Commodities Blowoff Potential by September 2008

By: Donald_W_Dony

KEY POINTS:
• Higher caution is advised for CRB Index, as blowoff potential increases over summer
• Oil prices expected to spike over $150 during peak demand season; solid support at $120
• Hurricane season starts for natural gas; $14 target, but storms could drive prices far higher
• Grain prices start their advance; first from wet weather and later, summer heat
• Gold-shopping season begins in late July the year (summer driving) has arrived.

The first half of 2008 has been quite a ride for the much- watched Commodity Research Bureau (CRB) Index. Prices have vaulted from the 350-range in January to above 460 by June, with barely a correction. And, as I said in last month’s issue, technical models suggest that additional upward pressure can be expected in July and possibly August. Much of this advancing strength to the index can be attributed to the world’s ever-increasing thirst for oil. Light crude oil prices have roared from $90 to $140 during this same time period, and the biggest demand season of the year (summer driving) has arrived.

Grains are also contributing to the lofty CRB now, with global weather patterns often negatively affecting crops and therefore driving prices higher.

Both industrial- and precious-metal prices have held surprisingly firm in 2008. The main reasons? Stronger-thanexpected Asian gross domestic product (GDP) growth and a continually weak U.S. dollar.

Too far, too fast

Although I am confident about the long-term outlook for commodities, it is the shorter term, post-summer, that has me slightly concerned. Every investor knows that markets do not continue in any one direction for long, regardless of supporting fundamental data.

The upward movement of the CRB Index (see Chart 1) since December 2007 has been a series of sharp upward advances, with very minimal short-term profiting-taking or corrections.

But this pattern cannot be sustained.

TS Model Growth Portfolios update

Models suggest that upward pressure (see the lower portion of Chart 1) from demand will continue to increase the price of the CRB into July, and possibly part of August.

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By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2008 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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