INTERMARKET PICTURE SHOWS IMPROVEMENT
CRB INDEX ENTERS DOWNSIDE CORRECTION -- BUT IS NOW OVERSOLD... The last time we analyzed the CRB Commodity Index, we expressed caution as it approached formidable chart resistance along the 1996-1997 peaks -- and also looked over-extended at the time. We talked about it being vulnerable to a downturn. That's just what's happened over the last month, although much of the downturn is due to sharp selloffs in gold and oil. The CRB is now retesting the peak formed in late 2000. The longer-term picture still looks more bullish than bearish. However, the intermediate trend has turned back down. The weekly chart shows the CRB having reached its 40-week moving average. At the very least, that could provide the springboard for an oversold commodity bounce. However, the fact that both the weekly stochastic and MACD lines are negative will probably limit any short-term rally in the commodity pits.
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CRUDE OIL FAILS AT $40 AGAIN... They say charts don't have a memory. Not according to the next chart. As oil prices were headed higher, we showed this same chart to make the point that there was major resistance at $40, which was the high hit during the Persian Gulf War thirteen years ago. [Oil also peaked at $40 in 1980 at the end of the commodity boom of the 1970s]. Since hitting $39.99 at the end of February, oil has fallen $13 (or 33%). Although the oil market has clearly been on the defensive since the start of the war, it's starting to rebound again. We suspect that's mainly due to the fact that crude has retraced 62% of last year's rally -- and a short-term oversold condition. The weekly indicators, however, aren't that positive for oil right now. The weekly stochastic lines are falling -- and are nowhere near oversold territory. The weekly MACD lines have turned negative as well. Given the oil drop of $13, a bounce of $5 to 8$ from the recent low might be all oil traders can hope for. That would limit the current oil bounce to somewhere in the $31-$34 region.
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GOLD RETESTING CHART SUPPORT AT $325... When gold started its downside correction early in February, we talked about a possible drop back to major support in the $325-330 region. Gold is now in that critical support zone. The next two charts where we got that figure from. The weekly chart shows that zone marking the top of the "triangular" pattern formed from last May through November. The first level of support is normally the top of that pattern. The weekly stochastic lines have moved into oversold territory under 20, but haven't turned postive. The weekly MACD lines are negative. The monthly chart also shows why gold is at a critical chart junture. Last December, gold broke through its 1999 peak right around the $325 region. In chartwork, a market shouldn't fall much below its original breakout point -- and that's at $325.
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DOLLAR BOUNCING FROM LONG-TERM SUPPORT... One of the reasons commodity prices are under pressure is that the U.S. Dollar is now bouncing. [The Dollar usually moves in the opposite direction of commodities -- especially gold]. The weekly chart shows that the dollar is still in the midst of a yearlong descent. However, its weekly stochastic and MACD lines have turned up. That suggests that a bottom of intermediate proportions may have formed in the dollar. It has already cleared its 10-week average, but remains below its 40-week line. The monthly chart may carry some encouraging news. The Dollar Index has reached a level of potential chart support along the highs formed during 1991 and 1993 -- not to mention the lows formed during the middle of 1999. The monthly stochastic lines are oversold, which is another positive factor. The monthly MACD lines are still negative. A stronger dollar would most likely have a positive impact on stocks, but a negative impact on bonds.
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BOND YIELDS BOTTOMING?... Bond yields are also showing preliminary signs of a bottom. The yield on the long bond is trading at the lowest level in forty years. The weekly chart, however, shows the yield on the 30-year T-bond trying to stabilize around the lows of 1998 and 2001 -- and also last October. The weekly stochastic lines are close to turning positive from under 20. The weekly MACD lines haven't turned positive either, but are trading well over their 1999 lows -- which is a bullish divergence. A bottom in bond yields could be positive for stocks -- at least for awhile -- since they've been moving in the same direction since 1998.
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S&P 500 STABILIZING IN DOWNTREND... The monthly chart shows the S&P still in a major downtrend. However, it is showing some signs of stabilization. The monthly stochastic lines are flattening out near oversold territory. The monthly MACD lines are still negative, but are converging. A positive crossover is still needed to negate the major bear signal given in the middle of 2000. However, the two MACD lines haven't been this close to turning positive in three years. The S&P would also have to cross above the neckline drawn under the 1998 low to reverse the breakdown of last summer. The weekly bar chart shows the S&P trading sideways since last summer between 800 and 950. Coincidentally, the top of the trading range coincides with the down trendline drawn over the highs of the past three years -- making the 950 region a formidable resistance barrier. Prices would have to exceed that level in decisive fashion to turn the current trend from sideways to up. The weekly indicators are showing some improvement. The weekly stochastic lines are positive -- as are the weekly MACD lines. A rally to the top of the eight-month trading range still appears likely. What it does from there will determine if this is a bottom in formation -- or just another bear market rally. Despite all these recent signs of improvement, we don't think this is a good time to be making big bets -- one way or the other.
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