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Commodities Breadth Explained

 
1 August 2006                                              By John Ritchie

    
Revamped breadth indicators

Breadth indicators are a major feature of the Investors Intelligence web site. For several years we have shown breadth for major equity indices in the US and globally, along with in depth coverage of US breadth by sector.

We now have forex breadth indicators and today we relaunch our new improved commodity breadth indicators. This article explains how the indicators are structured in the commodities section of the web site.

 

Breadth components and calculation

Within the Commodities section of the web site, breadth indicators are reached through the ’Indicators’ - ’Commodities Breadth’ menu.

We have categorised commodities into six groups: Energies, Precious Metals, Industrial Metals, Meats, Grains, Softs. We have breadth indicators for these and the following groups.

All Metals (4 precious and 6 industrial)

All Agricultural (8 grain and 6 other)

CRB Commodities Index (19 components)

Broad Commodities (37 components)

 

Data used for breadth calculations

Although in the ’Charts’ section of the site, there are multiple versions of a commodity (different contracts, expiry months, continuation charts), for breadth calculation, we only want one price series for each commodity. In most cases, these are 1st month continuation charts. These have the advantage of having a long history, unlike individual contract charts.

Although the prices on continuation charts are not equal to the spot price at the time, this does not matter. What we are interested in is when the turns in price occurred for each commodity. Taken together, these turns comprise the breadth indicator for that group.

The constituents can be seen within each group using the ’See Constituents’ command.

The breadth indicators

There are four breadth indicators on the web site. These are:

  • Bullish %: This shows the percentage of stocks in point and figure uptrends. Please note that this P&F status is derived from the ’Standard’ P&F chart, which is not a linear scale but an ’extended semi log scale’. This varies the box size with the range of prices. Details of this are found by clicking the blue question mark icon, below the breadth chart for a group (when that breadth chart is displayed as a P&F chart).

To see the P&F chart that each commodities’ signal is derived from, click ’See Constituents’ select the commodity, view it as a P&F chart, then click the ’Standard P&F Chart’ link below the chart.

  • % Relative Strength: Each member of the group is plotted against the benchmark for this section of the web site, the CRB Index. These are plotted as ’Standard’ P&F charts, then the Relative Strength breadth is calculated from these charts. This should allow us to identify points of overextension for the six groups (listed above) within the commodity complex.

For example, the 100% relative uptrend breadth for Energies in September 2005 was an overbought reading, which was followed by a fall in the DJ Energy Index. A similar high reading lead to a fall in October 2004.

When applied to larger groups such as the CRB Index and Broad Commodities groups, this indicator will be less meaningful.

  • %30 week ma & %10 week ma: For each component of a group, we work out whether the price is above or below the 30 week and 10 week (exponential) moving average. The %30 week indicator is slower moving and picks out overbought/sold levels in the medium term. The %10 week indicator is faster moving and can be useful in picking out short term peaks and troughs.   
Breadth Indicators with Indices

In the same way that we can plot stock breadth below a stock index, we can now plot breadth for a commodity group below a relevant commodity index.

This facility is reached through the ’Charts’ menu, then ’Commodities’.

On the left hand side, under ’Chart Libraries’, there is a Commodity Indices section.

If any of these are plotted as a time series (i.e. anything other than a P&F chart), a selection of Indicators become available to the right of the chart. Ticking the last of the boxes (named ’Indicators’) and pressing ’set’ produces a drop down box of breadth indicators that can be applied to that commodity index.

Below is the CRB Index with its Bullish % indicator. It shows that during the steady uptrend in the period shown, breadth has found support just below 50% and that with the exception of October 2005, the CRB Index has risen from those points in time. When the Bullish % indicator has exceeded 80%, it has become overbought and the CRB Index has pulled back to the trend.

Commodity indices have been linked to their relevant breadth series. Broad commodity market indices (CRB, DJ AIG Index and Rogers International Commodity Index) can be shown with CRB Index breadth or Broad Commodity breadth.

 

Softs Bullish % is oversold

Perhaps the most interesting group at present is the Softs. This has only one of its six components (Cocoa) in a P&F uptrend on the ’Standard’ (extended semi log) scale chart.

The chart below shows the DJ Softs Index with our Softs Bullish % for the last five years. We can see that there is a correlation between the index and breadth charts.

With the breadth as low as it has been since mid 2002 and the index back to its trendline from the late 2001 low (that was the low), we should be looking for long side opportunities in these commodities. We should also consider their related stocks, although these of course are subject to other factors.

It is this sort of relationship that our new breadth tools allow subscribers to find and we will be commenting on them in the Commodities Daily Hotline as they occur.

    

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