By Jim Donnelly, Olson Global Markets

After a few weeks of “fits and starts”, it appears that the CRB index and its underlying commodity components are in position to extend higher again. An end-of-the-quarter weakening of the dollar index may well be the culprit here. Despite a rather well received “mini” Treasury refunding last week, the greenback slid lower in the wake of rekindled references to the need for a new reserve currency by foreign holders of U.S. debt.

From a technical perspective, a bullish reverse Head & Shoulders pattern that targets a move up to the 292 area on the CRB index has been formed. A much needed break above key “neckline” resistance at 245 and a subsequent “retest” of that level has already occurred as well, putting daily technical studies into a new bullish configuration.

The recent rise in commodity prices, of course, has helped to firm up a number of commodity-related stock valuations. Last week’s reversal in initial jobless claims, however, suggests that the rise in the CRB index may have less to do with an increase in final demand than with a decline in the dollar. A week-long slide in interest rates on U.S. Treasuries also tended to diminish demand for the dollar.

Still, commodity prices have experienced a “disconnect” with the balance of actual “supply and demand” issues in the past …as witnessed by the rally in 2008 which reached its crescendo last July. The current set-up for commodities is far from having anything resembling a fever pitch to it. Instead, it resembles a market that has been base building and getting ready for a renewed advance. It might be the anticipation of future demand that will tilt the balance toward commodity bullishness.

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