Commodities Correction Continues into September

By: Donald_W_Dony

KEY POINTS:
• U.S. dollar bounce for four to six weeks expected; target of $0.80 to $0.81
• Broad consolidation for commodities lengthens; business cycle suggests crest is developing
• Gold weakness expected until late September; $725 to $740 is the target
• Oil on support at $105; $120-to-$125 target
• Positive seasonality begins for natural gas

Over the last several months, I have been advising subscribers that a commodities blowoff was likely coming before September. The commodity markets have enjoyed a near-flawless upward ride in 2007 and early 2008, and they were a fairly safe haven for steady profits, but the advance began to accelerate too quickly starting in March 2008. And this is where the concern for a pullback began to grow. The trigger for this expected retracement came from the most logical place – the U.S. dollar. Just as the U.S. dollar started its momentous decline in 2002 – which signalled the start of the commodities secular bull market – any strength out of the dollar will have an equally negative impact on raw-material prices. The U.S. currency is at the head of the intermarket chain and its movements affect commodities, bonds and stocks.

‘Down under’ rally

Currencies ultimately trade to reflect their fundamentals. As the trade deficit now stands at more than US$9 trillion and is expanding at US$2 billion per day, it is no wonder that the U.S. dollar has been falling faster than airborne bricks. However, nothing ever trades in the same direction forever, and the greenback is no exception. The rally that is developing for the dollar can best be considered a technical bounce within a bear market. The currency has developed several of these ‘down under’ rallies since 2002, most notably from late 2004 to late 2005, when the dollar advanced 15%, only to stumble again due to the negative fundamentals.

So how high can the dollar climb, and what should be the effects on commodities? The U.S. dollar (see Chart 1) has reached good support at $0.70 to $0.71. The rise can be expected up to solid resistance at $0.80 to $0.81, until the first part of October (see the lower portion of Chart 1). This anticipated increase will affect most natural-resource prices and especially gold, which trades the closest to the currency.

The equally weighted Continuous Commodity Index (CCI) (see Chart 2 on page 2), although still in a bull market, has clearly begun to flatten out and decline. And just as the U.S. dollar is expected to strengthen until early October, the CCI should weaken during the same timeframe and drift lower, to support at 450 to 470. Another factor weighing on commodities right now is the stock market cycle (see Chart 3 on page 2). Certain stock market sectors rise and fall during different phases of the standard expansion and contraction of the economic cycle. As the global economy continues to contract over the next 18 to 24 months, utilization of raw materials will typically stabilize or shrink. Commodities are normally the last sector to crest. This appears to be happening now.

The September newsletter also highlights eight stocks that are fighting the downward trend of the indexes and making strong advances.

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Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2008 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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