Talking Points

  •  Copper to Rise as Risky Assets Correct Higher After Yesterday's Selloff
  •  Silver Likely to Outperform Gold as US Dollar Pullback Boosts Metals
  •  Crude Oil Aims Higher But Iran Tensions Downgrade May Counter Gains

As we discussed yesterday, commodities came under broad-based selling pressure as a market-wide flare-up in risk aversion weighed on demand for growth-sensitive assets while boosting the safe-haven US Dollar. A correction now appears underway, with most benchmark commodity prices following a cautious recovery in European stock exchanges higher. S&P 500 stock index futures are pointing upward as well, hinting more of the same is likely as Wall Street comes online.

A slowdown in German Factory Orders may offer a bit of a counterbalance to the chipper mood, with expectations pointing to a 0.6 percent increase in January following a 1.7 percent gain in December. With that in mind, orders have been trending lower since mid-2009, so a mere reinforcement of the status quo may not be enough to derail corrective momentum. On the other hand, an upside surprise is likely to have a disproportionately positive effect in the current environment.

Later in the session, the spotlight will turn to the ADP employment report to set the tone for official US jobs data due on Friday. Expectations call for an increase of 215,000 jobs in February, marking a meaningful improvement over the 170,000 gain in the prior month. This too appears likely to fuel the bounce in risky assets, pointing to recoveries in crude oil and copper(although the announcement of new talks between Iran and Western powers may limit gains in the WTI contract). In a reversal of yesterday's trading dynamics, improving sentiment is also likely to weigh on the US Dollar, offering a boost to gold and silver prices. The gold/silver ratio continues to show a significant inverse correlation with the S&P 500, meaning the cheaper metal is likely to outperform in a risk-on environment.

WTI Crude Oil (NY Close): $104.70 // -2.02 // -1.89%

Prices followed a bearish Three Outside Down candlestick pattern with a break below support at 105.82, the confluence of the 23.6% Fibonacci retracement and a rising trend line set from the February 2 swing bottom. Sellers now target the 38.2% Fib at 103.28. The 23.6% level has been recast as near-term resistance.

Commodities_to_Recover_as_Profit-Taking_Fuels_Bounce_in_Risky_Assets_body_Picture_3.png,

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1674.32 // -32.18 // -1.89%

Prices took out support at 1687.97, the 38.2% Fibonacci retracement, exposing the 50% Fib at 1656.38 as the next downside objective. The 1687.97 level has been recast as near-term resistance.

Commodities_to_Recover_as_Profit-Taking_Fuels_Bounce_in_Risky_Assets_body_Picture_4.png,

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $32.95 // -1.03 // -3.02%

Prices continue to decline after completing a Bearish Engulfing candlestick pattern below resistance at 36.99, the August 29 2011 swing low. Sellers have narrowly taken out support at 32.97, the 38.2% Fibonacci retracement, although secondary support at the February 16 low (32.63) needs to be overcome before the 50% level at 31.67 is exposed. The 23.6% retracement at 34.59 is acting as near-term resistance.

Commodities_to_Recover_as_Profit-Taking_Fuels_Bounce_in_Risky_Assets_body_Picture_5.png,

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.738 // -0.122 // -3.16%

Copper is moving closer toward validating a Head and Shoulders top chart pattern below the 4.0 figure, with prices taking out rising trend line support set from the December 15 swing low. The bears now aim to challenge the would-be H&S neckline at 3.713, with a close below that completing the formation and exposing a measured target at 3.438. The trend line, now at 3.837, has been recast as near-term resistance.

Commodities_to_Recover_as_Profit-Taking_Fuels_Bounce_in_Risky_Assets_body_Picture_6.png,

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com