The CRB Is Breaking Down

08/23/07 01:18:14 PM

by Arthur Hill

With a sharp decline over the last three weeks, the CRB Index broke the lower trendline of a rising wedge, and a bigger ABC pattern points to further downside in the coming months.

Security: $CRD
Position: Sell

On the weekly candlestick chart (Figure 1), the CRB Index declined sharply from May 2006 to January 2007 and then bounced back with a rising wedge this year. The wedge retraced 50% of the previous decline and met resistance near broken support. This is a classic setup. The rising wedge is typical for countertrend rallies, and a 50% retracement is normal for such rallies. The index broke the lower trendline with a sharp decline over the last three weeks, and further weakness below the May-June lows would complete the bearish trend reversal.

FIGURE 1: CRB INDEX, WEEKLY. The CRB index dropped from May 2006 to January 2007 and then bounced back with a rising wedge.

Graphic provided by: MetaStock.

Turning to a long-term chart (Figure 2), we can get an idea for a downside target. First, you can see that the index broke a long-term trendline in 2006 and is in the midst of at least a correction. The index pretty much doubled with the run from 183 to 265 (October 2001 to May 2006). This advance occurred with relatively small corrections along the way and the current decline is the first significant sign of weakness.

FIGURE 2: CRB INDEX, LONG-TERM. Looking long term, we can get at least an idea for a downside target.

Graphic provided by: MetaStock.

According to Elliott wave theory, corrections often take form as ABC declines. Wave A is the initial decline, wave B represents a bounce after this decline, and wave C is a continuation of wave A. In addition, wave C is often equal to wave A and we can use wave A to calculate a downside target. Wave A declined 21% and a 21% decline from the wave C high would carry down to around 260. This level is between the 50% and 62% retracement marks. The 50% retracement mark is around 275 and this is too close to the low of wave A. Therefore, I would mark my downside target zone around 250-260.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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The CRB Is Breaking Down

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