Break Up Your Fallow Ground And Sow Not Among Thorns

February 24, 2015

Mish's Daily

By Mish Schneider

Old Testament

Many folks have been asking me questions lately about certain commodities and whether or not I see basing action. Let’s stray from the sheep/goat conversation for now (related to the indices) and talk about bears and potential bulls (old school).

Not only are many commodities hanging out in a completely different pasture from the rest of the market, that pasture is fallow. Instead of wolves as the major predators, commodities have been under siege from a strong US Dollar, weaker Emerging Markets Supply/Demand issues, particularly in oil and energy, and domestic political pressures (Keystone Pipeline, Farm Subsidies, etc.)

Looking at the Commodity Index (DBC), since July 2014, it has traded under the 50 and 200 Daily Moving Averages in a sharply accelerating Bearish Phase.

Simple way of determining whether or not the instruments in that ETF are basing out or not is by watching the declining 50 DMA. If the price clears over and the slope of the 50 DMA flattens out, we can safely assume that selling has dried up.

But, is that the same as assuming buyers have come in? Not really. I can report that on January 30th, DBC had a reversal pattern off the lows. Those lows remain solidly in place. The subsequent price action suggested that not only had selling dried up, but also that buyers came in over the following week and a half.

To date, those buyers have disappeared. I will be observing the 50 DMA and where the price trades in relation to it, as well as how much volume appears. A move above the 50 DMA along with greater than average volume and perhaps we will have a whole new pasture to play in.

I do have to mention, though, that these rallies in the indices have been so peaceful. Really, if you think about it, sheep are the perfect metaphor. Quiet grazers, nothing crazy, who scatter at times only to come back for more.

S&P 500 (SPY) New high close

Russell 2000 (IWM) Although a bit overbought, another new high close

Dow (DIA) Strong new high close

Nasdaq (QQQ) Consolidating near the highs

XLF (Financials) 24.90 the January Calendar Range high to clear

KRE (Regional Banks) 41.06 the January Calendar Range High to clear

SMH (Semiconductors) New highs-they’re back!

IYT (Transportation) 165.17 January high-big eyes here!

IBB (Biotechnology) From steroids to the result of too many steroids

XRT (Retail) Consolidating

IYR (Real Estate) Maybe overvalued but declined on lower rates-unusual to see

ITB (US Home Construction) New highs with a breakaway gap