Charts of the Week: Commodity Correction Develops as Anticipated

      by Erik McCurdy

  Caption graph from Wikiposit.org.

The violent retracement in the Continuous Commodity Index (CCI) that we have been expecting developed this week with the index declining 8% and moving well below support at the lower boundary of the uptrend from June 2010.  Two weeks ago, our GEI Investing article entitled “Commodities Correction Coming” suggested that a violent overbought correction was becoming more likely. Although the long-term uptrend was relatively healthy at the time, it had been rising at an unsustainable rate for many months and technical indicators had begun to issue warning signs, suggesting that the rally was losing strength. This week, the CCI experienced the largest decline since late 2008. 

Price behavior and technical indicators experienced meaningful breakdowns on the weekly chart, suggesting that the index is likely beginning a multi-week correction. On the monthly chart, the index has moved well below support at the lower boundary of the power uptrend from June 2010, signaling a likely return to long-term uptrend support in the 570 area sometime during the next few months.

A breakdown following an extended unsustainable rise is usually accompanied by a surge in volatility, so be prepared for violent short-term swings as the retracement develops.