Commodity Insight: The shape of things to come

Virtually all markets collapsed in March. There was serious weakness in January and February, but March was far worse.

Stocks as measured by the Dow Jones dropped to levels not seen since the fall of 2016, three years ago. The CRB index that is to commodities as the Dow is to stocks fell to a 21-year low.

The Goldman Sachs index weighted towards crude oil hit a 19-year low. Crude prices fell to levels not seen in 20 years.

Cattle prices experienced one of the most dramatic declines in history. Cotton prices fell a 10-year low.

It has been a market environment that Bloomberg News described as “sell everything.”

With major tops having been carved out with stocks and commodities, the race is now on to pick how low the markets will decline before recovering — assuming they do.

But, first, let me say trying to catch a collapsing market is akin to catching a falling knife and not getting cut. It can be done, but more often than not, there is pain.

Historically, market lows are generally formed once certain chart patterns are seen. The three most important pattern shapes are what economists tend to refer to as L-shaped, U-shaped and V-shaped.

Understandingmarkets.com has this to say: The two most important questions you will hear during any recession, or market collapse, are “When will it end?” and “How quickly will we recover?” The answers to both of these questions can be found by analyzing the chart shape of the recession.

Also from understandingmarkets.com: L-shaped recessions are recessions that fall quickly and fail to recover. An L-shaped recession is a worst-case scenario because they offer no hope of recovery. The Japanese recession that began in the early 1990s is considered an L-shaped recession.

The Japanese stock market peaked in late 1989 at nearly 39,000 and today is trading around 19,000. The Japanese market topped out 30 years ago and remains depressed, to the chagrin of long-term investors.

U-shaped recessions are recessions that begin with a slightly slower decline, but then remain at the bottom for an extended period of time before turning around and moving higher again. The recession from 1971 through 1978, when both unemployment and inflation were high for years, is considered a U-shaped recession.

V-shaped recessions are recessions that begin with a steep fall, but then quickly find a bottom, turn back around and move immediately higher. A V-shaped recession is a best-case scenario.

The recession of 1990 to 1991 and the recession of 2001, both of which only lasted eight months, are V-shaped recessions.

When trying to pick a bottom for any market, I watch carefully for one of those three chart patterns to surface. There is no easy answer to picking a bottom or a top to a market.

It is a science and an art. And only with the benefit of hindsight can you know for sure that a bottom or top is in place.

Though virtually every market on the globe has collapsed, my work suggests a new and dynamic movement in the U.S. ag markets is in the process of unfolding and quickly.

The one market that appears to be headed higher is now showing V formation; the other, a U formation. One market should be probed only from the long side of the ledger; the other from the short side.

Moving forward, I am searching for signs about L.U.V. You should, as well — especially regarding that new and dynamic scenario rapidly unfolding in agriculture where one market can be bought and another sold short.

Please feel free to drop me a line at commodityinsite1@gmail.com if you wish to learn more about the new and dynamic scenario unfolding in the U.S ag markets.

And please check out my Facebook page — facebook.com/jerryfwelch — and give it a "like." I need a "like" while looking for some L.U.V.