Commodity-based investments
have historically displayed definitive cycles that experience dramatic peaks
and valleys. Technical,
chart-based analytical tools that anticipate price movements can give
a heads up in advance of a sector’s move. Indicators that confirm
price direction are worth paying attention to when one weighs the evidence
that a trend will continue. One
such important indicator is a holding’s trend line.
In my May 13th article,
“Commodity Stocks – Trouble or Opportunity,”
I highlighted the coal and steel producers’ stock indices. The timing of the article roughly
coincided with the acceleration of the dollar’s strength as cited by my
colleague, Chip Hanlon. The deep
pullback in these stocks discounted the dollar’s renewed movement and,
together with anecdotal evidence that demand for many basic materials was
waning in the Far East, many of these securities returned to their the
Bullish Support Lines, a crucial guide in Point and Figure technical
analysis. When the steel producers’
index subsequently breached its support line, for example, it told me to be
cautious on this group in my managed portfolios. While some of these stocks may be due
for a bounce, many must now see a 25% rise to take out overhead resistance
and thus change the trend back to positive. Steel stocks tend to move quickly, but
are you willing to wait for that sort of change? Coal producers were well above their
support line and had a significant spread triple top breakout to solidify
their up-trends. These are the
types of signals that I use in the management of the portfolios I run at
Delta. So, how do some other
commodities-related charts look now?
Commodity Indices
First, investors need to realize
that all commodities indices are not created equal; each uses a different
balance of raw materials that emphasizes one commodity component over
others. While the performance of
each will vary depending on these weightings, unmistakable signs of trouble
have emerged in many of the individual commodities and a yellow cautionary
light is flashing with respect to those indices. At the very least, one should review
current basic material exposure in his accounts.
Index investors, for
example need to know that while The Rogers International Commodity Index currently has a 35% weighting in
crude oil, (Jim Rogers came up with this weighting as he rode his Harley on 5
continents, not us… we’re just jealous!), the CRB Index Spot
is an unweighted geometric average of commodity price levels, The Dow
Jones AIG Index has a 25% exposure to crude and natural gas and The
Goldman Sachs Commodity Index has two to three times the weighting in
Crude as the CRB or Dow Jones AIG.
One caveat: the following
remarks are technical comments only.
While I make recommendations primarily based on technical criteria
such as those that follow in this report, investors must be aware of
fundamental data for the stocks they buy as well as important data regarding
delivery, market-moving government releases and other factors that may
influence commodity pricing.
CRB
Spot Index (CR/Y) – 300.83:
The CRB broke out of a big
base late last year and lay in wait until February’s triple top break
at 290. This accelerated the
upside move, taking just 1 month to reach 322. Since then, however, two lower tops
and two broken bottoms have moved this index ever so close to the support
line that has been intact since June of 2002. Cheerleaders for the CRB would be
heartened by an upside break at $312, while realists must face the
possibility of a trend line breach and a resulting 278–284 downside
target.
Dow
Jones AIG Commodity Index (DJAIG) – 150.73:
This chart is a bit slower
moving and thus shows a longer history.
It’s up-trend started in June of 2002, same as the CRB. It spent most of 2003 and all of 2004
comfortably above the bullish line. The late 2004 sell off and subsequent
consolidation led to a spike to 166 in March and then a downside reversal to
lay right on top of support at 144. Implications of a break here could have
risks to 132.
Commodity Components
There are decidedly mixed
signals in some of the Industrial components of the indices mentioned
above. Some remain above and some
recently broke below trend lines.
This is very much a time when discipline and vigilance will make the
difference for investors.
Crude
Oil (CRUDE) – 51.98:
Crude bounces off its
support level as it has done twice recently. Amid calls that oil will top $100, its
chart is telling a different story.
The first sign of a resumption of the upward price movement would be a
break out above $52.50. Long-term, however, the trend has stayed intact thus
far.
Aluminum (AL/) – 81.50:
Aluminum sold
off along with other metals in the April-May period. It headed south on route 95 and kept
going ‘til it reached Florida,
or 81 on this chart, below the Mason Dixon line at 83. A dead cat bounce occurred, only to
lead to another sell signal taking AL/
down to the lows of last fall.
Lumber (LB/) – 369.50:
Lumber’s
trend just turned positive after undergoing a speedy round trip— it
turned negative early in May and re-emerged positive later the same
month. The recent triple top break
at 354 was a key sign something positive was developing. The bullish price objective now is 402.
With the recent rally in
the U.S. Dollar now becoming extended in the short-term, investors can look
for a bounce in non-Dollar holdings such as commodities. How such holdings perform will likely
tell us more not only about the commodities themselves, but perhaps whether
this Dollar rally is for real or merely a powerful counter-trend rally in an
ongoing, multi-year bear market for our currency.
Bruce Zaro
Chief
Technical Strategist
Delta Global Advisors, Inc
877-746-4228
bzaro@deltaga.com.
Over his 20-year investment career, Mr. Zaro has become a
highly-regarded technical analyst who runs private client portfolios at Delta
Global. For the last year, he
served as Managing Director of Granite Wealth Management outside of Boston and spent nearly
15 years prior as a Vice President at Gage Wiley & Co. His current firm is full-service, but
specializes in providing international market access as well as alternative
investment strategies
19051 Goldenwest, #106-116 Huntington Beach, CA
92648 Phone:
800-485-1220
Fax: 800-485-1225 www.deltaga.com
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