Trend Following - Week in Review - November 15, 2024

Welcome to "This Week in Trend", where each week, we cover key movements and trends in the futures markets, offering insights on commodities and indices shaping the economy. From price surges to notable declines, we provide an overview of the factors driving these changes. Stay informed about the latest developments and navigate the market with confidence. Join us weekly to explore the dynamic world of futures trading and the trends that matter most.

"Momentum Builds: Trend Followers Ride Strong November Gains"

As of November 14, 2024, the SG Trend Index recorded a month-to-date (MTD) gain of 3.17%, bringing the year-to-date (YTD) performance to 1.05%. This marks a continuation of the positive momentum seen last week, with the MTD rising from 1.61% and the YTD shifting into positive territory from -0.48%.

The TTU Trend Barometer rose to 48%, up from last week's 39%, signalling a potential transition into a "good" trend environment. This improvement reflects strengthening trend dynamics across markets, further bolstering optimism for trend-following strategies as we move deeper into November.

The Top Traders Unplugged (TTU) Trend Barometer is a proprietary tool that measures the percentage of markets with medium to strong trends. Just as a thermometer reading of 0 degrees Celsius equates to freezing, when the TTU Trend Barometer reads a value that is less than 40%, market trendiness begins to get “colder” or weaken. Likewise, when the TTU Trend Barometer gets above 55%, the environment gets “hotter” (better).

Weekly Asset Class Snapshot

In the past week, various asset classes have experienced notable movements influenced by economic data releases and geopolitical developments:

• Volatility Index (VIX): The VIX rose by 5.18%, indicating increased market uncertainty. This uptick reflects investor caution amid recent economic indicators and geopolitical events.
• Soft Commodities: This sector led gains with a 5.68% increase, driven by significant price surges in cocoa and coffee. Supply concerns and robust demand have contributed to these movements.
• Metals: Metals declined by 4.37%, with gold and palladium experiencing sharp drops. A strengthening U.S. dollar and shifting investor sentiment have pressured prices in this sector.
• Grains: The grains sector fell by 2.42%, influenced by favourable harvest conditions in major producing regions, leading to increased supply and downward pressure on prices.
• Energy: Energy prices edged down by 1.18%, as crude oil markets faced headwinds from global supply dynamics and demand expectations. Concerns over a potential supply surplus and soft demand from China have impacted this sector.
• Currencies: Currencies posted a modest decline of 1.20%, reflecting cautious sentiment in forex markets. The U.S. dollar's strength has influenced currency movements, affecting emerging-market stocks and commodities.

These developments underscore the dynamic nature of global markets, highlighting the importance of monitoring economic indicators and geopolitical events to navigate the evolving financial landscape effectively.

Top 10 Bear and Bull Price Moves

Here's a detailed analysis of the key market movers for the week.

What’s Moving Up

• Cocoa: +22.26%

Cocoa futures have climbed to approximately $8,700 per tonne, nearing the recent high of $8,760 set on November 14th, as concerns over limited supplies persist. The price surge has been driven by challenging weather conditions in key West African cocoa-growing regions like Ghana and Nigeria. Unseasonably low rainfall and higher-than-average temperatures have created concerns about diminished yields, which have added upward pressure to the market.

The situation has been further complicated by recent regulatory changes in Europe. On November 14th, the European Parliament voted to delay and adjust parts of its "deforestation law," which enforces strict due diligence requirements on imports of specific raw materials, including cocoa. This legislation aims to ensure that products entering the European market are not linked to deforestation or forest degradation globally. The potential reduction of cocoa imports from countries like Ivory Coast and Ghana, where deforestation remains an issue, has amplified concerns about future supply availability, fuelling bullish sentiment in the market.

The weekly chart reflects a powerful resumption of the upward trend, with prices decisively breaking previous resistance levels and showing no significant signs of slowing down. Accompanied by rising volume, the rally indicates strong buying momentum. For medium to long-term trend followers, this sustained move has likely resulted in substantial profits. Traders employing systematic trend-following strategies would have benefited significantly from the persistent bullish trajectory, solidifying cocoa's position as a key market mover this week.

