The current correction in crude oil (and most commodities) has developed into more than just a normal pullback, taking out several primary support levels. The last major drop like this was in the summer of 2006, when crude dropped 36.1% from almost $80 to just above $50. A similar drop this time would take crude all the way back to $94.51; but we think the real battle will take place at the all important, round number $100 level. It took 5 attempts and much media hype to break $100 on the upside, and this was immediately followed by 5 weekly tests from above as support. Crude then rallied 50% in four months (eventually almost tripling from the lows) before topping out just under $150 at the beginning of July. A similar rally from the lows this time would put crude near the high level target of $250 on its next leg up.
Confirming this support are the commodity indices themselves. These show very similar targets to the one suggested by crude. First, the CRB, the most widely watched commodity index; with a heavy energy weighting. The daily chart shows the various support levels including the key retracement levels and the moving averages. First retrace support at 38.2% held for a while and we even had a minor bounce. Next up was the 200 day which held for two days before falling on Friday thanks to a strong showing by the dollar (see this chart below). We closed Friday right on the 50% retrace level, but we think we may ultimately be headed for the 61.8% retrace (the last support level in a bullish correction) because of what we see on the other charts including crude above and those below.
This is the weekly chart of the same index, CRB. This compares the drop in 2006 to the current drop, as above with the crude chart. A similar drop this time would take us to 368.57, which is very close to the 61.8% retrace level as shown above. It is also just above the previous major highs, which can now be expected to act as support. This correlation of support tells us that the 365-370 level should be a major battle on this index. This will coincide with crude around $100.
Next is the CCI, an older version of the CRB index that is more evenly weighted, with less of an emphasis on crude and energy. This confirms the story shown by crude and the CRB above. The 61.8% retrace level is just over 480 as shown on the daily chart here.
The weekly chart confirms long term trend line support in the 480 area. Notice how it tested this line twice after the 2006 correction and once again late last summer before rocketing up on the last run. Before any of these areas are taken out, it is premature to call these bull markets dead. They just had one hell of a run followed by a complimentary correction. If anything, we look for a solid bounce from these levels just to test the death of the bull if nothing else. Our favorite head and shoulders top could develop on the commodity indices along with a possible double top in crude. That is IF they don’t just rocket to new highs after testing long term support as before. This test of support could come this week and take merely hours or it could play out for a month or so, backing and filling some before recovering.
Which brings us to the next two charts of the dollar. Just as these above are in long term up trends, those below are in long term downtrends. We would need to see these resistance levels taken out to change our opinion on the dollar, and as a result commodities. Until support falls in commodities and resistance does the same in the dollar, we are bullish on commodities and bearish on the dollar.
The 80 level on the dollar index was a very long term support level that fell last fall. Until it is reclaimed, you have to believe it will be just as strong from the bottom as it was from the top, meaning 80 is major resistance in addition to the trend lines shown on these charts. We could talk fundamentals forever, but all that really matters is what the market thinks.