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Here at Mullooly Asset Management we use a form of technical analysis called point and figure charting to manage investments. In point and figure, one of the main purposes the chart has it to help us identify trends. Whether we’re looking at a stock, index, mutual fund, ETF or commodity, the chart will show us its trend. On this week’s podcast, Tom and Brendan discuss how bad things happen in negative trends and relate that to the current weakness of commodities.
To begin 2015, many market headlines have been about commodities crashing. It seems like you can’t check any market related site without seeing a new post on crude oil. The commodity space is ripe with examples that embody the statement: bad things happen in negative trends.
So what do we mean by a negative trend? On point and figure charts we use two main trend lines: the bullish support line and the bearish resistance line. You can see them clearly identified in the chart below. These trend lines can stay in force for months or years at a time. When something breaks its bullish support line, it enters a negative trend. This is a huge deal!
The chart below shows crude oil. You can see that near the end of July/early August it broke through its bullish support line around $100 a barrel. The chart tells the story since then and we’re seeing prices in the $45 a barrel range today.
This is a point and figure chart of crude oil
All of our point and figure charts are provided courtesy of our friends at Dorsey, Wright and Associates
As you can see on the crude oil chart, bad things have certainly occurred in its negative trend. The examples don’t stop there though! Other commodities experiencing big draw downs in negative trends include copper, gold, and silver:
- Copper broke its support line at $3.20 in March 2014. The price has dropped over 20% since then, and today it’s trading around $2.64.
- Gold has been in a negative trend since February 2013 when it was $1600 an ounce. Gold is currently around $1230 an ounce.
- Silver entered a negative trend in September 2011 at $37 an ounce. Today it’s around $17 an ounce.
The headlines will have you believe that the commodity crash is a new phenomenon, but as you can see, many commodities have been in negative trends for a considerable time. Bloggers and journalists love to speculate about the reason why things like this are happening to commodities. They make for interesting articles, but the truth of the matter is that price matters most. We might find out weeks, months, or years from now what the real story behind the move in crude oil has been. That’ll make a fascinating book, but it won’t bring back the money investors have lost over the last few months.
We can avoid situations like the current one in commodities by watching the charts. When something enters a negative trend, it’s a big deal and needs to be handled accordingly. We’re not in the business of fighting trends here at Mullooly Asset Management. When the charts change, we change with them.