Tuesday 2/2/10 Commodity Ideas

Opening Note:
After closing on new lows in many of the commodity and equity markets on Friday the market made a strong corrective rally yesterday to start the month of February. Some bullish earnings data and energy and metal sector reports fueled much of the buying that came in. Looking at the majority of the commodity markets however I first noticed that volume yesterday was lower than most of the days over the last two weeks. Secondly, the poorer performers yesterday stood out to me. The currency sector had a smaller rally comparatively to the other markets and copper, which experienced a large break while violating it's weekly trendline, also displayed a smaller rally compared to the other metals and building materials. I still believe that with the Euro/Yen having it's lowest weekly close since March 2nd of last year and other indicators confirming negative market action in the future that selling rallies is the profitable way to trade right now unless the macro market displays continuation on the rally today and tomorrow.

Buys to Watch:

Dollar Index: The dollar index did not experience as large of a break yesterday as the majority of the other markets. The dollar index also is a bit higher than it normally would be on a day like today because the Australian Dollar is largely down on a move that happened at 9:30 last evening. A low volume buying zone on market profile exists from 7926 - 7935. Below this level I would be hesitant to buy it right now as a larger break could be occurring.


Sells to Watch:

Copper: By violating it's weekly trendline last week with a four day break of 34 cents copper becomes a sell to watch. Despite working lower yesterday it managed to close in positive territory, but with not as much of a gain as the rest of the metal sector. The next good low volume sell zone I have is from 315 to 320, but if the rest of the macro market rallies enough for copper to reach these levels I would be concerned about selling commodities in general. I recommend waiting for a better setup to enter copper.

Euro: The currency sector did not have as much of a pullback as the rest of commodity markets yesterday and the Euro maintains it's status as the worst currency technically and arguably the worst fundamentally. So far, today is a good potential two day rally sell, but I do not have good low volume levels to sell against. The flag projection second leg still projects to 136.50.

Put on the Radar:

Australian Dollar: Last night at 9:30 the Aussie Dollar quickly broke over 100 ticks and has basically maintained the break for the rest of the night and morning. I do not know the fundamental news that likely came out yet, but the Aussie is nearing the low end of it's range over the last few months and with a downside breakout could have some momentum as longs clear out. Australia's economy and dollar are largely based on physical resources so watching it's action can also be used as an indicator of relative commodity strength or weakness.

Silver: The huge breaks could not last forever as silver rallied to close 47 cents higher yesterday on market and metal sector strength. Gold also rallied and is currently sitting on it's head and shoulders breakout neckline of $1111 today. The gold move is slightly troubling by not holding it's breakout, but silver has been significantly worse than gold and barely gained on it even yesterday. I have a low volume sell zone from 16.77 to 16.85 on a two day rally. Above 16.90 despite maintaining it's weekly head and shoulders breakout I would give up on silver for the time being as it has high volatility and could rally to a larger recovery.

Euro/Yen Cross: The weekly close on Friday was the lowest since March 2nd of 2009, which was the time that the stock market bottomed out last year during the large break. The Euro/Yen correlates well to equities and it appears to have formed a large top that could send the value back near the lows it made in February of last year. The Euro/Yen bottomed out last year in February, a month before the stocks, so I expect the stocks again to be slightly delayed in a break following this chart.

Notes:

Stock Indexes: In the S&P I have a low volume sell zone from 1092.5 to 1097 and in the NASDAQ I have one from 1759 to 1765, which was already reached. I believe the NASDAQ continues to be the better sell technically than the other indexes and also with the opinion that because it had the largest rally that it should have the largest correction as the stock market breaks. Above these levels today in the S&P I would be concerned selling equities as technical momentum could fuel a larger rally.

July Nov Bean Spread: Finally holding multiple closes below 30 cents, it was a long time coming for the inter-crop spread. With record plantings in South America, a large carryover, and not bearish fundamentals in most of the other grains I believe it was a lost cause trying to keep the spread inverted above 30. Although I believe it will likely try a couple times I can see little reason for the spread to hold again above 30 because there is a low chance that supplies for our beans tighten enough to create the premium for the July beans.