How Commodity Charts Are Reacting (or Not) to China Currency News

By Michael Paulenoff  JUN 21, 2010 3:10 PM

The China story is important because it either helps inspire charts, or it inspires volatility, causing upgaps that only lead to downside reversals.

 


Editor's Note: This article was originally published on MPTrader.com (click to visit the site and watch the accompanying video).


News that China will re-value its yuan currency is viewed positively, of course, by world markets as it lowers inflation risk and exudes confidence about China’s growth picture.

After an initial higher opening on Monday, what can be expected? The daily chart on the Shanghai is hardly a bullish chart, and in fact went down 3% on Friday. Does the news now invalidate this chart? I don’t know, but to even begin to look exciting, the index has to take out 2600, or 3.5% from Friday’s close at 2514, and then faces stiff resistance at around 2800.

The S&P 500, meanwhile, needs to get through its 50% Fibonacci retracement of the April-June decline, which comes in at 1130, and then take out its 50-day moving average at 1139-40, or 2% from Friday’s close. If it runs out of gas at the 50% Fib retracement, then it might well test the 200-day moving average at 1110.

One thing for sure is that if the Chinese situation is the bellwether of a start of a new up-cycle in the global economy, or the renewal of an up-cycle, then commodities will have to move. So, let's take a look at the commodities.

Copper and Gold


Looking first at the copper situation, the iPath DJ-UBS Copper TR Sub-Idx ETN (JJC) appears to have a very big distribution top pattern with the resistance level at around 38.56 upwards to about the 42.83-43 zone.

If the market is supposed to be a discounting mechanism, then it would seem as though copper would have made a move near the 40.16-40.86 area. Instead, copper had a very tough Wednesday, Thursday, and Friday of last week, and seems to be struggling. In addition, it’s below its relative moving averages, and in fact, those who watch the 200- and 50-day interaction are seeing a kind of death-cross happening, where the 50-day is about to cross under the 200-day, which is a very tricky situation.

It seems as though copper, as a discounting mechanism, didn't see the Chinese situation coming or it would have been prepared, since the Chinese would have been buying up copper before they made the announcement. Copper needs to show some sign that global supply/demand and global growth is improving, and right now that’s not what the chart is showing.

Freeport-McMoRan Copper & Gold Inc.
(FCX) shows a very similar picture. In the last couple weeks FCX has pretty much struggled because it’s seen as a copper producer in a sluggish US and global economic environment.

To get any traction on the upside, Freeport will have to take out 71.50, or 8.5% above where it closed Friday, at 65.90.

Freeport should have been a lot higher based on the anticipation of the China currency move. As a discounting mechanism, both JJC and FCX are giving every indication that the China news is more words than action.

Steel

Steel, as represented by the Market Vectors Steel ETF (SLX), doesn't look much better than copper. It looks to be a distribution top that's tested and so far has held the 52 to 54 area. If there’s an upward move in steel and the SLX, then it will get into the 61.5 area and test the declining 50-day, which would be about a 6.5% move from its Friday close at 58.09.

Looking at United States Steel Corporation (X), we can see a troubled situation. If it pops, it could get back to 49, but it has a bigger top than the top on the SLX, and between the two, it doesn’t appear as though China's situation is the solution for either one or the steel sector in general. Nucor Corporation (NUE), also in the steel sector, has a suspect-looking chart. Can it rally to 43.5 - 44 from 41, or 8% to 10%? Possibly. Whether or not it can get through that level is another thing. If it breaks 40, down to 39, it’s going to be a dicey situation for Nucor. So, that's another suspect, discounting chart mechanism for what may be considered the start of another bull move triggered by the China news.

Cliffs Natural Resources Inc. (CLF) had some big swings as of late. But as long as the 200-day holds any weakness, which it has done so far, it could be an indication that something is going on that could drive it higher. Right now it has a sharply declining 50-day moving average at 59.48, which it could test on a reaction rally to the China news.

But if these commodities do gap up, can we afford to chase them? Cliffs has a better looking chart than the previous ones, but it, too, looks like it has limited upside.

Silver

The chart on silver is more compelling than copper and steel, as the iShares Silver Trust (SLV) is still trying to make new highs. The SLV looks strong, with rising lows and higher highs. If it can take out 20, then it may have some momentum on the upside, and the gold-silver ratio will start to move in favor of silver -- that is, it will narrow.

If that happens, we must seriously consider that the China news is being embraced by the commodity sector, and silver is the beneficiary of that even if copper doesn’t look so hot.

Pan American Silver Corp (PAAS) is very volatile. I got out of it, as the market was buying gold rather than silver in its flight to safety. But right now, with silver appearing to be back on the upside, we’ll have to see if Pan American can get through the 28.5 area to the top of the channel at 32.50 or so. That could be a good move.

Australia

If China is coming back strong, or perceived to be rekindled in a big way, you'd think Australia would be one of the first places to rocket because Australia sells so much into China.

The iShares MSCI Australia Index (EWA) doesn't look that bad, though needs to do some work. It has some serious resistance between 22 and 24, which we need to watch closely as the Australian market responds to the China news.

BHP Billiton Ltd. (BHP), a representative of this market, too, has strong resistance at the 50-day at 69.5 and then at 70.75 to 71 that I'll be watching.

Aluminum, Fertilizer, Heavy Equipment, Materials

Alcoa, Inc. (AA), representing the aluminum side of things, is hardly a picture where anyone is buying this as a discounting mechanism for China. This is one sorry-looking chart, consolidating under the neckline for yet another breakdown at 8 or 9, and, of course, the next round of earnings is already approaching, due to come out July 12.

Potash Corp. of Saskatchewan, Inc. (POT), procurer of fertilizer, is hardly the kind of chart that's inspiring, either. It needs to get over the 106-106.50 area.

Bucyrus International Inc.
(BUCY), a company that manufactures equipment, is impacted by China since China needs its product. This is another uninspiring picture, with a big distribution top, and it had better rally through the declining 50-day at 57.80 and 200-day at 51 and change, which would be a 13% -14% range. It looks like it has a bearish consolidation and if it can’t get over 55, it’s actually telling us that it has another down leg off the distribution top.

Finally, the Materials Select Sector ETF (XLB) has been in a top or trading range between 29.30 and 35. A break of 32 could be an indication that some dynamic things are happening as a result of the Chinese decision on the currency.

So, the China story is an important one, either because it helps inspire some of these charts, or because it inspires volatility, causing upgaps that only lead to downside reversals. We’ll certainly know soon.

For more on ETFs, take a FREE 14 day trial to Minyanville's Grail ETF & Equity Investor newsletter. Receive specific trades with entries, targets, stops and strategy. Learn more.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.