Market expert Aaron Lynch explores commodities markets: is a relief rally due?

Once again we are seeing a sell-off in commodities and equities amid renewed concerns of worsening economic conditions. This type of movement can be advantageous for traders with the skills for shorting markets but is very damaging to the Australian economy and others heavily exposed to commodities markets, such as Canada. It’s little wonder the currencies of both nations have been heavily sold down, notwithstanding their strong fundamentals.
The commodities index is forming some interesting patterns. Before we get to the technicals, let’s look at the primary factor that has (in many ways artificially) driven commodities prices lower. That is, the ever-present possibility of a European meltdown amid the inevitable concerns that Greece might default on its debt. This is a constant reminder of the debt-binge-driven weakness of most Western economies.
Throughout 2011 I have been writing about the DX (dollar index futures contract), which values the US dollar against a basket of other currencies to ascertain a relative value. Figure 1 shows the dollar index travelling mainly sideways from April and forming a technical base, so that when eurozone concerns again gained traction it was technically positioned for fundamental factors to drive prices higher. The chart shows how the current run is approximately 150 per cent of the previous swing that took a number of months to form. (Remember, most commodities are priced in USD, so any upswing in the price of dollars will translate to weakening commodity prices.)...

Excerpted from an article originally published in the Nov/Dec 2011 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2011, Your Media Edge Pty Ltd.
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