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Commodities: risk aversity versus relative strength

The twenty most traded commodities apart from sugar all showed a negative return last week with copper and natural gas leading the rout falling by 8.8% and 10.8% respectively.

The dollar rally continues and from being a rally primarily versus the Euro, it has now become broad based with the dollar index rising 4% from the mid-January low. The speculative net short position in Euro has reached the highest level since September 2008 according to the Commodity futures trading commission in Washington. At the same time the two-week relative strength indicator stays below 30, which indicates the market is oversold and it may be ready for a rebound.

The US unemployment report on Friday 5 February will be the main event with traders looking for signs of a pick-up in US economic activity.

Crude oil dropped in January for the first time in six months as a combination of unfriendly news continued to drive prices lower. The Chinese attempt to curb lending combined with concerns about the lack of demand pick-up in the developed economies have been  driving the return of risk adversity which also have seen stock markets slump from their recent highs.

The uptrend in the front month crude oil futures is still intact above USD 71.50 with a break below signaling an extended period of sideways consolidation. The whole energy sector is now into oversold territory and the speculative long position that has kept the market under pressure these past few weeks continue to be reduced increasing the chance of a turn around.

Technical support below USD 71.50 is the 200 day moving average at USD 70 followed by the December low at USD 68.60. Resistance near term can be found at USD 75.

crude oil futures

Copper which were the main market benefitting from Chinese demand last year have now been one of the main losers as dollar strength and China’s limit on lending have removed one major source of support. The sell off from the January highs continued last week leading to the biggest monthly drop since December 2008.

Technically important support levels were reached and breached. A break below USD 300 on High Grade Copper for March delivery could signal additional weakness towards the September 2008 low at USD 265. Resistance can be found at the 100 day moving average at USD 307.70 followed by USD 327.50.

Copper futures

Gold just like all other commodities continues to suffer as the investment environment has become focused on risk adversity. George Soros and Nouriel  Roubini both came out taking about a potential bubble in the gold market,  something that strikes fear in investors’ minds given the current fragile state of the market.

The year long uptrend support was tested last week but so far USD 1,070 support has been firm. The coming week will be very important as a break below could signal further losses towards USD 1,000. A move back above USD 1,105 is needed for the nervousness to disappear.

Gold futures