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Record-high crude oil and wheat futures prices, gold futures prices nearing 30-year highs and a sharply lower value of the U.S. dollar vs. the other major currencies are a bullish cocktail that has pushed the Continuous Commodity Index to a 30-year-plus high this week.
The slumping greenback makes U.S. export prices cheaper to foreign buyers, which fuels stronger demand for those exports, including raw commodities. U.S. grain exports have surged recently, partly due to the lower value of the U.S. currency. Commodity market bulls are again enjoying success after hitting a serious speed bump in August when the CCI made a dramatic downside correction, throwing a serious scare into the commodity bulls. However, the strong rebound in the CCI and the steep uptrend now in place on the daily bar chart have the raw-commodity-market bulls again flexing their muscles. In fact, the Directional Movement Index (DMI) overlaid on the daily CCI chart has an Average Directional Index line reading of 37.19. Any ADX line reading above 30 indicates a powerful trending move.
When investors and large speculative traders (also called "commodity funds") see the record-high crude oil prices and historically high gold prices, they then begin to look at other raw-commodity markets that are not at or near historically high price levels.
These other markets become bargain-hunting opportunities on the long side on the notion that "a rising tide lifts all boats." Commodity futures markets such as corn, soybeans, cotton, coffee, sugar, orange juice, silver and copper all have seen recent solid price gains on spillover buying interest from the strong gains seen in the headline markets, crude oil and gold. It's been perplexing to some market watchers that recent stronger signals pointing to U.S. economic recession or economic stagnation have not put the brakes on the big rallies in raw commodity markets. Slowing economic growth means less consumer and industrial demand for raw commodities.
These market watchers also wonder aloud whether crude oil prices trading above $80 a barrel can keep U.S. economic growth trending higher. However, the raw-commodity bulls will correctly counter that the world's major industrial economies are still growing at a strong rate, highlighted by Chinese economic growth at better than a 10% annual pace. This strong worldwide demand for raw commodities will keep prices at higher levels for months or even years to come. However, do not be surprised to see more downside "corrections" in raw-commodity markets and the Continuous Commodity Index -- like that which occurred during August -- in the ongoing bull market run in commodities. Also, the present technical posture of the CCI daily chart does suggest continuing high volatility in many futures markets -- both on the upside and on the downside, in the coming days and weeks. In the present raw-commodities investing environment, the smart traders will be looking to "buy the dips" during those downside corrections.
At time of publication, Wyckoff had no positions in the stocks mentioned, although positions may change at any time. 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. Brokerage Partners
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