Another Way To View The Upside Potential Of The CRB Index

By Jim Donnelly, Olson Global Markets

On October 11th, we observed that a possible bullish “cup & handle” pattern that targeted a move up to the 343 area was developing on the CRB Index of commodity prices. A “break” above key “neckline resistance at the 268 level was needed to verify this pattern’s validity, and that occurred on October 14th.

Supplementing the notion for a solid extension higher in commodity prices can be helped by looking at monthly bar charts. When looking at the monthly time frame, the CRB index broke above key “cross” trend line resistance at the 265 level on October 12th with long-term technical oscillators signaling “buy”.

Important to note, however, was that an upward sloping trend line dating back to the CRB Index’s 182 low of November 30, 2001 held as support until October 7, 2008 as liquidations of many asset classes ensued following the collapse of Lehman Brothers. It is now interesting to observe that the “backside” of that former support line now sits as resistance coincidentally at the 343 level (and rises gradually over time).

With the relationship between commodity prices and the S&P 500 index still apparently in effect, a rise in commodity prices should be positive for equity prices. One reason for continuation of this relationship is that a rise in commodity prices points to a global economic recovery with the demand increasing for raw materials, both hard and soft. Another reason is that the U.S. dollar will likely continue its bearish trend for a bit longer. If that assessment is accurate, U.S.  companies should benefit by having competitive pricing power for goods and services, thus helping their bottom lines.

In any event, commodity prices and the CRB Index appear to hold a bullish bias with much more upside yet to unfold.


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