The Reuters/Jefferies CRB Commodity Index is a commodity price index created in 1957 and currently made up of 19 commodities (petroleum products, base metals, agricultural products…). It has a critical role as a transparent and widely available benchmark for the performance of commodities as an asset class.

In our last update of August 13, the bearish technical indicators were arguing for a further move on the downside. At this time the CRB index was trading at 385, and the expected target for the correction pullback was 363, which was a key Fibonacci ratio. The price action eventually fell below this level as it posted a closing low price at 341 on September 16.

A strong rebound has already driven the Index back to 366, the closing price yesterday. Investors consider that the correction that occurs on the global commodities markets has been too strong in a relatively short-time frame. Despite the lower demand worldwide generated by a slowing economic growth, the financial credit crisis and the action plan decided by US authorities is likely to make the US Dollar plunge. That’s why, as a mechanical hedge against the decline of the Greenback, the commodities have bounced back sharply.

Three days ago (September 22), surging prices for oil, silver, soybeans and gold sent the CRB Index to its biggest gain in more than five decades.

All 19 commodities in the index gained. However the very next sessions should be choppy as the price action has just reached a first resistance line. This resistance is built by the lower high points (points C, D and now E) posted since the beginning of the retracement initiated in early July (point A).

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Between A and B, the CRB fell by 28%. Despite the recent bounce back, the price action has failed to cross above the medium-term resistance line at 374, which also corresponds to the 23.6% Fibonacci ratio of the 2 months-and-a-half-decline, and to the 30-day moving average. There are consequently 3 good reasons for traders to sell back the CRB.

However the technical indicators have turned bullish therefore a further upside move is probable. The RSI showed that the CRB was clearly oversold, so did the Commodity Channel index that is now well oriented on the upside. The MACD has triggered a bullish signal last Friday.

If the current price development succeeds to clear the resistance level and to jump above 375, the next targets would probably be the next Fibonacci ratios, therefore 390 (38.2%) and 405 (50%).

Despite all the market excitement, some things never change. On Monday the Australian Bureau of Agricultural and Resource Economics (ABARE) released its September quarter commodities report.

It further strengthens our reasoning for not caring about what happens in the US. Of course, if the US does go into a steep recession it will have an impact on global markets and economies. But the influence of the US is becoming less important as time goes on.

When we take a step back and look at what is happening in Asia and the rich Arab emirates in the Middle East it becomes even more apparent that Australia does not need to be too concerned about the US Congress taking on USD$700 billion of additional debt.

Why? Because it is all still ticking along nicely in the commodities markets.

For the most part anyway. There is the odd story floating around of capital raisings being postponed due to tighter credit markets, but they appear to be in the minority.

The report from ABARE tells us that although “world economic growth is assumed to decline from 5 per cent in 2007 to around 3.9 per cent in 2008 and 3.8 per cent in 2009″ Australia’s “commodity export earnings are forecast to increase to a record $214 billion in 2008-09.”

Australian Resources Exports to Increase by 48%
That represents an increase of 40% over the previous year. Even better than that is that energy and minerals exports are forecast to increase by 48% to $178 billion.

Putting those figures into perspective, the entire value of all exports for the year until May 2008 was $216 billion.

In other words, based on forecasts (which may or may not be reliable) the resources sector alone will export this amount alone.

And what market share does the United States contribute to our exports? Last year it totaled $10.3 billion, that’s less than half of what was exported to China. And only a third of the exports to Japan.

Look to Asia for Profit Growth
Compare the economic growth rates of the major OECD economies…

… with those in Asia.

We know things can change. And we also know that many of these Asian countries rely on the US as an export market. But increasingly, the new economies in Asia are growing to an extent that is making the ‘Old World’ economies less important.

If you believe, like I do, that inflation is still very much embedded in the financial system then you must also adhere to hard assets, including gold. There’s absolutely no doubt in my mind that we’ll see much higher inflation as a result of this extravagant spending.

In my Commodity Trend Alert (CTA) service, we’ve recently raised our hedges against commodities. I anticipate tough markets for most of the sector until clearer signs emerge that the Fed has arrested deflation.

