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REVERSAL


The CRB Index In Wide Range

02/16/10 11:43:59 AM
by Chaitali Mohile

The bullish journey of the CRB index was stopped by the two robust moving average resistances. The index has broken out of the rising wedge formation.

Security:   $CRB
Position:   N/A

After hitting a new low at 200 levels, the CRB Index (end of day) index ($CRB) began a bullish reversal rally. The higher bottom moved in the shape of a bowl, gradually forming a rounded-bottom pattern. The formation is a bullish reversal, and a descending overheated downtrend reconfirmed it. The average directional movement index (ADX) (14) was highly overheated (at 50 levels) for about two months, suggesting a big reversal move for $CRB. The full stochastic (14,3,3) remained oversold for a much longer period, and the moving average convergence/divergence (MACD) showed a bullish crossover in negative territory. Therefore, the rounded bottom and the indicators were suggesting a significant up move in the near term.

The rounded-bottom's bullish breakout is confirmed after converting the moving average (MA) resistance to support. In Figure 1, $CRB surged after violating the 50-day MA resistance. Generally, the rounded-bottom breakout generates tremendous strength in the breakout rally. But the picture for $CRB was a little different. The breakout rally failed to move vertically upward. After the rounded-bottom breakout, the stochastic oscillator soon moved in a wide range between the 50 and 80 levels. Although these levels are considered to be a healthy overbought area, the oscillator in Figure 1 frequently changed its direction, because of the high volatility in the rally. Hence, the trading range of the index narrowed as price levels moved closer to the 200-day MA resistance. Finally, a rising wedge was formed in Figure 1, highlighting a breakdown for $CRB.

FIGURE 1: $CRB, WEEKLY. Due to the 200-day MA resistance, the rounded-bottom breakout formed the rising wedge formation.
Graphic provided by: StockCharts.com.
 
The MACD (12,26,9) was likely to turn negative as the gap between the MACD line and trigger was narrowing. The declining downtrend weakened, however, and the uptrend could not develop. Thus, the weak trend, the volatile stochastic, and the negative MACD affected the bullish breakout rally, forming the rising wedge -- a bearish reversal formation. As the wedge hit the 200-day MA resistance, the pattern broke downward. The breakout drifted $CRB almost 40 points and settled near the 50-day MA support. Currently, we can see in Figure 1, a bullish candle with the MA support, suggesting the possibility of a pullback rally. The upward moving stochastic in an oversold area may confirm the relief rally. However, the ADX (14) has not developed any bullish sign. Hence, traders need to wait for more confirmation from the price chart as well as from the indicators. $CRB has moved in a strong support-resistance zone of 50-day MA and 200-day MA, respectively.

FIGURE 2: $CRB, MONTHLY. The index is ranged between the 200-day MA support and 100-day MA resistance.
Graphic provided by: StockCharts.com.
 
The monthly time frame gives a very long-term view of the stocks and indexes (Figure 2). $CRB is range-bound within the 100-day MA support and 200-day MA resistance. The lower and upper shadows of the bullish candles within the range reflected instability in the bullish strength. This shows that the index was unable to sustain near the highs and lows of the month. The full stochastic (14,3,3) is on its bullish path toward the overbought region, indicating the bullish move. The MACD (12,26,9) has a bullish crossover in negative territory below the zero line. The ADX (14) is consistently descending from an overheated area. Therefore, the trend indicator is currently suggesting the declining downtrend. This mixed picture provides the range-bound price movement for $CRB.

To conclude, $CRB would continue its movements between the support-resistance of the MAs. The path is likely to be tricky.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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Date: 02/17/10Rank: 2Comment: 
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