For the second straight day this week, commodities have been leading markets lower as the pre-earnings season correction continues. While green shoots continue to appear in the form of positive Canadian building permit and PMI data, for now they appear to be obscured by the lingering weeds from the recession and increasing concerns that a global economic recovery may be slower than initially hoped.
This sentiment suggests that markets appear vulnerable to increased selling pressure in the short term but this potential selloff may take a very different form than the last two major market declines that led to the November and March lows. In the last two selloffs, declines had been driven by fears of widespread bankruptcies or dilutive financings and concerns over global financial market liquidity, with the weakest sectors like financials and autos leading the way lower.
This time around so far, the tone has been quite different. Recent declines have been led by profit-taking in the strongest sectors (commodities and resource producers) on concerns that they may have run up too quickly in the last rally. In other words, the current pullback feels more like a normal correction in a new bull market than a continuation of the previous bear market. This suggests that while there remains a risk of significant volatility and a possible retreat in the short term, (don’t forget 50-62% retracements are common) this may also create significant short-term opportunities for investors to trade both sides of the market and also possible long-term opportunities.
Current significant support areas to note for major indices include 8,000-8,100 for the Dow Industrials (US30 CFD), 865-880 for the S&P 500 (SPX500 CFD), 1,400 for the NASDAQ 100 (NDAQ100 CFD), 575-590 for the S&P/TMX 60 (Toronto60 CFD) and 9,700-9,750 for the S&P/TMX Composite.
In commodities today, soybeans have been absolutely crushed (no pun intended) dropping 6.3% back toward the $11.00/bushel level on reports of good weather for growing. Wheat has continued to drift lower following yesterday’s break of the $5.00/bushel level while corn appears to be stabilizing near $3.45/bushel
Crude oil continues to drop ahead of tomorrow’s inventory report, testing $62.50/bbl today, with a continued risk that the key $60.00/bbl level may be retested with resistance now in the $64.00-$65.00 range. Natural gas, meanwhile, continues to hold just below the $3.50/mmbtu level.
Metals have been backing off as well although to a lesser extent than other commodity groups. Copper has drifted back toward the lower end of its $2.20-$2.25/lb trading range, gold has dropped back to test $925/oz again and silver continues to trade in the $13.25 -$13.75 range.
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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.
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