Over the past few months, these articles have discussed inflation and commodity pricing increases. Rises in commodity prices and currency pairs have certainly budded; however, now we are facing a potential pullback.

The potential pullback is based on the Morgan Stanley Commodity Related Equities Index (CRX). As shown in Figure 1, the CRX has been very bullish while commodity prices have risen. Commodity price increases line the pockets of companies that benefit from mining, processing, selling or are otherwise involved in commodities and represent economic health driven by commodity prices. The CRX trended up more than 50% from March lows before breaking trend this past week. When a consistent trend breaks, a correction that equals the size of the trend channel and a conjunction with Fibonacci levels usually follows.

The break in the CRX trend could see price dip to retest the 38% Fibonacci level, near 570, or further to the 50% Fibonacci level, near 540, without ending commodities' bullish sentiment (see Figure 1). If this pullback continues and bounces off a support level, as it appears it may, then commodity-sensitive currency pairs might see a similar pullback, which may signal an opportunity to enter into the long-term trend at a lower price and with better money management.

Although the pattern isn't identical to the CRX, the GBP/JPY pair has experienced a similar end to a bullish trend and may be showing signs of further potential pullback. The pair could form a head and shoulders pattern within the next four to five days, placing the pullback almost perfectly at support, near 151, within two weeks. If the pair reaches support near 151 and the CRX bounces off a support level at the same moment, this would further confirm the expectations of a continued bullish run. As shown in Figure 2, price is near 159, which is almost a perfect shoulder height if price rolls over. A break below 156 could see the pair reach the 151 level and if it does, there is a great shorting opportunity. However, if the longer trend and fundamentally based trade bounce off the bigger trend's support level, the probabilities of success may increase.

The short, or long-term bullish, position can be traded in the forex spot market or by properly combing futures, which in this instance, for the GBP/JPY pair, would be buying British pound futures (/6B) pair and selling yen futures (/6J).

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