• Coffee: +12.80%

Coffee futures surged past $2.80 per pound, marking the highest levels seen since mid-2011, as concerns over supply conditions intensified. This bullish move has been highly favourable for trend followers who have been riding the sustained upward momentum in coffee prices. Market participants remain focused on the implications of the European Union's decision to delay its Deforestation Regulation by one year, a policy aimed at limiting imports of products linked to deforestation. This delay has added uncertainty to the supply chain, particularly for coffee sourced from Brazil and Indonesia, where deforestation remains a concern.

Meanwhile, attention is also fixed on the upcoming 2024 crop in Brazil, the world’s largest producer of Arabica coffee. Despite recent rainfall, soil moisture remains insufficient, leading to poor fruit development and excessive leaf growth, both of which have raised alarms about next year’s harvest. The weather forecast for Minas Gerais, Brazil’s primary Arabica coffee-producing region, continues to predict hot and dry conditions, further exacerbating supply worries and providing a firm underpinning for prices.

The weekly chart underscores the strength of the bullish trend, with prices breaking above key resistance levels and maintaining momentum throughout the week. For trend-following traders, this has likely been an exceptionally profitable position, as the market continues to move decisively higher with limited signs of reversal. The combination of supply-side constraints and regulatory uncertainty reinforces the narrative of sustained upward pressure on coffee prices, making it a standout performer in the commodity markets.

• Natural Gas: +6.29%

Natural gas futures rose by 6.29% this week, settling near $2.80/MMBtu. Despite the increase, the price action remains confined to a well-established congestion pattern, making it less appealing for trend followers, who typically look for sustained directional movements. This week's rally came as the U.S. Energy Information Administration (EIA) reported a storage build of 42 billion cubic feet (bcf), slightly below expectations of 43 bcf. However, gas inventories remain robust, sitting 6.1% above the seasonal average, marking the fourth consecutive week of above-average builds—a trend last observed in October 2022.

Forecasts indicate that while heating demand may increase as colder weather sets in later this month, warmer-than-usual temperatures are expected to persist until November 20, with average conditions likely afterward. This muted demand outlook has tempered some of the bullish momentum in the market. Meanwhile, production levels have declined slightly, with average output in the Lower 48 states dropping to 100.0 billion cubic feet per day (bcfd) in November, down from 101.3 bcfd in October. This drop included a nine-month low of 98.3 bcfd earlier this week, partially due to Hurricane Rafael’s disruptions in the Gulf of Mexico.

From a technical perspective, the weekly chart shows that prices remain range-bound, with no decisive breakout in sight. This lack of a clear trend means trend followers are likely sidelined, awaiting stronger directional signals before entering the market. The continued oscillation within the congestion zone reflects uncertainty and a lack of sustained momentum, underscoring why natural gas may not yet capture the interest of systematic traders relying on trend-following strategies.

• VIX Futures: +5.18%

The Volatility Futures, often referred to as the "Fear Index," experienced a 5.18% increase this week, reflecting heightened market uncertainty. While trend followers typically do not trade VIX futures directly, the VIX serves as a crucial barometer of investor sentiment, particularly in the U.S. equity markets. A rising VIX indicates growing fear among investors, often leading to increased volatility in stock prices. Conversely, a declining VIX suggests a more complacent market environment. This week's uptick in the VIX may signal potential caution for equity investors, as it often precedes market downturns.

Rough Rice: +4.49%

Rough rice futures climbed by 4.49% this week, marking a reversal that likely challenged trend followers. The commodity's price increase was primarily driven by concerns over potential supply disruptions caused by ongoing El Niño conditions, which are expected to impact major rice-producing regions in Asia. These weather-related challenges have heightened fears of reduced yields, adding bullish pressure to the market. Additionally, export restrictions by some countries aiming to protect domestic supplies have contributed to the upward momentum.

