Tuesday 1/26/10 Commodity Ideas

Opening Note:
Consolidation has been the name of the game over the past three or four days in many of the markets. Grains, metals, and currencies have all sat in fairly tight ranges after volatile moves during the beginning of last week. Meanwhile, the equity indexes have had one of the more violent three day breaks we have seen since the market bottomed out in March. Looking at 15 minute charts during hours that the stock market is open you can notice that the S&P has often been able to set up a base facilitated by dip/low buying action that has usually led to uptrends and eventually higher price action. It is notable that these dip buying programs have gotten crushed over the last four days because it shows that traders are now willing to hold a short position through new daily lows, which I think marks a shift in mentality. As the markets consolidate awaiting a smaller story by the FOMC tomorrow (I do not expect they will raise rates based on fed fund contract action) and a bigger story with the State of the Union address I am keeping my ammo ready as consolidation breeds momentum. In order of interest I am watching metals, currencies, energies, and stock indexes.

Buys to Watch:

Dollar Index- Consolidation over the last three days but an upside breakout of the consolidation overnight. I am looking at this as the second leg of a rally and have a projection between 8050 and 8200.

Sugar- I do not recommend buying any physical commodities at the time being but I put this here strictly because it is the best looking one out there and could be used as a hedge against shorts. The spreads remain largely inverted and on down days it has held up the best of anything.


Sells to Watch:

Silver- Turn on the tv and you hear about the gold and people will point out the head and shoulders top that has set off on the daily chart, but under the radar silver has greatly outperformed gold to the downside over the last week. Easier to notice on a weekly chart the silver has a head and shoulders top set off below $17.00 with a projection to the low $14's. The slope of the neckline on the silver is flatter so it should provide greater momentum than gold and with less ETF fund and government participation in the market it is much easier to move. The gold to silver ratio (Gold - Silver/2 for the best chart in dollars) has moved $50 in silvers favor the last week and I expect this to continue as they fall apart.
* Huge downside move today as I was writing this so entry could be difficult but look at gold silver ratio as another entry idea

Euro- With movement overnight in the currencies after a few quiet days I still believe the Euro is the best foreign currency sell based on technicals. I am looking at the two weeks of consolidation over the beginning of the year as a flag with a projection to 136.50 on the second leg of the down move. Also notice the Euro/Yen chart (Use symbol YR on CQG with a continuous chart to see the traded values) has a downside breakout of it's range since May. You double your risk here because they are moving very contrary to each other, but I would look at selling Yen puts to fund buying Euro puts as a trade because I expect more downside on the Euro than upside on the Yen.

Put on the Radar:

Copper- I believe this will be a sell within the next two weeks as the weekly trendline sits this week at 325. Copper has been the consistent strength leader to the upside on the recovery and is one of last commodities to have a non-violated weekly uptrend. When this breaks the trend open the selling flood gates.

Bonds- They have sat in a range on the weekly chart since June building a nice looking base for a breakout. On a daily chart they also have nice uptrend with nice pullback entry positions. Keep an eye on the long side of the curve for larger breakout potential



Notes:

Potential two day pullback opportunity to sell the Nasdaq in a low volume price area that should reject higher prices between 1813 and 1820. Not my favorite sector to sell right now though.

Palladium and Platinum both have recently created ETFs involved in the markets that have accumulated large open interest positions that have rallied the markets beyond reasonable levels. It is like fighting a giant in a thin market but if the copper breaks it's uptrend there could be a furious liquidation in a thin market with big opportunity.