Strength in the US Dollar has combined with risk aversion trades and a widespread margin related selling across the entirety of the commodity complex to derail the technical posture of the CCI. It has now dropped firmly below its 100 day moving average, the first time it has done so since last year shortly before QE1 was set to expire. The expectation that the Fed would come out with QE2 and subsequent announcement and inception of that program, kicked the commodity sector into high gear driving the index to a new all time high in the process.
Now that it appears as if QE2 is set to expire at the end of June, money is flowing out of the commodity sector as a whole and this is working towards knocking the index lower.
From a technical perspective, the index has violated the low made back in March of this year which was associated with the Japanese earthquake and tsunami, an event which precipitated a huge rush out of commodities and away from risk. At that time, commodities were sold off fiercely but then recovered as traders reassessed the situation and voted in favor of no long term effect on the overall global economy. As of today, we have now violated that low which does not bode well for the sector for the immediate term as a double top has now been posted on the chart.
The 100 day moving average is still above the 200 day however so the longer term trend is still up but one can see that the 200 day moving average is flattening out indicating the possibility of that average turning lower. Should that occur and we get a downside crossover of the 100 day below the 200 day, it will signal an extended period of price weakness in the commodity sector, much like what we experienced back in 2008.
While this is by no means set in stone, especially given the very perilous condition of the US fiscal condition, it does bear watching as there is an obvious rotation occuring out of the commodity sector into elsewhere for the time being.
Bernanke and company have basically attempted a form of tightening without tightening by talking up the end of QE2 next month. Sovereign debt woes out of the Eurozone is affecting sentiment towards the Euro. China is attempting to get the inflation genie back into the bottle and several nations are actually raising interest rates. This has some expecting a slowdown in global growth and a subsequent decrease in demand for commodities. All of this is working to push up the Dollar and that is generating algorithm related selling of commodities by hedge funds in return.
None of this has the least bit to do with the longer term fortunes of the US Dollar. We now have some leading figures in economic circles outrightly voicing fears of economic ruin for the US unless it gets in house in order. One is calling for a return to a gold standard to enforce fiscal discipline on our profligate spending. The issues facing the US are deep rooted and will require drastic and concerted action to correct, something the current feckless administration will never attempt to do. This all adds up to a wave of woes coming our way down the road but for the time being, traders being the short-sighted ninnies that they are, the Dollar is being viewed as a good place to park cash.
My view is that the next occasion that sees the Dollar falling down towards the 73 level, it will no longer hold and will crash through that level, precipitating the events that many of us have long feared. Remember, consequences cannot be avoided, only postponed.
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