The Latest Commodity Correction

By Jake Bernstein www.trade-futures.com

When commodity prices were in the doldrums of bear markets and there were few “experts” who were willing to express bullish expectations, I told you that big bull markets were coming. All along I advised patience. And your patience was handsomely rewarded if you remained long. When a virtual army of bulls appeared on the scene, all touting the virtues of commodity trading my radar began to tell me that problems were on the horizon. In short, I concluded that commodities were likely to plunge before they went higher again. Simply stated, the newcomers had to get stopped out before the market was purged and ready to rally again. And so, combined with my knowledge of cycles, timing, divergence and several other indicators, I warned you clearly and concisely several times, beginning with my March 1st 2008 Webinar that a collapse was coming in commodity prices. Prices fell sharply the next few days in many of the markets. Then I warned again in my Webinar for Genesis on 18 March 2008 that a severe decline was coming. The very next day prices plunged across a broad front with a number of markets going limit down. Are the declines over? Is this the commodity crash I warned about? Is this the volatility I warned about? Are more rallies coming? Here are my current thoughts on the above (all subject to change depending on the behavior of my indicators).

Is this the “crash” I warned about? No! This was just a rehearsal – a bull market reaction – a correction that has been long overdue. It’s likely that this reaction was just the thing the markets needed in order to stop out those who came to the party too late. I warned you that traders who were new to the game and who used small stop losses would get wiped out. Expect more of the same.

Is this the volatility I warned about?: No! This is just a harbinger – reality check – a warning of what may well make the current volatility look small by comparison? And as I have said before (even though some have taken issue with my conclusion), we have electronic trading to thank for part of this. The others who deserve a note of thanks are hedge funds, sovereign wealth funds, and the army of bullish “experts” who have been promoting the commodity bull market in the media. Yes, there is much more volatility to come.

Are more rallies coming?: I think so. Why? Because bull markets don’t die easily. Global demand for commodities in developing countries and in the hot industrial economies such as China isn’t about to end abruptly. Even though demand may slow, shortages will continue and this will bolster commodity prices. In addition I don’t rule out the power of hedge funds and other speculators to keep prices up. And so I do expect another round of higher prices and this where short term timing will come into play.

What else can we expect?: I have stated on many occasions that there are several markets which have yet to be swept up and away by the bull fever. These are the meats and lumber. I still have my sights set on these as the next candidates of the bull market hunters.

Final word of warning: I try very hard not to listen to the business news such as CNBC, Bloomberg, etc.

Believe me I do not do so out of disrespect for the job the media are trying to do. I do so because I can’t take the chance of having my own ideas and thinking polluted by the constant parade of experts who express an opinion and then leave only to come back months later without any continuity or follow up. All too often they tell us what they expect without giving any idea of risk, stop loss or precise follow up. Such opinions are worthless. Every morning I can get this type of information waiting in line at Starbucks or from taxi drivers. As an example, just in the last few weeks I happened to see at least six experts on gold recommending longs when it crossed the $1000 mark. As I write this report gold has dropped to as low as $935.

What happened to those who took the advice and bought gold at $1015? Most likely they have been stopped out or scared out. A few months from now, if and when gold rallies back over the $1000 mark the experts who recommended it may be back on CBNC again telling people that the forecast was right. In the meantime all but those with the deepest of deep pockets have been stopped out.

My advice: DON’T TAKE ANY ADVICE FROM ANYONE, myself included UNLESS THESE RECOMMENDATIONS INCLUDE THE SETUP, TRIGGER AND FOLLOW THROUGH! As volatility continues to grow you will see more and more media hype, more ads touting commodities and more schemes designed to separate you from your money.

Be more careful than ever before. I have advised you that the big losers in this commodity bubble above and beyond the consumer will be some major hedge funds, some sovereign wealth funds and the small trader. Some things never change.