Technically Speaking

Commodity Indices, Equities Pointed Higher

The E-mini S&P futures are a great example of why momentum studies should not be used as "overbought" or "oversold" indicators. The trend is strong and could keep momentum indicators reading high for weeks or months to come. (DTN ProphetX chart)

U.S. Dollar Index: After falling to the lowest levels since July 1, the U.S. Dollar Index has staged a nice recovery which has resulted in trade back above the 200-day moving average. The 50- and 100-day moving averages rest just overhead. With the rebound in price, momentum has also rallied sharply with no signs of divergence or slowing. There does not seem to be a great deal of excitement surrounding the greenback, however, as three-week volatility sits at just 3.47%, barely off the low of 2.82% on Dec. 10. Spot prices are right around the midpoint of the 98.5440-96.5880 range, which presents the risk of aimless, whipsaw trade. We would be watchful for any short-term momentum failures around the top end of the range cap should the rally progress in the coming sessions. From an Elliot Wave perspective, it looks as though the lows at 96.5880 complete a 3-wave, and likely corrective, affair with markets poised to move back above the Nov. 27 corrective high.

Bloomberg Commodity Index: Benefitting from the U.S. Dollar Index weakness has been the commodity sector as evidenced by the Bloomberg Commodity Index. The Index has rallied to the highest level since Nov. 6 and is less than 1.0% away from the highest levels since April. That said, the index has failed three times between 80.70 and 81.00, making the range cap formidable resistance. Momentum indicators will be crucial in the coming days to gauge whether the current rally is running out of steam, especially with spot levels near the upper-range cap. The stochastic measure of momentum has not diverged from price just yet, but the ascent has slowed and any rise to another round of new highs on this move, which is accompanied by declining momentum, would be a big red flag the commodity sector as a whole could be in for a rough ride.

E-mini S&P 500: E-mini S&P futures, or the larger S&P 500 Index, are great examples of several technical principles worth pointing out. For starters, with both cash and futures at all-time record highs, neither have physical price history to act as resistance. The old adage of "the trend is your friend" could not be on display any more fully and a great example of why remaining on the right side of trend is so important. In addition, this market illustrates perfectly why the terms "overbought" and "oversold" have no use in technical analysis of any kind. When looking at the stochastic measure of momentum, it has a reading of 97.42, and has been above the magic 80.00 line since mid-October. If one would have sold when stochastics rose above the 80.00 line, they would have missed out on another 8.8% of the rally. Momentum indicators are helpful in determining when price moves are slowing or accelerating but their use as a buy/sell indicator based on an arbitrary number is of no practical use. The nearest risk parameter the E-mini would have to trade under to warrant paring bullish exposure would be the 3069.50 corrective low from Dec. 3. Otherwise, the uptrend is expected to continue, and an acceleration would not be out of character.

Tregg Cronin can be reached at tmcronin31@gmail.com

Follow Tregg Cronin on Twitter @5thWave_tcronin

Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grains and grain futures involve substantial risk and are not suitable for everyone.

(/CZ)

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