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Are Commodities Expecting QE3?

 September 01, 2011 01:36 PM

The Fed's QE2 program was a failure as far as the economy is concerned. The U.S. economy is in considerably worse shape than last summer when the Fed attempted to come to the rescue with its QE2 flood of extra dollars into the global financial system.

But QE2 did have a big effect on global stock markets by producing hope that it would work to rescue the economy. And it had an equally large effect on commodity prices that had investors plowing money into commodity trading at a never before seen pace.

When it was clear that the positive effect of QE2 on the economy had been very brief, the stock market quickly gave back most of its QE2 induced gains.

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And now with its realization that the economy is even closer to potentially falling all the way into recession the market is hoping the Fed will come in with some form of QE3. And while the experts are saying it won't help the economy, investors are hoping that perhaps it will work similar to QE2 and give the stock market another boost.

Meanwhile, commodity prices also took a tumble beginning May 1st along with the stock market, on realization that the weakening economy was not going to provide the ongoing demand for goods that had created a spike up in the prices of oil and other commodities.


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Commodities are now at an interesting juncture, having again reached the upper limit of the trading band that has had them confined since they topped out. Will they roll over to the downside and remain in the trading band or break out to the upside?

Since the stock market and commodities have been tracking so closely with each other, beginning last summer's QE2 rally together and topping out together at the end of April, the answer to that question might be just as important to the stock market.

In its plunge from the April top the S&P 500 became extremely oversold short-term beneath its 50-day m.a., practically guaranteeing at least a brief rally to alleviate the oversold condition.

That rally has been underway.

In determining whether the market will roll over and resume its correction once the oversold condition is alleviated, or keep going into a resumption of the bull market, market technicians might find it useful to also apply technical indicators to the commodities index.

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