Commodity bulls have had a rough time over the past five or six years. As the global gross domestic product (GDP) growth faltered, so did commodities as a whole, which tend to excel when global GDP accelerates. Back in February 2012, Robert Moreno first drew our attention to the fact that in commodities, the worst of the bear market was likely behind us.
Using the Elements Rogers International Commodity Index Total Return ETN (RJI), which invests in a broad basket of commodity futures contracts, Moreno pointed to a number of technical reasons to support an end to that bear market. But he also emphasized that a true turnaround would likely take time.
The support level that Moreno identified (shown on the monthly chart below) has held well over the two years. It created the left shoulder of what has since emerged as an inverse head-and-shoulders pattern on that monthly time frame. The bulls continued to struggle as this larger pattern developed, but after the completion of the right shoulder, they have been gaining the upper hand.
2014 may indeed bring the return of the commodity bulls. From a technical standpoint, the timing is ideal. Like Moreno suggested, I often build a position in a longer-term investment while it is in a consolidation phase, adding to it as more commonly touted strategies occur.
One of the tools that I use for timing within these periods of congestion is a concept I call "time development." In the case of an inverse head-and-shoulders pattern, the ideal time development for the right shoulder of the pattern is comparable to the time it took for the left shoulder to form. This took place in early 2013, as noted on the monthly chart above.
Another tool that I use as confirmation is a Fibonacci fan. Since the RJI had two strong waves of upside off the 2009 lows into the early 2001 high, this tool is ideal for identifying support on corrective moves. It not only shows price support, it also gives you a feel for how long it may take for that support to strike. I've found that timing an entry on a pivot at these fan levels greatly diminishes my risk of a false trigger or early entry. As the right shoulder of the inverse head-and-shoulders pattern completed in early 2013, it was still a bit shy of the next Fibonacci fan zone. In this case, it was the 76.4/78.6% support level.
Momentum on the second selloff within that right shoulder was also quite strong. You can see this more clearly on the weekly time frame shown below. The result was a slower start to the upside coming out of this right shoulder. Since testing the Fibonacci fan support, however, that momentum has greatly increased. Additionally, we've seen an increase in volume as well.
On a daily time frame, the RJI is struggling at prior highs and the midway congestion from the right shoulder of the monthly pattern. This is stalling the move off lows. The larger monthly pattern, however, suggest that this is still a nice price zone to build a position. Global GDP is expected to accelerate over the next year, and if it does, this could be just the catalyst that the bulls need to once again see strong returns.