Commodity Technician—June 2009

06/18/2009 12:30 pm EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

In the latter part of March and early April, I focused on the commodity markets since it was my view that the dollar had completed a top on March 13 and many of the commodities appeared to be bottoming. The commodities have had a nice run the past few months, though there were signs of profit taking during the week ending June12, 2009, so an update seems appropriate. Let's once again start with the dollar.

Dollar Index

Figure 1 - Click to Enlarge

The bearish candle formation the week ending March 13 was consistent with the negative divergence in the RSI (line b) indicating a weekly top was in place. After a quick drop to the 83 area, the dollar index tried to edge higher for the next five weeks. The violation of the RSI's short-term uptrend (line c) at point 1 was a reason to sell on the rally. The dollar index came very close to the 61.8% support level two weeks ago (point 2) before attempting to turn higher. The decline in the dollar was strong enough to break the bullish divergence support, line d,  in the RSI (point 3). This is consistent with a resumption of the dollar decline after a bounce and a break below the recent lows. The 38% retracement resistance is at 82.80, with the 50% at 84.10, which should be the maximum upside for a dollar rebound.

Crude Oil

Figure 2 - Click to Enlarge

In March, we noted that the OBV had moved above its WMA (point 1) during the same week the dollar topped out, which was a positive sign for crude. As crude prices consolidated over the next few weeks (circle 2), the market started reacting positively to normally negative news. This was a sign of a sold out market. This period of backing and filling set the stage for the recent sharp rally. Basis the weekly continuous data, the 38.2% resistance is at $78, which corresponds to $82.50 basis the August crude oil. The positive weekly signals suggest a deeper correction will be a buying opportunity. Initial support for August is now at $65-67 with stronger support in the $59-$62.50 area.
 

Gold

Figure 3 - Click to Enlarge

For the past few months, gold has gotten quite a bit of press and investor interest. The weekly and monthly analysis was positive in March, even though gold was correcting as it tested the strong chart and Fibonacci support in the $880 area. This pullback set the stage for the rally back towards the $1,000 level. The technical picture is still split, as the weekly chart shows building resistance in the $1,000 area (line a). Clearly, there are some heavy sellers in this area and the high bullish sentiment does not help. The monthly and weekly indicators, including the OBV, are positive and continue to suggest an eventual breakout to the upside. For example, the weekly OBV shows a pattern of higher highs (line b), and has pulled back to its rising WMA. It would take a break below weekly OBV support (line c) and require its WMA to turn lower before the weekly trend would reverse to negative. The daily chart of the August gold shows that the selling picked up in the past week as the 50-day MA is being tested. The 50- and 200-day MAs are positive, with more important support now at $865-$880. A close back above $965 would reassert the uptrend.
 

Copper

Figure 4 - Click to Enlarge

In our last comments on copper, we noted that while the momentum seemed positive, we did not see the clear bottoming signals that were evident in some of the other commodities. By this I mean there were no confirmed weekly positive divergence, but the RSI and OBV had both moved above their WMAs. The positive momentum pushed the OBV above the downtrend that went back to the 2008 highs (line b) in the first week of April, and subsequently, the OBV turned sharply higher. The stronger resistance (line a) was surpassed a few weeks ago as the major 38% retracement resistance has now been overcome. The strength in copper is an encouraging sign for the economy, with the 50% retracement resistance at 278. The weekly trend continues to look positive with first support for the September contract in the 220-224 area.
 

NEXT: What's Ahead for Agricultural Commodities? |pagebreak|

Soybeans

Figure 5 - Click to Enlarge

When I last reviewed the soybean market, the August contract was trading around 900, but then surged to the upside and two weeks later, was trading above 1000. Recently, soybeans have moved above the 1200 level. This rally was consistent with the weekly analysis as the year-long downtrend in the RSI (line c) was overcome in March (point 2). Another positive was that the RSI had held well above the positive divergence support formed at the December 2008 lows, line d, and the move above the prior peak confirmed a bottom. The weekly analysis is still positive, so a correction should be a buying opportunity. The daily chart of the August beans shows that the rally has almost reached the 50% retracement resistance at 1225 with the 61.8% resistance at 1330. The daily RSI shows a minor negative divergence and the uptrend (line d) is likely to be broken. This suggests we could see a correction down to the 1050-1070 area (line e).

Wheat

Figure 6 - Click to Enlarge

The wheat market also appeared to be bottoming in March, and while it has also moved higher, the weekly analysis at this point is much less positive than that of soybeans. From the latter part of February through early May, wheat traded in a narrow range before breaking out with a significant increase in volume. On the weekly chart, we can see that the rally reached the 23.6% resistance level before reversing. Though the weekly RSI is still above its rising WMA and its uptrend (line 1), a full test of the lows is still a possibility. The daily chart of the September Wheat shows a broad trading range with resistance just above 700 (line d) and support in the 550 area (line e). The 50- and 200-day MAs are negative, and the 50-day MA is now being tested.

Sugar

Figure 7 - Click to Enlarge

In April (point 1), sugar was still in its broad wedge formation and the OBV had pulled back to test its rising WMA. The OBV moved above its WMA in early 2009, which was a positive sign, and then in mid-April, it broke through resistance (line d), leading the price breakout by one week. The rally appears to have stalled in the 16.00 area, with longer-term resistance at 18.00. The weekly OBV continues to act stronger than prices, so a pullback should be well-supported. There is first good support basis the October contract in the 14.90-15.20 area, with stronger support in the 14.30 area
 

Commodity Index Fund (DBC)

Figure 8 - Click to Enlarge

In March, we also mentioned the PowerShares DB Commodity Index Fund (DBC), which has just completed a bottom formation on the daily charts (lines a and b). Though DBC is up over 20% since then, the action has been somewhat disappointing as the 23.6% resistance has not yet been overcome. Support now lies in the $22-$22.50 area and a break below $19 would be negative.

Typically, a correction in the commodities could last three to five weeks, but I will watch the action closely and hopefully release an update at the appropriate time. In the next issue, we will look at the FX markets, which have been quite active lately as well.

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