A Second Chance to Buy Commodities?

Back to the key breakout levels

The BCOM index recently broke higher but subsequently gave back most of its short-term gains. It is currently trading around important support zones, close to the 50-day moving average.

This pullback to the former breakout levels is seen as a potential second chance for the market. If support holds, a resumption of the upward move is possible. However, a downside break would keep the risk of a deeper correction in place.

Everything will start to look like gold

Earlier in December, Michael Hartnett noted that in a scenario where Trump’s policies keep the economy “overheated,” oil rebounds following a potential resolution of the Russia–Ukraine conflict, and China continues to maintain a weak yuan, the commodity market landscape would change noticeably.

In such an environment, he argues, an increasing number of commodity charts would begin to resemble that of gold—featuring upside breakouts and sustained uptrends. This would signal growing interest in real assets and broader support for the commodities sector in the months ahead.

They like it “hot”

According to Michael Hartnett, the global financial crisis led to monetary excesses and fiscal austerity, which put bonds in a better position than commodities during the period of secular stagnation.

The COVID pandemic, however, changed the regime. It triggered strong fiscal stimulus, more constrained monetary excess, and a gradual retreat from globalization. In this environment, commodities begin to outperform bonds in the 2020s, amid rising political populism and inflationary economic growth.

Slippery and waterlogged

Oil continues to trade weakly — the downward trend channel remains intact, and selling on tests of the 50-day moving average is still a simple and effective strategy. The technical picture offers no justification for aggressive long positions: lower highs, lack of momentum, and continued failure to hold above short-term resistance levels.

That said, a contrarian signal is starting to emerge. Positioning and sentiment look one-sided, volatility is compressing, and price is grinding around areas where sellers have historically begun to exhaust themselves. This is not a reversal signal, but rather a sign of increased sensitivity to surprises — geopolitical, macroeconomic, or supply-related.

Tactically: the trend remains “the enemy,” but the risk/reward for initiating new shorts is no longer as clean. Instead, this is an environment for patiently waiting for either:

• a clear break of the trend channel and sustained trading above the 50-day moving average, or
• a final “flush” below support that fully clears consensus positioning.

For now, oil is slippery and waterlogged — but markets like this often lay the groundwork for the next move.

Large CTA short positions

CTA strategies’ short positions in oil are at exceptionally high levels, creating strong positive convexity on any upside move. For now, this is not an immediate threat to the prevailing trend, but it does mean that even a limited rebound could be mechanically amplified by systematic participants.

At the first sign of sustained upside momentum, CTA models are likely to begin covering shorts and adding exposure, which would accelerate the move and shift the market dynamic from “selling rallies” to a more reflexive environment. This does not change the base case at present, but it does increase risk asymmetry.

The takeaway for now is clear: as long as price remains below key moving averages, downside pressure dominates — but any upward move now has the potential to become self-reinforcing. These are exactly the conditions that often turn an ordinary bounce into a more meaningful rally once technical levels are broken.

All or nothing

The BCOM Energy Index is trading at exceptionally strong support levels. Price is compressed into zones that have historically acted as a key balance point between sellers and buyers.

From here, the outlook is binary. Holding above these levels would open room for a more meaningful rebound and a shift in short-term dynamics. A downside break, however, would signal that pressure in the energy complex remains dominant and that the market is accepting lower equilibrium prices.

For investors, this is an “all or nothing” moment — not an area for passive waiting, but for close monitoring of price behavior around support. This is often where it is decided whether a correction is ending or turning into a new phase of weakness.

The Energy Range

XLE continues to trade within the broad range that has been in place for years. Attempts to position for breakouts in such an environment often prove costly, but when a breakout eventually occurs, price “vacuum zones” typically form and moves tend to be fast and powerful.

For now, mean-reversion thinking remains the winning approach as long as the market stays within this seemingly “permanent” range. At the same time, positioning in the energy sector is relatively light and investor interest remains subdued.

This combination means the balance still favors range trading, but potential is building beneath the surface. If and when a decisive move out of this range occurs, the reaction could be far sharper than expected, precisely because there are few accumulated long positions.

The Energy Selloff

Positioning in the energy sector has fallen to relatively low levels. Selling has accelerated and investor interest has cooled noticeably, suggesting a capitulation element in the latest move.

Such a setup usually means that selling pressure has already been largely “absorbed” by the market. On its own, this does not guarantee a bottom, but it does reduce the likelihood of another aggressive leg lower without a pause or a bounce.

In this context, energy remains vulnerable, but it is also becoming increasingly sensitive to positive surprises. If prices stabilize or even a modest catalyst emerges, the upside reaction could be stronger than expected precisely because positioning is so light.