COMMODITIES FINISH STRONG -- DOLLAR ENDS WEEK AT CRUCIAL CHART JUNTURE -- UTILITIES SURGE ON FALLING BOND YIELDS
CRB INDEX STAYS OVER 50-DAY LINE ... The Reuters/Jefferies CRB Index jumped seven points today to close at 350. As Chart 1 shows, that keeps the CRB above its 50-day moving average. Chart 1 also shows that very little damage has been done to the commodity uptrend. While most of the commodities gained ground today, the biggest gains were seen in the energy complex. Crude oil rose $2.00. Chart 2 shows that key commodity back over $72 and still above its 50-day moving average. That gave a boost to energy shares which were the day's strongest market sector. Chart 3 shows the Energy SPDR (XLE) closing back over its 50-day line. The only negative feature was the day's light trading volume. The Oil Service Holders (OIH) also closed over their 50-day line. Gold and gold shares gained as well. The ability of gold and other commodities to resume their uptrends, however, may depend on the direction of the dollar. Today's news that May job growth was the slowest in seven months pushed bond yields lower and weakened the dollar. What the dollar does from here could have a big impact on what commodities do.
Chart 1
Chart 2
Chart 3
COMPARISON OF THE CRB AND THE DOLLAR ... Chart 4 compares the Dollar Index (green line) to the CRB Index (purple line) since last September. The main message to be drawn from the chart is that the two markets have been trending in opposite directions which is their natural tendency. Dollar peaks last November and again in March coincided with CRB upturns. A dollar bounce during the first quarter coincided with a CRB selloff. The recent minor bounce in the dollar may have contributed to the recent slide in commodities. That's why commodity traders need to watch the dollar especially closely at this point. That's because the dollar is at a crucial chart juncture.
Chart 4
DOLLAR INDEX TESTS EARLY 2004 LOW ... Back in March I wrote a column about a possible "head and shoulders" bottom being formed by the Dollar Index. Chart 5 is an updated look at that possible chart pattern. The horizontal line drawn over the 2005 peaks near 92 is a possible "neckline". The middle trough formed at the start of 2005 is a possible "head", while the early 2004 trough is a possible "left shoulder". If the current selloff is a "right shoulder", it shouldn't fall below the left shoulder. The two green circles show that level to be just above 84. The Dollar Index is testing that support level at the moment. To turn the chart pattern bullish, the USD would have to rally from this level and exceed its neckline at 92. It's a long way from doing that. If it doesn't hold near 84, it could drop all the way back to its early 2005 low near 80. Technical indicators are mixed. The 9-week RSI is in oversold territory under 30. But the weekly MACD lines are still negative. Since I'm a believer in the maxim that it's easier to continue a trend than to reverse one, I think odds favor a dollar move to the downside. That would be even more likely if today's weak jobs data encouraged to Fed to take a pause in June. That would be bullish for gold and other commodity markets. That's why a lot rides on the trend of the dollar. That's also why Chart 6 is so worrisome. Going back to the mid-1980's, it shows the dollar in a long-term secular decline. It also shows how important the support line is along the 80 level. It held at the start of 2005 and prevented a major breakdown. If the current level of 84 doesn't hold, that long-term support line at 80 will be threatened again.
Chart 5
Chart 6
UTILITIES SURGE ON FALLING BOND YIELDS ... Utilities usually rally when bond yields are falling as they did today on the weak job report. They also tend to rally along with energy shares which were strong today as well. Utilities are also considered to be defensive in nature. They may also be benefiting from investors' recent tendency to move into more conservative stocks. The final chart shows the Dow Jones Utility Average jumping to a four-month high today. It's testing a resistance line drawn over the September/January highs. The relative strength ratio has already broken that eight-month down trendline.
Chart 7
