CRB Index Chart
Here’s the CRB Index Chart that shows how narrow the trading range has become. The action on the CRB Index has been developing in a contracting triangle since mid 2010. As you can see, the MACD is nicely oscillating about the zero line which is a good indicator to confirm a contracting triangle.
As you know, the contracting triangle can break on either side. It could break to the upside as well as to the downside. The important thing to note is that when a contracting triangle breaks, the following move would be a vigorous one. This tells us that you can expect a big move on the commodities in the weeks ahead.
There are a few potential target levels should the CRB Index break to the upside. These target levels are derived using the Fib retracement as well as using the measured move of the widest part of the triangle. The first target is at 369 region and the second one is at 420 region. Both of these regions are a confluence of Fib levels. The 420 level has the added target from the triangle measured move and carries more weight.
The triangle could break to the downside as well. That would be the beginning of Primary wave [C] to the downside. Primary wave [C] is a picture of a major collapse in commodity prices.
The commodities and the US Dollar Index moves in the opposite direction to each other. Let’s examine the US Dollar Index to see where it is headed to.
The US Dollar Index
The US Dollar Index is approaching an important trend line which was published in this blog a few days back. You can read the detailed review on the US Dollar Index Technical Analysis. Should the US Dollar Index break the trend line and move higher, it would spell trouble for the commodities.
On the other hand, should the US Dollar retreat from the trend line and head lower as what we are anticipating, the commodities will then head higher.
The Position of Crude Oil
Crude Oil forms a large part of CRB Index and it is no wonder that the CRB Index Chart resembles the Crude Oil Chart. Notice that the crude oil has broken the triangle to the upside. It could be just a throw over and the price could move swiftly to the downside. In order to have a confirmed break out, the crude oil must travel above the top of wave D (in amber). That is at 110.55 which is just a few more dollars from where it’s at right now.
The Position of Gold and Silver
Gold and Silver are also commodities that move in the opposite direction to the US Dollar Index. The interesting thing about gold and silver is that both these precious metals have been on a bear market and are showing signs of bottoming.
Putting it All Together
Putting all of these together, the most likely trend that is expected to develop is one where the US Dollar depreciates resulting in a surge in commodity prices in medium term. This could last for a year or two.
The alternate view, which is still on the table as there is no confirmed break out yet, is that the US Dollar Index will rise breaking the long term trend line and put price pressure on the commodities.
The break out is expected to take place in the next two to three weeks time and it would likely present some big opportunities if you are on the right side. The commodities stocks as well as oil and gas related counters that has been sliding for quite a while now might finally get their turn to enjoy a bull run.
As always, plan your trade strategy and trade your plan.
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