Commodity hedging: Trading cobalt using seasonal and technical analysis
How to use seasonal and technical analysis within your risk management tool kit
Besides looking at supply and demand, are there other ways to evaluate a market price?
The short answer is yes. There are several ways to assess the movements of a commodity price. While the fundamentals drive the price of a commodity over the long run, the sentiment of market participants will usually be a factor over the short term.
Different types of analysis that can assist in your view of cobalt prices are technical analysis and seasonal analysis.
The seasonality of a time series reflects regular and predictable patterns that recur every calendar year. Any change or movement that repeats over one year is seasonal. Seasonality is present in many commodities. For example, heating oil and natural gas prices seem to rally during the winter most years.
Cobalt prices have tumbled, dropping more than 39% since hitting a high in May. While this has been driven by fundamental factors, including Chinese Covid lockdowns and ongoing weakness in demand from consumer electronics and NCM battery makers, it is noteworthy that August and September have historically been seasonal low points for cobalt prices over the past decade.
You can see that there is some seasonal nature to cobalt prices. Prices appear to peak in March and then slide and bottom in September. During Q4, prices seem to rise and then rally in Q1, peaking in March.
Technical analysis is the study of past price movements. Some technicians believe that all the currently available information is incorporated into the price of a commodity. If this concept has truth, then past price movements may be able to describe the future activities of cobalt prices.
One of the most common ways to evaluate prices is to determine if they have moved too far too fast. A study that can help you determine if prices are stretched too far is the Relative Strength Index.
The purple line is the RSI, with the purple shaded band marking the threshold of overbought/oversold levels. The bottom part of the chart shows the MACD indicator; the blue line is the MACD line, the orange line is the signal line, and the red/green histogram shows the difference between the two.
J. Welles Wilder developed the relative strength index (RSI) in 1978. The RSI is a momentum indicator that monitors how quickly prices have moved over a specific period. Wilder’s default when testing the RSI is a 14-day/week/month. The index oscillates between zero and 100. According to Wilder, levels above 70 are considered overbought, while a reading below 30 is considered oversold.
The chart of Fastmarkets standard-grade cobalt metal prices – the settlement basis for cobalt futures – shows that the RSI has dropped to where weekly prices are oversold. The relative strength index (RSI) has a weekly reading of 24.33. This reading is below the oversold trigger level of 30 and could foreshadow a correction.
Another technical indicator we can use is the Moving Average Convergence Divergence (MACD). The MACD, invented by Gerald Appel in 1979, measures the relationship of exponential moving averages (EMA).
The defaults used to create the MACD are the 12-period moving average minus the 26-period moving average (The MACD line). These EMAs are compared to the 9-period moving average of the MACD, which is the signal line. The MACD displays a MACD line (blue), a signal line (orange), and a histogram (red/green) – showing the difference between the MACD line and the signal line.
The MACD histogram oscillates around the zero level, helping to signal uptrends (MACD line above zero) and downtrends (MACD line below zero). In addition, the MACD can indicate a buy or sell signal when the MACD line and signal line cross. When the MACD line crosses above the signal line, traders may use this as a buy indication. Conversely, traders view this as a sell indication when the MACD line crosses below the signal line.
As we can see, the crossing of MACD lines around May this year was a clear sell signal, with prices dropping sharply over subsequent weeks. The oscillation began to reverse in late August, and we see the two lines starting to converge.
Fastmarkets research cobalt forecast
The latest commentary from Fastmarkets Research’s weekly Battery Raw Materials Tracker states that: “Seaborne cobalt metal prices have fallen, reflecting the weakness in China, where prices have been trading at a significant discount for an extended period.”
One interesting issue with the RSI is that prices can remain oversold for a long time…
Fastmarkets analysts also note that: “Cobalt prices have shown signs of stabilizing in Q3 2022. With the lifting of the majority of lockdown restrictions in China boosting market sentiment and China’s State Reserves Bureau’s plans to stockpile around 2,500t of cobalt over the coming months, prices are not expected to fall further this quarter.”
Fastmarkets do, however, “see headwinds for the cobalt market later in the year and heading into 2023. The ongoing energy crisis and inflationary pressure continue to damage the global economic outlook.”
How to take advantage of seasonal and oversold conditions
While the market is in contango, with deferred prices above spot prices, there seems to be an opportunity if you believe there is a seasonal tendency to cobalt prices. Traders looking to hedge an oversold condition based on the relative strength index can purchase the Fastmarkets cobalt futures contract, looking for prices to rebound and rally to their seasonal norm.
The bottom line
The upshot is that there are several ways to analyze a commodity market. While fundamental analysis is the cornerstone, understanding seasonal and technical analysis can help determine the best time to hedge your commodity exposure. Two of the most useful technical analysis tools are the relative strength index and the MACD. These popular indicators allow you to determine if cobalt prices are overbought or oversold and whether they are in an uptrend or downtrend.
Technical analysis may help reinforce conviction and optimize timing if you have identified a fundamental trend you wish to trade.
If you would like help in determining if your business would benefit from commodity hedging, please reach out to our risk solutions team.