Still, I’m buying distressed oil companies and oil equipment stocks - and I’m buying oil right along side some of the best positioned global insiders. The energy sector remains the only segment of the marketplace heavily accompanied by net insider buying since prices began dropping in July.

Gold, which FDR confiscated in 1933, would probably rally in a deflationary economy. We got a taste of the huge gold rally to come when gold jumped over a US$100 last week after the AIG rescue.

Also, gold stocks haven’t been this cheap and bombed-out since 2005. In fact, the mining stocks trade at a seven-year low versus physical gold! You should be aggressively buying up this sector now.

 

It sounds like more of the same from the past few weeks: sharemarkets rattled, financial stocks rattled and commodities on the slide. 

Well, it was up till Friday when it suddenly became a very different story.

And this morning, a switchback, with oil under the $US100 a barrel mark in New York trading early today as damage from Hurricane Ike wasn’t as bad as feared.

The US dollar fell Friday as the slide in the euro came to an end; the Australian dollar bounced a couple of cents; gold, copper and several other commodities rose and Hurricane Ike was the big influence.

But the big question was whether Friday’s bounce was due to Ike coming ashore and apparently not leaving too much damage to the oil and gas producing, refining and distribution facilities along the Texas coast between Houston and Galveston.

At least 13 refineries in Texas were shut for the passage of Ike.

That was 3.64 million barrels a day of refining capacity.

But as we have seen after storms in the past month, once the situation is clarified, then the prices of oil, petrol and gas will ease quite quickly.

And that’s what seems to have happened after Ike as oil fell in early electronic trading in new York to $US99.25 after dropping to $US98.75 a barrel early this morning, our time.

The October New York contract briefly dipped to $US99.99 on Friday, falling under the $US100 level for the first time since April 1.

But Nymex crude in New York rose 31c to close at $US101.18 a barrel.

In London, October Brent North Sea crude eased 6c to settle at $US97.58 a barrel.

Oil prices are down $US47.29 a barrel since the peak of $US147.47 on July 11.

For all the sound and fury of Ike, the real story remains the continuing dip in American consumption of oil-based energy products.

US energy consumption is down 3.8% over the past four weeks compared with the same period in 2007, while petrol consumption is down 2.1%.

 

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On the Chicago grain markets, the emphasis is shifting as the harvest gets underway and the yields of wheat, corn, soybean and other crops becomes clearer.

The United States Department of Agriculture said on Friday that the hugely important corn harvest won’t be as big as thought because of widespread dry, warm weather last month.

The USDA said farmers will harvest 1.8% less corn than forecast last month, while the soybean harvest will be down 1.3%, but wheat output will be higher in both the US and globally.

The USDA forecasts steeper increases in corn and soybean prices, which have eased from the record levels set earlier in the year.

December corn rose 30 USc, or 5.6% on Friday to $US5.6325 a bushel in Chicago. That pushed prices up 2.7% this week. That left the price of the most active contract down 30% from the all time high of $US7.9925 in late June.

November soybean futures rose 26c, or 2.2%, to $US12.02 a bushel in Chicago. The price rose 2.1% last week. Beans are down 27% from the all time high of $US16.3675 hit in early July

The USDA said the average cash corn prices in the crop year that began September1 were $US5.50 a bushel, compared with $US5.40 estimated in August and $US4.20 in the most recent year.

The Department said cash soybean prices will average $US12.35 a bushel this crop year (which started on September 1), up from last month’s estimate of $US2.25 and up from $US10.15 in the previous year.

 

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Wheat was the odd one out with prices falling for a third straight week after the USDA made no change in its estimate of US domestic stocks in the coming year, suggesting that there might be more grain than the market thought.

The USDA said it expects US carryover stocks on May 31 (the end of the wheat crop year) will be around 574 million bushels, while exports will total 1 billion bushels, matching the forecasts made in August by the USDA.

December wheat futures fell 7c to $US7.1925 a bushel on Friday, down 4.3% over the week and 19% this year.

The USDA also increased its estimate of global production to a record 676.3 million tonnes, up from last month’s forecast of 670.8 million tonnes.

