by Kevin Klombies, Senior Analyst, TradingEducation.com, LLC


Friday, August 15, 2008

Chart Presentation: Trends

After a sharp gain on Wednesday commodity prices cooled somewhat yesterday as the U.S. dollar continued to strengthen.

U.S. inflation for the year ending in July rose at the fastest pace in 17 years but bond prices were stronger as Europe’s economy contracted for the first time since the introduction of the euro almost a decade ago.

The end result was that both the U.S. Dollar Index (DXY) and the U.S. 30-year T-Bond futures were higher in price yesterday so we start things off with a comparative view of the sum of these two markets along with the sum of copper futures and crude oil futures (copper in cents with crude oil in dollars multiplied by three times).

The offset to a rising trend for energy and metals prices is weakness in the combination of the dollar and long-term bond prices. The chart shows that the trend shifted towards positive for the commodities markets just after the September 11th terrorist attacks back in 2001.

Just about everything feels easier and better when one is trading with the trend instead of against it. The trend for the past six to seven years has been positive for energy and metals prices and negative for long-term Treasuries and the dollar. The trend has favored foreign equity markets and, within the U.S. equity market, small cap over large cap.

At the end of this year’s second quarter the commodity markets began to correct lower. We show the same chart comparison for a shorter period of time at bottom right.

The point is that even if we argue otherwise it is still difficult to make the case that the major trend has actually changed. The sum of the dollar and TBonds has most certainly rallied but it remains below the resistance line that has held since 2001. The sum of copper and crude oil futures prices has quite obviously declined but through trading yesterday it is well above the logarithmic support line that has served as long-term support.

In our work we will undoubtedly suggest that the major trend has or is in the process of changing but this view would be aided considerably by another 3 or 4 points of joint dollar and TBond price gains along with a further 10% or so of price weakness for copper and crude oil.

The chart at right shows the ratio between the Amex Oil Index (XOI) and the pharma etf (PPH). Similar to today’s first page the point here is that prices have corrected since the end of June without breaking a number of key trends. The XOI/PPH ratio is very close to breaking support but until it does the trend will continue to favor the oils.

Below we show rather large chart comparisons between the Nasdaq Composite Index and Canada’s Bank of Montreal (BMO) through the Nasdaq’s peak in 2000 as well as the CRB Index and Japan’s Mitsubishi UFJ (MTU) from the current time period.

We made this argument on a number of occasions in the past so we thought it appropriate to update it given that it is not behaving as expected.

The idea was that as the Nasdaq powered to a high in March of 2000 money was being pulled towards the dollar and away from non-U.S. financials. Our view was that the strong commodity trend into 2008 was pulling money away from both Japan and the U.S. so once the CRB Index made a peak and turned lower we should see a rebound in Japan’s banks similar to the recovery in Canada’s banks back in 2000. MTU did turn higher through the first half of July before slumping to new lows last week. It is possible that the weakness is temporary and that it is simply trading ‘below trend’ but so far this is not the outcome that we were looking for.

Kevin Klombies is a prolific writer and market analyst specializing in the commodity stock market and bond commodity market trading in the energy sector. He  graduated in 1980 from the University of Saskatchewan with a Bachelor of Commerce degree (Honours) in Finance/Economics.  Click here for full bio >>