Bouncing Along

Rubber has an elastic relationship with oil. As the price of oil increases the cost of producing synthetic rubber increases. Producers switch from synthetic rubber to natural rubber and this pushes up the price of natural rubber which is most easily tracked using the Tokyo Commodities RUCC contract.

The price of oil has increased by more than 100 percent in the past year, while the price of rubber has jumped by about 50 percent. The relationship between the two commodities is erratic and no longer sell correlated. Analysis of the oil market was once used as a proxy for analysis of the rubber market. Now the rubber market is analyzed on its own merits, with its own distinctive patterns of price behavior.

The daily rubber chart is defined with two key features. The first is a trading band. The lower edge of the band is located near 265. The upper edge of the band is located near 310. From November 2007 through May 2008 the price activity was confined within this band. The market essentially moved sideways in a 17% range in period when the oil price added 55%.

The breakout above the upper resistance band near 310 helped to create the second feature on the chart. This is the strong and well defined trend line starting with the March 2008 low. The target for the breakout above 310 is near 355. This is calculated by projecting the width of the trading band upwards. The retreat from this resistance level is consistent with the pricing behavior for rubber.

There is an important difference with the breakout above 310 and it is shown by the behavior of the long term Guppy Multiple Moving Averages (GMMA) display. This group captures the behavior of investors. The price dip in June is the leading indicator of trend strength. This sharp sell off was driven by traders. Investors came into the market as buyers. They did not join the sellers. We reach this conclusion because the long term GMMA did not compress in reaction to the selloff. Investor support was bullish and it remains bullish. Currently there is no evidence of compression in the long term GMMA.

This GMMA relationship suggests continued bullish pressure. It suggests that the current price retreat has a high probability of rebounding from the trend line rather than continuing to retreat all the way back to support near 310. On the weekly chart the full impact of this bullish pressure is clear.

The weekly chart shows a long term up sloping triangle. This is a bullish chart pattern. The target projection for this pattern is set near 380. The pattern of behavior on the daily chart suggests there is a high probability the 380 target will be achieved as the rubber price rebounds from the trend line. Initial downside lows are in the 330 level. There is a higher probability of a repeat of the price activity seen in June with a fast rally towards the initial resistance at 355 and the longer term target near 380.

Rubber does not have the same driving power as oil. The bounce in this market is more closely related to long term factors rather than the more recent sharp acceleration of the oil price.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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