Commodites - A second line of defense?

Commodities have been in a bull run since 2002. The last two weeks have seen commodities take a hit. As we had noted in our earlier posts rightly, oil/ natgas/ metals/ ag had gotten ahead of themselves. There are analysts on CNBC talking about going back to the 90s oil, due to demand destruction and the bursting of the commodity bubble.

Above is a chart of the commodity tracking $CRB index. Clearly, this has taken a hit in the last three weeks, as indicated by the 3 red bars.

Usually, such steep trends cannot be sustained and usually return to their baseline trend. In the figure are two gentler trends.

• A steeper purple trendline, which coincides with a 38% fib retracement.
• A less steeper black trendline, which coincides with a 50% fib retracement and possibly also the 50WMA, a further correction of 5-6%
  

The next couple of weeks, will be key in the commodities cycle. It is rare that multiple trendlines are broken in one direction, without a bounce. For now, we wish for the purple trendline to hold. In the worst case scenario, we expect the black trendline to hold. The SMN (ultra short basic commodities) charts are also showing bearish divergences, so the picture is not entirely clear to us. We may just have to wait and watch.