Commodities face dollar impact

The dollar index neared a strong support level last week, which could be bearish for major commodities. In fact, on Monday the commodities had a sharp down day.

The support zone on the dollar index is in the 74.12-74.70 level and at the time of writing this article the greenback was still a little above it. Prices often turn higher from support levels and a rally in the dollar augurs poorly for commodities. However, one must keep in the mind that the dollar is on a long-term bearish trend and the commodities are bullish. Hence, any correction may be just short term.

As the dollar index neared support, commodities such as copper, crude oil, gold and silver fell sharply on Monday. If the greenback rallies, one can expect the trend to continue.

GOLD
Gold fell sharply on Monday given it’s inverse relationship with the US dollar. However, the greenback broke out of a consolidation pattern to the upside indicating further bullishness. We believe the yellow metal will continue it’s rally once the dollar completes it’s run up.

However, the most important aspect of gold’s price action is the break of the consolidation pattern. In our article on March 9, we had mentioned that gold was moving in a broadening range formation.

In a broadening formation, prices make higher highs and lower lows, thereby broadening the price range. A higher high is when the new high in price is higher than the previous high. A lower low is when the new low in price is lower than the previous low. This makes trading difficult for breakout traders as well as support and resistance level traders. Breakout traders enter when prices make a new low or high only to see a reversal in the opposite direction. Support and resistance traders enter at support and resistance levels only to see prices drop or rise a little more, stop them out and then go in the direction predicted in the first place.

However, now gold has broken out of the range and we’d wait for pullbacks to buy into. Better still, one can wait for gold to rally and show signs of reversing before taking a position on gold.

CRUDE OIL
Crude oil had the sharpest fall on Monday relative to gold, copper and silver. In fact, crude oil reversed at a level we had identified on March 9 in the 4,112 range. The light sweet brent crude oil went into the $112 a barrel range and then reversed. Crude oil has had a great run and a correction was inevitable We would wait for a decent pull back to buy into. Remember that the driving season in the US is coming up pretty soon, which means more demand for oil.

Some of the areas we’d go long are 105.75, 102 range and the 98 range. Obviously buying lower is better, but prices may never reach that level.

COPPER AND SILVER
Copper is testing if it can break out of it’s bearish head and shoulders pattern. If prices close above $4.55, the bearish pattern is invalidated. Copper, however, has one more level of $4.65 to clear for a breakout in price. Silver, on the other hand, paused after a major rally. The trend is still bullish and longs should move their stop loss to a little below $36. The white metal has rallied all the way to $42.

The author is based in Chicago and is the editor of www.capturetrends.com