This commodity has benefited from a nice rebound for a few months now. The price action is about to reach a level where uncertainty may lead to a correction.

The long-term trend remains negative as the price fell from a high posted in February 2006 at $27 to a low at $11.21 posted in last October (down 59%). The rebound generated in December has only retraced a small part of this decline. Actually the price action has just reached the first Fibonacci ratio, which is the 23.6% retracement level, at $15.

The rebound started in December when a double-bottom technical pattern was created (points A and B on the chart). This is a typical trend reversal signal. However there is now a resistance line that could prevent prices moving higher. A correction is possible as prices bounced by 36% since December. The resistance is an oblique slope that comes from the high of 2006 (point C) and goes through the lower high of March 2008 (point D).

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The intraday high posted at $15.27 two days ago might be a second lower high and become an inflection point.

What do reveal the technical indicators?

Actually they argue for a weakening momentum and for a potential trend completion. The 50-day Commodity Channel Index (CCI) and the Momentum indicators have jumped to extreme high values. The RSI is about to enter into its overbought area.

That’s why we expect a correction of sugar prices. The medium-term bullish trend generated in last December is backed by an oblique support level that goes through higher lows regularly posted during 4 months. That may be the new target in the near-term.

However if the Bears don’t succeed to contain the recent spike, a breakout above the resistance line at $15.50 would give a fresh bullish signal. In this scenario the current “bear market rally” would become a new trend and would drive the price significantly higher.

The Reuters-CRB Index is the benchmark for commodity performance, reader. Just to refresh you a bit on its price action during the last few years, let’s have a look at a long-term weekly chart.

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A double-bottom (points A and B) occurred in 2001. As you can see, that was ground zero for the commodities boom.

The first bullish trend started in early 2002 and wound up in August 2006. During this period the CRB Index rose 92%.

One year of consolidation followed. Then the second bullish trend meant 58% gains for investors…until July this year. Then commodities took their second correction, breaking the long-term support line.

That’s the big picture. Now let’s switch to a short-term daily chart.

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The second bullish trend mentioned above developed between point A and point B. During this period, the 75-day moving average was the stalwart of support. The break below this line on July 18 triggered bearish signals for many traders and fund managers. It was a key point around 435, as it was also the 23.6% Fibonacci retracement level.

The further move downward found a bit of support on the 38.2% Fibonacci ratio, at 408, as the price action rebounded a bit (point C). Yesterday the price closed below the 50% Fibonacci level. We see another drop in the next few days.

The different oscillators and momentum indicators all show bearish configurations that should drive the CRB index lower. The RSI and MACD for example, despite currently reaching low levels, are still bearish.

The fast pace of commodity gains last year wasn’t sustainable. This is the commodity correction we had to have. It’s not the least bit surprising.

But here’s the part you’re probably interested in. Where does it end?

The next target now is clearly now around 363. There’s more than one reason for this.

Firstly it’s the last Fibonacci ratio (61.8% retracement level). Secondly, and foremost, it’s the level of a significant high. It was, indeed, the high of the first bullish trend ended 2 years ago (point D on the chart). Expect it to be the new low in the commodity boom.

This is a further 6% move on the downside from there. At 363 the CRB would be oversold. A technical rebound would be probable. That may be the point to buy back into resources. However, a break below 363 would give some further bearish momentum on the medium-term.

Where will commodity prices go from here? Well, just as all asset classes moved up in a simultaneous bull market from 2003 to 2007, we now have the possibility of all asset classes—equities, property, bonds, and commodities—moving down in a simultaneous bear market. It could be protracted, global, and unavoidable.

–We asked Gabriel to take a look at the CRB Index and tell us what he saw. He produced the chart below.

–What does the chart tell us? Gabriel says that, “The commodities index is experiencing a correction that should go further…This downturn corrects the bullish trend started in last August. Between August 22 last year and July 3 this year (points A and B on the chart), the index jumped by nearly 57%.”

–“The bearish momentum is likely to drive the index lower,” Gabriel adds. “The 75-day moving average was a good support to the bullish trend. The price action crossed below it on July 18. It was also corresponding to the 23.6% Fibonacci level. This breakout is a clear bearish signal. Moreover the index is not yet oversold.”

–Well. None of that is good news for resource bulls. It suggests that there is a capitulation low yet to be put in. That’s the point at which even resource investors begin to doubt the wisdom of being long. The market will shake out anyone without conviction between now and then.

Resource Stocks Selling Below Book Value

Investors dropped everything and stampeded out of the resource sector yesterday, reader. We mean everything. There are kitchen sinks lying all over the place. According to the Australian Financial Review, Lynas (ASX:LYC) was the best-performed miner in the top 200 yesterday. It only lost 0.4%.

So today’s issue is an idea-fest. Among the wreckage there are good stocks. Really, unless you believe there isn’t a good miner in the country, that has to be true. They all went down.

But before we get to ideas…why did the miners cop such a drilling yesterday?

Falling commodity prices. Oil’s trading at US$116 this morning. It’s leading a lot of other hard assets down. If you’re a fan of the charts, stay tuned for tomorrow’s MM. Gabriel can tell you what this plunge means for technical traders and the market’s sentiment.

Today, we have two things to say about the commodity correction.

It’s only a correction. And it’s not an all-in, broad bear market like the one you’re seeing in financials shares.

On the first point…look at what commodities have done since 2004.

No market can keep that up forever. When you hear that metals are down, or that wheat is losing ground…it’s mainly because in the last 4 years their prices took enough ground to fill the Grand Canyon.

And it’s not a bear market. Why? Because in a bear market, everything falls. That simply isn’t the case with commodities. Take a look at a break-down of that chart above.

Those are the key sectors for Australia’s trade. They don’t move in tandem, contrary to what a lot of people believe. The financial drama ended in tragedy. That’s because no-one needed a reason to buy financial stocks anymore. They just did it.

But every commodity is different, with different sources of supply and demand. We guess if you wanted an analogy for the financial market…they only trade mainly in one commodity: interest rates.

Resource stocks aren’t all the same. So we don’t expect them all to drop at once. And when they do…like yesterday…it means some are probably more valuable than they look.

Some are even trading below their book value.

Companies in the Materials Sector Trading Below Book Value

Companies in the Energy Sector Trading Below Book Value

Flat Rates…Falling Oil…Wall Street Gains 3%

But the deflation of some commodities is bringing some buyers back to the market. Add in the fact that the Federal Reserve declined to cut rates again. What do you have?

A 3% bounce in the Dow.

In a ridiculous circle of un-logic, we’re now left with a huge opening in the All Ordinaries today. The ASX200 Materials and SAX200 Mining indices are flying with a 2% gain already.

Falling commodities yesterday meant a falling ASX. The fall in oil also meant the Dow rose. And if the Dow goes up, the ASX follows it like a lost puppy. Make up your mind, ASX.

Stronger US Dollar To Weigh On Commodity Prices