What Can We Learn From the CRB Index?

The CRB Index represents a basket of commodities ranging from Coffee and Cotton to Silver and Natural Gas. This is an important one guys. For over 50 years, this index has served as the most widely recognized measure of the global commodity markets. "The Thomson Reuters/ Jefferies CRB Index", as it is more formally known, is comprised of 19 commodities. The ups and downs in the prices of these commodities tells us a lot about global demand and can help us make decisions in our every day trading of US Equities. The Intermarket relationships have been mentioned here in the past, but today we are going to focus on just the price of this particular index.

The 19 components each carry a different weight with Crude Oil, for example, being the heaviest:

The first chart we're looking at is a longer term view of the CRB Index. It's easy to see here how devastating the crash of 2008 was to commodities. After the lows were put in during the first quarter of 2009, it took over 2 years for the index to retrace 61.8% of the crash. This key Fibonacci level will certainly be an important pivot point for this index going forward.

Now in the near-term, this 61.8% Fibonacci number is coming into play as well, but the other way around. In this case, we are talking about the most recent rally in commodities off the 2010 summer lows and up to the highs last Spring. The Double Bottom put in during the 4th Quarter of 2011 is marked by green arrows in October and then in December. This support came at exactly the 61.8% Fibonacci retracement from the recent up move. You can't make this stuff up:

So great - Fibonacci this, retracement that....Now what, right?

The 325 level in the CRB Index is really what needs to be taken out. Trendline resistance was broken to the upside at the beginning of this year, and it was certainly a huge positive. Now the October highs are the fixed level that caused some trouble a few weeks ago, right at 325. If the CRB Index takes that out, it would represent the higher high to compliment the higher lows that we are already seeing.

A series of higher highs and higher lows is what the experts like to call, "an uptrend". This breakout in commodities would give us an upside objective of around 370, which is the key number that we discussed in the first chart (61.8% Fib Retracement from the '09-'11 move). If commodities make a move of that magnitude, then I would expect the major US stock market averages to continue higher. Some of the largest components in the S&P500 are commodity based names (i.e. $XOM).

Now remember, this breakout in Commodities still needs to be confirmed with higher highs. The Relative Strength Index is showing some positive signs leading me to believe that the breakout is inevitable. The Bullish Divergence put in during the double bottom in October and December was just the beginning. And then just recently, RSI reached some overbought levels on the daily chart - all of these are Bull Mode Characteristics.

To the downside, we are watching that double bottom from last quarter as the most critical level. Even a retest of that 292 support would be a big negative. Word on The Street is that there's no such thing as Triple Bottoms.

We're at some pretty important levels here for Commodities. I think that this area in the global capital markets is going to tell us a lot about what to expect for the rest of 2012. Don't ignore it.

Source:

Thomson Reuters Commodity Indices (CRB Fact Sheet)

Tags: $CRB $CRBQ $CR_F $CL_F $SPY