Dissector: Baltic Dry Index facing key resistance

Baltic dry index (BDI) captures the movement in prices of the dry bulk shipping market.

It acts as a fairly accurate leading economic indicator. The index fell 93 points or 4.8 per cent on Friday to close at 1814.

The BDI was on an intermediate-term downtrend since peaking out in November 2009 at around 4661, and was forming lower peaks and troughs. However, after recording a new low this year at 1043 in early February, the BDI bottomed out as its relative strength index reached deep oversold levels, below level 3.

Historically, RSI had slipped below level 3 in the last quarter of 2008 and the index had bottommed out in first quarter of 2009.

Since this February, the Baltic dry index has been on a budding intermediate-term uptrend.

After forming a strong base at 1250 in late April, the index took support at around this base level during August and resumed its uptrend subsequently.

In the first week of September, the index emphatically broke through its key resistance at 1585 levels (March 2011 peak) and continued its northward journey.

However, the index is facing a psychological resistance at 2000 level.

Moreover, the daily relative strength index is displaying negative divergence indicating potential reversal in the trend.

Price rate of change indicator has slipped into negative territory from the positive territory after showing negative divergence.

This signals that selling pressure is emerging in the index.

A downward reversal from the psychological resistance can pull the index down to 1700 level (July 2010 low) in the short-term.

Strong drop below 1700 can pull the BDI down to 1585 or even to 1250 in the medium-term.

Nevertheless, upward reversal from 1700 levels and a decisive breakthrough of the psychological 2000 level will pave way for a rally in the long-term to 3000, which is significant resistance level.

Immediate resistance above 2000 is at 2450 levels.

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