Commodity Traders, Keep an Eye on the Euro

Remember that even strong bull markets do not see prices go straight up. Rather, there are periods of strong price rallies interspersed with solid downside price "corrections" in the uptrend that can spell trouble for bullish trend-following traders who enter the market at the wrong time.

Veteran market traders also know that it's virtually impossible to accurately predict a major bull market price top. There are technical clues that can suggest a market top could be imminent. But initiating trades against strong uptrends on those technical notions is akin to standing in front of a steaming locomotive.

Importantly, there is now one market that all commodity market participants should monitor closely: the European currency, the euro. The euro trades in an inverse posture vs. the value of the U.S. dollar. By examining longer-term weekly charts, one can see that during the past few months, as the commodity market prices have appreciated strongly, so has the value of the euro.

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At present, the daily bar chart for the March euro currency futures shows that prices are in a well-defined sideways trading range at higher price levels. The direction in which euro prices "break out" of this trading range on the daily chart is likely to also be a determinant of the general price trends in commodity futures markets.

An upside breakout from the trading range by the euro, and to fresh all-time highs in the currency, would suggest yet another solid leg up in raw commodity market prices. However, a downside breakout from the sideways trading range at higher levels in the euro would be technically bearish for that currency and would also suggest that raw commodity futures markets may have marked their highs, or are at least due for significant corrective price pullbacks soon.

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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.