Download PDF, Issue 26 - Swiss Futures and Options Association

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Education Commodities: Bubble or Emerging Secular Uptrend? Taboo before 2000, the word “bubble” shows up regularly since 2002 in the financial press and has become a mandatory fashionable item to attract readers whenever financial assets rise. A historical perspective allows us to have a fresh look at recent price evolution: let’s look at a few charts from a Technical Analyst’s perspective to see if we can gain some wisdom and insight into the cyclical forces at work within these markets. 40 Chart 1 – The Commodity Index First, we consider the following question: Has the CRB index started a secular uptrend around 1999 by failing to make a new low at the end of 2001? There are many measures of commodity indices. Although the CRB Index is seen as giving less weight to oil products than other commodity indices, we note that it has ended a secular downtrend in 2002, after a rebound just above the 1999 low. In Chart 1 below (courtesy of Tradermade International Ltd), the descending red line represents the downtrend that started from the area at about 328 points in 1980–81. Most will recall that interest rates in the US were above 12% at the time, since when interest rates have declined together with the CRB Index (which was capped by this red downtrend line until 2002). The duration of this downward move was about 20 years, which is a normal time span for a secular move. In Chart 1, it is worth noting that a continued rise of the CRB between the green line (support) and the blue line (resistance) would bring it back up to Chart 1 the 1981 area of 330 by the end of 2006. That extrapolation might well be a bit too linear, but is not too far fetched, given the price behavior of the commodities composing that index. However, focusing on the more recent rise from early 2002 until its interruption by a black quarterly candle early in 2003, we would expect that an equal rise of the second (current) leg could meet some heavy resistance near 291–292. Indeed a failure to maintain an advance above 292 for more than 2 weeks would call for a longer sideways consolidation, lasting possibly two or three quarters. This expected range would also need to hold well above the (now key) support of 262 in order to maintain the longer-term target near 330. So far, apart from a slight slowdown in momentum (indicated by a potential bearish divergence in the “Slow Stochastic” – located below the price chart), the CRB index is giving no signs of reversal. Such divergence would be confirmed if the price fails to rise above 292 during the last months of 2004. Chart 2 – The Oil Price If we consider the evolution of the oil price from a long-term perspective of more than 100 years on Chart 2 (courtesy of the Notley Information Service, Ridgefield CT, USA), we note on the upper part of this logarithmic price scale chart a black line displaying yearly prices, from 1868 updated until July 2004 and on top of it a red line like a sinusoidal oscillating curve, which is a long-term smoothed rate of change of the yearly prices. That red line suggests that a major top occurred around 1984 and a major bottom of this momentum occurred around 1999. Such momentum would remain on an advancing path (and thus help maintain an advance of prices), providing the 2004 yearly close of the oil price remains above $21. This seems very likely under current circumstances. On the lower part of chart 2, the black line is a ratio of Oil by the S&P 500 displaying the Relative Strength (R/S) underperformance of oil for 18 years until 1999. The red curve is again a smoothed rate of change of the yearly prices. Hereby technical analysts assume that long-term momentum gives an indication on the long-term direction of prices or of Relative Strength. So by integrating this perspective of a major long-term bottom of price momentum of oil into the commodities picture, we feel that it is appropriate to speak of the high likelihood of a general secular bottom of commodities around the year 2000 and that it could coincide with an out performance of these assets versus US equities (since the CRB Index would display similar momentum behavior if data history was available for the CRB Index as it is here for the oil price). If we focus on prices from January 1983 using a logarithmic price scale and quarterly price candles (Chart 3), it is difficult to envision an immediate top, since the quarterly “Slow Stochastic” lines have not yet crossed within the SWISS DERIVATIVES REVIEW 26 – NOVEMBER 2004
Education Chart 2 Overbought zone (above 75%). The red line at $55 has been set as explained below. year, that futures contract was again testing its August 20 high, around $48 per barrel. Before jumping at any extreme price projections, we suggested a cautious approach, given that the oil price had already started a parabolic rise from $32 to $48 per barrel in 2004. Even a weekly close above $49.25 would only indicate a modest potential rise towards the $53.45–$55.30 area. Thereafter, a likely stabilization is expected between $55 and $40 per barrel. At the time, we indicated that immediate daily closes below $47 would indicate a termination of the parabolic rise, leading to an immediate consolidation between $50 and $37. On October 15, with price near $54, the rise has reached our $53.45–$55.30 target area. Though it is always difficult to predict the exact area of potential tops, especially with such a volatile commodity as oil, it is important to look for signs of a possible exhaustion of this parabolic rise – characterized by a significant daily price reversal (as seen in August 2004). A less common sign of a top in the oil price would be a transition to “price churning behavior”, specifically a flattening out of 41 Chart 3 – Oil Price Quarterly Looking at a weekly chart with a standard arithmetic price scale (Chart 4), the parabolic price acceleration could clearly be seen weeks ago, although (as mentioned in the comment of that chart on September 24, 2004) the view for 2004 offered only modest upside potential from $48 to $55 at most. Chart 4 – Weekly NYMEX The history of the oil price is represented on this weekly NYMEX chart (Chart 4) by a continuation chart from September 2000. A continuation chart is constructed by displaying the prices from the most liquid futures contracts, one after the other. The last weekly price bar shows the trading in the November 2004 NYMEX futures contract for Light Sweet crude oil. On September 23 this Chart 3 SWISS DERIVATIVES REVIEW 26 – NOVEMBER 2004
Page 1 and 2: SWISS DERIVATIVES ISSUE 26 - NOVEMB
Page 3 and 4: Contents Contents SWISS FUTURES AND
Page 5 and 6: Dear Members and Friends of SFOA Ed
Page 7 and 8: Focus Treasury. Then came Ginnie Ma
Page 9 and 10: “This approach moves us in the di
Page 11 and 12: WHEN YOUR FIRST NAME IS “NEW,”
Page 13 and 14: Focus Union’s regulators in terms
Page 15 and 16: “There’s no rule saying banks c
Page 17 and 18: The rush of endless opportunity. Li
Page 19 and 20: Further your future: team up with a
Page 21 and 22: “Investor interest in gold was re
Page 23 and 24: A new standard in the derivatives i
Page 25 and 26: “The Stone Age didn’t end becau
Page 27 and 28: A blazing sponsor for Friday night
Page 29 and 30: CNBC Europe reporting live from Bü
Page 31 and 32: A fascinating presentation by ballo
Page 33 and 34: “Swiss taxation is very advantage
Page 35 and 36: “These results seriously question
Page 37 and 38: D O W J O N E S I N D E X E S THE D
Page 39: “ ‘Carry’ strategies and even
Page 43 and 44: Bollinger Bands Let’s briefly rev
Page 46 and 47: Emerging Markets A Perspective on E
Page 48 and 49: Profile IFRI - The International Fi
Page 50 and 51: Profile 50 Official Publication of

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