Technically Speaking Blog

By Darin Newsom
DTN Senior Analyst

It's possible that the short-term fate of the commodity sector, including grains, could hang on whether or not the Federal Reserve includes two words in its September meeting policy statement. If the phrase "considerable time" is seen commodities, again including grains, could find new life until the burdensome supplies knock them out again. If the phrase isn't seen, "look out below" could be heard next.

So why does the future (albeit short-term) come down to this linguistic coin toss? Because if "considerable time" is not stated in regard to the talk of holding interest rates steady after the FOMC stops buying bonds (scheduled for October), the U.S. dollar index (USDX) would be expected to post another strong rally. And the higher the USDX goes (supported by the possibility of higher interest rates) the more pressure is put on commodities as ideas of inflation are deflated.

This being a technical analysis blog, is there any hint as to what may happen on the charts? I'm glad you asked that. Yes, the weekly chart does seem to be indicating a possible change in the secondary (intermediate-term) trend.

Notice that this most recent run in the USDX has seen it move within shouting distance of its previous high of 84.753 (week of July 8, 2013). However, you will also note that the index has stalled this week in anticipation of the release of Fed's September comments. From a purely technical point of view, the USDX seems to be in the process of establishing a secondary double-top, meaning the next move should be down.

Furthermore, weekly stochastics (bottom study) are nearing a bearish crossover well above the overbought level of 80%. If this is still in place at the close of the week (Wednesday morning has the faster moving blued line at 92.4%, the slower moving red line at 93.3%), then it would confirm the idea that the secondary trend has turned down. However, we need to keep in mind that in situations of strong major (long-term) trends (e.g. the uptrend in cattle, downtrend in corn) crossovers by weekly stochastics (bullish or bearish) can be trumped by longer-term signals. The major trend in the USDX is not that clear-cut though, showing signs of being nothing more than an extended sideways pattern between support at 78.725 and resistance at the previously mentioned 84.753 level.

Therefore, analysis of both the weekly and monthly technical situation of the U.S. dollar index would indicate that those two little words (considerable time) should be found in the Fed's comments Wednesday afternoon, sending the USDX into a downtrend and possibly sparking a round of short-term buying interest in commodities.

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