition, however, this could play out yet.  The tensions rising from this political rift could still have an effect on the price of NG, we need to keep a keen eye on this situation to ensure we don’t get caught on the wrong side of this issue.  Despite the short-lived drop to the 2.90 level, the 3 level is still in play for support and the first resistance level remains at the 3.15 level.

Gold –
The pullback in gold got deeper this week.  We talked about the 1265 level and how it could possibly serve as support in a textbook bull retracement like we are seeing in GC.  Of course, we all know that what is in textbooks isn’t always what happens in the real world, things are seldom as orderly as we might like it to be and the stock market is a beautiful example of just that.  GC fell through the 1265 level and is looking for support possibly at the 1250 level, this, of course, is a nice round number and a former support/resistance level.  This bigger than expected downdraft shouldn’t be that big of a surprise as the usual suspects are working on the price of gold.  This week we had the FED raise the interest rate a quarter point.  This was not a surprise to most, however, the plan for reducing the balance sheet might have blown your hair back a bit.  The FED unveiled its plan to reduce the  4.2 trillion portfolios of bonds and mortgage-backed securities.  This did catch some off guard as the economic data heading into the FED announcement was mixed at best.   The FED remained quite hawkish and indicated that more rate hikes are on tap.  Janet Yellen stated that the FED would continue hiking on the schedule that has been put in place and this orderly conduct was healthy for the US dollar but not so much for gold.  We need to watch this 125o support/resistance zone, to see if it can halt this short-term slide and reverse into its longer term bullish posture.  If GC can turn around here then we should expect some resistance at 1265 in the near term and if that is broken then 1285/1290 could serve as the next logical resistance.

Silver –

The decent fro silver continues.  The precious metals are in lockstep right now.  Gold and silver are both bowing to the pressure of rate hikes and the rebound of the US dollar. The FED is moving on with the rate hikes as scheduled and they are being rewarded with better than expected economic numbers.  This week the jobless claims declined by 5000, with the expectation being a decline of only 3000.  In addition to this, the manufacturing numbers were surprisingly upbeat.  The  Empire State manufacturing index climbed to 19.8 after being negative last month.  a positive number in the manufacturing index indicates conditions are improving, whilst a negative number represents worsening conditions.  All this suffices to say, that the run to safe-havens is currently on hold.  As far as the technicals go for SI, we need to watch 16.50 and 16 for a spot to bounce.  When looking at the difference between the gold and silver charts, gold is in a pullback in a decent bullish uptrend whereas silver is more of a neutral to slightly bearish feel.  So even though the two metals can act similarly at times we must remember they are two different entities at the end of the day.

TRADING INSIGHT OF THE WEEK

This week’s trading insight is all about fundamentals.  We discuss the fundamental wranglings of our beloved commodities each week to try to understand why the price action might be doing what it is doing.  We are looking at the laws of supply and demand and trying to decipher what is currently happening and what could occur going forward.  Here’s the thing about fundamentals, they will always play in the long term, however, in the short term the fundamentals may or may not have an effect on the equity or commodity.  So you might be asking how do we know what to do in the short term?  This is the place where we marry our technical analysis with our fundamental analysis.  We need to know and understand the forces that push an equity or commodity one way or another but we need to trade according to what the price chart is telling us in the timeframe that we are trading in. Let’s muse on this for a moment,  if we are looking at a trade in gold that we expect to last a week or so, can we expect the fundamentals of a flawed monetary system to come into play in that one week trade?  The answer is most likely not, however, we need to be aware that the flawed system still exists and that it will come to roost at some point, but we need to focus on our short term charts like the daily or hourly charts for the price action and trade accordingly.  So in closing, we need to know what is going on but we need to trade what we see.  Happy Trading.

Greg Holmes is a full-time trader that came into the world of trading through an unusual channel.  Greg held a securities license that allowed him to sell mutual funds and insurance investment products such as segregated funds and annuities.  After learning more about the financial markets through his education, including Rich Dad’s Master Trader and Cash Flow Options and graduating from a host of other trading programs, Greg came to the realization that he could better help his clients achieve their financial objectives through trading of the financial markets.

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