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Commodities Strong Across the Board

Wheat – Wheat futures fell sharply yesterday on expectations that Friday's USDA report will show an increase in the forecast crop size for Argentina and Australia. A private forecast indicates that after several years of drought, Australian production may rise to record levels due to the La Nina weather pattern. While the pattern may adversely affect the U.S. crop due to dry conditions, the back end of the pattern produces good rains for the Aussie crop. New crop contracts have made solid gains versus the old crop recently, significantly tightening the spread that at one point was almost two dollars between the March and December contracts, but the Aussie and Argentinian outlooks may dampen hopes of another bull run in 2008. December Wheat recently broke out of a bullish wedge formation, signaling the possibility of higher prices. Yesterday's reversal pattern on the daily chart, along with a bearish divergence between the momentum and RSI indicators, may lead to the conclusion that this was a false breakout. With this morning's move to the downside, the momentum indicator is resting on the 0 line and further selling could cause the indicator to slip into the red for the first time in almost two months. Support comes in at 813.50, 807.50 and 797.25, while resistance can be found at 829.50, 839.75 and 846.00.

Sugar – Sugar continues to climb this morning, aided by rising fuel costs and solid commodity prices. Commodity index fund activity remains strong in the Sugar market, with funds adding positions to more closely match the DJ-AIG index. Morgan Stanley indicated that 53 percent of Brazil's crop has been diverted to ethanol production, giving traders hope that exports will be smaller that previously forecast. Although Oil prices dropped sharply yesterday, energy costs remain close to historic levels, which may result in higher ethanol use. Also in play, several sources have already indicated that Brazil may raise the ethanol component of its domestic fuel blend and India is also behind schedule harvesting its Sugar crop. The recent bullish turn in the fundamentals and relatively cheap prices have attracted investors to Sugar, but traders may move forward cautiously given the recent strong showing, which may open the door to profit-taking in the near-term. The March Sugar chart shows no sign of a letup after breakout out of a bullish consolidation pattern last week. Momentum is sharply outpacing the RSI indicator, which is bullish in the near- to mid-term. Support comes in at 11.28, 11.20 and 11.12, while resistance can be found at 11.45, 11.54 and 11.63.

Gold – The strength in commodity prices this morning has helped push the Gold market to new all-time highs, with the February contract trading as high as 879.30 as of the writing of this report. Today's pending home sales figures are expected to come in very weak, which could prompt the FOMC to lower interest rates when it meets later this month. Gold fundamentals remain very bullish and the ideal inflation scenario for precious metals bulls may be forming, with commodity prices rallying and interest rates falling. The Dollar continues to stumble in its bid to rally from all-time lows and the weakness in the U.S. currency will only add to the bullishness in the market. February Gold is breaking out of a bullish consolidation pattern on the chart. If the pattern is confirmed prices may rally to the target of 890 set by the wedge formation validated several weeks ago. Momentum remains bullish and is outpacing the RSI, which remains in overbought territory. Overbought conditions may do little to halt a strong bull run, but may bring about more consolidation and cause the market to labor going forward. Support comes in at 855.60, 849.00 and 844.50, while the market may find resistance at 879.30 and 885.70.

Rob Kurzatkowski, Commodity Analyst