Charted Territories

By Jim Donnelly, Olson Global Markets

After a frenetic week in the commodity pits culminating with the decision by the International Energy Agency (IEA) to release emergency reserves to make up for lost Libyan supplies, oil prices tumbled on Friday. And although half of the 60 million barrels to be released over the next month was from the U.S., that 30 million barrel commitment represents less than 4% of the 727 million barrels held in strategic reserve. In addition, the 727 million barrel stockpile is 35 million barrels above its 5-year average.

In any event, oil prices had already begun to fall following their recent peak set during the first week in May. Moreover, the AMEX’s XOI Oil Index had broken below key trend line support at 1,280 on June 10th, well before Friday’s surprise announcement. At the moment, oversold conditions are present on the XOI’s weekly time frame, which suggests that a rebound higher in oil prices is entirely possible from current levels. If the XOI does recover, a retest of the 1,280 area would likely be viewed as an opportunity to “lighten up” on long oil positions. When looking at the XOI weekly charts, it also appears that there is a reasonable “risk” for a possible move down to test key trend line support now sitting near the 1,100 area. That’s a whole lot lower than market participants are currently expecting. But from a technical point-of-view, the pattern that traced out between January 14, 2011 and the June 10^th “breakdown” also happens to look like a bearish “head & shoulders” pattern that points to an eventual test of the 1,100 area as well.

In any event, increased volatility in oil prices appears to be likely during the summer months. Don’t be surprised if lower oil prices result.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

With weekly technical oscillators in a near-oversold condition, the Reuters/Jefferies CRB Total Return Index (CRB) is approaching a test of key trend line support at the 323 level. The real question is: Will the CRB Index hold at this support level, or will it break through it?

Worries over a possible default of Greek debt intensified last week, which sent commodity prices lower. In addition, a complimentary rise in the value of the greenback as measured by the U.S. Dollar Index (DXY) clearly added to the decline of commodity prices last week as well.

That being said, a last minute agreement to lend Greece $12B over the weekend, if it occurs, could send the U.S. Dollar Index lower once again. In turn, that should cushion the recent decline in commodity prices, at least over the short run.

Nevertheless, a possible slowdown in global growth combined with broader concerns over European sovereign debt could keep pressure off energy prices as well as industrial metals over the intermediate-term. Given this kind of scenario, the absence of a “QE3” type initiative by the Federal Reserve would likely keep commodity prices from rising anytime soon unless weather related circumstances overrode their price stability.

In any event, a key test of the 323 level on the CRB index near-term should find it acting as support much the same way that it did back in August 2004 and again in January 2007.

A solid break below 323, however, would dramatically change this outlook, as well as the outlook of the U.S. Dollar index.

http://www.ogmarkets.com/