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Jason Sen

Commodities in freefall: how long will the bear market continue?

We have all been reading about deflation and the drop in commodity prices. This has been highlighted recently with the enormous drop in the share price of Glencore. So let’s have a look at the charts.
The weekly chart below shows the Thomson Reuters CRB Commodity Index.

We can see that the index has been in decline since as early as the first half of 2011 when it topped out. After a steep drop from 3999 in April 2011, the index bottomed at 2695 in October of that same year. The recovery then topped out at the lows seen in the first half of 2011, in the 3540/3560 area.
This area was in fact never broken, although it was approached a few times throughout 2012, 2013 and 2014. After this three-year period of sideways trading we started heading low again. China, the largest buyer of the world’s commodities, could no longer support the commodity-exporting countries like Brazil and Australia who had enjoyed a huge boom as China expanded her economy in recent decades.
We have zoomed in on the weekly chart below to show how the next leg lower started in July 2014 as we topped at 3480. This was a clear indication that activity in China was slowing dramatically.

As is typical of a market trend, there are consolidation patterns where price trends sideways for an extended period of time, before resuming the longer-term trend. We can see this in the first half of 2015 in the chart above.
It was not until the summer of 2015 that the world, and in particular global stock markets, woke up to the fact that expansion in the Chinese economy was seriously slowing down. The trigger was a devaluation of the yuan in early August, but the CRB was already starting its next leg lower.
In the last three months the index has fallen from 3091 to 2135 this week, a drop of 30%. This brings the total loss for the four-and-a-half-year bear market to a whopping 46%. Despite the fact that the index has been severely oversold on the weekly chart for three months, there are no buyers.
Let’s zoom in again and have a look at the daily chart to see if there is any evidence of a bottom yet.

Obviously the daily chart is also severely oversold as is usually the case in a bear market. This is never a good reason to look for a bottom. Markets stay oversold for long periods of time in a bear trend, just as they stay overbought for long periods of time in a bull trend – the US stock market bull run being a perfect example.
There is really no evidence of a turnaround in the index at this stage. There is a slightly positive three-candle pattern, which one could argue may signal a period of stability in the short term at least. To confirm we would need to see a break above the August low at 2260. This may allow a further recovery to the September high at 2400/2420 but, if we do manage such a recovery, this area looks likely to cap a recovery rally at this stage.
If further deflation is a worry for the stock markets or if it may stop the Federal Reserve from aggressive rate hikes in 2016, the CRB index is indicating that further weakness is the most likely scenario in the coming weeks.
Jason Sen – Technical Analyst & Trader
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The content of this article is the personal opinion of the author and not The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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