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February 9, 2006

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A Longer-Term Perspective on Key Markets
Name: Jim Wyckoff

Learn More About Today's Author
Years Trading: Over 20

Favorite Movie: The Outlaw Josey Wales

A Longer-Term Perspective on Key Markets

Continuous Commodity Index: The CCI Index last week established another 25-plus year high as the powerful bull run in the raw commodities sector rolls on. The CCI (formerly called the CRB Index) is a basket of 17 major raw commodities futures prices rolled into one composite price index. The CCI is an excellent barometer of raw commodity price inflation.

A look at the monthly chart for the CCI index shows just how powerful is the uptrend in raw commodities prices, in general. The monthly CCI chart shows the index hit a slow of 182.83 in October of 2001. Since that time the CCI has been in a steep uptrend, with prices this week hitting a high above 360.00.

For perspective, previous bull market runs in the CCI index the past 25 years saw a peak of 272.19 in 1988. In 1996, the CCI topped out at 263.79. The present bull move in the CCI index has produced an uptrend that dwarfs the previous two bull market moves dating back 25 years.

There are no specific near-term or longer-term technical clues that suggest the uptrend in the CCI index is about to climax. However, the steepness of the present uptrend in the CCI index, from the 2001 low, does hint that when the top in the index does occur, the ride back south could be as rapid as the ascent.

Commodity market bulls make the plausible argument that a "paradigm shift" in the raw commodities markets will fuel strong demand--and higher prices--for years to come. They correctly point out that China's explosive economic growth is a major factor in the major bull runs in many raw commodities markets. Other world economies are also experiencing double-digit rates of growth in industrialization, including India and Malaysia.

Veteran traders will point out that markets (and indexes) are the most very bullish at the very top. One thing appears likely: Volatility in the raw commodities futures markets will remain high of months to come, or even longer. Traders can enjoy market price volatility, as long as it's on their side. If it's not, or if markets turn both volatile and choppy, then both the bulls and the bears will suffer.

Enter the commodity "index funds." The energy and metals markets (and the CCI) have early this year been beneficiaries of index money flowing in on the long side. Remember that unlike other "commodity funds," the index funds only trade on the long side of futures markets. And the index funds tend to have a "buy and hold" strategy as they track a certain commodity index.

The grain futures markets have recently seen an unexpected influx of index money that drove prices significantly higher. Veteran traders have learned not to try to stand in front of those markets experiencing such inflows of speculative monies--even if the fundamentals of those markets may be decidedly bearish. Corn is one market that has rallied significantly recently, despite possessing overall bearish fundamentals.

Crude Oil: The monthly crude oil chart shows that prices have been in a solid uptrend ever since the December 1998 low of $10.35 a barrel, basis nearby futures. For the bears to produce some longer-term chart damage to suggest that a major top could be in place in the crude oil futures market, nearby prices would have to drop below the last "reaction low" of $55.40, scored in November of last year. A push in nearby crude oil futures above technical resistance around the $71.00 area would open the door to another solid leg up in prices in the coming weeks and months.

S&P 500 Index: The monthly continuation chart for nearby S&P 500 futures shows that prices are in an uptrend from the 2002 low of 767.50. Nearby S&P 500 futures in January hit a 4.5-year high of 1301.00. The solid longer-term uptrend in this stock index should be very encouraging to the bulls. The price uptrend is a steady one that has not become extreme. The general investing public also appears not to be paying as much attention to the stock market as in years past. There are rivals competing for investors' money, including a red-hot commodities market and a still-active real estate market.

The lack of attention the uptrend in the S&P 500 is garnering one clue that the uptrend is going to continue. Remember that when the general trading/investing public catches wind of a major trending price move in a market, the odds are high that the majority of the trending move has already occurred, and that a market top or bottom is likely closer at hand.

A move above longer-term technical resistance at 1,340.00, basis nearby S&P 500 futures, would provide the bulls with some additional longer-term technical strength. A drop below longer-term support at 1,200.00 would penetrate on the downside the uptrend line on the monthly chart and would provide the bears with some fresh longer-term technical strength.

Gold: The precious yellow metal last week hit a fresh 25-year high as nearby futures prices close in on major psychological resistance at $600.00 an ounce. My bias is that nearby gold futures will hit the $600.00 level at some point this year.

