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All participants in the Australian market - be they investors or traders - know the importance of commodities to the Aussie economy, and in turn, the markets. The commodities space is being used as a political football, with all sides claiming it needs to be taxed more (or less) and be saved from oblivion (or driven to the stars). This sort of debate really muddies the waters for the average punter who believes these opinions and takes them as fact. All opinions expressed - including those in this article – should be independently verified, especially if you are going to act on them with real money.
(As a side note, I am currently reading a book about the GFC and the complex derivatives products that caused it. Most of the damage was done by people who did not conduct due diligence because it was too hard to understand or they did not care. And we all know how that ended up.)
Charts are a good short-term provider of facts as they tell you what is happening right now. Our stock market is linked heavily to resources stocks but the actual percentage they contributes to the economy is not as large as many people think. Different percentages are claimed but it’s not the 80% some mining magnates would have you believe.
The commodities index chart below (GI-Spotv in ProfitSource) shows a recent sell-off that has accelerated when compared to the first range down off the March highs. We are in a second section of that top and are closing in on the 100% repeat of price. It is also noteworthy that we are hovering near the 50% level of the October to March highs and I have included a basic time count showing the move in days using 50% levels.
Chart 1 – Daily Bar Chart GI – Spotv
click chart to enlarge
This chart is, of course, heavily weighted to crude oil, which will show a very similar pattern. So are we in for a bounce or a continued decline? Well, you could look at the demand figures and the sales to China and this will tell you we are in a contracting phase. But these fundamentals can shift quickly. People will always consume commodities (and more when prices fall) but there is always a lag and this is why the charts don’t lie.
Australia’s star is tied very closely to China’s wagon and this has given us a greater level of stability than most Western countries. The Aussie dollar, (which is holding at parity as I write) has been a function of our commodities placement and high interest rates, but this could change as official rates decline.
Extending our analysis to the big picture indicates that May will be significant again. Oil and Commodities have produced some significant lows many times in mid-May, so I am on ‘red alert’ for signs of reversal.
Chart 2 – Daily Bar Chart GI – Spotv
click chart to enlarge
We are currently being subjected to the worst reporting standards and political behavior I have ever seen. Be very wary about being drawn in by the information and disinformation that is being fed to the masses. Whatever you do, be independent, make your own opinions and create your own outcomes.
Good Trading
Aaron Lynch
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