From a technical perspective, the weekly chart shows a sharp upward movement, disrupting the prevailing downtrend. For trend followers who were likely positioned short, this rally may have resulted in losses, as the price failed to maintain its bearish trajectory. The sudden reversal underscores the inherent volatility in agricultural commodities, where external factors such as weather and policy changes can significantly impact market dynamics. For systematic traders relying on trend-following models, this week served as a reminder of the importance of risk management in navigating unpredictable market conditions.

What’s Moving Down

• Soybean Oil: -6.79%

Soybean oil futures dropped by 6.79% this week, aligning with the medium-to-long-term bearish trend, which likely benefited trend followers positioned short. The decline was driven by a combination of increased production forecasts and weaker demand. Improved weather conditions in major soybean-producing regions, such as the United States and Brazil, have contributed to higher yield expectations, easing concerns about supply constraints.

Additionally, a softening in global demand for biodiesel, which utilizes soybean oil as a primary feedstock, has further pressured prices. The broader edible oil market has also seen declining prices, reflecting an easing of prior disruptions in global supply chains.

The weekly chart illustrates a continuation of the bearish trajectory, with the price breaking lower and resuming the downtrend. For trend followers, the persistence of this movement would have provided opportunities to extend or maintain short positions following the recent retracement. The strong alignment of fundamental and technical factors underscores soybean oil’s role as a consistent performer for systematic trend-following strategies this week.

• Cotton: -6.20%

Cotton futures fell by 6.20% this week, continuing a well-established bearish trend that has likely benefited trend followers holding short positions. The drop in prices reflects several fundamental factors. Favourable weather conditions in major producing regions, including the United States and India, have improved harvest expectations, alleviating supply concerns. Additionally, global demand for cotton has softened amid an economic slowdown, with reduced activity in the textile manufacturing sector.

The strengthening of the U.S. dollar has further weighed on cotton prices, making U.S. exports less competitive on the global market. This dynamic has contributed to a persistent downward trajectory in the commodity, reinforcing bearish sentiment.

The weekly chart shows a clear continuation of the downward trend, with prices breaking lower and confirming the bearish momentum. For medium- to long-term trend followers, this price action aligns well with systematic strategies targeting sustained declines. The consistency of the move provides confidence for maintaining or extending short positions, with cotton remaining a favourable market for trend-following strategies this week.

• Wheat: -6.20%

Wheat futures dropped by 6.20% this week, aligning with the broader bearish trend that has likely been rewarding for trend followers holding short positions. The decline is primarily attributed to strong harvests in major producing countries like Russia and Canada, which have bolstered global supply. This surplus has weighed heavily on prices, particularly as export competition has intensified, with cheaper suppliers dominating the market.

Global demand for wheat has remained subdued, partly due to declining global food prices, as reflected in the FAO Food Price Index. Furthermore, the stronger U.S. dollar has added downward pressure on wheat exports, making them less competitive in the international markets.

The weekly chart supports this narrative, showing a consistent downward trajectory with prices breaking lower and reinforcing the bearish momentum. For medium- to long-term trend followers, the move has provided a continuation of favourable conditions for systematic short strategies. Wheat remains a reliable performer in aligning with bearish trends, offering profitable opportunities for traders in this environment.

• Copper: -5.63%

Copper futures stabilized near $4.08 per pound by the end of the week but remained on course for their steepest weekly decline in four months, dropping 5.63%. The sell-off was driven by persistent concerns about weak demand, particularly in China, and a strengthening U.S. dollar. Market participants expressed disappointment with Beijing’s latest measures to support the economy, which included tax incentives for home and land transactions announced on Wednesday. However, these initiatives were seen as insufficient to meaningfully boost copper demand, with Eagle Metal International, a key copper importer in China, emphasizing the need for more robust economic stimulus.

