All about commodities

Very soon it is going to be all about commodities. The reason is that the 'Forward guidance given by Janet Yellen all year long has managed to give us a bear market in commodities. This bear is often considered as a sign of deflation well ahead of the actual event of deflation. Inflation and deflation should be understood in the right light. That is in the form of an expansion and contraction in the overall money supply. This contraction comes without any debt deflation but simply the scare of it. On the other hand the US Fed remains committed to higher inflation in its guidance. In this light it is highly probable that this has nothing to do with the event of deflation, at least not yet. Then what lies ahead is already on the charts. What started in 2008 as a 5 wave decline has been followed by another 5 wave decline in wave C. The chart below shows 5 waves in wave C. I had to invert it to count it properly.

The Idea here is that wave C down appears complete meaning that the current bearish leg might be over. Here C is not exactly equal to wave A but is almost there. While you can argue about extentions in various waves the extremes in sentiment against buying commodities seen accross the board along with the extreme in sentiment on the Euro/Dollar combined are important to take this view at this stage. In wave C wave 5 = 0.382 times wave {1-3} in size so it is a good level for the 5th wave to end in terms of Fibonacci ratios as well.

On completion of a 7 year bear market in Commodities it either implies the start of a new bull run OR it means that we will get an X wave. An X wave would be a corrective 3 wave rise in prices that would retrace 50-61.8% of the losses of this time period and could take years to complete. In either case it limits the downside in the index for years till fresh evidence shows up. This is not a time to focus on selling commodities but buying them as the risk reward is extremely favourable to the bulls. The world of currencies and commodities are changing all the time and not following historical precedence because the Central banks are as aware of financial history as we are, and they are acting together to ensure that we do not follow the same path as in the past. That is why the charts and markets themselves will signal which asset class will move which way first. Historical logic/precedence of what happened in past deflations or hyper-inflations might not be relevant. The end goal might be to deflate and inflate but the path is not straight forward due to the active interventions by the Reserve banks and the government to keep the situation in control. This is causing big speculative moves in assets in bunches based on a bet on a future event. But none of the said events have taken place yet. So look at the markets and be open to what it presents as speculative forces remain in play. In such markets not logic but price is everything.

Thailand SET

Thailand equities have fallen below the low marked as wave b. Note that most markets appears like they started counter trends in a-b-c from the Aug/Sep low. This market completed 3 waves and is now falling. So has a larger collapse in wave C down stared? This is the first sign that it could have so an early sign of Asia rolling over to the bear side again.

Dollar index

The Dollar index - has been making small moves both ways but is in a narrow range that continues to look like a ending diagonal, or a wedge that occurs at the end of a move. Today it even touched the upper Bollinger band. So the next move should be lower at least to the lower Bollinger band at 98 to start with. At 100.50 this is a third time prices have reached this level. In March and April the dollar reacted downwards from this level.

Gold

Two to three days back I had several questions about shorting commodities and Gold. My view is out. We are at an extreme. Today prices did dip below the 1052 swing low made two days ago. But it does not change the view that we are in wave E down the last leg of the decline for gold. So it is not time to try and fine tune the last $ decline but wait for a trend reversal to show up clearly. Minor squiggles do not matter. The lower line is at 1050$ and even if we get a throw under below the line for a while it does not change the stance. Yes you need to either use position sizing or wait for a confirmation but this is where we are in the overall structure with sentiment at an extreme.

Crude

Crude Oil fell after rising in 3 waves so it is still short term bearish however the fall might only be wave e of a wedge like patttern at the end of wave 2/B down. So a dip to 38.20$ cannot be ruled out, however it should be the last of it looking at the extreme short building up in CFTC data.