Tuesday, August 12, 2008

Commodities are now in a cyclical bear market

About a month ago oil pushed up into the largest parabola of the entire bull market. At the time many commodity bulls were finding an unending list of fundamental reasons for why the price was going to continue up for the foreseeable future. This is what happens at the top of parabolic spikes.

Let me first say that we aren't even close to the ultimate top of the commodity bull. We are however entering a global recession. As such I wouldn't expect rising commodity prices for the next couple of years. Once we get through this recession though the commodity bull will resume.

However at some point years into the future we will see the final top in commodities and it will end in another one of these parabolic spikes. At that point the bulls will need to have the discipline to exit when things look the brightest. If they don't they will run the risk of giving back many years of gains very quickly. So far I see very little ability to do this by most of the bulls.

I suggest we start practicing now before that final top comes.

Now we should see a bounce soon in oil, probably at the $110 level. Gold is also showing a long tail down. Which is a signal of a very oversold market. I expect gold to bounce along with oil. I would suggest using that bounce to exit any remaining long positions. The longer term trend is now broken in commodities. At this point I would have to say that commodities have now joined the rest of the market and are in bear mode. If that's the case rallies should be sold instead of buying the dips.