Chinese economic data for October further weighed on sentiment, with mixed results reinforcing uncertainty about the demand outlook in the world’s largest metals consumer. Adding to the bearish tone, the U.S. dollar continued its rally following comments from Federal Reserve Chair Jerome Powell, who indicated that the central bank is unlikely to cut interest rates anytime soon due to the ongoing strength of the U.S. economy. A stronger dollar typically puts downward pressure on dollar-priced commodities like copper, making them more expensive for holders of other currencies.

The weekly chart shows signs of mounting bearish momentum, with prices breaking lower from recent levels and testing key support areas. While the longer-term trend remains unclear, this week’s movement may signal the early development of a more pronounced bearish trend. For trend followers, this could be an opportunity to position for potential further declines, but caution remains warranted until the trend solidifies. The interplay of macroeconomic forces, including Chinese demand and U.S. monetary policy, will likely remain key drivers in the weeks ahead.

• Crude Oil WTI: -3.84%

WTI crude oil futures dropped 3.84% this week, continuing a mild bearish trend as concerns over waning global demand and a stronger U.S. dollar weighed on prices. Futures settled at $67 per barrel, marking a weekly decline of approximately 5%. China's crude oil processing fell by 4.6% in October, a reflection of slower industrial activity and ongoing demand challenges in the world’s second-largest economy. The situation was compounded by the International Energy Agency (IEA) and OPEC both revising down their global demand growth forecasts. The IEA projected a 1 million barrel per day supply surplus in 2025, while OPEC lowered its 2023 and 2025 demand outlooks, citing persistent weakness in key markets such as China and India.

Adding to the bearish pressure was the continued rally in the U.S. dollar, which surged to a two-year high. The stronger dollar has made dollar-priced commodities like crude oil more expensive for buyers using other currencies, further dampening demand. U.S. crude inventories also rose by 2.1 million barrels last week, surpassing expectations of a 1.9-million-barrel increase, according to data from the U.S. Energy Information Administration.

The weekly chart reflects a continuation of a mild bearish trend, with prices drifting lower and testing key support levels. For trend followers, this gradual decline may align with short positions already in place, though the lack of strong momentum might limit opportunities for new entries. As the market grapples with a combination of oversupply concerns and sluggish demand, crude oil is likely to remain under pressure, providing a challenging environment for directional traders.

Conclusion

This week’s trends have showcased the resilience and adaptability of trend-following strategies in the face of volatile and evolving market conditions. The SG Trend Index, with its impressive month-to-date gain of 3.17% and a year-to-date performance returning to positive territory at 1.05%, reflects the strength of systematic approaches in capturing sustained momentum. Meanwhile, the TTU Trend Barometer's rise to 48% underscores the improving trend environment, providing fertile ground for disciplined traders to capitalize on emerging opportunities.

From cocoa and coffee’s remarkable rallies fuelled by supply disruptions and regulatory developments to bearish moves in soybean oil, cotton, and wheat driven by favourable production and weaker demand, this week underscored the diverse forces shaping global markets. While the energy and metals sectors grappled with headwinds such as oversupply, waning demand, and a stronger U.S. dollar, soft commodities continued to lead the charge, delivering standout performances for traders positioned to capture these moves.

However, not all markets provided clear opportunities for trend followers. Natural gas remained range-bound, offering little directional clarity, while the Volatility Index served as a key sentiment indicator rather than a tradable trend. These instances remind us of the importance of selectivity and risk management in navigating the complexities of financial markets.

As we move deeper into November, the interplay of macroeconomic factors, geopolitical developments, and shifting weather patterns will remain central to market movements. For trend followers, this week reinforces the importance of maintaining a systematic and adaptive approach, ready to seize opportunities where trends emerge while mitigating risks in less favourable environments. The dynamic world of futures trading continues to reward those who stay disciplined, vigilant, and focused on the long-term power of trend following.

List of Resources used in the Week in Review

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