Commodity Technician—October 2009

10/08/2009 11:20 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

Our last review of the commodity markets was in June, using the data from the close on June 12 (click here to review). Quite a bit has changed since then for many of the markets, but there have been some constants as our negative technical view of the dollar index has persisted.


Figure 1 - Click to Enlarge

In June, we noted that the uptrend in the weekly RSI on the dollar index, line d, had been broken, which favored a further decline after a technical rebound. The bounce took the dollar index from 78.37 to 81.79 and failed to even reach the 38.2% resistance level at 82.80. The dollar has since drifted lower and despite the high degree of bearish sentiment, the weekly studies show no signs yet of bottoming. The RSI is still well below its declining WMA and has not yet formed any positive divergences. This suggests that the band of next support at 71-74.50 will be tested. The first sign of a bottom would require an impulsive two- to three-week rally that would take the RSI back above its WMA, and then it would take more time for the WMA to flatten out and turn higher. For now, rallies are likely to fail at resistance in the 78-79 area.


Figure 2 - Click to Enlarge

By looking at the price performance of gold and crude oil, one would expect the chart of the CRB Index to look much different that it does. Despite some weak bottoming signals at the late-2007 lows, the rally has not been that impressive. The weekly chart shows that the 38.2% resistance at 433 has not been convincingly overcome with the 50% level at 470. The weekly RSI gave strong signals of a top in the summer of 2008 as it formed a significant negative divergence at the July 2007 highs, point 2. The downtrend in the RSI, line a, was overcome in March (line 3), which confirmed the slight positive divergence in the RSI, line b. So far, the RSI is holding above its WMA and a break of the uptrend would weaken the intermediate-term uptrend.


Figure 3 - Click to Enlarge

Sugar has been of the strongest commodity markets as it has risen from the April lows of 12.13 to a high of 25.37. The weekly triangle formation, lines b and c, was completed in April and the OBV confirmed the breakout as it moved above major resistance at line 3. In June, we noted that rally appeared to have stalled in the 16 area, but expected a pullback to be well supported. As is often the case, the OBV just briefly dropped below its rising WMA during this period of consolidation. After moving sideways for four weeks, sugar once again accelerated to the upside. The OBV continues to lead prices higher and is well above its uptrend, line 4. Using the rally from a to b and projecting up from the low at point c, the 261.8% target is now at 27.50. The all-time high from 1980 is at 43.

NEXT: Current Technical Picture for Soybeans, Wheat, Coffee, and More

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Figure 4 - Click to Enlarge

The grain markets have been especially weak over the past few months. The rally into mid-June took soybeans near the 61.8% resistance level even though the positive RSI divergence at the December 2008 lows was not that impressive. The move in the RSI through bearish divergence resistance, line a, in March (point 1) gave a weekly buy signal.  In June, soybeans were still positive basis the weekly analysis, while the daily studies were just turning negative. The decline was quite sharp and by early July, the weekly studies had also turned negative as the RSI dropped back below its WMA. In August (point 2), the bullish divergence support in the RSI, line b, was broken, which was consistent with a further decline. Though some of the daily studies are currently trying to stabilize, the weekly analysis is still negative, which allows for a test of the major support in the 800 area.


Figure 5 - Click to Enlarge

Though the weekly studies on wheat turned positive in March, there were no strong signs of a significant low. The rally in wheat was very anemic as it just reached the major 23.6% retracement resistance before turning lower. The OBV was stronger than prices in April, but then quickly reversed in June and has made further new lows over the past two months. This makes a further decline quite likely as it would take some time—and a strong rally—for the weekly studies to bottom out.


Figure 6 - Click to Enlarge

In March, we noted that for corn "The weekly technical studies are not yet giving strong bottoming signals" and also noted the potential continuation pattern (dashed lines) that had us concerned. This pattern was completed in June as corn dropped down to test the long-term support in the 300 area. Over the past several weeks, the technical picture has improved as prices stabilized in the 305-310 area and then rallied more sharply. The December contract has reached the resistance in the 360-370 area. The weekly RSI shows a strong long-term bullish divergence, line d, and has moved back above its WMA. The RSI's short-term downtrend, line c, could be broken this week, which would support the bottoming formation. The RSI is still well below longer-term resistance at line b.


Figure 7 - Click to Enlarge

Coffee is a market that is starting to look quite interesting as the long-term uptrend, line b, going back to 2002 has held on several tests. In April, the OBV moved above its WMA as coffee rallied quickly to the resistance in the 140 area. The OBV has stayed in a narrow range recently and is now testing its 18-month downtrend, line d. The insert shows that the daily downtrend on the December contract is currently at 137.50. On the weekly chart, this resistance is shown by line e. A convincing move through this resistance, confirmed by the technical studies, should signal a move to the 155 area and more likely the upper boundaries of the weekly trading channel in the 175-180 area.

In summary, the weekly analysis of the CRB is not giving any strong buy signals for the commodity markets in general, though corn and coffee do look interesting. Sugar still looks very strong and any decent setback should be a buying opportunity. For current views on gold and crude oil, please check the daily Technical View chart studies on MoneyShow.com.

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