Commodities on the “Edge of Gory” – Article by Michael Kahn (Source Marketwatch)

Hi All,

I am pasting an article I just read and will be of interest to many of you. Even if you do not follow commodities probably you can relate this to metal stocks prices. Not sure how the next few days/weeks turn out but if the technical trend does break for commodities then it will be good for inflation and companies raw material prices but at the same time bad for companies trading in commodities in terms of revenue and accordingly profits. Anyways commodities is a cyclical market and everyone should be ready for cycles in the stock pattern. Commodities related stocks have already corrected and as I say stocks generally outguess the real scenario atleast 2qtrs ahead so I will not be surprised if some of the breakdown in commodities is already priced in stocks. As you can see in article below, oil also managed to reverse breaking the trend so will not be surprised if others also do so after breaking down and trend line is not a forward looking indicator but can only show what has already happened.

This article is taken from Marketwatch and writer is Michael Kahn.

NEW YORK (MarketWatch) — With a few exceptions, many key commodities are at do or die moments.

Stingy bond yields and volatile stock prices are sending people scrambling for alternative places to put their money. While news reports tell us that selected food prices are rising, investors looking at the commodities markets as places to ride this trend may be in for a surprise.

Many commodities are now at long-term crossroads where any further selling pressures can push them over the edge. One look at the Reuters/Jefferies CRB index XX:CRY -0.59%   bears this out (see Chart 1).

This index, the reformulated version of the venerable Commodities Research Bureau index, is now sitting on a three-year trendline with bearish implications. In technical analysis, when a strong market trades down to touch a support feature such as a rising trendline it usually bounces quickly and gets back on its rally horse. That is not the case here.

In September, when commodities prices dropped sharply with the stock market they seemed to bounce back just as quickly. However, within a few weeks they were back down to once again land on the long-term trendline.

Weak markets do indeed stay on support features to allow weak hands to buy comfortably. The market does not often accommodate latecomers and the longer the index stays on the trendline the more likely it is to break down.

Why? Because the bulls could not take control. Because demand was just barely enough to stop the price decline but not strong enough to take them higher.

TRADING STRATEGIES: DECEMBER

Gold Will Glitter In December
Gold prices have softened of late, but reasons for buying gold haven’t changed, says Adrian Day, president of investment firm Adrian Day Asset Management.

Fortunately, there is a little wiggle room on the charts. Should the trendline, currently at 303, break there is an important support level just below at 294. This is derived from the major January 2010 peak, the minor November 2010 correction low and the major low set this past October.

It is the last defense for the bulls and if it fails to attract buyers then there is little in the way of chart support until the mid-250s. That would be a 13% drop on top of what has already been lost this year to date.

The two commodities most individual investors follow – West Texas Intermediate crude oil and gold – are the exceptions.

Gold, for example, is often considered to be another form of money and not a commodity at all. A long-term chart shows the yellow metal to still be holding firm in a well defined bull market (see Chart 2).

The September plunge was merely a correction and because prices were rising at what is normally an unsustainable pace it was much needed. Don’t let the size of the drop fool you. It was a necessary cleansing of a frenzied market and that frenzy is now gone.

Technically, the September low at $1535 per ounce was a nearly perfect touch of the long-term trendline. And following on the earlier analysis for the commodities index, gold bounced quickly from the trendline making it uncomfortable for weak hands. They had to move quickly or miss the train pulling out from the station.

I still view gold in this light. While the trend is choppier now than it has been for the past few years, it is still rising.

And finally, crude oil presents a muddier picture (see Chart 3). It broke down below its rising long-term trendline in August but it has already reversed course to head back up. Right now, it is at a crossroads. If the bulls can push the market back above the old trendline into triple digits and hold it there then the long-term bull market would be back in force. If prices fail there and head lower then we will have confirmation that the rally was a temporary upside correction in a new declining long-term trend.

The bottom line is that across the commodities markets, most are in do-or-die positions. Gold may be the exception but it, too, cannot afford to flounder at this point or risk the resurgence of the bears.

And for investors, if you are looking something that will let you sleep at night, commodities is not the place.