Dear Traders,

Last December I started to talk to you about the Economic Super Cycle, This is because I saw signals of the change we were about to experience as the bond market hit its top. We are now past the point of no return on that cycle which is a scary thought.

For those of you that don’t know what I’m talking about, the market moves – as a whole – in specific and calculated ways. In the case of the Super Cycle it happens in three phases.

Phase one, the bonds. Bond Traders are assumedly the smartest traders in the room. This is due to the size of the market and the number of small nuances they deal with on a day to day basis.

Phase two, the equities. This group, put simply, gets its signals from the bond traders. When the bond market goes down equities follow, when they go up it is also mirrored by the equities.

Lastly, the Commodity market… this is much more economically driven

This is where we are at bonds have fallen next came the equities for the past several months they have continued the free fall. Now with inflation still being and issue and the Fed dropping bombs regularly to combat this, commodities are in a precarious situation.

Once they start to move they are going to lead us to a scary situation that can only be reconciled with time, and a belief in the economic systems we have in place.

Let’s dig into how to prepare for your next two months of trading as the Cycle leads us down a dark path with Commodities ready to tip over the edge of the cliff just like the rest of the market.

How to fly by Instrument

For those of you who don’t know, back in the day I actually took flight lessons. It’s actually a lot of fun but when you first start they give you a ton of material to read over they don’t just toss you in the plane and let you go for it.

At first I was not sure why but after my first flight I realized when you are in the air you cant see anything. It’s nothing but fog, rain, and any other condition you happen to be flying through.

So without being able to see anything how can you avoid hitting other planes or a mountain, or any other obstruction that happens to be 10,000 feet in the air? You learn to fly by the instruments on the dashboard. It’s the data that matters most in that situation.

This is a lot like the market. You can kind of see what going on but you cannot be 100% certain unless you are looking at the data. The data will give you the full picture of what it going on around you. This will give a special ability to navigate and traverse the market safely.

Now let’s look at the gauges on the dashboard…

  • SPX 3,900:
    • Double bottom from 9/6
    • 61.8% retracement
  • QQQ $290
    • Same Double
    • Approaching the $280 “bear market zone”
  • VIX 28
    • Lower low on the SPX yet the VIX didn’t make that higher high from the week. This is always one of the sentiment things that makes you nervous

Along with these we need to know where the destination is and of course I have a tool that has a pretty clear general direction for us…. The heat map chart!

Now the beauty of this chart is its right where you want to be. The headline risk goes down and helps you peel some of the noise away from the market.

You can also parlay them into an additional alpha for your portfolio by trading a company within one of these ETF such as U.S steel that is going to be weaker than the parent sector.

This is something that we have been following with my Night Trader for some time as we already had some exposure to U.S Steel in the way of a put.

Actually we are going to be getting more into the commodity trade as the Super Cycle start to heat up.

Whats hot in the commodity market.

Right now there are as few sectors that I am watching via their ETF, here they are-

  • USO

You find the trend in the USO has been weak. IF you break down below the $70 it’s going to start giving you more of a trade in the energy sector.

The trade here is going to be found in XOP, XLE, and XES you can even expect to see some companies like OXY, HAL and similar ones in the group to hit your radar.

  • XLB

This ETF is giving us some real signals that can be traded with the 20-day crossing back below the 50-day and all trend lines are following a bearish pattern. Sometimes all you have to do is look and there will be opportunity to get a trade going.

Of course, it is nice to know where to look for a trade but there is one other thing that you should be aware of… Where to avoid trading at all cost.

This is where your walk down Main Street comes into play.

Stay away from the ones that make sense, you’re not going to stop buying food youre hearing about food being grown, and the winter planting season is coming up.

There are materials that are needed for those processes that might not be as available just keep that in mind.

We will continue the commodity talk in the coming weeks because we are in a global climate that puts commodities on the chopping block and there is a lot of money to be made given your instrument cluster is preforming properly.

I’ll see you guys next week.

Talk soon,

Chris Johnson
Quantitative Specialist, Penny Hawk


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