Commodities Corner: Crude, Copper & Commodity FX Crushed

Commodities Corner: Crude, Copper & Commodity FX Crushed

Commodities Corner: The Commodity sector and commodity FX pairs have been hammered at the open of 2016. As the books open on 2016 the inaugural trading week of the year has witnessed two trading halts in Chinese stock markets, as seven percent declines at the market opens on Monday and Wednesday triggered circuit breakers. The risk rout was initiated by the the dire Caxin PMI data released during Asian trade Sunday, which has promoted more concerns regarding the pace of the decline in Chinese economic activity, the reverberations have been felt globally as over two trillion dollars worth of equity values has been erased in the first four trading days of the years, with asset markets experiencing their worst start to the year in over a century.

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The collapse in risk sentiment has had an obvious direct read through to global commodity markets. Specifically growth focused commodities, crude has been the poster child for of the commodity crash, as of writing we are trading just above $32 per barrel in West Texas Crude, levels that haven’t traded since 2003 registering a $5 decline or eleven percent in four days. Interestingly we are witnessing some divergence in Black and Yellow gold, as traders are moving funds into the yellow metal as a safe haven source while crude has been falling off a cliff this week Gold has caught a decent bid, up nearly $50 in the first four days of trading to retest the $1100 handle from below as traders reduce their appetite for yield and focus on capital preservation.

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As commodity prices crumble there has been obvious roll over effects within the commodity FX space. The AUDUSD has been handicapped from the Asian open of 2016, initially the Aussie was offered as many use the AUD as a China proxy play with China viewed as the major trading partner of the largest antipodean economy, hence any sustained decline in China sentiment is going to have a negative impact on the Australian economy as a first derivative trade. The Aussie also suffers from secondary effects as it is also viewed as a commodity FX pair and has been sold off as commodity prices, specifically copper, one of Australia’s largest exports are once again rolling over hard, threatening to to take out 2015 crash lows.

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If Copper has weighed on the beleaguered Aussie the Crude crash has crippled the CAD. The loonie started 2016 enjoying some much needed support as crude prices were showing the first signs of stabilizing. However as the week kicked off and the crude collapse commenced so to did the demise of the CAD after opening the year just above 1.38 the Loonie has soared higher trading back through its 2015 double top highs at 1.40 and is now threatening to test 1.42 as we head into the back end of the week. Bank of Canada Chief Poloz has been on the wires today stating that domestic FX weakness was a natural by product of an economy that is transitioning from being export led to one that focuses more on services, these comment have done little to arrest the rise in the loonie.

Technical & Trading Takeaways

Now we are up to speed on the commodity and commodity FX pairs landscape, lets take a look at where the nearer term trading opportunities maybe developing.

From the outset I would like to stress that I am in no way an advocate of attempting to catch falling knives, this misguided approach to trading is quite frankly one of the fastest strategies to liquidating your trading account. This said through experience and adhering to rigorous rules it is possible to pinpoint potential counter trend trading locations before looking tt logical reversal points to realign with the broader trend.

For now I have one set up that I am monitoring in the Commodity space that I would like to highlight as worth keeping on your radar in the coming days/weeks.

Gold

As highlighted above Gold has caught a decent bid midst the market chaos. Technically i see no value in chasing prices higher here instead I have identified a pattern that if it repeats or rhymes with prior patterns will offer a low risk high probability entry opportunity. As you will see from the chart below the last two correction have followed a similar pattern forming a small base breaking higher then pulling back to test the base, before extending higher for a secondary stab higher. Overlaying a similar structure to the current move in Gold would provide the possibility of set up where price extends higher from current levels before pulling back to test the base 1080/60 area as highlighted in the chart.

  • I will be looking to buy a repetition of this pattern, buying a pull back to test 1080/60 targeting an initial test of the descending trend line at 1140/50.

gc71

For updates on trade of the day set ups and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick

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