When we talk of commodities trading in India, we are broadly referring to 3 classes of commodities. Firstly, there are precious metals, which in the Indian context is tantamount to gold. Secondly, there is oil, which is still one of the most globalized commodities in the world today. Lastly, there are industrial commodities like copper, aluminium, zinc and nickel which follow cycles that are aligned to global investment and demand cycles. But do you know the key technical indicators for commodity trading and how to use CCI indicator for day trading. What are the most accurate intraday trading indicators for traders? Let us first look at the 6 different commodity signals and how to interpret them for equity trading.
1. What does gold bullishness or bearishness indicate
We have seen gold prices in the past oscillating quite sharply. For example, when the Fed raised rates after a long gap in 2016, gold went into a frenetic rally. Similarly, when there was global uncertainty in 2008 after the Lehman crisis, there was a sharp rise in the demand for gold as an asset class. When you find bullishness in gold backed by sustained volumes, it is not just about routine demand and supply. It is essentially indicates that there is panic in the street and the smart traders are seeking refuge in gold. There are two ways to approach this signal. Firstly, you can shift to gold as an asset class or shift your exposure to less cyclical equity shares. Secondly, you can identify stocks that will benefit from a rise in the price of gold. Typically, jewellers like Titan and PC Jewellers as well as gold financers like Muthoot and Mannapuram have been the big beneficiaries of a rise in gold prices. Play your stock picks accordingly.
Bearishness in gold typically indicates two things. Firstly, if you look at the historical pattern of dollar and gold, they are negatively correlated. So gold bearishness means the dollar is going to get stronger. Secondly, weak gold prices also indicates that GDP growth is picking up and therefore investor preference is likely to gravitate towards equities and similar asset classes that carry risk.
2. What does oil bullishness and bearishness indicate?
In the last 4 years, we have been familiar with both phases of the oil market. Between August 2014 and February 2016, oil was vertically down from $115/bbl to $32/bbl. However, over the last 2 years the price of Brent Crude has bounced back to $75/bbl. What does oil bullishness and bearishness indicate for equities? There is a macro story and there is the micro story. For example, when oil prices weaken, it results in lower inflation and makes the case for lower interest rates. You can play rate sensitive equities positively. The reverse is the situation when oil prices are strengthening. Secondly, there is a larger implication of oil prices on asset allocation. Globally, there are net oil producers and net oil consumers. Countries like India, China, EU and Japan are net consumers of oil. On the other hand countries like Indonesia, Middle East, Russia are all net producers of oil. When oil prices fall, there is a shift in wealth from the oil producing nations to the oil consuming nations. The reverse works when the oil prices are moving up.
3. What does IC bullishness and bearishness indicate
Industrial commodities (IC) are a slightly different ball game. When it comes to industrial commodities, it is not just about sentiments but about hard core factory demand. Typically, the prices of industrial commodities like aluminium, copper zinc and nickel will see a rally when there is sharp rise in factory demand. Currently, China accounts for more than 50% of the global demand for most of these Industrial commodities. So any Chinese plans to reduce domestic output or reduce supply will be seen as negative for the price of ICs, since the prices of these commodities are largely demand and supply driven. Similarly, Chinese plans to invest in fresh capacities means greater demand and higher prices for these commodities. These can be used as a lead indicator for buying stocks. In the last couple of years, stocks like Tata Steel, Vedanta and Hindalco have seen a massive price appreciation in tandem with rising prices of these industrial commodities. The earlier you catch these trends and apply to your equity strategy, the better of you will be!