Commodities and QE Infinity

There’s been some debate about what to call this latest bout of QE by the Fed. As it has no defined term QE Infinity is a better name than QE3, but what is the short version of that? I’m going to go with QEX for the moment I think.

I’m working on the assumption that QEX will be able to boost equity prices over the next few months, and short term after Friday’s sharp reversal at the test of the 2012 highs, I’m expecting to see some more consolidation that would ideally test rising channel support on SPX in the 1430-5 area before starting the main move up into the end of the year.

It is worth mentioning however that there is now a possible double-top in place on SPX that would trigger a target in the 1380-5 area on a break below the late September low, so I’d be watching that rising channel support slightly above there carefully for a possible break below:

What about commodities however? With the slowdown in global demand and in China particularly I’m much more doubtful about the prospects for commodities during the next few months and the setup on the CCI broad commodities index certainly looks bearish short term, having just peaked at a perfect retest of the broken rising support trendline from the 2008 low:

There are three obvious paths from here on CCI. The first path is failure here and continuation of the bear market on commodities from the 2011 high. The second path is a decline here to form the right shoulder on an inverse head and shoulders pattern (IHS) that might then break up later to signal a retest of the 2011 high. The third path is a break over 605.48 to a higher high to signal the end of the downtrend.

Of these three paths one of the first two seem more likely here, and those both start with an immediate decline. The path and duration of that decline is likely to be mirrored in AUDUSD, with the Australian currency very strongly linked to hard commodity prices.

AUDUSD is testing the valley low and trigger level on a short term double top within what is likely to be a symmetrical triangle, though the lower triangle trendline needs a third touch for confirmation. On a break below support at the 2010 high in the 101.75 area the pattern target and triangle support would be in the 97 to 97.25 area:

What will happen to commodity prices over the next year? It seems doubtful that QEX in the US is going to push hard commodity prices up in the face of sharply declining global demand for them. On the other hand the effect during QE1 and QE2 was very powerful We’ll have to wait and see, but if CCI reaches the ideal right shoulder low in the 545 area and AUDUSD reaches triangle support in the 97 area, those would certainly be the ideal long entries for a possible retest of the 2011 highs on both.

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