Commodities have been on the rise, and I see the trend continuing amid persistent weakness in the U.S. dollar. I'm bullish just about every commodity out there, but am most bullish the ones I feel have been underachieving, and haven't made big breakouts yet--namely coffee, cotton and sugar.

Last week, grains were in the spotlight as wheat and soybeans rose to record highs. The bullish trends in grain markets continued this week, and a number of other physical commodity markets staged significant rallies, including crude oil, which closed above $100 for the first time ever. One factor that’s helped boost a number of commodities can’t be overlooked—the weak U.S. dollar. So let’s start there first.

Dollar Index

Prolonged weakness in the U.S. dollar has precipitated the commodity bull market over the past year. Many commodities are priced in dollars, and the weaker U.S. dollar spurs more foreign purchases, sending prices upward. Looking at the ICE Dollar Index futures contract, which tracks the dollar against a basket of currencies, we can see the March futures have been trading in a three-point range, currently near $76.10. For directional clues, I’m watching $77.80 on the upside, and $74.80 downside. I think the odds favor a break lower, and a drop under $74.80 would keep commodities booming. A close above $77.80 could spark a big commodity correction. So while I favor the downside, this market has been going sideways about 4-½ months and I want to watch those levels for the next breakout that could impact a number of markets.

Coffee

Coffee is a commodity I feel will benefit from dollar weakness. May ICE coffee futures rose 5.35 cents to $1.5775 a pound Tuesday. I use a projection technique to try and gage where prices may be headed next. The high of the chart pattern back in October was $1.4460, and the low of the pattern was $1.2225; that gives us a 22-point difference. I add that to the breakout point at $1.4460, and that gives me an upside target of $1.67. Based on the pattern this market just broke out of, I expect coffee prices to increase, and would recommend buying on breaks. Many other commodities have doubled in the past year, and I expect this one to as well. Coffee inventories in Brazil, the world’s biggest grower, are at a 50-year low, and I think coffee at $3 a pound is not out of reach as long as the dollar remains weak. I can’t stress that enough; I would reverse my opinion if the dollar stages a recovery. Trading is like driving a Ferrari, one wrong move at a fast speed and you can get hurt severely. You have to be quick to trade these markets.

Cotton

Cotton is the commodity I’m most bullish on. This past year cotton has gone sideways but I think it’s poised for a big breakout. Last year’s lofty corn prices had farmers shifting acreage in favor of corn and away from other crops like cotton, while record-high wheat and soybean prices this year are likely to continue that shift. At some point, cotton supply isn’t going to be able to meet demand. According to the National Cotton Council, increased wheat and soybean plantings could reduce cotton 12 percent from last year to 9.55 million acres this year, which would be the lowest since 1983.

Looking at the recent channel this market has been trading in, cotton futures posted a high of 73 cents a pound in July, and moved as low as 60 cents. I see December futures rising to $1. The whole pattern is bullish, and I expect cotton to double over the next year or two. On Tuesday, front-month ICE May cotton futures closed at 71.79 cents a pound.

Sugar

The ICE sugar #11 contract also climbed Tuesday, hitting an 18-month high at 14.11 cents a pound. This market has had a massive uptrend, breaking out of a nice long base, Sugar traded up to17.80 in 2006, and I see sugar not only passing that level, but moving to 20 cents sometime this year. This is one of the commodities I like the best and on the fundamental side, the ethanol story has helped not only corn, but should also boost sugar.

Crude Oil

Crude oil made headlines on Tuesday, February 19, 2008, as March NYMEX futures settled up above $100 a barrel for the first time ever. March heating oil and reformulated gasoline blendstock futures (RBOB), also hit record highs Tuesday. All energy products got a lift from a refinery fire in Big Spring Texas that would thwart production of some 70,000 barrels a day for weeks or even months, more unrest in Nigeria, and continued talk of OPEC production cuts.

Using my measured analysis, I’m looking at the low end of the range in futures at $85 a barrel, and $100 on the high end. I project a move to $115 if this market defends that $100 level. It’s hard to be bearish any commodity right now, this one included. China’s growth rate is still booming, and its inflation rate is the highest in 11 years--food prices were reported to have surged 18 percent in January. And expectations for increased demand for fuel in China has been fueling crude oil.

Metals

Gold futures also had a great day Tuesday, rising to near a seven-week high, and silver closed at its highest level since 1980. April gold rose $23.70 to $929.80 an ounce, while silver closed up 39 cents to $17.508 an ounce. Looking at gold, I’d like to see a close above $938 to start new leg to $1,000 an ounce. Everyone was calling for $100 crude and we got it, and I think it’s only a matter of time before we see $1,000 gold. A close below $885 in the April contact, however, and this chart will turn ugly. The dollar is so important for this market, as many investors see gold as an inflation hedge, and alternative currency. Silver is currently trading near $17.50 an ounce, and I think it can make it to $20.

Financials

The oil surge Tuesday put a damper on the stock market’s performance, and major market averages closed lower. However, I’m an optimist on the S&P 500, and I think the market declined too far and too fast. S&P futures posted a low of 1255 in January when the Federal Reserve came in and made its emergency interest rate cut, and if that level gives way, I see a drop down to 1,000 possible. March futures are trading near 1355 currently, right in the middle of the trading range pattern. A close above 1400 would confirm the bottom, but a close under 1311 and I’d get worried. This market may be a tough trade but I don’t see another massive leg lower. I wouldn’t offer a specific trade recommendation at this time, although my bias is to believe the market may be stabilizing.

We’ll see what comes next from the Federal Reserve at the March 18 policy meeting, which will likely impact this market and a number of other commodities as well. Market participants are expecting the Fed to lower its key short-term lending rate, the Fed funds rate, to 2.5 percent. Continued rate cuts are likely to keep the dollar week.

Overall, we are seeing continued bullish news for all commodities. I’m not going to pick a top in any one of these commodities until I see the dollar garner strength. Again, if the dollar index takes out $74.80, these commodities could see levels no one would think possible. There is a lot of uncertainty right now, but if you had to pin me down on one market, I’d pick cotton. I think it has the most potential.

Blake Robben is a Senior Market Strategist at Lind Plus, Lind-Waldock's broker-assisted division. He can be reached at 800-266-0551 or via email at brobben@lind-waldock.com.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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