A couple of months ago we were looking at some charts of the CRB Index (see here). One was a long-term picture showing key Fibonacci resistance while the other shorter-term chart showed us how the mid-290’s were critial support.
Well, here we are: this is now the third test of the 61.8% Fibonacci retracement. A breakdown here could potentially be devastating for commodities. The consequences of a support break would probably be another 15-16% down to the 2010 lows.
What worries me is that the more times a level is tested, the higher the likelihood that it breaks. We’re now going on 3.
The good news is that we still do not have a convincing support break and this could just be a nice buying opportunity as this level has served as a trampoline in the past. Momentum has been holding its own and maintaining its bullish mode, so far. And as we mentioned back in March, the recent overbought conditions were a good thing and the lack of oversold readings in the daily chart were also a positive.
Here is what Walter Kurtz had to say at Sober Look via Pragmatic Capitalism:
“The CRB commodity index has been a good relative indicator of global risk appetite. During stressed conditions the expectations for global growth declines, forcing commodities lower. Oil prices for example respond to the upside during periods of economic growth. But they also move up due to regional tensions such as those associated with Iran. The CRB index on the other hand tends to respond mostly to growth expectations only.
The index peaked in the first half of 2011, driven by QE2. In the past 9 months the index has found a support level at about 293. This is the third time during the period that we’ve approached this level, and it looks as though we are again going to bounce up. But it tells us that this period of financial stress driven by Europe and the US slowdown is similar to what we experienced in September and December of last year. This will be one of the key indicators to watch for early signs of financial stress conditions going forward.”
This is really the key level to watch. I don’t think there is any way around it. And as we’ve been saying, Energy is going to be important as it is the biggest component of the $CRB Index. (see Energy Needs To Step Up Here and Energy: All Eyes On Me). We can’t ignore this, regardless of what stocks or asset classes we’re trading.
There is wisdom in price.