With the gut-wrenching
volatility we've seen in commodities markets lately, it seemed an appropriate
time to take a look at some key components in this group.
CRB Index
The CRB has, of course, been
volatile lately, but recent action smashed all hope of the trend line staying
intact. An un-weighted geometric average of commodity price levels, this
index covers a very broad mix of materials, including all the usual metals, textiles
and fibers, livestock and foodstuffs and other raw materials like cotton and
rubber. Thus, a picture of the CRB is worth a thousand words for the trend in
materials:
Source: www.stockcharts.com
Currently, most commodities
are very oversold and due for a bounce. The CRB itself is probably is no
exception as it has already fully realized a bearish price objective in the
low $300's and its momentum has been negative for 7 weeks (the average time a
chart displays negative momentum is 8 weeks). Aggressive bottom-fishers can
look to nibble right now, but the negatives far outweigh the positives here
from a long-term technical standpoint, including the recent violation of the
bullish trend line and relative strength, a reliable long-term indicator,
which is weakening and close to a sell signal.
Copper
Copper recently broke down and
violated its trend line that saw its price move from $.64 to over $4.00, a
bullish trend which had been in place since October of 2001. After copper
reached its $4.04 peak in May, it sold off 25% in June to the $3.00 range.
The subsequent bounce up to the $3.40 - $3.60 range was never able to regain
the momentum it had earlier in the spring:
Source: www.stockcharts.com
With such moves, consolidation
around the mid point of a trading range is typical action but if we don't see
a meaningful push from here, preferably to new highs, then any bounce from
here is likely to fail. Technically, copper does not look as unhealthy as
many other commodities (which also puts a question mark over recent recession
fears), so it can be given a little more rope. This theory, however, would be
enhanced if it does manage an upside break at $3.72. Barring such a
performance, we would use a weak rally that fails below that level to lighten
up on copper exposure.
Gold
Gold peak in May at $724, in
the heart of the commodity boom pricing that saw no shortage of predictions
for $1000/ounce by year's end. Commodities have a long history of moving up
and down dramatically, something investors were reminded of this summer.
Certainly, a slowing economy and thus reduced inflation expectations have
played a part in gold's recent pattern of lower highs and lower lows, but its
recent plunge should be considered particularly bothersome:
Source: www.stockcharts.com
Gold's recent move below $600
violated the Point and Figure bullish support line (can't be reproduced on
these charts), which is an important signal to keep in mind. This same trend
line had been in place since October of 2001. In addition, the relative
strength of gold versus the S&P 500 weakened significantly in early
September, although it has not given an outright sell signal. Further
declines in gold or strength in that broad U.S. stock market index would
suggest to us that a more aggressive move out of gold might be in order.
While gold is deeply oversold on a short-term basis and a bounce could occur
anytime, a move into the $625-$650 range would likely amount to a timely
opportunity to roll out of some gold exposure.
Conclusion
Commodities are indeed grossly
oversold at the moment, generally speaking, and could rally at any time. That
being said, enough technical damage has been done that bounces from here,
which could be quite meaningful, should not necessarily be taken as a sign
that the bull market in commodities remains intact. I'm not predicting the
commodity market's demise, mind you; I'd prefer to see more evidence before
making that call. Those who are offering such forecasts, however, might be
proven right should we see poor, failed rally attempts in coming weeks.
**Does the pullback in oil and
gas provide an opportunity? If so, are Canadian trusts worth considering for
energy exposure right now? For starters, get "Go North!" our
exclusive, free report on Canadian royalty trusts by visiting: http://www.deltaga.com/reportForm.asp?rep=2.
