Is the Worst Over?

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Oil prices realized their largest weekly drop in history from $145 a barrel down to $129 a barrel. Thats a $16-a-barrel drop. Oil prices are now down $18 a barrel from the July 11 high. Since last Friday, gasoline prices dropped about 40 cents a gallon, and this should show up at the pump in a few weeks.

Soybeans collapsed $1.60 per bushel last week, a 12 percent drop. Remember the Midwest flooding that ravaged the corn crop? Corn is down 19 percent from then to the same prices seen before the flooding began.

The Dow Jones Industrial Average was up 400 points last week and registered a bullish weekly reversal higher (trading to a new low for the past two years and closing above the previous weeks high). Still, based on our quarterly indicator (see CT, July 7, 2008, Stock Market Success), its nowhere close to flashing a new buy signal.

Take a look at the daily chart of the Dow. Does this look like a new bull market to you or merely a correction in a major bear trend?

Stocks appear to be short-term bullish and certainly could rally another couple hundred points or even double that, but much more than that will be required to turn this bear back into a new bull. And I dont see that yet.

What about commodities? Oil had the largest weekly price drop in its history last week, but thats in raw terms, not percentage terms.

From the top, oil prices have corrected 13 percent. Historically, there have been larger percentage breaks; it happened three years ago. The price break in January from $96.50 a barrel to below $85 was also a 13 percent drop.

Back then, folks were very worried that $100 a barrel might be a possibility. Today, even after this 13 percent break, $100 a barrel oil appears cheap. The reason oil prices have risen as high as they have has less to do with US consumption (down about 500,000 barrels per day, or 3 percent) than with the emerging economies that are more than picking up the slack.

Today China is temporarily shutting down entire industries to curb pollution in preparation for the Olympics. However, last week China reported its second quarter GDP rose by 10 percent, and the country is experiencing 20 percent inflation.

India is also experiencing the fastest inflation in 13 years. There's been a lot of talk about how speculators have been pushing up oil prices. Take a look at open interest (orange line, a measure of outstanding futures contracts) on the oil chart above. Its collapsed in recent weeks, indicating a purging of speculative participation in this market.

Its now at the lowest level since February 2007 at about $60 a barrel. Emerging market energy demand isnt going to disappear this year, and at some point, the next oil price rally will begin. Sure, oil could drop some more, but dont expect it to go back under $100 a barrel anytime soon. And after the next higher low is registered, the next price spike will likely be swift and brutal.

Soybean prices followed oil sharply lower last week and are now down 12 percent from the all-time highs registered a few weeks ago. Last weeks news announced that the Argentine farmers strike was settled and the country will now flood the globe with soybean supplies. Note there was a 12 percent correction in April and an even more dramatic 29 percent correction in March, which turned into premier buying opportunities.

The charts are bearish. The market has carved out a head-and-shoulders top pattern that points to a continued downside objective at 1,338. However, like oil, the majority of the speculative open interest has been purged from this market. The fundamentals are decidedly bullish with the lowest projected carryover supply in history.

US soybean exports to China are running at a record-high pace, and their buying interest has picked up on this break. Prices could retreat further and possibly even reach the head-and-shoulders objective. However, at some point, this market will turn out to be a premier buying opportunity again. It could come sooner rather than later, and we need to stay alert for a new buy signal. Ill keep watching for my premium service, Futures Market Forecaster, subscribers.

Despite the devastating flooding last month, corn prices are down even more than soybeans, now 21 percent from the top at prices lower than pre-flood levels. However, China--once the biggest corn exporter in Asia--has curtailed corn exports. And in India--where corn prices have risen 40 percent this year--the government also put a halt to corn exports. Meanwhile, the worlds fourth-largest producer, South Africa, has no spare supplies to export as it feeds starving neighbors in Zimbabwe in a bid to maintain its own domestic order.

These new, lower prices have helped the ethanol industry in this country. The ethanol stocks were up sharply last week, and theyre still slated to take 30 percent of this years crop. Sure, the corn bear is still alive, but its an old bear and will be replaced by the bull again in short stead. We just need to let the market tell us when this money-induced liquidation has run its course and new buying interest starts to emerge.

What about gold? With soybeans dropping 12 percent, oil 13 percent and corn 21 percent, youd would expect a similar performance from gold. However, even I was surprised to see gold prices were down a mere $2.50 an ounce (or less than three-tenths of 1 percent) last week after all the fluctuations.

Look at open interest (represented by the orange line). Unlike the other commodities, its been rising lately. This is bullish relative strength, and I believe my analysis will ultimately come to fruition: Gold prices will trade well above $1,000 an ounce before the year is over. All they need is a little push from these other markets.

In summation, the markets are treacherous right now; remain patient, stay liquid, be ultra-cautious, and consider diversifying back into commodities on the first sign this correction is over.

Speaking Engagements

Be sure to wear a flower in your hair when you venture west to San Francisco. My colleagues Neil George, Roger Conrad and Elliott Gue will be heading to "The City" Aug. 7-10, 2008, for the San Francisco Money Show.

Neil, Roger and Elliott will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011470 to attend as our guest.

Also, be sure to check out our blog, At These Levels, for more noteworthy stories.

Special Invitation

We have a special invitation for our readers. KCI Communications, Inc., publisher of Commodities Trends, is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts knowledge and passion for the markets. During the sail, youll not only explore the cerulean splendor of the Caribbean, but youll also delve deep into current markets in search of the most profitable opportunities for your portfolios. Youll also have the rare chance to sail through one of the worlds engineering marvels, the Panama Canal.

Its always a special treat to meet and talk with subscribers in person, and we couldnt have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope youll join us.

For more information, please click here or call 877-238-1270.