OVERSOLD COMMODITIES ARE BOUNCING -- CRB INDEX TURNS UP AT 200-DAY AVERAGE

CRB UPTREND IS STILL INTACT... It was in October of 2001 that the Reuters/Jefferies CRB Index started the four-year rally that continues to this day. During that period, we've seen steep rallies followed by downside corrections or periods of consolidation. Two things,however, have remained constant. One is the pattern of rising peaks and troughs, which is the standard definition of an uptrend. The other is the ability of the CRB to stay above its 40-week (or 200-day) moving average line (red line on Chart 1). Over the past month, commodities have come under heavy selling pressure. So far, however, no important support levels have been broken and the major uptrend is still intact. In fact, the CRB Index is bouncing again. Chart 2 shows why.

Chart 1

OVERSOLD CRB BOUNCES OFF 200-DAY AVERAGE ... The daily bars in Chart 2 show a couple of technical reasons supporting the current CRB rebound. The 9-day RSI line is turning up from oversold territory under 30, while the stochastic lines are doing the same from below their oversold threshold at 20. The CRB is also finding support at its (red) 200-day moving average. That's also helped keep the CRB above its fourth quarter low near 311. As long as those two long-term support levels hold, the major CRB uptrend will remain intact. Late last week we witnessed upside reversals in several individual commodity markets including coffee, sugar, and agricultural markets. [A "reversal day" occurs when a market falls below the previous day's low and reverses to close higher. That bullish pattern occurred last Thursday on the CRB Index]. Upside reversals also occurred in gold and crude oil.

Chart 2

GOLD BOUNCES AS DOLLAR STALLS ... The gold market bounced off its 50-day average last week to keep its uptrend intact. Gold is trading higher again today. At the same time, the rally in the U.S. Dollar appears to be stalling. Part of the reason for that is the fact that the USD has reached a short-term overbought condition. The solid line above Chart 4 shows the 12-day Rate of Change (ROC) starting to weaken. The USD, however, is still trading over its 50-day line. While the Japanese yen has been under pressure of late, the Euro and Canadian Dollar have shown more resiliency against the greenback. With gold bouncing, gold stocks are also starting to do better. The same is true with energy.

Chart 3

Chart 4

CRUDE OIL BACK OVER ITS 200-DAY LINE... The oil market also experienced a rally at the end of last week. Although some of rally has been attributed to unrest in oil-rich Nigeria, there are some technical factors at play as well. Crude had reached the most oversold level since last November (as measured by the 20-day Commodity Channel (CCI) Index). It bounced off a support line drawn under its November/December lows, is trading back over its 200-day moving average, and is bouncing again today. That's caused some buying in an oversold energy sector and some short-term profit-taking in the rest of the market.

Chart 5

MEDIA SKEPTICISM IS A GOOD THING... Wall Street has never bought into the commodity rally. Some economists still refer to the three-year energy uptrend is a "short-term blip". Wall Street strategists have missed the bull market in gold and take every opportunity to diminish its importance. That's why it wasn't surprising to see the financial media jump at the chance to declare a major top in commodities over the last month. All we see is a normal downside correction in an ongoing bull market. We also believe that the recent pullback in commodities (and their related stocks) has provided another buying opportunity for that sector. Having said that, we will be watching the current commodity rally very closely to see how far it carries. More importantly, we'll be watching to ensure that no major support levels get broken in the weeks and months ahead. That would force us to reevaluate our long-term bullish outlook for commodities. So far, that hasn't happened and we don't think that it's likely to happen. Our view is that the four-year commodity uptrend is still intact.

Chart 6

EDITOR'S NOTE ... This article was written by John Murphy and Jeanette Schwarz Young who is a technical trader on the New York Board of Trade.