Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Commodity Technician—March 2009
03/26/2009 12:01 am EST
Most of you are aware that the commodity markets had a roller coaster ride in 2008 as the high to low ranges were the widest most commodity traders had ever seen. For example, corn had a high of 796 in June with a low at the end of the year of 309. Though I covered many of these markets during the year, the coverage was not systematic enough in my opinion. Therefore, every few months, or at least once a quarter, I will review the key commodity markets, and decided for the review to use the title of a commodity publication that I wrote many years ago. Commodity traders watch the dollar very closely, and with the dollar index's close on Friday, March 13, 2009, the weekly chart suggested that an intermediate top had been formed. (Click here for chart) This was confirmed the following week as the dollar plunged against all of the major currencies. This action should have important implications for the key commodity markets, but first let's look at the dollar.
The continuous chart of the Dollar Index futures shows that it made a new closing high the week ending March 6, and the following week, the dollar closed lower, taking out the low of the prior week. The weekly RSI formed a significant negative divergence at point 2, and the break below RSI support (line c) confirmed a weekly top for the dollar. The daily technical studies turned negative on March 11, suggesting a decline to the 200-day MA at 81.40, and perhaps to the lower support in the 78-80 area. It will be important to see whether the weekly RSI can hold the positive divergence support (line d); if not, a drop to the 76 area cannot be ruled out. On a much longer-term basis, it appears that the dollar's lows in mid-2008 have long-term significance as the monthly downtrend in the RSI going back to the 2000 highs has been broken.
Now let's look at some of the individual markets.
Crude oil retested support in the $33 area five weeks ago and has since turned higher. This was an area of long-term support going back to 2001 and 2003. Over the past few weeks, the weekly technical studies have improved as the OBV has finally moved back above its WMA (point 2). It has been below its WMA since July 2007. The action on Wednesday, March 18 was particularly significant. Despite the higher-than-expected inventories, crude, after dropping over $2.00, reversed to close the day just down slightly. The weekly close above the chart and psychological resistance at $50 has definitely gotten the market's attention. Basis the June contract: The next resistance is at $60, with the 23.6% retracement resistance at $66 and the 38.2% resistance at $81. The 38.2% fan line on the weekly chart is being tested, and if overcome, would project higher prices. It is interesting to note that the 61.8% fan line and the 38.2% arc line (not shown) intersect during the first week of May. It would take a daily close, again, basis the June contract, below $45 to reverse the positive signals.
From the early July 2008 highs at 1665 (point 2), the beans dropped just below 800 in December 2008, which corresponded nicely with the 2005 highs. The weekly RSI did a good job of identifying last year's highs as it reached the 86 level in March (point 1) and then formed a lower high at 71.7 in July 2008 at point 3. The time between the RSI's peaks is significant, and such a divergence is commonly seen at significant turning points. The break of the RSI uptrend (line a) in mid-March made it very likely that a new high in price would not be confirmed by the RSI. After turning lower in July, the RSI again dropped below its WMA and stayed below it until October. The key RSI level to watch after the peak at point 3 was the downtrend in the RSI (line b). It was tested in early 2009 before the RSI again turned lower. This resistance was overcome with the close on March 20th. A move above the 1040 area (line c) should signal a move to the major 50% retracement resistance at 1107 if not the 61.8% resistance at 1212. Support for the July contract is at 840.
NEXT: Wheat, Gold, and More
The technical outlook for wheat is very similar to that of soybeans even though the 2007 lows at 470 were well above the longer-term support in the 450 area that goes back to 1997 and 2003. The weekly RSI on wheat peaked in September 2007 (point 1) when wheat reached the 960 area. After a six-week correction, wheat turned higher, eventually reaching a high of 1318 in March 2008 (point 2). On these new highs, the RSI was much lower, as it barely moved above the 70 level. This negative divergence allowed us to draw a downtrend in the RSI (line a), which was finally broken in late 2008. Wheat retested the support in the 500 area over the past two weeks, and closed at the highest level in the past five weeks. The RSI, after retesting its rising WMA, has again turned higher. A move above the 50 level (line c) will confirm that the lows are in place. The 23.6% retracement resistance is at 667 with the 50% resistance at 800. For the July contract, initial support is at 512 with further support at 498.
The technical picture is a bit less clear for corn, though the action still looks positive. The weekly technical studies are not yet giving strong bottoming signals. Corn reached long-term support in the 300 area in late 2008, but held well above these lows during the decline in early 2009. Corn has rallied for the past three weeks, forming a short-term uptrend (line c). Volume has increased over the past few weeks, which is also a positive sign. Volume played an important part during the explosive rally of 2008, as it was low for most of 2007 (line a) and then increased sharply in early 2008 (see arrow), confirming the price action. The first key resistance is at 428, basis the July contract, and a strong close above 448 should confirm that the lows are in place. A break of the recent lows at 354 (basis July) would indicate a drop back to 325-335 area.
The recent action in gold has been quite volatile as the April contract hit a low of $885 on Wednesday, but then surged in after-hours trading with the Fed announcement and reached the $940 area. Gold continued higher to close the week strong, indicating that the correction from the recent highs at $1000 was over. It is important to note that both the uptrend (line d) and the former downtrend were tested during the week. The OBV has continued to act stronger than prices as it broke its short-term downtrend (line b) during the week ending November 22 and made new highs in both January and February. The OBV has held above its rising WMA on the recent decline and has turned up once more. The weekly downtrend (line a) and the 61.8% resistance level were overcome in January. This suggested that the 2008 highs would be overcome. As I noted in my January article on Fibonacci projections (Click here for article), once the prior highs are overcome, the next upside target is at $1130, which represents the 127.2% projection from the 2008 high to the 2008 low. If that level is surpassed, the 161.8% projection is at $1252. First good support (basis the June contract) is at $928-940, with much more important support now at $885.
Though May copper has rallied about 40 cents from the February 20 lows, the weekly studies are still not that impressive. The RSI formed a long-term negative divergence at the early 2008 highs (line b). Even though the break of chart and RSI support (lines a and c) in August 2007 was quite negative, the 60% decline was certainly unexpected as the support at 240-250 was easily broken. The RSI has formed lower lows over the past two years (line d) and only formed a minor positive divergence at the late 2007 lows. The weekly RSI moved back above its WMA a couple of weeks after the lows and is still rising nicely. A break above the long-term downtrend would be positive. The first retracement resistance is at 200, with the 38.2% resistance at 240, which also corresponds to the long-term chart resistance. There is initial support for the May contract at 158 with more important support in the 140 area.
If you are not a commodities trader, one of the ways for stock traders to participate is the PowerShares DB Commodity Index Fund (DBA). The daily chart shows that DBA bottomed in the $18 area and completed its falling wedge formation (lines a and b) several days later (point 1). The breakout was confirmed the week of March 20, as DBA rallied further on heavy volume (point 2). The 23.6% retracement resistance is just below $25, with the 38.2% level at $29. Short-term support is now at $19.80-$20.00, with stronger support in the $18.50-$19.00 area. Stock traders might also look at some of the other commodity related companies.
In the next trading lesson on April 9, we will look at some of the other commodity markets as well as a long-term look at the commodity indices, as I feel that the action in these markets over the next four to eight weeks could set the tone for the rest of the year.
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