In part 2 of this 3-part
series on market technicals, Bruce Zaro takes a look forward at the technical
condition of a number of commodities, a group that has become so popular in
recent years.
NYMEX Crude
The line in the sand is drawn
at 56, as in $56 per barrel of oil. If crude breaks below that mark, we could
see $47 to $52, yet a longer-term chart suggests this area in the mid-$50's
should act as formidable support which won't fall easily. Because buyers of
crude have come in to buy in that range on 7 separate occasions over the last
year-plus, however, a breach of $56 would strongly suggest a test of
the 50 level or even slightly lower:
A faster-acting chart of ½
point-per-box provides a way to look at crude's action in a different light.
Here, however, the case remains the same; it is trading very close to the
Saudi Arabian line in the sand at $56, the October lows which still seem to
define the line of support:
Since crude's 4th quarter
bounce to the $63 range, that point now offers the next bullish action point;
for crude to become a buy, it would have to breakout at $63.50. The problem
is, meaningful chart resistance as well as the Point and Figure Bearish Resistance
Line loom near $67 - $68, which means that crude has a lot of technical work
to do before it would suggest that a lot of upside potential exists. And in
the meantime, the going could first get even tougher for crude traders.
**Note from DGA: Since the
writing of this article at year-end, crude's downward action has added more
O's to the declining columns in both charts above, bringing it closer to that
support "line in the sand." The comments above still apply,
however.
Natural Gas Continuous
Supply and mild weather
concerns caused NG investors to withstand extreme volatility in 2006. Whether
an asset is headed higher or lower, the trend line is the most basic compass
of that asset's trend. For gas, the positive trend line had been in place
since October of 2000 but was broken in September of '06:
Commodity investments are
generally volatile, but natural gs was an extreme case in the number of times
the trend line changed last year. Currently, the trend is clearly negative;
in fact, a move back down to the $5.20 low of September now seems likely.
Dow Jones AIG Commodity
Index
2006 was not as simple a year
for commodity investors overall as recent ones had been, as the Dow Jones AIG
Commodity Index, helped along by the 2nd half fall in crude, logged its first
losing year since 2001. After the 87% rally seen since early 2002, this index
was due for a consolidation period, at the very least. While this index's 33%
weighting in crude makes the DJAIG sensitive to oil's volatility, even
strength within other raw materials has not provided enough positive action
to prevent this chart from looking very toppy:
...instead, we are heading
into 2007 while the chart of this commodity index shows significant overhead
resistance in the 180's. A move to break out above 182 would abort the
current topping pattern, while a breach of the low 150 support would suggest
much lower targets that most commodity bulls would today consider
unimaginable.
Copper
I last commented on copper in
September (Commodities: A Technical Update - 9/26/2006). In that article I
suggested that although copper had held up well considering it had broken its
uptrend line at 3.36 (intact since 2001), the chart at that time showed
little reason to own or bottom fish for copper at that time. Since then,
bounces have indeed been generally uninspiring:
Although copper today is below
the bottom of its suggested trading band at 2.80, any trades today would be
for aggressive investors only. Trend lines are especially important to
protecting or accumulating wealth, thus when holdings move through these
lines I take them seriously. While many times a broken-down asset does
experience a bounce, it is then often just a dead cat bounce that really does
not diminish the fact that trend has changed. Any bounces in copper from here
are likely to be the same -- short-term and dangerous in nature. Most
investors would be wise to show patience and let this chart develop over time
until the trend can change back to positive. As things stand now, such a
change for the better would occur at 3.32.
Gold
Gold is in the rebuilding
stage as it has rebounded sharply from its sharp mid-year correction. Gold's
chart looks similar to that of oil, which sold off in the late spring,
followed by a vigorous rebound in July that lead to a re-test of the year's
low in October. Gold, however, has done a bit better, holding above its early
summer low this time while showing subsequent strength with numerous buy
signals as it has worked its way up towards the top of its trading band and
near recent resistance in the 660's:
So far, gold remains an
orderly uptrend which supports the view that gold can work its way still
higher. I typically look for backing and filling for evidence of a chart
working off its overbought conditions. In Late November gold became 77%
overbought on its expected trading band. While this condition was not as extended
as the April / May reading -- gold was 193% overbought on its weekly
trading band at that time -- the late November condition has been rectified
and gold resides almost exactly in the middle of the band now, pretty good
technical action considering how other commodities are faring. In addition,
it remains just above its 50, 150 and 200 moving averages. Further, gold did
show a recent positive divergence compared to the major US market indices and
it remains a superior relative strength performer against these benchmarks.
Traders can initiate positions
here with a tight stop at the triple bottom break at 612, while longer-term
investors can use $600 as their stop. Current Bullish price objectives point
once again up toward the 660's. Remember, though, gold remains a commodity,
which means it too can be subject to extreme volatility. I favor a
trading-oriented strategy at this time to lessen the chances of getting
should gold's technical condition deteriorate.
In summary: with gold as a
possible exception, there looks to be a lot of dangerous, toppy-looking
action in commodities at present. Even if the long-term case for commodities
remains intact, we all know that meaningful corrections and trying times can
occur along the way. Broadly speaking, commodities look more at risk of
facing such a challenging time period than they have in many years.
**Speaking of the long-term
case for commodities, many investors favor oil and have looked to Canada's
energy trusts for such exposure. However, the Canadian government's recent
proposal to dramatically alter the royalty trust landscape continues to weigh
on the minds of investors. To learn more, get "Ottawa Bombshell!"
our exclusive, free report on this important situation by visiting: http://www.deltaga.com/reportForm.asp?rep=4.