Prying the Lid Off Crude Oil

 | Jan 31, 2012 | 11:30 AM EST
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Veteran commodity market watchers know that for the past few years most raw commodity futures markets have been significantly influenced, on a daily basis, by the price movements of the U.S. dollar index and crude oil futures. Indeed, on any given morning a market watcher can glance at the prices of crude oil and the dollar index and get a good reading on that day's likely price action in the entire raw commodity sector.

Recently, the weakening U.S. dollar index has been a bullish factor for most raw commodity markets. On Tuesday, the dollar index, which is a basket of six major world currencies weighted against the greenback, hit a fresh seven-week low.

The recent downtrend in the dollar index has been a bullish "outside market" force for the raw commodity markets. Most major raw commodities of the world are priced in U.S. dollars. A weaker U.S. dollar makes commodities priced in dollars cheaper to purchase with other currencies. As the dollar index made a nearly two-month low early this week, commodities -- including the precious and base metals, cattle and orange juice -- scored at least multi-week highs.

The present near-term technical posture of the U.S. dollar index has turned bearish. If the dollar index continues to trend lower in the near term, which is now what the charts suggest, then most commodity futures markets would likely trend sideways to higher, or at least sideways.

The other key outside market force for most commodity futures markets is the Nymex crude oil futures market. While the crude oil market reacts to the daily machinations of the U.S. dollar index, the other commodity markets pay very close attention to crude.

Nearby Nymex crude oil futures have been trading sideways at higher price levels on the daily chart for over two months. Crude prices are trapped in a trading range marked by strong overhead technical resistance at the January high of $103.90 per barrel and by strong technical support located at the December low of $92.95 per barrel, based on the nearby March contract. The fact that crude oil futures are trading near the key $100-a-barrel level is a bullish underlying factor for the raw commodity sector.

Importantly, however, it will take a move in nearby crude-oil futures above the aforementioned sideways trading range on the daily chart to provide the crude-oil bulls with fresh, strong upside technical momentum to then suggest a solid price uptrend can be sustained. And crude oil prices will need to begin to trend higher on the daily chart -- instead of sideways -- in order to give the raw-commodity sector bulls the confidence to produce the solid bull market moves that the sector has seen in recent years.

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