Commodity-based investments
have historically displayed definitive cycles that experience dramatic peaks
and valleys. Technical, chart-based analytical tools that anticipate price
movements can give a heads up in advance of a sector's move. Indicators that confirm
price direction are worth paying attention to when one weighs the evidence
that a trend will continue. One such important indicator is a holding's trend
line.
In my May 13th article,
"Commodity Stocks - Trouble or Opportunity," I highlighted the coal
and steel producers' stock indices. The timing of the article roughly
coincided with the acceleration of the dollar's strength as cited by my
colleague, Chip Hanlon. The deep pullback in these stocks discounted the
dollar's renewed movement and, together with anecdotal evidence that demand
for many basic materials was waning in the Far East, many of these securities
returned to their the Bullish Support Lines, a crucial guide in Point and
Figure technical analysis. When the steel producers' index subsequently
breached its support line, for example, it told me to be cautious on this
group in my managed portfolios. While some of these stocks may be due for a
bounce, many must now see a 25% rise to take out overhead resistance and thus
change the trend back to positive. Steel stocks tend to move quickly, but are
you willing to wait for that sort of change? Coal producers were well above
their support line and had a significant spread triple top breakout to
solidify their up-trends. These are the types of signals that I use in the
management of the portfolios I run at Delta. So, how do some other
commodities-related charts look now?
Commodity Indices
First, investors need to realize that all commodities indices are not created
equal; each uses a different balance of raw materials that emphasizes one
commodity component over others. While the performance of each will vary
depending on these weightings, unmistakable signs of trouble have emerged in
many of the individual commodities and a yellow cautionary light is flashing
with respect to those indices. At the very least, one should review current
basic material exposure in his accounts.
Index investors, for example
need to know that while The Rogers International Commodity Index
currently has a 35% weighting in crude oil, (Jim Rogers came up with this
weighting as he rode his Harley on 5 continents, not us& we're just
jealous!), the CRB Index Spot is an unweighted geometric average of
commodity price levels, The Dow Jones AIG Index has a 25% exposure to
crude and natural gas and The Goldman Sachs Commodity Index has two to
three times the weighting in Crude as the CRB or Dow Jones AIG.
One caveat: the following
remarks are technical comments only. While I make recommendations primarily
based on technical criteria such as those that follow in this report,
investors must be aware of fundamental data for the stocks they buy as well
as important data regarding delivery, market-moving government releases and
other factors that may influence commodity pricing.
CRB Spot Index (CR/Y) -
300.83:
The CRB broke out of a big base late last year and lay in wait until
February's triple top break at 290. This accelerated the upside move, taking
just 1 month to reach 322. Since then, however, two lower tops and two broken
bottoms have moved this index ever so close to the support line that has been
intact since June of 2002. Cheerleaders for the CRB would be heartened by an
upside break at $312, while realists must face the possibility of a trend
line breach and a resulting 278-284 downside target.
Dow Jones AIG Commodity
Index (DJAIG) - 150.73:
This chart is a bit slower moving and thus shows a longer history. Its
up-trend started in June of 2002, same as the CRB. It spent most of 2003 and
all of 2004 comfortably above the bullish line. The late 2004 sell off and
subsequent consolidation led to a spike to 166 in March and then a downside
reversal to lay right on top of support at 144. Implications of a break here
could have risks to 132.
Commodity Components
There are decidedly mixed signals in some of the Industrial components of the
indices mentioned above. Some remain above and some recently broke below
trend lines. This is very much a time when discipline and vigilance will make
the difference for investors.
Crude Oil (CRUDE) - 51.98:
Crude bounces off its support level as it has done twice recently. Amid calls
that oil will top $100, its chart is telling a different story. The first
sign of a resumption of the upward price movement would be a break out above
$52.50. Long-term, however, the trend has stayed intact thus far.
Aluminum (AL/) - 81.50:
Aluminum sold off along with other metals in the April-May period. It headed
south on route 95 and kept going 'til it reached Florida, or 81 on this
chart, below the Mason Dixon line at 83. A dead cat bounce occurred, only to
lead to another sell signal taking AL/ down to the lows of last fall.
Lumber (LB/) - 369.50:
Lumber's trend just turned positive after undergoing a speedy round trip
it turned negative early in May and re-emerged positive later the same month.
The recent triple top break at 354 was a key sign something positive was
developing. The bullish price objective now is 402.
With the recent rally in the
U.S. Dollar now becoming extended in the short-term, investors can look for a
bounce in non-Dollar holdings such as commodities. How such holdings perform
will likely tell us more not only about the commodities themselves, but
perhaps whether this Dollar rally is for real or merely a powerful
counter-trend rally in an ongoing, multi-year bear market for our currency.
*The essay above is an excerpt
from the one currently available with more charts and commentary at our
website, www.deltaga.com.
