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I began
warning my subscribers of the less than positive developments in commodities back
in February. The cyclical and statistical issues discussed there have
continued to develop and a couple of weeks ago I wrote here about the
structural non-confirmation that had occurred between commodities and
equities. In that article I basically explained that because of the similar
cyclical structure that had followed since the 2009 lows, the
non-confirmation was a warning of deeper rooted economic issues, that it is a
sign of deflationary pressure and that lower commodity prices should be
expected.
Since the
article posted here a couple of weeks ago, the CRB Index has dropped below
its 2011 low. In fact, it has moved to levels not seen since October 2010.
Crude oil has since dropped from the 106 range to the 93 range. Gold has
dropped roughly 100 dollars in the last two weeks and the XAU has moved below
its 2010 low.
As the
commodity complex moves into cyclical low points, they will find a low and a
rally will follow. The danger is that most will view the cyclical low points
and the advance that follows as an indication that the decline is over. Well,
the decline will be over, but based on the structural developments that have
occurred, it should be temporary. Meaning that it should be a counter trend
rally and still lower prices should follow. That said, there is a slight
chance that the rally out of the next cyclical low point could evolve into
something more meaningful and the recent weakness could prove to have been a
mere correction. However, based on current evidence, such possibility looks
to be rather remote. The key will be the structural developments that occur
in conjunction with the advance and the behavior of the Cycle Turn Indicator.
If the associated cyclical picture should begin to develop in a structurally
positive manner, then so be it. At that point the currently negative setup
will begin to change. However, if positive structural developments are not
seen in association with the rally out of the next cyclical low point, then
such rally should prove to be an opportunity to get out of any existing long
positions before the next shoe drops. Again, either way, the key will be the
cyclical structure and the behavior of the Cycle Turn Indicator. Whatever
happens happens as I let the data stand on its own
feet and merely follow its meaning. A perfect example of this is the warnings
I gave my subscribers beginning back in February and the warnings that I
posted here a couple of weeks ago. My hope is that the recent weakness seen
in the commodity complex has gotten every ones attention and that they are
now more objective in their views. Otherwise, being married to a position and
a belief can be a very costly mistake. My approach is based on price action
and the associated statistics, which is much more objective and is available
in great detail in my monthly research letters and short-term updates.
Nothing goes straight up or straight down. Knowing where the cyclical
inflection points are due, when we have hit them, the degree of that
inflection point and the statistical meaning of the short, intermediate and
longer-term developments are vital in navigating any market. For now, the
probe for the next inflection point remains intact. I have included long term
charts of the CRB Index, crude oil, gold and the XAU below. Also included is
a chart of Natural Gas, which is back to 1990 levels. Did anyone think the
advance into 2008 would be a failure? Was the decline out of the 2008 high to
current levels expected? Is this perhaps a precursor of what's to come in
other areas? Never say never. The structural
developments are key in every market. With that
knowledge we have statistical expectations to guide us just as we did in
anticipation of the recent weakness.
Tim Wood
Editor, Cyclesman.com
Copyright © 2004-2008 by Tim W. Wood. All rights reserved.
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