OVERSOLD COMMODITIES START RALLY ATTEMPT -- WEAKER DOLLAR PUSHES GOLD INTO TEST OF OVERHEAD RESISTANCE -- BOX SIZE MATTERS

DB COMMODITY ETF IS RALLYING ... Last Friday I suggested that an overbought US Dollar Index was starting to back off potential resistance at its 200-day average. The dollar is dropping today against the Euro and is giving a boost to oversold commodity markets. I also suggested on Friday that commodity markets (especially oil) were in oversold territory and due for a rebound. The DB Commodities Tracking Fund (DBC) has been stabilizing at chart support along its October low. Today's rally puts the DBC at a new two-week high (Chart 1). The daily stochastic lines are turning up from oversold territory below 20. Fifteen commmodities in the CRB Index are rallying, led by energy and metal markets. Their related stocks are up sharply.

Chart 1

ENERGY ETFS REBOUND ... With oil climbing a dollar today, and colder weather boosting natural gas, energy stocks are the day's strongest market sector. Chart 2 shows the Energy Sector SPDR (XLE) trading back over its 200-day moving average. The daily MACD lines are giving the first short-term buy signal in a month. The Oil Service Holders (OIH) are rebounding as well, but are still have a way to go to reach its moving average lines. Upside volume hasn't been all that impressive either. So far, it looks mainly like short-covering going on rather than aggressive new buying. The new buying is taking place in the gold pit.

Chart 2

Chart 3

GOLD ETF NEARS UPSIDE BREAKOUT... A weaker dollar pushed the price of bullion $11 higher today. The daily bars in Chart 4 show the streetTRACKS Gold Trust Shares (GLD) moving up to challenge its recent highs ranging from 64.02 to 64.55. Needless to say, a close above the upper level would be a bullish breakout. The point & figure boxes in Chart 5 show the recent GLD trend in a more compressed fashion. Each box is worth .50 points. A close at 65 or higher would consitute a "triple top" breakout which is usually a very bullish pattern. [Some of you have asked how to determine the proper box size to use on a p&f chart. The traditional box size is the default value offered to you, which can be used in most cases. The percentage choice makes each box worth 1%. I often use that. Chart 6 shows the same GLD chart with each box worth 1%. Although the "percentage" scale of GLD in Chart 6 is a bit more sensitive than the "traditional" scale in Chart 5, there isn't that much difference in the current situation. That's not the case with XAU Index.

Chart 4

Chart 5

Chart 6

COMPARISON OF XAU P&F SIGNALS ... Sometimes the type of p&f scale you use does make difference. Like in the case of the Gold & Silver (XAU) Index. In the traditional scale shown in Chart 7, each box is worth a constant value of 2 points. (The box size drops to 1 point under 100]. Chart 8 shows the XAU plotted with each box size worth 1%. The traditional p&f scale in Chart 8 shows the XAU still on a sell signal. The percentage scale in Chart 8 show the XAU on an initial buy signal. At the moment, I'm more inclined to go with the initial buy signal in Chart 8. That's based primarily on the fact that the price of bullion may be on the verge of a bullish breakout of its own. Plus the fact that the percentage scale in Chart 9 has been given earlier signals all year.

Chart 7

Chart 8

GOLD MINES ETF EXCEEDS 200-DAY LINE ... The last two charts add more credibility to today's precious metals' bounce. Chart 9 shows the Market Vectors Gold Miners ETF (GDX) jumping back over its 200-day moving average (on very strong volume). Chart 10 shows the Euro gapping up .59% today. Notice that the two charts usually trend in the same direction (and in the opposite direction of the dollar). The reason I focus on the Euro so much is because it has the biggest influence on the U.S. Dollar. The Dollar Index (USD) measures the U.S. currency against six foreign correncies. The Euro counts for 56% and has the biggest influence on the USD trend. So today's Euro bounce means a weaker dollar which usually translates into higher precious metals.

Chart 9

Chart 10