Commodities and QE Infinity

Commodities and QE Infinity

By Springheel Jack

I’ve been debating about what to call this latest bout of QE by the Fed. As it has no defined term, QE Infinity is better than QE3, but I like QEX, for the moment.

I think QEX will be able to support equity prices over the next few months. Short term, after Friday’s sharp reversal at the test of the 2012 highs, I’m expecting more consolidation that would ideally test the rising channel support on SPX in the 1430-5 area before starting the main move up into the end of the year.

Nevertheless, there is a possible double-top in place on SPX that could trigger a target in the 1380-5 area on a break below the late September low (in the 1425 area). I’ll be watching the rising channel support in the same area (and rising) for a possible break below:

(click on charts to enlarge)

 

With the slowdown in global demand, particularly in China, I’m doubtful about the prospects for commodities during the next few months. The effect of QEX weighs in the opposite direction however, because QEX (“money printing”) weakens the Dollar, and a weak Dollar is correlated to money flowing into commodities and stocks.

The setup on the CCI broad commodities index looks bearish, short-term, having just peaked at a perfect retest of the broken rising support trendline from the 2008 low (chart below).

There are three potential future paths on CCI. The first path is failure here and continuation of the commodities bear from the 2011 high. The second is a decline to form the right shoulder on an inverse head and shoulders pattern (IHS) that might then break up, signaling a retest of the 2011 high. The third path is a break over 605.48 to a higher high, signaling an end to the downtrend.

 

 

Of these three possibilities, the first two seem most likely.  They both begin with a decline. The path and duration of the decline is likely to be mirrored in AUDUSD, with the Australian currency very strongly linked to hard commodity prices. (Commodities rise with the AUDUSD – AUD up, USD down.)

AUDUSD is testing the valley low (the low of the dip between two peaks of a double-top) and trigger level on a short term double top. On a break below support at the 2010 high in the 101.75 area, the pattern target and triangle support would be in the 97 range:

 

 

It seems doubtful that QEX will drive hard commodity prices up in the face of sharply declining global demand. On the other hand the effects during QE1 and QE2 were very powerful. We’ll have to see, but if CCI reaches the ideal right shoulder low in the 545 area and AUDUSD reaches triangle support in the 97 area, those would be the reasonable long entries for a possible retest of the 2011 highs on both – betting on CCI up, AUD up, USD down.

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