Commodities – Energy
Crude Oil Struggles to Break Out Ahead of Inventory Figures
Crude Oil (WTI) – $86.30 // $0.42 // 0.48%
Commentary: Crude oil dropped $0.34, or 0.39%, on Monday to settle at $86.72. Prices earlier hit new 25-month highs at $87.63 before backing down. While crude was down, it held up better than U.S. equity markets which fell 0.8% on profit taking. A stronger dollar also weighed on crude. As commodities are denominated in U.S. dollars, strength in the currency is sometimes used as an excuse to sell. But while crude fell, other commodities such as copper continued to soar to new multi-month highs. Incidentally, copper is now nearing its all-time high levels of 2008.
With news flow light this week, traders be watching Wednesday's Department of Energy inventory report closely for guidance. The API survey was extremely bullish, showing a 7.4 million barrel withdrawal in crude stocks, a 3.4 million barrel draw in gasoline stocks, and a 4 million barrel draw in distillate stocks. If the government report shows anything close to these numbers, crude should be well supported.
That being said, crude has not yet broken decisively above the $87.15 May highs. Granted, it briefly hit levels above those highs, but until we get a decisive breakout, the bulls cannot claim victory. As of now, the 13-month range between the high-$60's and mid-$80's still stands. And though we expect crude to break higher in the coming weeks and months, there is nothing to prevent a minor correction given the huge gains of the past couple of weeks.
Technical Outlook: Prices have stalled after putting in a bearish Hanging Man candlestick at $87.15, the major swing top set in May that – until last week – served as the 2010 yearly high. Negative RSI divergence continues to point toward (at least) a pullback, with a reversal lower initially targeting resistance-turned-support at $84.43, the 10/07 wick high.
Commodities – Metals
Gold Finally Buckles as the Dollar Rallies for a Third Day
Gold – $1396.30 // $3.40 // 0.24%
Commentary: A third day of gains in the U.S. Dollar was finally enough to pull gold prices down, but not before they hit yet another record high at $1424.60. Prices ended the day $16.65, or 1.18%, lower at $1392.90. After two days in which it seemed the strong inverse correlation between gold and the dollar was breaking down, perhaps the gold-dollar relationship is reverting back to its usual self. But in the bigger picture, even if the U.S. dollar manages to string together something of an uptrend here, gold bulls likely won't believe that it is anything but an oversold bounce.
With gold prices so overbought— having increased much more than one would suspect given the increase in gold ETF holdings—a selloff would not be surprising, especially if the dollar keeps rising. But any dips in gold will likely be seen as buying opportunities by a large swath of market participants. Many are seeking long-term protection against the debauchment of fiat currencies, and gold is seen as the vehicle that will give this protection.
To get a more sustainable downtrend in gold going, central banks around the world have to at least begin to end the current easy money paradigm that is so prevalent. If we see interest rate hike expectations for the Fed and ECB increase, that may be the trigger for all the investment capital tied up in gold to head for the exits. But most would agree that any rate hikes are still far off.
Technical Outlook: Prices have retreated from resistance at $1414.82, the 138.2% Fibonacci extension of the 10/14-10/22 downswing, to meet resistance-turned-support at $1387.35, the mid-October swing high. Near-term resistance remains unchanged while a break past current support exposes the 76.4% Fib at $1370.38.
Silver – $27.24 // $0.32 // 1.17%
Commentary: Silver had an incredible whipsaw session on Tuesday, first rising almost 6% to hit a 30-year high at $29.36, but ending the session down $0.83, or 2.97% to settle at $26.92. The price action in silver is out of control and extremely characteristic of a animal spirits run amok. With volatility so high, only the most aggressive traders should consider a position in silver.
The gold/silver ratio rose slightly to 51.1, but remains near the lowest levels of the year and near the levels of February 2008. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance, while a lower ratio indicates silver outperformance).
Technical Outlook: Prices dropped sharply lower having set a new 30-year high at $29.36 to meet support at $26.87, the 38.2% Fibonacci retracement of the 10/21-11/09 advance. Continued selling targets the 50% Fib at $26.10. Near-term resistance lines up at $27.82, the 23.6% retracement level.
