Commodities Fall Sharply this Week

Mar 22, 2008: 9:18 AM CST

The major Commodities Markets were not spared the rampant volatility of last week’s price action. Let’s take a look at some of these key markets:

Let’s look at the broad-based $CRB, a widely followed Commodity Index (weekly chart):

I have drawn three blue lines which are indicative of the “Three Push” pattern which can precede a trend reversal. The pattern is indicative of strong buying power and consists of three waves of buying pressure that occurs in strengthening momentum. Notice the ferociousness of the recent price retracement in the index, which took the value down to the rising 20 week moving average for a test of that level.

We can’t call a trend reversal yet without a lower high and a lower low. Right now, we simply have a strong momentum higher high following a momentous rally. It would not be surprising to see consolidation at least at these levels.

Crude Oil prices fell $10 from its intraday high of $110 last Monday and recently tested the rising 50 period daily moving average just beneath $100 per barrel.

Notice the power of the recent ‘power buy’ swing which took prices out of the consolidation rectangle onto new highs. It’s not at all surprising that the market would need to ‘rest’ after that major development (and un-checked swing from $85 to $110).

Like a coiled spring that is stretched too far, the market will often snap back quickly after a lengthy power swing that doesn’t have a clean retracement.

Gold is not much different than Oil recently. The precious metal fell 10% from its intraday high Monday of over $1,020 per ounce. Price is currently testing the rising 50 period moving average.

Notice the momentum divergence that preceded the snap-back retracement. You shouldn’t be surprised that a move of this magnitude could occur following an obvious momentum divergence, especially with the two doji candlesticks that preceded the two-day drop (doji patterns are often signs of potential market reversals).

Also, commodity prices (especially gold and oil) were being featured prominently on the news and in the conversations of everyday people, and when news becomes widespread, the opportunity dims and contrarian thinking causes savvy traders to employ potential reversal strategies.

These commodities remain in powerful up-trends, and retracements against this trend should not surprise us in the least.

Let’s continue to keep a close eye on these markets for signs of trend resumption (which would be a negative for the broad stock market) or reversal (which would help the market because it would crush the argument that stagflation is possible).

2 Comments

2 Responses to “Commodities Fall Sharply this Week”

  1. ArizonaChartist Says:

    Good stuff, Corey! Since you mentioned the momentum divergence in gold just thought I’d bring to your attention the momentum divergences in the S&P and the Nasdaq.

    http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&mn=9&dy=0&id=p46011663706

    http://stockcharts.com/h-sc/ui?s=$COMPQ&p=D&yr=0&mn=9&dy=0&id=p27478401987

    One thing I was wondering which may be part of your CMT studies; what is the generally accepted method, if any, for calculating the upside target should the positive momentum divergences in the S&P and the Nasdaq be resolved?

  2. Corey Rosenbloom Says:

    Thank you for providing the chart examples and for the comment!

    You have highlighted a major divergence between those two indexes and the standard MACD indicator. Positive divergences like this hint at upside potential.

    For me, I use settings of 3, 10, and 16 on the MACD to capture shorter term swings and capture a shorter-term moving average distance, but yes, either way, it’s a clear divergence.

    In the CMT material, divergences don’t have specific targets, but can aid in your analysis of chart patterns that do. For example, if there’s a positive divergence on a symmetrical triangle formation, then that would add greater odds to price achieving (let’s say) an upside target which would be equal to the distance of the height of the triangle.

    I want to run some more tests, but from what I’ve found in my own trading and analysis, momentum divergences are like springs that unwind (sometimes sharply) and when they do, they typically unwind to where the price was located at the first swing of the divergence (when it was forming). It’s almost as though the resolution completely negates the divergence in the first place, but again I need more testing to validate this.

    Until then, divergences serve as an observational tool to highlight hidden features within the structure of price that aren’t seen by those who aren’t using that tool.

    Excellent observation!