COMMODITIES RECAP - Jeanette Young
EURO SETTING NEW HIGHS FOR THE YEAR... As indicated in Chart 1, after the strong rally seen on April 05, 2006, the Euro retreated, never breaking the uptrend line. All this backing and filling gave the Euro enough energy to leap forward, gapping higher and printing a new high for this year. As you will notice, the MACD continues to keep you long, but it is warning you that the Euro is extremely overbought. There's a candle left on the chart, a long-tailed candle that might be a short-term top, perhaps a point at which some well-deserved rest might be seen?
When you look at the weekly chart (Chart 2), you will be impressed with the upside breakout in the Euro, illustrated by the Euro breaking the neckline of a W formation. There is reason to believe that after a rest, because the Euro is very overbought, a run to the 1.27 level, would be a conservative target for the completion of that formation. While it is true that either a rest or a retreat is very likely, the direction of this market continues to be to the upside. The weekly chart illustrates the magnitude of the recent rally.
Chart 1
Chart 2
CURRENCIES - US DOLLAR... The chart of the US Dollar index (below) clearly shows the damage done effected in the recent retreat in the US Dollar index. Note that the MACD continues to point to lower levels. Clearly, this indicates that a bounce in the US Dollar index will be seen shortly, but that bounce, will be a dead cat bounce. (Apologies to cat lovers, it is a Wall Street idiom.)
Chart 3
GOLD AND SILVER... Gold hit yet another high and silver enjoyed a rally reminiscent of those rallies seen in the early 80s. There is very little resistance here. As you well know, as the US Dollar index falls, the precious metals rise, especially in this environment where we see commodities rising and crude oil is daily making new highs. Inflation may not be acknowledged by the Federal Reserve studies, but the market is seeing inflation and is reacting to it. Gold has always been considered to be a hedge against inflation and the market is seeing inflation in the pipeline. Perhaps that is why the US Dollar index is enduring the recent days punishments. If the FOMC is perceived to be falling behind the inflation demon, gold will rally as we've seen it has done.
Chart 4
CRUDE OIL - THE BLACK GOLD!... As the yellow gold rallied, so too did the Black Gold (oil). The good news here is that although crude printed a fresh new high, it was unable to close at that level. We notice that there is a doji-like candle, one which can be described as a transition candle on the chart. A doji, in the classical sense, has the same opening and closing price, which yields the line where the real body (the difference between the opening price and the closing price), is normally seen. Generally, it is thought that this effect occurs when both bulls and bears are in equilibrium. It also indicates that the market may change direction. After the aggressive rally seen in this market, a bit of a rest would be a welcome event. We do not have confirmation of this from the MACD, which continues to tell us that higher prices are yet in future store.
Chart 5
THE MARKET CONUNDRUM... With the rally in the Reuters Jeffries CRB to new highs and the rally in the Continuous Commodity Index to new highs, qualification as a conundrum is beginning to make itself clear. How can the S&P 500, the Dow and the Russell Indices, continue to rally in the face of a falling US Dollar index, a rising Euro, rising precious metals and rising energy prices? The 10 bond rose to a reading of 5.02% and this rise had no effect on the equity markets. As a matter of fact, the NASDAQ Composite closed near a fresh 5-year high. What is wrong with this picture? As was noted in John Murphys notes of April 19, 2006, CORE CONSUMER INFLATION PICKS UP AS FED DECLARES INFLATION UNDER CONTROL. This question and the behavior of the bond market indicates that although the Fed made that declaration, the bond market didnt buy into it. Yet, to become concerned with the rising four-year highs in interest rates is the question of the day; will the equity market begin to feel the pressure of rising commodity prices, rising yields, and the falling dollar? With this, we turn to the chart of the VIX, which is a measure of volatility in the S&P 500, derived from all the at-the-money and out-of the money options, both puts and calls in the two front months. This measurement is: a measurement of fear in the market.
Chart 6 shows the daily chart of the VIX which seems to be trying to form a bottom. The recent plunge in the VIX was seen as a result of the recent rally in the S&P 500. Chart 7 is a monthly chart of the VIX and show just how historically low it is right now.
Chart 6
Chart 7
CONCLUSION... In conclusion, it is likely that the equity market will take note of the increasing commodity prices as well as the increased cost of money. Although it seems as though the rally, especially as seen in the small capitalization stock, will never end, there will come a time when the compelling weight of increased costs will be felt.
- Jeanette Young, CFP, CMT
Floor/broker trader at the New York Board of Trade
Editor's Note: John is speaking at a local college today and will be back tomorrow.
