Dollar Recovery Could Shake Commodities

Apr 25, 2008: 10:12 AM CST

This week, the US Dollar Index has recovered slightly, and price finds itself above key resistance and attempting a new swing high. What might this mean for commodities?

First, the US Dollar Index is breaking above a consolidation pattern, which was preceded by a positive momentum divergence. Should price break the $73 level, the next upside resistance target would be $75.

Notice the strong support level just above $71.

Recall that the Dollar Index and the CRB (Commodity) Index are inverse relationships. A strengthening dollar (or at least an upside rally or counter-swing up) would be bearish for commodity prices.

In other words, an upswing here would lead to lower gold and oil prices, and potentially rice, wheat, and other commodity prices (not all commodities trade alike).

Let’s look at the CRB:

Indeed, as the dollar rallied, commodities fell. Price seems destined to test its 20 period moving average at $410, but something more ominous could be on the horizon.

Notice the negative momentum divergence – as price made a higher swing high (barely), momentum actually made a lower swing high, indicating loss of momentum.

Also, the pattern comes as price may be forming a double top reversal pattern. If indeed this pattern completes, price could break down and retest the rising 200 period moving average near $355 or $360. That would be an interesting development.

Keep watching these two indexes for clues of strength and weakness, and realize that any bearish signal on one could be confirmed by a bullish signal on the other.

And of course, falling commodity prices – in the economic environment we’re in – would likely be bullish for the US Stock Market.

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