See on the monthly continuation chart for nearby gold futures that prices are in a steep uptrend from the 2001 low of $255.00 an ounce. See also on the monthly chart that prices are still not close to the all-time high of $873.00 an ounce scored in January of 1980.

There is now an important longer-term technical benchmark on which both the bulls and the bears can set their sights: The solid support zone on the monthly chart, located at $500.00 to $514.00, basis nearby Comex gold futures. It will take a move in prices below this support zone to suggest that the major long-term bull market in gold is finished, and that a fresh longer-term price downtrend could be under way.

Corn: The corn futures market has seen a surprising rebound recently. Prices were hovering near contract lows just recently, and then a surprising influx of commodity fund and "index fund" money came into the corn (and other grain futures) market to produce a sharp rebound. The sharp rebound came amid fundamentals in the corn market that were considered significantly bearish.

Why would the index funds choose the corn market in which to participate? One major reason can be explained by examining the longer-term monthly continuation chart for nearby corn futures. See on the chart that recent price history dating back over 35 years shows that nearby corn futures prices are presently trading in the lower one-third of that trading range. The index funds looked at the corn market and figured that with the CCI index at a 25-plus year high, and with other major raw commodities prices rallying strongly and near recent historical highs, the corn futures market does have upside price potential in the coming weeks and months--despite what are perceived to be bearish fundamentals at present.

The jury is still out, and will be out for a while, regarding whether or not the index funds made the right move in corn. My bias is that it will take a serious weather market in the U.S. Corn Belt this coming growing season to propel corn futures prices significantly higher. But heading into the growing season in the Corn Belt, conditions are already abnormally dry. Iowa (in the heart of the Corn Belt) just experienced one of the warmest and driest Januarys in recorded history.

Soybeans: Looking at the monthly continuation chart for nearby soybean futures, one can see, too, that prices at present are not anywhere near the recent historical highs of the past 35 years. With the recent media publicity regarding the red-hot raw commodities sector, soybeans are also receiving attention from the commodity funds and other speculators--with long-side intentions in mind. A weather scare in Brazil and Argentine soybean-growing regions has added some fuel to bullish soybean notions. But like corn, there are bearish soybean fundamentals--namely large stockpiles from last year's harvests.

Soybean, corn and cotton traders are anxiously awaiting what is arguably the most important USDA report of the year: the March 31 planting intentions report. Early ideas are that the corn planted acres figure will be bullish and that the soybean planted acres figure will be on the bearish side.

As is usually the case in the soybean market, the U.S. planting and growing season will be accompanied by higher price volatility amid at least one significant weather market scare. Remember that more years than not during the U.S. planting and growing season for corn and soybeans, at least one significant weather scare does develop. And with soil conditions in the Corn Belt already abnormally dry in key areas, grain traders will be especially "goosey" this spring and summer.


Cotton: See on the monthly continuation chart for nearby New York cotton futures that prices are in a longer-term uptrend from the 2001 low of 28.20 cents. Cotton futures prices trading below 60 cents a pound are still nowhere near the all-time high of 117.20 cents scored in 1995. Cotton futures prices at present are still well into the lower half of the recent historical trading range of the past 30-plus years.

My bias is that cotton futures prices will see more upside price action in the coming weeks and months. Given the strong raw commodity price inflation scenario at present, as depicted by this week's 25-plus year high in the Continuous Commodity Index (CCI), it's likely the speculative trader interest--on the long side--will be high this year.

Fundamentally for cotton, the strong growth in the Chinese economy--a major world cotton importer--is likely to also keep cotton futures prices supported.

Coffee: The New York coffee futures market has seen a solid bull market move unfold the past several weeks. However, see on the monthly continuation chart for nearby coffee futures the prices at present--just below 120 cents a pound--are nowhere near the all-time high of 337.50 cents scored in 1977. See also on the monthly chart for coffee that there have been some major bull market runs uncorked the past 30 years.

See, too, that nearby coffee futures prices at present are in a solid longer-term uptrend from the 2001 low of 41.50 cents a pound.

Given the present posture of the Continuous Commodity Index (a fresh 25-plus year high scored this week) the path of least resistance for the coffee futures prices still appears to be up. The next longer-term upside price objective for the coffee market bulls is the 2005 high of 137.00 cents, basis nearby futures.

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