Friday 4/30/10 Commodity Ideas

Opening Note:
It is pretty clear from yesterday's rally that the risk trade is at least temporarily back on again in the market. I was watching a number of correlated low volume zones that could have provided pressure on the Equity Indexes, but every one of these zones was quickly dismantled by a sharp rally early in the day. The Energies, Grains, Silver, and Supportive Currencies all saw buying flow into the market on the European open yesterday and throughout the U.S. morning trading hours. This does not appear to be a corrective rally as I speculated in yesterday's letter, but rather a continuation higher with the FOMC keeping low borrowing rates to encourage investment. I am leaning towards the Equities rallying to new highs now with traders' buy buttons back on, but I can also see a sideways trade happening as the Equities encounter resistance at the top of their recent range. For this reason I am staying away from Equities for the time being and focusing on what I believe are some better looking patterns and charts. I have learned over the last year that you can not fight the money flow when it comes, so I have become a quickly fleeing technical bear on failed sell signals that would rather buy the flow when it is clear that it is coming. I do not recommend trying to fade this rally for right now as the Energy and Currency Sectors also have some strong components that support a rally to new highs.

Buys to Watch:

Gold- After a small break yesterday on a much higher market across the board, the Gold is one of the strengths thus far this morning as it has already made new highs on this rally leg. Because the Gold had a strong performance earlier in the week as a run to safety on the Tuesday break it was not too concerning that the Gold performed weaker yesterday as some of this trade was likely unwound. The daily head and shoulders pattern still has the same projection to $1244. Open interest continues to sharply rise in the Gold each day on the rally and Stochastics maintains a positive mode on the daily and weekly charts, supporting the rally continuation. Overnight some initial support from $1165.0 to 1168.4 provided a bottom for the market and if you are holding a position for the longer term move I believe that you can move your stop placement up to just below this $1165 level today. There is not a great entry zone on the Gold today, but a dip into the $1170 to 1171.8 range would be a decent entry point for today's trade.

Heating Oil or RBOB (Gasoline)- The head and shoulders pattern for the Heating Oil was on the radar yesterday and struggled to breakout, rejecting later in the afternoon. However, this morning the Heating Oil is broken out on it's head and shoulders pattern and the RBOB has gained on the Heat also setting off it's own. Margins for both the Heating Oil and RBOB have strengthened relative to the Crude Oil lately making them the strengths on a rally over the Crude Oil for the time being. The difference between whether you decide to execute in the Heating Oil or the RBOB is a matter of opinion more right now. The RBOB is the seasonal winner as we head into driving season, but looking at a differential chart between the two markets (RBEHOE symbol on CQG) it appears that they are mostly range bound with the RBOB near the high of this range. I personally am leaning towards execution in the Heating Oil because the open interest has risen quickly on the recent rally while the RBOBs has not and should provide better bullish momentum. For the Heating Oil the daily head and shoulders has a breakout today of 229.35 cents and a projection to 241.49. The RBOB daily head and shoulders pattern has a breakout today of 237.65 cents and a projection to 250.53. Note: Stochastics for both Heating Oil and RBOB are in overbought territory on the daily and weekly charts. This is not as alarming an indicator though as they have spent a considerable amount of time in this area throughout the recovery year.

Australian Dollar- The Aussie Dollar was in the Notes section yesterday as it was nearing the breakout on it's continuation wedge pattern. After rejecting the breakout yesterday afternoon the Aussie has convincingly broken out this morning above the .9234 level today providing a projection to .9471. Daily Stochastics provided a buy signal for the Australian Dollar yesterday that will likely be confirmed today barring a significant reversal and the weekly chart has a head and shoulders pattern that projects to .9850 further supporting the rally technically. A break into the .9241 - .9251 range would provide a good area for long entry with the option of a stop below the support to .9229 or the low for the day of .9225. The Australian Dollar has acted as the strength among the foreign Currencies on the recovery rally along with the Canadian Dollar. Because Australia has an economy fundamentally supported by Commodities I take a confirmation on the breakout of the Aussie as and indication of further support to Commodity and Equity prices.

Sells to Watch:

Copper- With a close near the current price level today the weekly Stochastics indicator for Copper will provide a strong sell signal as it has faded out of overbought territory. I have written about it the last two days, but with open interest barely falling a couple thousand contracts this week and over 25,000 (over 17% of market) open long positions that are net losers below $3.29 the Copper still is primed for a large long position sell off. It is a little disconcerting that the market has continued to find support in the low to mid $3.30's and could be building some bullish recovery momentum here. As the "risk trade" has rallied the broad class of supportive markets though the Copper has seriously lagged behind its correlated counterparts. I am still waiting for a breakout below the $3.29 lows from march or a rally into the low volume sell zone from $3.3870 to 3.4490 to execute a short position for the potential domino effect to lower prices. Stops will likely be triggered on liquidation below this $3.29 and I believe that the a test of the $2.8290 low from February is likely.

Put on the Radar:

Notes:

Cotton- Cotton rejected the daily and weekly breakout yesterday with a break below 84.24. After breaking out a week and a half ago the Cotton was unable to sustain any significant rally and had a number of failed rally spikes. I became sour on the trade a few days ago after the second rally failure attempt and hopefully gave enough warning to cut some losses and sell out long positions. I am unclear on the market direction going forward, so I recommend a flat position if you are still holding longs.