We've seen commodity prices skyrocket over the past several years and equities that have exposure to commodities have gone along for the ride. Should we be concerned now that those commodities have experienced weakness over the past couple months? Or should we instead be focused on the ensuing rally over the past few weeks? That is a very good question. Commodity prices, in our opinion, are in the process of topping. In May 2006, while the CRB Index was moving to yet another high at 365, a long-term negative divergence on the MACD formed (Chart 1). That led to the subsequent selloff and loss of support at 330. We are now looking at short-term resistance near that 330 level and we're fast approaching.
That's a glimpse at the last eighteen months of activity. A longer term ten year view (Chart 2) paints a more probable topping picture. There was a clear break of five year trendline support during the summer months and a subsequent low that appears to be the right side of the neckline of a long-term head and shoulders top. We are potentially forming the right shoulder whose top could be our current level, or possibly coincide with the aforementioned short-term resistance at 330.
Either way given the chart pattern, it would seem prudent to at least recognize the red flag that is present and protect your portfolio accordingly.