Time To Watch Those Commodities Like A Hawk

• CRB Composite touches a 40-year low but is deeply oversold
• Oil is also at critical support
• Short-term commodity picture finely balanced but narrowly favors the bears
• Dollar Index is back at its March 2015 high
• Some short-term dollar indicators starting to roll over

Long-term commodity picture

Chart 1 shows that the CRB Composite ($CRB) has fallen back to a level of mega, and I don’t use that term lightly, support in the form of the red horizontal trendline. Since the early 1970’s the price has either approached or actually touched the line eight times, which really underpins its role as a pivotal point. Right now it’s testing that line for the ninth time. The same chart shows that West Texas crude price is also at support. Although you can’t see it from this chart, that red line also touched the 1980 oil price high. The stakes are pretty high because a downside penetration of these two support lines would indicate that a further drop in commodity prices lies ahead. That could take the form of a multi-year decline or a sharp drop. Note that in the case of the CRB Composite there is no real support until the 110-115 level. Given the precarious nature of the global economy, a further erosion of commodity prices could well result in some spill-over effects. Remember, lots of resource producers are already struggling, so any additional price erosion would send many of them into bankruptcy.

Chart 1

The good news is that Charts 2 and 3 show that both series are very oversold. In this respect, I have used a PPO with the 12/48 parameters to try to capture business cycle sized fluctuations. Of course, there is nothing in the rule book that says these series cannot get more oversold or even that prices could move lower as momentum sets up a positive divergence. All I am pointing out is that right now when prices have reached support and are deeply oversold, is as good a time as any for expecting a rally.

Chart 2

Chart 3

The nearer-term picture

When we turn to the nearer-term picture in Chart 4, the $CRB is again oversold, as measured by both the short and intermediate KSTs. Moreover, both series are in a declining mode. A bearish stance, therefore, seems appropriate unless or until the Index can rally through its 200-day MA, which is currently at 210. In doing so, it would also have cleared a couple of technical hurdles. They take the form of the down trendline and its previous high, which has been flagged by the horizontal dashed trendline.

Chart 4

Chart 5 reverts to the short-term technical picture for the oil ETF, the OIL. Here, we see the completion of a small consolidation head and shoulders pattern. Again the short-term KST is moderately oversold, so prices could literally reverse at any time. However, hostilities in the Middle East have heated up in the last few weeks. Indeed, Russian involvement has given the oil price every excuse to rally but the traders have not pushed it higher. It’s the exact opposite of the reaction of the stock market to the Paris attacks. It should have gone down, but as I pointed out early last week, the market’s ability not only to shrug off the bad news but to actually rally in the face of it was a positive sign. If oil especially, can’t respond to what should be good news towards the commodity’s price pushing higher, it may be in worse technical shape than we think regardless of its oversold status.

Chart 5

US Dollar

Another market worth watching is the dollar, not only because commodities typically move in the opposite direction, but because the Dollar Index ($USD) has rallied back to its March high. Remember, previous highs and lows mark potential support and resistance zones and commodities are at support. Ergo, if the dollar reverses from here commodities may well bounce off their multi-year zone of support that we saw in Chart 1. My own take is that I was expecting to see the Dollar Index ($USD) at new highs by year-end. Now I am not quite so sure, so let’s drill down on the dollar’s technical position to see if an upside break is feasible.

Long-term, the Dollar Index looks fine, as we can see from the fact that it is comfortably above its 12-month MA and the long-term KST remains above its average. On the other hand, it has started to flatten in its trajectory, which needs to be watched.

Chart 6
However, Chart 7 compares the dollar’s progress to the 2/10-year Treasury yield curve and the ratio between good quality bonds as represented by the Barclays 7-10-year Treasury ETF, the IEF and junk bonds in the form of the iBoxx High Yield ETF, the HYG. As you can see, rising confidence in the bond market combined with a flattening in the yield curve both support a rising dollar and both series are currently in rising trends. As long as this continues to be the case, the dollar should move higher.

Chart 7

Having said that, there are a couple of indications that the Dollar Index may face some trouble ahead. First, Chart 8 shows that the Special K has rallied back to resistance in the form of the green trendline but has not yet been able to push through it. Note that the KST in the bottom panel has begun to roll over. Since it is also in an overbought condition and the Index is at resistance, that could spell trouble.

Chart 8

Chart 9 has features my dollar diffusion indicator (!PRDIFCUR). This one attempts to reflect whether an advance in the dollar is narrowly or broadly based since it measures the percentage of a basket of dollar cross rates that are in a positive trend. Buy and sell signals are triggered as the indicator crosses above and below its MA. Most of the time this approach works reasonably well, but the false negative that developed earlier this year is a sharp reminder that it is not perfect. Recently this diffusion series rolled over from a relatively low level. That type of action is a two-edged sword. On the one hand, the rolling over action at a low level indicates weakness, especially as the indicator was at a much higher reading the last time the Index approached 100. On the other hand, the fact that it has reversed from a low level means that it would not take much in the form of a broader advance to confirm any upside breakout from the March/November trading range. Bottom line, I think the odds narrowly favor higher levels for the dollar, but I would not stand in the way of that opinion if the indicators continued to deteriorate.

Chart 9

Good luck, good charting…..and Happy Thanksgiving,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.