Commodity selloff drags Canadian equities lower

Commodities have been dropping today as green shoots theories and hopes for a strong and quick economic recovery appear to be wilting under the hot summer sun. It appears that the initial rebound in prices this spring may have been too much too quick and that commodity prices may be correcting back to levels more in line with current economic conditions and the potential for a longer and slower economic recovery that may see false starts and setbacks along the way.

In today’s trading, a number of commodities have dropped significantly, suggesting that the bears appear to have gained the upper hand for now. For example, U.S. crude has broken down below $65.00/bbl with next major support in the $60.00-$62.50/bbl range, while natural gas has dropped to test $3.40-$3.50/mmbtu support once again, and wheat has broken down through $5.00/bushel. That being said, a number of commodities have moved up off their lows and do appear to be attracting support near key levels. For example, copper has stabilized in the $2.20-$2.25/lb range, gold has held above $925/oz and soybeans have held above the $12.00/bushel level.

This suggests that an overdue correction does not necessarily mean a return to the depths of earlier this year either and a solid pullback may create trading opportunities. Don’t forget that 50%-62% retracements can be common within the context of larger trends.

The near-term decline in commodity prices appears to have particularly weighed on Canadian and U.K. indices, which tend to be more resource-weighted than their counterparts in the U.S. and Europe. For example, the FTSE (UK100 CFD) has fallen 3.5% to dip under 4,200 with next support near 4,000. In contrast, the Dax (German30 CFD) has fallen 0.1% today and has been holding near 4,600.

Today in Canada, the S&P/TMX 60 (Toronto60 CFD) has fallen 3.7% to test the 600 level with next support near 580. Meanwhile, the S&P/TMX Composite has dropped 300 points and fallen back under the 10,000 level with next support in the 9,650-9,750 area.

In contrast, the Dow Industrials (US30 CFD) have dropped 0.6% and continue to trade above their 8,100 support level, while the S&P 500 (SPX500 CFD) has been holding near 880 support and the NASDAQ 100 (NDAQ100 CFD) has been holding 1,425 support for now. Should these levels fail at some point, however, it could be viewed as a sign of a deeper correction unfolding. Recall from Friday’s note that we are moving through a time ahead of the start of earnings season where equities have been vulnerable in recent quarters.

About CMC Markets

For more information on CMC Markets visit www.cmcmarkets.ca

Disclaimer

This commentary is based upon technical analysis. Technical analysis is the study of price and volume and the interpretation of trading patterns associated with such studies in an attempt to project future price movements. Technical analysis does not consider any of the fundamentals of an underlying company, and as such is inherently uncertain and should not be the only factor considered by an investor in making an investment decision.

CMC Markets Canada Inc. is a member of the Investment Industry Regulatory Organization of Canada and Member CIPF. CFDs are distributed in Canada by CMC Markets Canada Inc. dealer and agent of CMC Markets UK plc. Trading CFDs and FX involves a high degree of risk and investors should be prepared for the risk of losing their entire investment and losing further amounts. CMC Markets is an execution only dealer and does not provide investment advice or recommendations regarding the purchase or sale of any securities. CFD and FX trading is available in jurisdictions in which CMC is registered or exempt from registration, and may be available to Accredited Investors only in certain jurisdictions.

Note that any references to CFD prices or price changes are sourced from CMC Markets' proprietary trading system Marketmaker™.

ABOUT THE AUTHOR

Colin Cieszynski, CMC Markets

Colin Cieszynski,CFA, CMT is a Market Analyst and Manager of Education with CMC Markets Canada. Currently, Colin provides daily technical commentary on North American equity markets and selected commodities. Colin has provided market commentary to individual investors for the last ten years and daily technical notes since 2001 and with CMC Markets since 2007. Colin is frequently mentioned in the press by a wide variety of publications such as the Globe and Mail, National Post, Dow Jones and stockhouse.com. He also is a frequent guest on CP24, BNN and CBC offering commentary on breaking market conditions.

Colin has completed both the Chartered Financial Analyst and Chartered Market Technician programs. He is a member of the Market Technicians Association, the Canadian Society of Technical Analysts, the CFA Institute, the Toronto CFA Society and the Prospectors and Developers Association of Canada.

About CMC Markets

CMC Markets is Canada's leading online CFD provider and was the first company in the world to offer online FX trading. With offices in Toronto, CMC Markets has been offering CFDs and FX to Canadian traders since 2005. The company now operates over 15 offices worldwide, and represents clients in over 85 countries. CMC Markets was founded in 1989 by Peter Cruddas and in December 2007,Goldman Sachs acquired a 10% stake.

For more information on CMC Markets visit www.cmcmarkets.ca

CMC Markets Canada Inc. is a member of the Investment Industry Regulatory Organization of Canada and Member CIPF. CFDs are distributed in Canada by CMC Markets Canada Inc. dealer and agent of CMC Markets UK plc. Trading CFDs and FX involves a high degree of risk and investors should be prepared for the risk of losing their entire investment and losing further amounts. CMC Markets is an execution only dealer and does not provide investment advice or recommendations regarding the purchase or sale of any securities. CFD and FX trading is available in jurisdictions in which CMC is registered or exempt from registration, and outside of Ontario and Quebec is available to Accredited Investors only.

Note that any references to CFD prices or price changes are sourced from CMC Markets' proprietary trading system Marketmaker™.

Copyright 2009, CMC Markets. All rights reserved.

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