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The commodity futures market bulls started out the new year with a bang. In the first week of 2008, fresh speculative buying interest from commodity funds and index funds propelled crude oil futures to just above the much-anticipated $100-a-barrel level. However, the bulls could not muster a technically important close above that key price level, nor have they been able to since.
Where will the commodity futures markets head from here? Pay close attention to the tried-and-true market adage, "The trend is your friend." There are not yet any strong, early technical clues on the price charts that market tops are close at hand in raw-commodity market leaders gold and crude oil. However, after the gold futures hit an all-time high this week, crude oil futures did experience a significant downside "correction." This divergence in gold and crude should be just a bit worrisome to the crude oil market bulls. However, would-be "top-pickers" in these mature bull market runs in the commodity futures markets need to exercise extreme caution. If you believe a top is close at hand, the best trading strategy may be to purchase put options in those markets. When you buy options, you at least know the financial risk. For there to be strong technical chart price clues that market tops are indeed near in gold and crude, the price uptrends on the charts would have to be negated, starting with the price uptrends on the daily charts and then being followed by price uptrends being negated on the longer-term weekly and monthly charts. As a student of the markets, I study not only price but also time. By that, I mean I study chart patterns and price action, but I also look at how prices act and react during certain periods of time. I can study how prices act during certain times by looking back at price history via the longer-term monthly charts. Time in any market is an important element. For example, in gold futures, the price trend at present is indeed solidly up. However, when examining the longer-term monthly chart, history shows that gold prices that approach or enter record territory do not stay at those levels for very long. More often than not, bearish V-top reversal chart patterns occur when major bull markets and strong price uptrends are uncorked in commodity futures markets. The reason for this is partly that futures traders usually overreact to bullish and bearish fundamental forces in a market, pushing prices too high or too low -- and then markets generally "correct" by reversing the existing price trend. I'm a firm believer in history repeating itself in market price action. I'm not convinced that the present raw-commodities boom, while still very strong at present, will last for years to come. History shows that raw commodities booms turn into busts, and usually sooner than anyone predicted.
The previous high in 1980 was a spike top. It would not surprise me to see the present bull market run in gold futures end with a big blow-off spike top. At present, time is not on the gold bulls' side, if you examine the longer-term history of this market.
However, the monthly chart does show the last major "reaction low" is just below the $50 mark. That suggests that $50 could be challenged at some point in the coming months or few years.
Jim Wyckoff is a senior market analyst for TradingEducation.com a free educational Web site. In addition, Wyckoff writes a blog offering current market commentaries every morning on TraderBlogs.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Wyckoff appreciates your feedback; click here to send him an email.
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