6/3/98

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Long-term cycles in the Commodity Research Bureau Index (CRB) indicate probable bottoms in the agricultural markets and metals July through August with a bull market in full swing this fall.

The DJIA is often used for an overview of the Stock Market, and the Commodity Research Bureau (CRB) Price Index serves the same function for the commodities markets. It is comprised of most active commodities markets measured as a percentage of gain against the base year of 1967. It is heavily agricultural weighted, but also has metals and energy markets.

Dominant Cycles in the CRB Index

Chart 1

This index has powerful and consistent cycles that can be used to forecast months and years into the future. There are three dominant cycles in the CRB Index traced back to the 1940s, and shown on the charts below from the late 60s forward.

• The largest and the most powerful cycle is six years from bottom to bottom. The double arrows in Chart 1 show the bottoms of this 6-year cycle.
• Within each 6-year cycle are two 3-year cycles indicated by the single arrows in Chart 1. The price levels and months of highs and lows are shown in Table A. The historical moves from high-to-low of both the 3 and 6-year cycles are indicating that a bottom is most likely to occur July through August.
• There is also a dominant 10-month cycle shown in Chart 2. There are usually three or four 10-month cycles within a 3-year cycle, and six or seven 10-month cycles within a 6-year cycle. The 10-month cycle has its own distinct tops and bottoms, which are used to fine-tune tops and bottoms of the 3 and 6-year cycles.

6-Year and 3-Year Cycles Forecast a Bottom this Summer
Of thirteen 3-year cycles, 11 bottomed July through December. Since only 15% of the bottoms occurred before July, odds favor the cycle bottom occurring July through December. Seven of the eleven 3-year cycles bottomed in the July-August time period, indicating that a bottom is most likely in July-August. Additionally, cycles for individual markets indicate that major bottoms are due this summer.

Table A lists the cycle bottoms and tops of the 3-year and 6-year cycles shown in Chart 1.

Column 2 is the price of the CRB Index at each 3-year and 6-year cycle bottom.

Column 3 lists the tops of the 3-year cycle and identifies the tops of the 6-year cycle with an asterisk. Ten of 13 (77%) tops occurred February through July. (Useful information for identifying the next 3-year cycle top.)

Column 4 is the price of the Index at each 3 and 6-year cycle top.

Column 5 is the % move from the cycle top to the low of each 3-year cycle.

Column 6 is Column 5 sorted from the smallest move to the largest move.

Column 7 is a price objective based on the % decline (in Column 6) from the 1995 3-year cycle high at 264. The low for the month of May, 1998, is 214, which coincides with the 8/97 low. It is of interest that the January low for the index was 224, matching the 3/75 low, and once that low was taken out the Index dropped sharply to 214. If the Index drops below 214, watch 209. It could be a support level, and a drop below it could be followed by a decline to 195 as the 3-year cycle bottoms.

Column 8 is the % move from the cycle top to the low of each 6-year cycle.

Column 9 is Column 8 sorted from the smallest move to the largest move. This shows that a decline is likely to find support at 26-27%. The 42% decline was off the inflationary high in 1980 and is not likely to be repeated.

Column 10 is the calculation from the October 1996 3 and 6-year cycle highs at 264 used to anticipate the low of the current 6-year cycle. 193 - 195 (26-27%) is likely to be a strong support level for the 3 and 6-year cycle bottoms if the Index drops below 209. However, to reach this price level, prices would drop below the 198 low of the 1992 6-year cycle bottom and 196, the low of the 1986 cycle bottom. This is unlikely as the second 3-year cycle high on 4/96 was above the first 3-year cycle high on 6/94. This is a bullish pattern that almost never sees a drop below the previous 6-year cycle bottom in the CRB Index, or any market with 3-year cycles.

10-Month Cycles in the CRB Index

Chart 2 - 10 Month Cycles in the CRB Index

The lows of the 10-month cycles are indicated by the up arrows in Chart 2.

· There are three or four 10-month cycles in a 3-year cycle, and 6 or 7 10-month cycles in a 6-year cycle.

· The current 10-month cycle is the third in the 3-year cycle and the sixth in the 6-year cycle. This would indicate the 3 and 6-year cycles should bottom with the current 10-month cycle.

· For the 3 and 6-year cycles to bottom with the next 10-month cycle would take prices into next spring, which would be a 4 and 7-year cycle bottom… possible, but not likely.

How low will the CRB Index drop before it bottoms?
Patterns of 10-month cycles that dropped below a previous 10-month cycle bottom indicate the most probable price range for the low is 202 - 214.

When will the 10-month cycle bottom?
Based on Table A, the most probable time is July through August. However, a look at the weekly cycles can often fine-tune the larger monthly cycle. A 10-month, or 40-week cycle is comprised of two 20-week cycles. Chart 3 shows the July 1997 low of the last 10-month cycle bottom, which was also a 20-week cycle bottom (indicated by two up arrows). The next 20-week cycle bottomed the week of 1/16/98, as indicated by the single up arrow.

Chart 3 - 20-week cycle forecasts 10-Month cycle low the last week of May through 7/2/98.
From the 20-week low, a set of time bands have been calculated.

• The green band for a cycle top was drawn the day following the cycle low. The cycle topped only three weeks from the low, in the first week of the band.
• The bottom of the 20-week cycle is most likely to occur in the overlap of purple and red bands, which ends the week of 6/5/98.
• Should this cycle extend beyond the overlap area, 90% of all similar weekly cycles bottom no later than the 24th week from the previous cycle bottom, or by 7/2/98. Therefore, our expectation is that this 20-week cycle, and the 10-month cycle will bottom no later than 7/2/98.

June Bottom
Based on this 20-week cycle, a June bottom is likely for the 10-month cycle. While this would be unusual, as only 15% of the 10-month/3-Year cycles have bottomed before July, a mechanical buy signal would confirm the bottom. The red oscillator at the bottom of Chart 3 is a 3-week RSI smoothed with a 3-bar moving average of the RSI. It is quite accurate for identifying tops and bottoms of 20-week cycles.

Confirmation of Bottom
A mechanical buy signal pattern would give an 85% confirmation of the 20-week cycle bottom, which should also be a 10-month, 3-year and 6-year bottom. When the oscillator turns up it will generate a red setup bar as it did at the previous two 20-week cycle bottoms (and the recent 10-week cycle bottom indicated by the single up arrow). Exceeding the high of the red setup bar is the buy signal. A bottom does not necessarily mean an immediate explosion to the upside, as the commodity markets could base for several weeks or months. But the bottom of a 6-year cycle is usually followed by a rising CRB index for at least two to four years.

The normal pattern for a 10-month cycle in a rising 3-year cycle is seven months up indicating commodity prices, in general, could make a sizeable move into the Dec-Feb time period. Once the bottom has been confirmed, the approximate timing and price levels for the tops of the 10-month, 3-year and 6-year cycles can be calculated, and will be included in an updated report.

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