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

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

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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.
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No positions in stocks mentioned.
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