MARKETS REMAIN BALANCED EXCEPT FOR FOUR
January 6, 2020
It has been my observation over the last 40 years that once we enter the Holiday season the market begins a steady slowdown in trading. When the Holiday season ends it takes a while for the markets to regenerate normal trading energy. It appears to me that using the LAWG 647 Model (which is the basis for all the following comments) this year is no different as the model shows that most commodities are balanced but not all. The Model tells us that out of the eighteen commodities I follow fourteen are balanced and four are approaching areas of being unbalanced but and one at the beginning of being positively unbalanced. Now this can all change very quickly if an unforeseen fundamental factor enters the market. In my opinion the fundamental factor we need to be mindful of at the present is the situation with Iran.
Let us examine several commodities that appear to be or could be heavily influenced by the international situation and enter unbalanced relationships.
February Gold certainly benefitted from the ongoing international situation. It has rallied over seventy dollars from the low of January 2 to the high as of this writing (January 6). It will take a close at or below $1424.90 on Friday, January 10 to reverse the trend…..not likely. As of the close last Friday the February Gold Positive Indicator exceeded the 2nd standard deviation of the 228-week average with an index of 88. Gold is the only commodity of the eighteen I follow that has an index above the second standard deviation and the closest to being positively unbalanced. Over the past 228 weeks the Gold market has exceeded the present positive deviation value five times before breaking. The Index as of this writing using a Feb Gold Value of 1575 is now 94. Be advised the market can still go higher. Be advised that the range where one needs to be cautious about going long begins at 90 but has gone as high as 105 before correcting. Given the underlying international situation I will have to wait for the Positive Index to reach at least 100 before fading the rally.
MARCH CRUDE OIL starting on December 31 began to rollover. Once news hit of the U.S. air strike Crude Oil rallied over four dollars from the low of January 2 to the high of today (January 6). It will take a close at or below $55.86 on Friday, January 10 to reverse the trend…..not likely. As of the close last Friday the March Crude Positive Indicator exceeded the first standard deviation of the 228-week average with an index of 83. It is important to know that each commodity has its own specific index range. That is why Gold is above the second standard deviation at 88 while Crude only exceeds the 1st standard deviation with an index of 83. I believe it is important to understand that over the last 228-week the Crude Oil Positive Index exceeded the third standard deviation only six times. The best support that Crude has is the situation with Iran. Without continuing tension, the Model favors a downside correction in Crude Oil at which point it suggests getting long.
What would a Lee Gaus letter be without a comment about my favorite Commodity market, COFFEE. As you recall late in the fourth quarter of 2019 the Positive Indicator for Coffee exploded. It not only reached the index of 110 once it returned and tested it one more time. After the second test of the index of 110 Coffee began its retreat. From the high made on December 17 to the low made as of this writing (January 6) March Coffee has broken almost twenty-one dollars. It will take a close at or below $107.55 on Friday, January 10 to reverse the trend to bearish…..not likely. As of the close last Friday both the Positive Indicator and Negative Indicators were within the first standard deviation of the 228-week average. This tells me that while the market is working on getting rebalanced it still has some more downside potential. To those interested in trading Coffee my suggestion would be to sell rallies during the next one to two weeks and then possibly look for levels to buy.
My name is Lee Gaus and if you would like to see the COFFEE comments go to our website ifgfutures.com. There you will also find articles written by my partners Tom Fritz, Steve Erdman. If you have any questions you can reach me at 1-877-304-1369, 312-384-1166, or email me atlee@efggrp.com. If there is a commodity you would like me to address shoot me an email.
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