Q4 look ahead: will the commodity recovery continue?

As we move into Q4, it is worth taking a look at gold and crude, which have enjoyed a particularly notable 2016 to date. Will the recovery in these markets continue apace?

Joshua Mahony
Market Analyst, London

2016-10-03T16:41:37+0100

Source: Bloomberg

The first three quarters of 2016 have been all about recovery for the commodity markets, with the sharp sell-offs of 2015 largely being left behind for a more stabilised environment. The Chinese slowdown remains a concern, yet much of those fears have abated somewhat, with the decline in growth and demand largely behind us. Despite the expectation that a strong dollar means weak commodity prices, we have seen strength across both the greenback and commodity prices, highlighting the correlation can often be tenuous at best.

Looking ahead to Q4, we look likely to resume this recovery, with OPEC helping crude punch higher as gold continues to consolidate prior to the next big move.

Gold

Gold’s recovery has been miraculous, with a multi-year downtrend reversed since the bullish wedge breakout in Q1. Since then, we have seen a stepped approach, with two periods of consolidation. This current period takes the form of a descending triangle, which given the entry is bullish.

With price currently close to the $1300 mark that largely underpins this pattern, we are looking at a strong risk to reward for longs, given the expectation we will break higher from this pattern. That being said, it is worth noting the bearish breakdown in momentum, as highlighted on the stochastic oscillator.

With the stochastic breaking below trendline and soon horizontal support, this could provide us with a clue that we are about to break back below $1300 support. However, until that happens, there is a strong potential for a bullish break higher to end the year.

Gold price chart

Brent crude

Crude prices have suffered at the hands of an oversupply issue, with OPEC (Saudi Arabia at least) unwilling to restrict supply to raise oil prices. That stance has finally come to an end, with the recent agreement to cut output as it seeks to make the business of oil profitable once more.

Questions remain regarding whether members will follow through on their promises and we are yet to see what the Saudi stance is if US output rises and their market share shrinks. Nevertheless, we are seeing a continuation of the strength which has dominated 2016 so far, with price seeking to break higher from a symmetrical triangle formation.

The key here is the ability to break and close above $51.38, which would signal a completion and exit from the triangle pattern. Should that occur, further gains would be likely, with $53.00 and $54.30 the next interesting near-term resistance levels. This recent decision to restrict supply could provide us with another sharp rally, yet it is worthwhile noting that US production generally follows prices and any rally could prove to last just a few months as US production catches up with oil prices.

With a clear V-shaped recovery in place, we do look primed for another leg higher. However, the $51.38-$54.30 resistance zone is likely to provide an absolutely crucial zone of resistance.