On Friday the US Dept of Commerce announced the US economy grew by 4.8 percent in the first quarter, which is pretty good. However, the Labor Dept announced that wages showed the smallest gains in seven years. The working guy is getting squeezed as prices of not just gasoline but just about everything are soaring without wages keeping pace. This is one classic definition of inflation, what I’ve been talking about in Commodities Trends for two years now.

Back to the significance of the Chinese rate increase; at the time of the last Chinese rate hike in April 2004, a top appeared to form for a slew of commodities. Thursday’s news thus caused a selling panic in a variety of our markets. In my subscription trading service Futures Market Forecaster, I waited for a bit of a rally after the first break to liquidate our gold position at a profit. I made this recommendation because of my time-tested rule of never letting a good profit turn into a loss.

On Friday, gold was back up to new highs for the move. And Friday was the deadline for Iran to comply with United Nations demands regarding Iran’s nuclear program, but their radical President Mahmoud Ahmadinejad rejected the UN's call. In other words, the world is no safer today than it was last week and volatility is still a fact of life in the metals and other markets.

In other commodity news, the silver exchange traded fund has been approved. The initial reaction by the silver market has been somewhat muted, as silver thus far has failed to make a higher high (like gold). Also supporting gold last week was Federal Reserve Chairman Ben Bernanke’s suggestion that the Open Market Committee may pause in its series of interest rate hikes; the US dollar dropped sharply. This news also resulted in a bullish reaction for a variety of commodities other than gold. We own three lower profile commodities right now in our Futures Market Forecaster portfolio, and all three happen to share the same two first letters.

The 3 Co’s

The three markets we currently have long positions in are corn, cotton, and cocoa. Take a look at the technical picture of cocoa.

July 2006 Cocoa

Source: Commodity.com

Note the volume spike (V). One of my trading observations, a simple but effective one, is that volume spikes (much greater than average volume days) tend to occur at major tops and/or major bottoms. I’ve seen this a lot, and it’s one of a number of reasons we bought July cocoa while it was still below 1,500.

To demonstrate this rule take a look at the bottom of the 2002 cocoa market, noting the volume spike that occurred at that bottom.

July 2002 Cocoa

Source: Commodity.com

This is the type of trading opportunity I look for every day to share with subscribers. This year has been very good thus far for the Futures Market Forecaster commodity trading service--e-mail me if you’d like additional information on how we’re doing.

George Kleinman is editor of Commodities Trends.
Click here for a quarterly trial subscription to Futures Market Forecaster.

© 2006 George Kleinman
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Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

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