Wednesday, August 13, 2008

Wednesday Commodities Round-Up

First, let's start with a P&F chart as this type of chart shows pure price movement. This will give us an idea of where we really are without a bunch of noise.


First, notice the pretty extreme volatility in this chart. Remember, prices have to move at least 12 points for a row of X's or O's to be added to this type of chart. At a price of 400 that means prices have to move at least 3%. Also notice the following:

-- 420 provided a great deal of resistance on the way up; prices ran up against this level three times before it broke through. On the way down, notice this level provided upside resistance in the row of x's just before the latest downward move of O's. Finally, prices had no problem moving through 420 on the way down, indicating strong downward momentum.

-- Prices consolidated gains in a triangle pattern at the top of the movement.


On the weekly chart, notice the following:

-- Prices have clearly broken the uptrend that started in mid-2007. That indicates the latest reversal is very strong and important -- breaking a long-standing trend is a very important technical development.

-- Prices are below the 10 and 20 week SMA which will pull these SMAs lower

-- Prices are standing right at the 50 day SMA -- a move below this level would be a very important development

-- The 10 day SMA is starting to turn negative. Because this is a weekly SMA it will take longer for the line to move in one direction or the other.


On the daily chart, notice the following:

-- Prices have broken the trend line started in March

-- Prices are below all the SMAs

-- The 10 and 20 day SMA have moved through the 50 day SMA

-- All the SMAs are now moving lower

There has been a fair amount of discussion about why this is happening -- why the sharp sell-off in commodities. Weren't these the hot areas of the market?

The real answer lies in the global slowdown that is going on. For example, from today's WSJ:

Japan's economy shrank for the first time in a year in the April-June quarter, confirming fears that the world's second-largest economy has entered a slump at the same time as some other major countries.

Gross domestic product, the widest measure of economic activity, fell 0.6% from the previous quarter on a seasonally-adjusted basis, the government said early Wednesday. That translates to an annualized rate of decline of 2.4%, and it represents the first quarterly contraction in a year.

The decline was the largest in nearly seven years, coming as rising prices of energy, food and raw materials hit consumers and corporations. Many Japanese companies are suffering from higher costs of materials at the same time as their sales decline around the world, and they are responding by cutting production. Japan is particularly vulnerable to higher energy prices, as it relies nearly entirely on imported oil.

And Asia isn't the only one. Consider this story from July 2:

European recession fears grew Tuesday as Denmark became the first European Union country to slip into a technical recession and a raft of weak data indicated others could soon follow.

The Purchasing Managers Index for the euro zone's manufacturing sector contracted in June for the first time in three years, dropping to 49.2 from 50.6 in May, research group Markit Economics said. A PMI reading above 50 signals an expansion in manufacturing, while a level below 50 indicates a contraction.

Europe's economies are currently facing a toxic combination of elevated inflationary pressures, higher oil prices, strong exchange rates, weakening global growth and tight credit conditions. Denmark, Spain, the United Kingdom and Ireland also face falling housing prices after a recent boom, trailing a trend set in the U.S. after a two-year lag.

So we have one economy that is in a technical recession, and three other countries face problems related to a housing market correction. This picture was highlighted in the latest ECB interest rate decision where Trichet changed from inflation hawk to at least a neutral stance on rates:

The dollar has bounced sharply higher against the euro in the wake of the European Central Bank head’s press conference, after the ECB elected to maintain its current 4.25% base rate for the eurozone. However, a few tweaks in the ECB’s statement, as well as acknowledgement by Mr. Trichet of weakness in the economy, have brought out the dollar bulls, who are selling the euro against the greenback.

The point of the preceding articles on Japan and the EU is this: demand is slowing down. Therefore, there is less need for commodities of all stripes. Traders are taking this confluence of events and dumping long positions