The Weekly Resistance and Daily Divergence in the CRB Commodity Index

May 4, 2011: 8:48 AM CST

We’ve seen huge volaitlity this week in silver, but what about the broader basket of commodities as seen in the CRB Commodity Index?

There’s actually a critical overhead resistance level to watch, and the daily chart is showing caution signals at that level.

Let’s start with the weekly Fibonacci Level and go from there:

The CRB is the Reuters/Jefferies Commodity Index that comprises a basket of 19 commodities (33% of which is oil related).

There are two main chart points to know on the weekly level:

1.  The Index has rallied to the 61.8% Fibonacci Retracement of the 2008 ‘bear market’ decline

2.  A Negative Momentum Divergence has formed into the resistance

That’s not at all to say “The end of the commodity rally is now!” but it is a warning/caution sign to tighten-up stops and pay close attention to what happens right here at the 370 level.

A clean breakthrough to new recovery highs above the 61.8% line (beyond 370) is an “all clear” signal – but that hasn’t happened yet.

The daily chart shows the divergences clearer, as well as an ominous pattern:

Dropping to a lower frame allows you to see structure clearly, especially in terms of lengthy divergences.   The problem is that you can’t see the 370 “Fibonacci Resistance” level unless you first reference the weekly chart.

We clearly see a triple-swing negative momentum divergence, which gives way to the “Three Push” reversal pattern (or “Three Drives to a Top” as you may have heard).

Anyway – the chart situation at the moment (with the exception of the simple uptrend and bullish EMA structure) argues for caution unless the commodity index can break through the 370 level and ‘bust’ this bearish reversal pattern.

In terms of the uptrend, you can see the many successful retracements to the rising 20 or 50 day exponential moving averages that rewarded traders who purchased on simple pullbacks.

So here’s the bottom line:

Watch what happens very closely at the 370 level.

A breakthrough invalidates these bearish developments and suggests the commodity rally has higher to travel (again confounding those who try to call a top).

Otherwise, a continuation of the down-swing in progress that breaks under the 20 then 50 day EMA at the 355 level suggests that we could be seeing a deeper retracement at the least, and a potential short-term reversal forming here – ahead of QE2 coming to an official end (June).

This is the power of “Decision Points” or “Inflection Points” in a market – either it breaks through the level or it doesn’t.

Traders can thus act accordingly depending on what happens objectively at key pivot levels in price – or in this case, a basket index of commodities.

Corey Rosenbloom, CMT
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