The Week Ahead - Commodity Charts are Aligning

The headlines are all decidedly bearish, there is nowhere to go but down they say, the end of the tunnel is still showing no light, the economics are in disarray, we have seen these periods seven times in the last 150 years and all were bad, blah, blah blah. The reality is that the market liquidation of all positions over the last six months that held any leverage, risk, or that were marked to market values, has created a tsunami of selling that may have thrown the baby out with the bath water.

Nobody wants to try to pick the bottom of anything, let alone a market, and as such the deadly headlines have to be tempered with the technical charts if we are to get a real semblance for market sentiment right now. Over the last week there has been a slowdown in currency reactions to the daily noise, and a dramatic reduction to the daily Average Trading Range of all of the major pairs. Volume reductions confirm that the speculative interest may have had its fill of currency selling against the dollar, and that was confirmed by the speculative bounce that broke the back of $750 on gold on Thursday/Friday.

Whatever the personal perspective, whatever the media's thoughts on the impending doom, and whatever the headlines say, the charts are showing something that needs attention paid to it. Friday's 'Tim Geithner Rally' may just be the spark that sets an ABC long structure in place on equities, it may not be the bottom, who knows where that will actually be, but it does look as though a relief bounce is coming.

S&P: The push lower on Friday came with no volume at all, and as such allowed the volatility to build again, which in turn allowed another day of large channel trading to form. That however only lasted up until the news broke of the placement of the first of the new U.S. President's financial team. The global equity markets are thirsty for positive news, and the markets drank from this story in such a way that it would seem that long-equity momentum will now at least run through until Monday's Wall Street open, and probably into the U.S. holiday. The next move really cannot be underestimated, it could be absolutely pivotal. The last of a five wave pattern may have just been completed in the W5 move from 1010 to 740, and as such we will be looking for an ABC structure to try to build long off any relief rallies that come in trade next week. The first move to form leg A going long may be targeting the 820 area.

Dollar Index: Looking to quickly test 89.00 in a bullish play that creates an exhaustion move that may then retrace to support at 86.00, and below. All dependent on equity direction; lower stocks equal 89.00 at least it seems, but that now may be tested as Gold pushes higher. Add in the Treasury market that has ripped yields lower and the dollar may be facing the first test since it was heavily protected at 71.50 on the index. If oil decides to trade above $50 this week, and gold holds $775, the greenback may get more easily sold than has been recently seen. The index is at a swing point, and has not yet made adecision on the direction that it plans to take it seems. Maybe the long push on the S&P will finally break the dollar buyer's resolve. There has just been a long 5 wave completion, and now we will watch for the ABC reversal structure.

Oil: Under $50 a barrel is good to hear for driver across the globe, but we need to be aware that OPEC meets this week, and are very likely to try to drive prices higher by limiting supply. Keep an eye on the moves around $50 each day, and watch the link to the dollar index. If equities move higher, Treasury yields hold around 3.2%, and gold holds $775 as support, we may see oil move back towards the $55 area. Oil has traded lower in very tight bear channel for the last three weeks (ending diagonal), so maybe it is time to start looking for new long positions especially as the market has finished a five wave cycle from the $100 top. The price structure is suggesting higher moves in the next week, with prices threatening the 20 day MA which has held prices below it for the last 2 months. The MACD indicator is showing bullish divergence which is suggesting a move higher, and the Stochastic read is also very bullish.

Gold: Looking now for the next long leg to test $825; there really seems to be very little in the way of this breakout now. On the daily gold chart we can see some very choppy waves down from the $1000 top. When compared with oil or the dollar index it reveals that investors had a lot more confidence in Gold holding, we have not seen the same powerful moves down as happened with Oil and the Eur/Usd charts. The positive correlation between gold and oil will be much stronger once crude finds support and the dollar index hits strong resistance, both of which look to be happening right now. In this case Gold will probably explode higher to test $810, $825, $850 and then $905, but first we need to see oil break and hold $55, and the dollar index find rejection around 89.00.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

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