Wednesday 1/27/10 Commodity Ideas

Opening Note:
With the FOMC report coming this afternoon and the State of the Union Address this evening I anticipate a fairly quiet day as the markets await this news. There was some interesting action in the metal markets yesterday as silver broke over 50 cents from 7 am to 8:15, but led by a rally in gold was able to recover 58 cents by 10:30 to end up net positive after a large move. Some of this rally was due to the fact that the Feb. option contract expired at noon so the market found equilibrium in gold at the high volume $1100 level, but it was apparent while watching the action that there were large volume buy orders executed in the market as the gold was on the edge of a huge break, leading me to believe that fund money entered this market yesterday. Also, despite a positive consumer confidence reports that rallied stocks, especially the Nasdaq, the market rejected these higher prices and closed relatively flat on the day. The majority of the directional signals that I watch are tipping towards a correction in the macro market recovery and I see little news to come in the next 12 hours that will significantly tip the scale to support the market. Things will definitely become clearer tomorrow as I expect the market to continue moving directionally out of consolidation. Use caution today entering positions as the market awaits the news.

Buys to Watch:

Dollar Index- The dollar tried to peak out of the top of it's three day consolidation but was only mildly successful as earlier gains faded during the consumer confidence rally. Despite being muffled over the last week I still believe the momentum is to the upside, and barring any surprises later today the index should rally as commodities break. A second leg projection of 8050 to 8200 still exists.


Sells to Watch:

Silver- Despite the viscious rally back after it's awful open I stand by silver as my favorite sell out there right now. The head and shoulders neckline breakout sits at $17.04 today and by a close at $16.86 yesterday was set off. The price action that set it off yesterday with the loss of momentum and rally swing was not exactly what I like to see when initiating a short, but I think that with gold maintaining it's head and shoulders pattern and the strength of the silver projection alone that the market will not be able to deny a move to the low $14 range unless there is significantly bullish news.

Euro- It has been slow going down in the Euro with a large consolidation formation for the first two weeks of the month and again consolidation over the last week but I have the largest bearish case for the Euro technically and fundamentally of any currency. Looking at the chart technically I believe it is in the second leg of a three leg down move, but with a significant battle recently going lower. Fundamentally, Greece has serious lending problems and I believe that others can not be far behind. The EU is unique in that it is a collaboration of countries with vastly different histories and ideals that is trying to work together. There are restrictions on movement of labor (meaning if I can't find work in Chicago I can go to L.A., but if a worker in Spain is looking for work he has to jump some hurdles to move to Germany) and a mix of strong individual countries and a number of weak individual economies. If the Euro continues to devalue expect some dissension between the strong economies not wanting to carry the weak. Downside second leg projection to 136.50.

Put on the Radar:

Copper- Copper has historically acted as a good indicator of the stock market and also other commodities. The weekly trendline sits extremely close at 325 and the price action has been much weaker recently in relation to other commodities.

Euro/Yen Cross: Another indicator of market direction so also one to keep an eye on. The chart has broken below all of the price action since May and looks fueled to continue more with the Yen gaining strength. Dr. Doom, one of the men who predicted the stock market collapse a year and a half ago used the bottoming of this chart in February to also signal that the bottoming of stocks in March. Breaking out of the range since May is one of the reasons I believe the market is correcting as a whole.


Notes:

Soybeans and Corn: The soybean and corn markets like many others have consolidated in a smaller range over the last week despite continued bearish sentiment by many traders. There is very little fundamental news to support the price of beans where they are and I believe that they will continue to break (more than corn) but as you can see from the July - Nov bean spread refusing to break below 30 cents that there are still enough bulls that believe there will be a supply shortage at some point to support prices. I am staying out of these markets right now because I believe there are others with easier moves.

Wheat: I have heard rumors that some wheat has been imported to the U.S. because our prices are significantly inflated in relation to the world's due to ETF and other commodity fund participation. I am looking for