Commodity Technician—April 2009

In the first part of this article, we looked at the dollar, crude oil, gold, and many of the agricultural markets. Though the dollar index has rebounded a bit over the past two weeks, the intermediate-term analysis still favors a further decline. Here in part two, I will be analyzing a major commodity index, stock index futures, interest rates, and a few of the other commodity markets.

Figure 1

Reuters CRB Index

The Reuters CRB Index rose from a low of 182 in 2001 to the 800 level the week of July 31, 2008 before reversing to close the week lower. The ensuing decline broke the 61.8% retracement support at the end of 2008, but held the support from the 2003 highs at 322, line 1, and stayed well above the 78.6% support level at 275. The Index has been trying to edge higher in 2009 as the RSI3 has turned up from oversold levels, point 2. A weekly close above 390 should signal a rally back to the 38.2% resistance at 440, and possibly the 50% retracement resistance at 470. Given the technical damage in 2008, a further rally is likely to be followed by some backing and filling, and it will take some time before a weekly bottom formation is completed.

Figure 2

S&P 500

The rally from the March lows has caused many to ask the question "Is this just a bear market rally or more?" From a technical standpoint, much work needs to be done to suggest that the bear market is over, yet the weekly studies on the S&P futures do indicate that this rally has further to go over the next few months. The weekly chart shows that the RSI bottomed in October (point 1) and then formed higher lows in March (point 2). This bullish divergence, line d, is supported by the fact that the RSI also moved above its short-term downtrend, line c. The key level in the RSI is now the long-term downtrend that is drawn from the multiple bearish divergences formed leading into the October 2007 highs. The RSI has just reached this downtrend and a weekly close above it would suggest a sharper rally over the near term. However, it would not be unusual to see a one- to three-week pullback in the RSI and a test of the rising WMA before the downtrend is overcome. It would take a break below the RSI support at line d to indicate that the rebound from the March lows was over. The next resistance for the S&P is at 900 and then at 940-950 with the 38.2% fan line currently in the 980 area. The action over the next few weeks should clarify the situation.

Figure 3

Two-Year US T-Notes

Since early 2007, the best investments have been the US T-Note markets as all maturities have done extremely well. The technical methods I have discussed in past articles have worked quite well on these markets. Unfortunately, after the T-Bond futures market dried up, I failed to track the other Treasury futures and was therefore not able to help you identify the lows in 2006-2007. Since it is a textbook example of the RSI, it is still worth examining. The weekly RSI formed a series of negative divergences in 2002 and 2003, as indicated by line a, which became the key level to watch. The RSI formed an 18-month positive divergence in 2006, line b, which was confirmed at the end of July 2006 (point 1) as the downtrend in the RSI, line a, was overcome. For the next year, the T-Notes stayed in a trading range between resistance at 102.80 and support at 101.40. The test of the lows in June 2007, just as the first real estate funds were collapsing, coincided with the RSI testing its former downtrend, point 2. Nine weeks later, the T-Notes broke through resistance in the 102.80 area (line c) and the RSI moved above its previous peaks. The first leg up took the notes to a high of 107.85. The drop in the RSI below its WMA signaled a correction, but the lack of any divergences did not indicate a top had been completed. The decline into the June 2008 lows was a perfect 50% retracement of the previous rally as the T-Notes surged above 109 by late 2008. These new highs (point 5) were not confirmed by the RSI as it formed a negative divergence. The RSI is now clearly below its declining WMA. The key RSI level now is the positive divergence support at line b and a break below this level would confirm that a top was in place. Next chart support is in the 107.50-108 area with more important support at 106.30, which is the 38.2% support level.

MORE: Sugar, Coffee, and Cattle |pagebreak|

Figure 4

Sugar

It has been about three years since the sugar market got much attention since it did not rally as much as the other commodity markets in 2008. In early 2006, it reached the 20.00 level, but for the past 18 months, it has been locked in a trading range between 10.00 and 15.00. The long-term uptrend from the 2004 and 2007 lows, line b, is still intact, which is a positive sign, and it is currently at 10.50. Weekly chart resistance is in the 14.00 area, line a, and a strong move above this level would be very bullish. The OBV declined last week and is testing its WMA, but is still well above the long-term support at line d. The OBV was stronger than prices in 2008 as it moved back to the 2006 highs, line c, even though prices were lower. This is consistent with an eventual upside resolution. It would not be unusual to see an upside breakout in the OBV ahead of prices.

Figure 5

Coffee

Coffee has surged twice over the past five years. In 2005, it rallied from around 65.00 to the 140.00 area, and then in 2008, it ran from 118.00 to just over 170.00. The long-term uptrend, line b, was tested in late 2008 and again here in early 2009 as coffee once again is trying to turn higher. The support in the 100-105 area, therefore, now looks to be significant. Next strong resistance is in the 125.00 area, which corresponds to the former weekly uptrend, line c. Even though prices violated the support at line c, the OBV has so far held its corresponding support at line d. The OBV has moved back above its WMA (point 1). A breakout above the short-term weekly uptrend, line e, which is confirmed by a move in the OBV above its resistance (line f), should signal that a new uptrend is underway. The upside targets would be the upper parallel trading channel, line a, currently in the 175-180 area.

Figure 6

Live Cattle

The weekly chart of live cattle shows a well-defined trading channel, lines a and b, which goes back almost six years. The lower boundaries of the channel were tested on the week ending April 3, 2009, and cattle closed up on strong volume. This is an encouraging sign. The weekly chart shows strong resistance in the 88.50-90 area, line c, and a strong close above this level would be a clear indication that the weekly trend had turned positive. A weekly close below the 80 area, especially on high volume, would be quite negative.

In the daily chart section of MoneyShow.com, I will do my best to update you as to any significant changes that occur to any of the markets covered in this these articles. Please feel free to email me in the future at tomaspray@moneyshow.com to alert me of any developments that I have missed.  I hope to update my analysis of the commodity markets at least once a quarter as there are some early signs that these markets may again be significant this year.