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June 23, 2013

Commodity Bear Market

Commodities have certainly not performed as proponents of the 'money printing equals inflation' school of thought have anticipated. After bouncing out of a 3-year cycle low in mid-2012, commodity indices leaped strongly for about three months and have been in fizzle mode ever since. Now, developments in the charts of bellwether commodities, copper and oil, suggest that the commodity bull could be in hiatus for another two years.

What makes this seemingly minor infraction so important? Well, the late April low represented a weekly cycle low, so a drop beneath that low indicates a failed cycle... a bearish development which projects price lower for the remainder of the current weekly cycle, or about 3-4 months. Furthermore, the April low represented a multi-cyclical low, a major low which occurs about every 5-8 quarters for copper. And a weekly cycle should only fail when copper is heading into a multi-cyclical low. In other words, copper's larger cycle is already in decline less than one quarter into a new cycle.

As with a failed weekly cycle, a failed major cycle project price lower for the remainder of the cycle. With copper's major cycle less than one quarter old, price should trend lower for up to seven more quarters... roughly the time needed for the general commodity cycle to reach its next 3-year cycle low.

Oil may soon deliver its own confirmation of a bearish commodity viewpoint.

If oil were to lose the last DCL at $91.26, a failed daily cycle would be confirmed. By extension, oil's weekly cycle would be in decline, and with a weekly count going only into Week 10, oil would be facing 4-6 months of downside into its next weekly cycle low. This span provides plenty of time for oil to drop beneath its last weekly low at $86, thereby forming a failed weekly cycle. What is the problem with a failed weekly cycle? Oil typically does not see a weekly cycle failure unless the 3-year commodity cycle is already in decline.

But, of course, we can always watch a commodity index for confirmation of a general commodity cycle failure.

Anyone demanding an imminent bullish turn for the commodity complex is placing a tall order. Just the opposite outcome appears to be in the works. If commodities cannot rally in the face of massive counterfeiting efforts on the part of world central banks, the benefit of that stimulus effort must be very muted, indeed. Commodities are more likely warning that a major global downturn is upon us.


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