The CRB Index Breaks Support as the Dollar Index Jumps

By Jim Donnelly, Olson Global Markets

Disappointment overEurope’s slow moving attempt to take strong enough measures to reduce its debt crisis resulted in a robust jump in the U.S. dollar index (DXY) and a sharp drop in the Reuters/Jefferies CRB Total Return Index (CRB) index last week.

On longer-term charts, last week’s frustration over the absence of a financial “big bazooka” inEuropecaused the CRB commodity index to close below key trend line support at the 303 level. Although technical oscillators on the CRB’s daily chart are currently in an oversold condition, long-term monthly studies are clearly not. With a “gap” also created at the 303 level during Wednesday’s volatile session, a move back toward 303 could result near-term; particularly if this week’s pre-holiday trading activity remains light.

That being said, dimming hopes that a believable resolve to the European debt crisis may ever come to fruition could send commodities solidly lower from current levels. Looming worries over the stability of the European banking system adds to the gloom.

From this vantage point, there is a “risk” that the CRB could eventually move down toward a test of key support currently sitting at 248. Although a move of this magnitude would be in-line with a global slowdown, a reduction in commodity prices would also be seen as a plus for consumers and companies that are large commodity users.

Nevertheless, the threat of a prolonged bout of price deflation could eventually panic central bankers to bring out an arsenal of “big bazookas” in a desperate attempt to avoid a global “liquidity trap”.

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