Key Commodity Index at Major Inflection Point May Provide Clues for Oil

Key Commodity Index at Major Inflection Point May Provide Clues for Oil

By, Simon Maierhofer

Wednesday January 28, 2015

The Granddaddy of commodity indexes is at major chart support. Although this index tracks 19 different commodities, oil is the MVP and accounts for 23%. Could this be an indication that oil is nearing a bottom.

As MVP of the commodity sector, oil is usually in the spotlight (especially after a dizzying 60% drop) while most of the other commodities operate in the shadow.

The Reuters/Jefferies CRB Commodity Index, the Granddaddy of broad commodity indexes, sports an interesting chart right now.

The index has reached the lower end of a trend channel that’s defined a multi-year down trend.

Is that a buying opportunity? Is oil near a low?

First we should look at the composition of the Reuters/Jefferies CRB Commodity Index.

In 2005, the index was revised from an equal weighted to a 4-tiered grouping system, designed to reflect the significance of each commodity. Here is the group weighting:

Agriculture: 41%
Energy: 39%
Base/Industrial metals: 13%
Precious metals: 7%

Crude oil makes up 23%. The next biggest components are gold, natural gas, corn, soybeans, aluminum, copper and live cattle with 6% each. Silver accounts for only 1%.

Since oil is the heavy weight of the Reuters/Jefferies CRB Commodity Index, trend channel support should be watched carefully for anyone fishing for an oil bottom.

Under normal circumstances this would be a low-risk opportunity to buy the Reuters/Jefferies CRB Commodity Index (trend channel could be used to manage risk).

However, there is no Reuters/Jefferies CRB Commodity ETF.

Broad based commodity ETFs include the PowerShares DB Commodity Tracking ETF (NYSEArca: DBC) and iShares GSCI Commodity ETN (NYSEArca: GSG).

DBC has a strong correlation to the Reuters/Jefferies CRB Commodity Index, but the actual chart paints a different story.

DBC already dropped below trend channel support and is near its all-time low. Aside from a Fibonacci projection level at 14.13, there is no technical chart support.

This makes it hard to manage risk effectively. Traders looking to bottom pick should probably use the Reuters/Jefferies CRB Commodity Index trend channel as stop-loss for any long positions. Oil ETFs include the United States Oil ETF (NYSEArca: USO) and iPath Oil ETN (NYSEArca: OIL).

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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