Kris Sayce (KS): Yesterday you told me to hold off if I wanted to buy gold – which was great because the gold price was down again last night. But what about the broader market for commodity prices? What are your charts telling you?
Gabriel Andre (GA): I monitor the Reuters/Jefferies CRB Commodity Index. It is a commodity price benchmark made up of 19 commodities. It includes petroleum products, base metals, and agricultural products. It has been consolidating since early December after it hit a low on December 5 at 208.58 points. Yesterday it closed at 219.21 points, which is 5% higher.
The last time I showed you the CRB index on December 2, the RSI was clearly oversold and it looked like a rebound might occur. Especially because the level of 230 points was identified as a support. However, since then the price action cleared on the downside this level before rebounding.
KS: So, do you think the December low was the low point, or could it go lower?
GA: Since the low was posted at 208.58 points the price action has been quite volatile. As you can see from ‘point C’ on the chart it first jumped back to 236 points on December 12. Then it fell back before climbing again to 244 points on January 6 – you can see that at ‘point D.’
Since then it has retraced to the current levels.
KS: Can you see any defined patterns on the CRB chart? Especially any points of resistance or support?
GA: Yes, you can see on the chart. The resistance points at 236 and 244 points are well identified. They correspond to the 38.2% and the 50% retracement levels of the decline occurred during exactly one month, between November 5 (which is ‘point A’) and December 5 (which is ‘point B’).
KS: Why do you think we are seeing so much volatility in commodities?
GA: Well the speculation in tight volumes during the last weeks of the year especially on oil contracts has increased the volatility. Oil jumped by more than 30% from $38 a barrel to $52 then fell back sharply the past few days.
It was the same thing with Gold: it jumped to $880 an ounce before coming back towards $810.
KS: Our readers see the price of gold and oil every day. What about some of the more unfamiliar base metals and agricultural products?
GA: For them, the prices have also soared during the last weeks of the year after a terrible year. Actually, almost all the metals deeply suffered from the deleveraging by investment funds and by slowing industrial demand worldwide.
The only durable rebound comes from the agricultural products.
KS: So, if I was thinking of trading long or short the CRB index which direction should I trade?
GA: it’s a bit too early to anticipate a medium-term sustainable bullish momentum for the CRB. The recent rebounds are technically only short retracements that do not invalidate the long-term bearish trend started in last July. A significant inflection would be possible only if the price action breaks the current resistance at 244 points and then 252 points. That’s the 50% and 61.8% Fibonacci ratios of the one-month fall between points A and B on the chart.
But technically, the fact that the price action cleared the support of $230 on the downside has opened the door to a further decline, towards the lows posted in February and July 1999 and in October 2001, when the CRB bottomed at 182 points.