The markets await the quantitative easing decision of the US Federal Reserve as the consequent movement of the dollar will affect all commodity prices.
The prices of commodities are influenced strongly by the value of the dollar and the greenback itself is at a support area. The dollar index, which measures the greenback against a basket of six other major currencies is at the 77 area. The index has support at the 76.50 area. After the Fed’s decision, the dollar has to break the 76.50 area for the commodity markets to rally.
Once the 76.50 area is broken, the dollar can go all the way down to the next level of support, which is at the 75-75.70 area. Under this scenario, we can see a rally in commodities. However, note that the markets may have already discounted the upcoming quantitative easing. Hence, it’s the extent of the easing that will affect the markets.
Let us look at some individual commodities and analyse their price action.
Gold: The precious metal has been in a strong rally for quite some time, but saw a correction in the past few days. The correction in gold is due to the fact that the dollar index rose from its support area of 76.50. The correction in gold has created a resistance area at $1,370 and the metal has to close above it to continue a rally. On the other hand, prices can test the resistance again and correct. Note that the trend in gold is bullish and any short trades should be for the short term.
Silver: Similar to gold, silver is on a strong bullish trend. It broke out of its resistance area around $22 some time back and is now rallying. The difference between gold and silver is that the white metal has no overhead resistance. This means that the weaker dollar after the QE announcement will result in a better rally for silver than gold.
Copper: The area between 400 and 450 is a level of resistance for the copper index and it’s right now in the resistance area. Copper has hit the lower end of the resistance range and not been able to rally higher. However, note that the resistance area is 50 points wide, which works out to a little over 10 per cent of the index. Hence, a fall in the dollar can lead to a slow rise in copper, taking prices deeper into resistance. However, a rise in the dollar after the Fed decision can result in a sharp fall.
Crude oil: Crude oil has been rallying for a few weeks as the dollar has been falling. It is right now in the $83 area, with resistance at 83.75 and support at $75.50. Being closer to resistance, crude can have a sharp drop if the dollar rallies. However, note that the $83.75 area has been hit a few times, which weakens resistance. A break out of resistance can take prices to the $91 area.
Natural Gas: Gas has been on a continuous decline and the trend is firmly down. We expect mild action in natural gas in comparison to other commodities.
Wheat: The grain is between support and resistance and can go either way, based on the Fed’s decision. Resistance on wheat is in the $725 area and support is at the $670 area.
The author is based in Chicago and is the editor of www.capturetrends.com
