One important index that’s always on my watchlist is the Core Commodity Index (CRB).
I look at the CRB to give me a snapshot of how the various commodity markets move.
The CRB basket holds 19 different commodities, with the largest holdings in energy and agriculture. Precious and industrial metals make up the rest.
As you might already know, I love to trade commodities.
Because of its potential for big moves, there’s also the potential to capture big gains trading commodities…
I use the CRB the same way I use the S&P 500.
First, I look at the broad market to develop a general sense of where the market is going.
Then, once I have a directional bias, I can narrow down the individual stocks or commodities for the best opportunities.
Today, I want to see if it’s a good time to buy into the energy sector.
So, let’s start with a weekly timeframe chart of the CRB…
As you can see, the CRB bottomed out in 2020 and has been ripping higher ever since.
The combination of low interest rates and a flood of new money printed by the Fed has been a perfect storm for commodity inflation.
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And while I think that the CRB has higher to go, it’s also time for this index to take a breather…
Here’s what’s going on with the CRB’s price chart:
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The CRB is about to trade into a very significant level of resistance at 274.87. This level bounced prices in 2013, before the index crashed through it in 2014. This led to an eventual decline of 59%, with the CRB eventually bottoming out in 2020.
Markets have long memories, and this prior support level should now act as resistance as the market trades back towards it.
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The price action has blown right through the upper Bollinger Band (blue shaded area between the lines), telling us the CRB’s rally is now extreme. The last time prices traded through the upper band was in October. Shortly afterwards, the CRB pulled back almost 8%.
If we put it all together, the technical case suggests that even if prices trade higher in the short term towards that 274.87 level, the CRB is due for a significant correction.
Looking at the CRB supports Jeff Clark’s analysis that the energy sector is likely overbought.
Sometimes the hardest thing to do as a trader is to wait patiently for the market to come to you… but it pays off.
Doing nothing and keeping your powder dry is just as valid a trading decision as putting your money to work.
If the market respects the technical levels we’ve outlined, then we’ll have the opportunity to buy into a hot energy market at significantly better prices.
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
What other commodities have you been following lately?
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