Canadian farmers will harvest 25.4 million tonnes, up slightly from the August forecast of 25 million tonnes; European Union output will be 147.2 million tonnes, up from 143.2 million tonnes in the August forecast and these will offset declines in Australia and Argentina: Australia will produce 22 million tonnes, down from the 25 million tonnes in the August forecast and Argentina growers may harvest 12.5 million tonnes, 1 million tonnes down on the August estimate.

According to the USDA’s forecast, the US is expected to be the largest exporter of wheat, followed by Canada, Russia, Australia, Ukraine and Argentina.

 

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Copper had its best week in three, rising sharply on Friday as the US dollar lost ground against the euro.

Comex December copper futures added 7.15 USc, or 2.3%, to $US3.194 a pound. The price was up 3.1% last week

The metal climbed from Wednesday-Friday, as signs of declining mine output increased concerns that supplies may be tight next year. Some analysts, especially at Citigroup, are forecasting demand to run ahead of production next year.

Copper was also supported Friday by a fall in Chinese stocks.

Stocks overseen by the Shanghai Futures Exchange dropped 29% to 13,554 tonnes, the lowest level since 2003.

On the London Metal Exchange, three month copper rose $US192, or 2.8%, to $US7,122 a tonne, or $US3.23 a pound.

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Gold jumped Friday, ending a nine-day losing streak, thanks to the US dollar’s fall against the euro.

The euro rose as much as 1.5% against greenback, but ended off 0.3% for the week.

The Australian dollar finished at $US82.36 in New York, up from $US80.48 in Sydney on Friday afternoon and $US81.64 in Sydney the week before.

It was a rare gain for the currency, the first for a month or more over the week and the strongest daily performance for weeks.

Gold fell 4.8% over the week, despite a $US19 dollar an ounce rise on the day.

Comex December gold rose $US19, or 2.5% to $US764.50 an ounce in New York. The metal had fallen 11% from the end of August to last Thursday

Silver also had a rare rise, finishing up 24c, or 2.3%, to $US10.795 an ounce for the December contract. The metal still dropped 12% last week and is down 28% this year.

Gold is down 26% from the record $US1,033.90 reached in March and is off 8.8% in 2008.

 

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Just when resources bears had convinced themselves that the China induced resources boom was over, and that the ending of the Olympics would symbolically reflect this, the Chinese have swept over the horizon to let everyone know that they are still here.

You may recall that back in February, Aluminum Corp. of China paid USD$14 billion for a 9% stake in Rio Tinto [ASX:RIO]. Although the shares were bought through Rio’s London listed shares and it was below the 15% threshold set for foreign ownership, Chinalco still went through the process of applying to the Foreign Investment Review Board for approval.

The Treasurer has now given the approval which means Chinalco can buy up to a 15% stake in Rio before it will need to go back to the FIRB.

It would seem likely that Chinalco will pursue taking a shareholding to that level, as there is minimal regulation on the UK side until its shareholding reaches 30% which would trigger a forced takeover bid for the whole of Rio. It’s questionable whether the Chinese have any interest in pursuing the matter that far, as it is more likely they are keen to be actively involved in the takeover discussions between BHP Billiton [ASX:BHP] and Rio, to perhaps gain some business concessions in return for supporting the takeover.

 takes a technical look at the Rio share price below

The stock (ASX:RIO) is still backed by a long-term bullish trend started in early 2007. It has posted low prices during this month of August but found this long-term support and has been bouncing back for 6 days now.

Despite a false break generated by the plunging equity markets one year ago when the subprime crisis blew up, the support line of the bullish trend remains valid. It means that over the long-term, the lows are posted higher. Therefore the slope typically illustrates an increasing price development.

From May 19, which is the historical high price, to August 13, RIO fell by 30%. The fact that the long-term support has been tested and validated twice recently argues for the end of this 30% decrease. The bearish trend is therefore completed. It is likely to open the way to a new bullish trend.

The first bullish indicator is that the price action succeeded to breakout above its resistance line. This resistance line was built by the high prices posted during the 3-months decline (points C, D, E and F on the chart). Each time the price action failed to go higher as there was not enough momentum, not enough conviction from investors to jump further into the stock.

