The electronic crash in the stock market also cued a selloff in many commodity markets.  Markets typically move in their own individual rhythms.  However, when fear dispossesses logic and panic takes over, it becomes a case of sell first and ask questions later.  We watched the media reports of riots in Greece as the stock market selloff acclerated, survival became the main concern.  Now that the dust has settled, it’s time to evaluate the current state of the markets.  It is my belief this system crash  brought to light some abundant commodity trading opportunities.

Let’s examine first, the context of the markets prior to the selloff.  In the currency markets,the Canadian and the Australian Dollar as well as the Japanese Yen had been consolidating near the upper end of their ranges.  All three had been holding their own since the U.S. Dollar’s rally has come, for the most part, at the expense of the Euro, Swiss Franc and British Pound.  The same pattern appears in the energies and metals as unleaded, heating oil  and crude as well as silver, gold and platinum had also had been consolidating near their highs.

Secondly, let’s consider the composition of the markets’ participants at these price levels. Commercial trader positions in the markets above were gaining momentum in the direction of their established trends with the only exception being the silver market.  This means that even as the markets were moving higher, commerical hedgers, the traders we follow, anticipated higher prices yet to come.  For our purpose, we track the commercial hedgers.  Prior to the market shock, we took for granted that we were in a value driven futures market  and no one knows fair value like the people who produce it or, have to use it.  In fact, it is precisely their sense of value that provides the commodity market’s rhythmic meanderings that swing traders love so much. Let’s face it, producers know when their product is overvalued and it should be sold just as well as end line users know when they should be stocking up at low prices.

Finally, in the wake of “Volatility’s Perfect Storm,” we have seen the commodity markets snap back from losses of 3% – 4% in the world currency markets to 7% – 10% in the physical commodity markets. This abrupt selloff and snap back to the previous range of consolidation prices is called a “Spike and Ledge” formation in technical analysis and pattern recognition. Typically, this occurs when an outside force creates a counter trend shock to the market and scares everyone out. The fear of being in the market is replaced instantly by the fear of NOT being in the market and missing the move. The shock forces out the market’s weaker players while allowing the strong to accumulate more positions at better prices. This is why COT Signals has been kicking out buy signals since the crash.  Following the commercial trader positions has allowed us to buy into oversold markets.   Our targets for these positions can be calculated by adding the depth of the market’s decline to the top of the consolidation levels.  If the market you’re following sold off 5% from its highs, a spike and ledge projected target is 5% above the market’s previous highs and a protective stop would be placed just beyond the spike.  

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.