Are Commodities Ready to Correct?

The week before last we opened a short position in the USO ETF, feeling rather lucky to grab an entry slightly above $108. What attracted us to short the oil trend was the extreme volume and the fact that the price of oil was trading above its price channel (an indication that it was overbought).

Last Friday we stopped out of our short position for a .20 loss when oil gapped higher and USO marked the highest trading volume on record.

Interestingly enough, USO has not seen follow through since Friday's price spike. In fact, it has been trading down on heavy volume. After a big spike one would expect consolidation, but consolidation should come on low volume. Heavy volume indicates that institutional money is shorting oil here.

Furthermore, oil stocks are heavily diverging negatively against the price of oil; yet another indication that this commodity that is on everyone's radar screen is under distribution.

But it's not just the price of oil that is showing signs of a trend change, gold has been trading in a series of lower highs over the past few months and has now carved out a head and shoulders pattern on its chart. If GLD cracks $84.80 it will break the neckline of this pattern.

What's behind this potential commodities correction?

The dollar.

The beaten down greenback has been diverging positively against the recent commodities run up and, opposite gold, has been trading in a series of higher highs for two months now. It now looks ready to make a run at the all important .74 resistance level.

It's always tough to pick a top in a strong trend and our stop out on Monday just highlights this very fact. But all this volatility, high volume, and widespread occurrence of divergences taking place are good indications that we are at the crux of a commodities correction.