The perspective has changed now as this barrier has been cleared last week. This resistance line was also strengthened by the 40-day moving average which was plot just above and was also acting as a resistance. Last Friday RIO closed at $122.17, well above its 40-day moving average: it’s another bullish signal. The stock has therefore already rebounded by almost 11% since the low of August. There is more to come.

The technical indicators show that a further move on the upside is probable. The MACD has triggered a bullish signal as it has crossed above its signal line. So did the 21-day technical momentum indicator as it jumped above the 100 level. It means that some momentum is building and that more and more money is currently flying into the stock. Both increasing volume and price are creating this bullish momentum.

In this scenario, investors should pay attention to the retracement levels of the recent 3-months decline. Short-term traders may take profit around those levels. The Fibonacci ratios show that the 38.2% level corresponds to $128 and that the 50% level corresponds to $134. These are the first objectives for the current price action.

On the downside, a pull back towards the long-term support line might occur, but only a breakdown below this support level would be a new strong bearish signal.

Pan Australian resources (ASX:PNA) is a growing mining exploration and development company that has assets in Laos and Thailand.

The stock has experienced a bullish trend starting in September 2006. The price at this time was $0.25. It peaked in last April when a high was posted at $1.25. It climbed by 400% in roughly 20 months. The price action has corrected between April and last week, where it retraced 61.8% of the initial rise.

It has been hammered by the current downturn on the equity markets, as well as a lot of stocks that reach their low points or support levels. However there are always performing stocks in bearish markets, and there are a lot of opportunities for technical rebounds. PNA is likely to be one of those stocks.

Why is that?

Well, typically in this bearish market, our aim is to detect the stocks that have been massively sold with the mass, but that meet criteria that argue for a near-term bullish correction.

We look for end of oversold configurations, increasing volumes, strong support levels, and bullish signals from oscillators and momentum indicators.

PNA meets those criteria.

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• The support level is the 61.8% retracement ratio of the 20-months bullish trend
• The RSI shows that the oversold configuration is over. It has triggered a bullish signal when it crossed above 30. So does the Money Flow Index (MFI)
• The Volume Oscillator is climbing
• The MACD has triggered a bullish signal on August 15 after it bottomed, turned upward and crossed above its signal line

A new low price has been posted on August 13, at $0.60 (point C on the chart). One week later, it closed at $0.73. It’s almost a 22% rise. With the indicators turning bullish, there is more to come. The price objective for a further move on the upside is $0.94. A rebound to this level would be indeed a correction of half of the recent decline (between points B and C). It would also correspond to a previous low that is set at crossroads of the two support lines of the previous bullish (from points A to B) and bearish (from point B to point C) trends.

 

Last Friday the S&P/ASX 200 Metals and Mining index closed at 4,515.70. That’s 27% less than 3 months ago.

Until recently, as you know, the Index was on a long-term bullish trend. It started in March 2007 and was the backbone for regular rebounds after price falls. Despite a quick, false break on January 21 (point E), this support has been then tested and validated several times during the last 20 months (points A, B, C, and D on the chart).

But support broke on July 17.

That gives a fresh impulse to the bearish momentum. So we think the metals sector is going to get cheaper. Maybe you can start thinking about averaging down any entry prices for this sector in the next month or so. But we don’t think the bottom is in yet.

And as a result of the break, that grand old support immediately became a new resistance line. Two rebounds have already failed to clear it. Expect a further move downward before finding a new support baseline for a potential consolidation phase.

Aha. But here’s the fun part. Where’s that baseline going to kick in?

The indicators certainly aren’t bullish yet. The moving average crossovers configuration is still bearish for the near-term. The 10-day MA is moving well below the 30-day MA.

And the 14-day Relative Strength Index shows that the Index isn’t oversold yet either.

But we have no support line to go on anymore either. So if I were a trader (I am), and I had no support line to work with (I don’t)…what would I look for?

A key price level. Specifically, a previous high. Check out that graph again. There’s a key point at around 3,950 points.

This previous high was posted in March 2007 (point X). Once cleared, it became an immediate support point a few weeks later (point Y). This is also where the price rebounded in August last year (point B).

So…traders and investors…get your favourite mining ideas in order. The index isn’t quite there yet. But look for a bounce from that mark. It should get there in the next month or two.