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April 29, 2008

Sold!

The unpleasantness continues for those holding various commodities. There seems to be a growing sentiment that the Fed will adjust its language, and eventually its policy, to one that prioritizes concern for inflation over concern for the credit situation. If the CRB chart has anything to say about it, this sentiment could persist:

CRB chart

Given the dismal news that is still spilling out of the world of finance, it is highly unlikely that we will see any rate hikes anytime soon. However, I think the Fed will adjust its rhetoric, and I think the world's central banks will continue to intervene to support the dollar for perhaps several months.

Precious metals delivered new lows for this correction, and gold now seems destined to visit the top of its previous consolidation zone.

gold chart

Important pivot levels can act like magnets for price. For those of you that were smart enough and/or brave enough to short gold during its recent downdraft, the $845-850 level seems like a reasonable place to take some off the table, especially with daily RSI approaching 30. Daily RSI has rarely breached 30 during the course of this bull market, and if gold's price lands on the support line above with RSI at or below 30, I'd take it as a low-risk entry for a long trade.

The intermediate term for precious metals concerns me, however. Gold's breach of $1,000, which occurred in conjunction with heavy news out of the financial sector, drew in a lot of skeptics. These latecomers are now being thrashed... a sort of punishment for their previous disbelief... and it will be difficult to judge how long the thrashing will last. In 1975/76, gold had finished a multi-year streak higher much like we've seen in recent years, and then rolled over into a tortuous, 19-month decline of nearly 50%!

Now, I'm not predicting that we are about to see a similar decline... only that a trader should be wary of what is possible.

Finally, a look at copper. I really like this chart:

copper chart

If we zoom in, we see that copper has a pretty clean and close stop at 380, so the risk/reward seems pretty good. The target for breaking higher out of this base is way up at $5.60. The risk, of course, is that copper gets dragged down with all the other commodities in a larger correction.

copper chart

 

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