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Did the U.S. economic business cycle peak in August? A few facts which concern analysts are an 8.3 per cent plunge in October U.S. durable goods orders, a retreat in the November U.S. consumer confidence numbers to 102.9 down from 105.1 in October and sliding energy and forest product prices, which outweighed gains in base metals and agricultural products. The result was also reflected in Scotiabank’s commodity price index, which dropped for two consecutive months. Added to those negative factors, the October commodity price level left the index 5.6 per cent below the October 2005 level and as such it marked the first year-over-year decline since August 2002. Rising commodity prices usually mark late economic expansion and if they’re cooling perhaps it marks the end of the expansion, so it’s no wonder everyone’s looking for a slowdown.
However, a closer look reveals that the consumer confidence numbers at 102.9 are still healthy, suggesting continued economic expansion. Then on November 29, there was the announcement of a surprise upward revision in third quarter U.S. GDP as the economy actually grew at a 2.2 per cent annual rate, a bit faster than the initial 1.6 per cent estimate. Annualizing the first three quarters data finds that the economy is growing at 3 per cent. In addition, the fact that the U.S. unemployment rate sank to a five-year low of 4.4 per cent in October 2006, with solid growth in workers’ wages, suggests that the recent declines in durable goods orders may be a temporary reaction to increased prices. Although there has been a decline, it is still all positive news. There may be a slowdown but based on the current data available there is no any evidence to suggest that it will turn into a recession.
A technical review of the Commodity Research Bureau chart below suggests there was a temporary correction over the past year and that we are most probably in the midst of a major commodity bull market.
The five-month decline which left the index over 5 per cent below 2005 levels was actually a wave 2 correction of primary wave degree, meaning that it appears that we are in a very bullish cycle and are still in the early stages of the commodity boom. The correction may be behind us now as the recent rally retraced 38.2 per cent of the wave 2 decline when it closed above 321 on November 30. With the third wave advance underway resistance will be found at 329, the 50 per cent retracement level, and a more significant overhead road block is posted at the 61.8 per cent level of 338. However, once the index is able to close above 360, the target for the third wave advance should register at about 475, which would be equal in length to the first wave advance.
With thoughts of colder weather and the holiday season around the corner, an oil sector stock might be the ideal gift to give this year. The February oil futures contract below reveals an identical pattern to the CRB Index and it appears that the bottom for the second wave completed during the weeks of November 12 and 19 when a tweezers bottom was formed. In addition, the week ending Dec. 1, witnessed higher weekly highs and a higher weekly closes than the previous four weeks, indicating that the four-week rule applies. Simply stated, that means that shorts should be covered and new buying positions should be entered. The four-week rule is a trend-following system and can be used to identify breakouts and trend reversals. However, if prices fall below the lows of the preceding full calendar weeks with the lowest low registering at $57.80 (U.S.) basis the February contract, then long positions should be liquidated.
With the rally likely to continue, the next target for February crude would be $66.63 and with the MACD turning positive there may be a quick explosive move to that target. Ultimately a close above $80.83 should be followed by $100 priced oil into the latter part of 2007.
With a view to higher oil prices, a speculative oil play, Petrobank Energy and resources Ltd., may interest risk orientated investors. The Calgary based oil and gas producer has operations in western Canada and Columbia. The Company operates high-impact projects through three business units, with the Canadian unit developing low-risk gas opportunities in central Alberta and light oil plays in southeast Saskatchewan, the 80.7 per cent owned Latin-American subsidiary produces oil through two contracts in Columbia and its 84 per cent owned subsidiary, WHITESANDS Institute Ltd., is involved in the oil sands in northeastern Alberta.
Technical analysis of the stock reveals that it is in a wave 2 corrective combination which is a horizontal correction. The sideways correction also seems to be tracing out an inverted head and shoulders pattern with the final right shoulder still under construction. The moving averages are positive and the MACD has issued a buy signal. As such a close above the pattern’s neckline at about $18.70 would confirm a breakout with a potential upside target of $26.90 over the next four months, which would certainly make a great beginning to a Happy New Year.
Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.