COMMODITIES MAY BE NEARING SHORT-TERM PEAK
CRB INDEX NEARING RESISTANCE... The bull market in commodity prices is reflected in the CRB Index rising to the highest level in five and half years. However, the CRB is approaching a potential resistance zone, which may stall its advance -- or at least cause some profit-taking. The two levels were formed during 1997 (near 255) and 1996 (264). The index has reached the 250 level. The 14 month RSI oscillator along the top of the chart also shows the CRB having reached overbought territory (over 70) for the first time since 1996. While this is also a caution flag, the monthly MACD lines are still rising strongly. The longer range CRB chart suggests that any setback from those resistance levels may be temporary.
Chart 1
THIRD FAN-LINE HAS BEEN BROKEN... Chart 2 shows the twenty-year bear market in the CRB Index that started during 1980. Over those two decades, there have been three significant commodity rallies. The first one lasted from 1987 into 1988 (and helped lead to the 1987 stock market crash). The second one lasted from 1993 to 1996 (when the currency crisis in Asia caused commodity prices to tumble on fears of deflation). The third one started in early 2002 and is still in progress. The three trendlines drawn on the chart represent "fan" lines. These are simply lines drawn over previous peaks. As the chart shows, the third "fan" line has been broken to the upside. That's usually a signal of a new bull trend. Having said that, notice that the last two moves over the 70 line coincided with previous market peaks. That's a note of caution that the current rally could stall along the horizontal resistance line. However, the bigger message is that the longer-range picture for commodities looks bullish. Any setback would probably be temporary. Needless to say, any breakout above the 1996 peak would be very bullish. [For the record, it should be noted that bull markets in commodities are rarely good for bonds and stocks -- and usually coincide with a weaker U.S. dollar].
Chart 2
