Is a Reversal Brewing in the CRB Commodity Index?

Jan 19, 2009: 10:50 AM CST

There is a multi-swing positive momentum divergence and perhaps a new set of higher highs and higher lows developing in the CRB (Commodity) Index – but might this lead to a reversal in price?  Let’s look:

$CRB Commodity Index Daily:

We have a confirmed and persistent downtrend in price as evidenced by lower lows and lower highs as well as the “most bearish orientation” possible for the key daily EMAs.

However… there has been subtle, recent potential strength in the index off the December ’08 lows.  If you look closely, price failed to exceed the falling 20 day EMA (which happened at least four times in the recent past) but price formed a higher swing low at the end of December and then pushed to a new swing high at the resistance from the falling 50 day EMA.

Generally, this is a pattern that forms when a market is shifting its trend and consolidating, or building a base.  Price will break initial resistance and reverse at the next resistance, which is the 50 EMA, fall again, and then attempt to break it on the next swing up.  We got the swing down and if we hold the $220 index level, we will have confirmed a second higher low and set-up a break of $240 to be the official “Sweet Spot” or Trend Reversal Zone.

If that is the case, then we would have to shift the bias – at least on the daily timeframe – back to the upside, meaning gold, oil, and agricultural commodities (see each market’s individual chart) might be putting in at least a short-term or temporary bottom for a decent-sized retracement of the prior violent down-move since July.  You’ll need to set upside Fibonacci targets if that is the case.

If we do break $240, a minimum target would be the falling 20 week EMA which is currently situated at $270, and we might get there quick if a break occurs.

The next confluence resistance zone would come in at $311, which would be the 38.2% Fibonacci retracement of the July peak to December low and also near the falling 50 week EMA.

However, if we break beneath $210 any time soon, any upside target would be off the mark.

Continue watching the CRB and major commodities very closely – we may be in for a surprise.

Corey Rosenbloom
Afraid to Trade.com

5 Comments

5 Responses to “Is a Reversal Brewing in the CRB Commodity Index?”

  1. Kris Says:

    HI Corey,

    A quick question- CRB is clearly in a down trend that on a daily chart would resemble a “trend day” behaviour. In such an environment momentum oscilators give usually false signals (vide: October divergence in CRB). How do you approach these type of set ups? Looking at macro environment? Higher lows on shorter time frames?
    Thanks for all your updates!

  2. Corey Rosenbloom Says:

    Kris,

    That’s a good question. Though odds favor downtrend continuation, eventually the trend will end and it will most likely end in multiple momentum divergences, which we’re seeing now. It’s as if price is building a base for a reversal – reversals don’t just occur on a dime.

    If we don’t get a reversal, then we don’t get one but it seems the downtrend is diminishing, though we must assume it will continue until it is officially reversed (with a higher high and higher low).

    They’re just set-ups… odds and probabilities. If we do get a reversal, we will stand to gain much more if we put a position on here than we will lose placing a stop beneath the lows of December. Ultimately trading is risk-management and edge analysis – the edge is to the upside whether or not we take out the lows.

    But you’re right – one could view higher timeframes and the broader inter-market relationships for additional clues.

  3. DaveB Says:

    Speaking of commodities – can someone please tell me if there is a way to see a chart of crude oil on stockcharts.com?

    I had been following $Wtic, but it doesn’t match up with the Nymex crude prices I see. What is the difference between the two? Nymex light crude is $34, and wtic is in the 40’s.

    I’ve also been reading about contracts expiring, front month contracts, and so forth. I don’t understand any of that yet I’ve been unable to find any websites that explain it. I’ve done countless google searches and had no luck so if anyone has any tips on where beginners can learn more about the oil futures market, please advise. Thanks!

    Oh, by the way, really like the article. I’ve been watching the $CRB and had noticed the higher low that was recently put in. Something to keep an eye on..

  4. Corey Rosenbloom Says:

    Dave,

    Unfortunately, to my knowledge as well, the only way to approximate Crude Oil is to use the West Texas continuous contract which does not equate to the NYMEX futures exactly. I wish we could see futures charts in StockCharts – it would make analysis easier.

    I can’t go into too much detail as I trade oil through ETFs but in general, futures contracts have an expiration date and must be rolled into the next month as that contract expires – most expire once per month (toward the middle of the month). Try searching for the terms “Backwardation” and “Contango” for some interesting reads.

    I would probably start with the NYMEX website and then compare to the CME or CBOT (which merged) for specific information on contact specs, margin requirements, and hopefully have all the questions answered there.

    Otherwise I’ll open the discussion up to traders who actively trade crude futures.

  5. QuantMinds » ZT: Possible Reversal in USO US Oil Fund and Crude Says:

    […] I showed the structure of the CRB Commodity Index and noted we might be experiencing a positive reversal, but let’s look now specifically at the US Oil Fund (USO) and $WTIC Crude Oil […]