With commodities being down this year and the equity market soaring ahead, it's interesting to take a look at the relative strength between individual issues. For instance, the relative strength between the Corn Continuous Futures Contract (@C) and the E-mini S&P 500 Continuous Futures Contract (@ES) has been in a free fall all year. But is the outperformance of the ES going to continue?
The chart shows that the underperformance of corn versus the ES has been quite consistent since the last year and a half (see downward sloping channel in the point and figure chart below). Notice however that the number of sharp down moves within the channel has declined, especially since last summer. Also, the relative strength ratio is currently in the middle of the channel. The period since the last retest will likely turn out to be the longest period the relationship has gone without testing the lower boundary of the channel. These developments may indicate that the relative strength is starting to level out. The chart is not providing a trend reversal signal yet, but it may be providing an early warning that the relationship has matured. This chart may warrant attention going forward. Lastly, keep in mind that underperformance does not necessary imply that Corn is declining in price but rather that Corn is underperforming versus the performance of the S&P E-mini.
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Written by Frederic Palmliden, CMT, Senior Quantitative Analyst, TradeStation.