Commodities Look Headed for Another Accumulation

In the past five months we have witnessed an unprecedented meltdown in raw commodity futures market prices. Crude oil, the commodity market leader, has seen prices drop more than $100 a barrel since early July, more than a two-thirds haircut from the all-time high of $147. Other markets, such as grains, metals, livestock and soft goods, have also seen their prices depreciate by up to 50% or more during the same time frame. Dour world economic and financial conditions that continue to deteriorate are mainly responsible for the washout in the commodity markets.

The year 2008 has shown us a classic example of the ways of the commodity markets and their traders. Early in the year, intense speculator buying interest drove most commodity futures prices to multiyear or even all-time record highs. The rising tide of commodity price inflation invited still more speculation on the long side of those markets -- from "newbie" commodity traders and from the growth of commodity index funds.

Open interest in commodity futures markets, or the total number of futures contracts outstanding, reached historically high levels amid the new speculators coming into the futures markets. Indeed, the accumulation phase of the commodity market trading realm was in high gear during the first half of the year.

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Source: FutureSource and TradingEducation.com

The accumulation phase in commodity market trading hit its peak in July, as crude oil prices hit their all-time highs, while at the same time the U.S. dollar's value hit a bottom vs. the other major currencies.

However, as financial markets began to seize up and as the stock markets of the world began to sell off, so began the distribution phase of the commodity trading cycle. Just as the bull market runs were unprecedented earlier this year, the bear market ride south in prices has been just as breathtaking.

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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.