COMMODITY CORRRECTION CONTINUES -- EVEN ENERGY LOOKS DUE FOR A PULLBACK -- AGRICULTURAL STOCKS LOSE GROUND -- COMMODITIES MAY BE ANTICIPATING FED SHIFT BACK TO FIGHTING INFLATION
MOST COMMODITIES ARE IN CORRECTIONS... Last Thursday I showed most of the charts shown below to make the point that, outside of energy, most other commodity markets have entered downside corrections. I attributed the reasons for that to be rising U.S. rates, a bouncing dollar, and economic slowing. Here's a quick review of the charts. Chart 1 shows the DB Commodities Tracking Index backing off from its March high near 39. The deterioration in the RSI and daily MACD lines suggest a deeper pullback. The charts get progressively weaker. Chart 2 shows the Power Shares Base Metals ETF trading well below its March high. Charts 3 and 4 show the PS Agricultural and Precious Metal ETFs in even deeper corrections. I also suggested that an overbought energy sector might be the next to feel the sting of profit-taking.
Chart 1
Chart 2
Chart 3
Chart 4
CRUDE AND NATURAL GAS LOOK OVERBOUGHT ... When only one commodity group is hitting new highs, that's usually a sign that it's out of step with the others. That seems to be the case with energy. I still believe that the energy complex is due for some profit-taking. Chart 5 shows the United States Oil Fund still in an uptrend. The 14-day RSI line, however, (top of chart) is backing off from overbought territory over 70. The daily MACD lines (bottom of chart) may be stalling at their March high. That's not a lot to go on. Add in the fact that energy shares are among the day's biggest losers, however, and we see a market group ripe for profit-taking. Chart 6 shows a negative divergence between the 14-day RSI (solid line) and the United States Natural Gas Fund. That's another sign that the recent energy runup is on weak technical footing.
Chart 5
Chart 6
AGRICULTURAL STOCKS ARE BEING SOLD ... It seems like everything tied to agricultural has been rising. This week, however, those same stocks are coming under profit-taking. In my mind, that suggests that the agricultural runup is overdone and also due for some profit-taking (as are most farm commodities). Chart 7 shows Potash Corp losing ground on heavy volume. It's still in an uptrend. But heavy selling like that usually suggests there more selling to come. Monsanto is one of the day's biggest percentage losers in the materials sector. Chart 8 shows that stock slipping below its 50-day average after pulling back from its January high. Deere shows a similar chart pattern. The farm equipment maker is down well over 3% today after failing a test of its January high at 95. We keep hearing that global economic slowing should slow the pace of commodity gains and stocks tied to those commodities. Some of that may now be happening. That will be especially true if the Fed decides to shift its emphasis away from economic slowing and back to inflation fighting. I suspect most commodity markets are already discounting that.
Chart 7
Chart 8
Chart 9
NYSE COMPOSITE UP AGAINST CHART RESISTANCE... The NYSE Composite Index is very influenced by the direction of basic materials and energy stocks which are among today's weakest groups. That may come at a bad time for the NYSE Index which is at a crucial chart juncture. Chart 10 shows the NYA right up twofold resistance at its November low (9400) and its 200-day moving average (9488). The Commodity Channel (CCI) Index shows the NYA to be in overbought territory with some loss of upside momentum. That puts this market rally at a moment of truth which will probably be resolved by how the market reacts to tomorrow's Fed decision on rates and on its accompanying statement on inflation. Technical odds favor stocks selling off from here.
Chart 10
