Monday 4/19/10 Commodity Ideas

Opening Note:
With the announcement Friday that the SEC has filed charges against Goldman Sachs the market finally took a bearish breather as the potential catalyst for a corrective leg down was introduced. The Metal and Energy Commodity sectors were hit hardest by the news along with the stock market on Friday as it appears that the market is making a macro top to it's 50 day rally since February. While the Metals and Energies were absolute bombs I was pretty underwhelmed by the break in Equities as I believed there was much more room to travel to the downside. The market is setting up the stage for a battle this week as tiring bull markets set off bearish signals, but will have to battle the money flow that continues to pile into the market whenever there is a dip or sell signal. For this reason I am still tepid about selling the Equity Indexes on a longer term trade, but believe that there is now a whole lot more risk to the downside, so I will focus on selling rallies in Equities and any other correlated markets. As a cautionary note I would be careful tying the movement of the European Currencies and therefore the Dollar Index to moves in the market right now. It is natural to look at your screen and see Dollar up and Equities Down and tie them together, but with a big fundamental story weighing Europe down these Currencies are now very out of tune with macro movement as they have already been stretched like a rubber band out of line. On Friday during the macro and Equity break the Euro was like watching paint dry as most of the loss in the market came overnight with very little movement during U.S. hours. While the path of least resistance for the Euro, Pound, and Franc is down right now this only has a slight correlation to the Equities, so I would use the more closely correlated Currencies like the Australian and Canadian Dollars for Currency trades on a potential leg down.

Buys to Watch:

Soy Meal- To form the head and shoulders pattern on the daily chart draw a neckline from the spiky highs from Feb. 23rd and Mar. 30th to receive today's breakout value of $282.8 and the projection to $315.1 for the May contract. While this is an awkward pattern because the neckline highs were spiky the Meal does have characteristics other than the pattern that make it a good buy. Technically, open interest in the Meal has strongly risen on the recent rally and Stochastics remain in a positive mode on the daily and weekly charts. With the Soybean Complex leading this potential Grain rally the Meal is also a strong buy because of Bean Oil weakness. With a correlation to the falling Crude Oil and Energy sector the Bean Oil also has a weak outright chart allowing the Meal to absorb more of the Bean rally. Because of this I would also look at buying the Meal versus the Oil on further dips.

November Soybeans- With the old crop failing to keep pace with the new I am focusing more on the stronger November contract as a buy right now. The chart has a cup and handle rally out of the consolidation breakout of $9.49 1/4 with a projection range from $9.86 to 9.92 1/2. The market has taken it on the chin overnight as much of the world is down on the day, but the Grains did hold up very well Friday despite a large bearish macro move. Open Interest for the Beans has continued to rise on the recent rally, but right now there is a threatening sell signal on the verge of setting off in the daily Stochastics. However, I still believe the market is a good buy on a pullback to the consolidation breakout as there is a good low volume zone. From the Thursday acceleration there is a buy zone from $9.48 3/4 to 9.51 1/2 with support from 9.45 to 9.48 for stop placement and good risk reward.

Sells to Watch:

June Crude Oil- Make sure you are trading the June contract now as it is the high volume contract or you may get a call asking how you wish to collect your 1000 oil barrels down in the Gulf. The June contract has a topping cup and handle pattern that was set off on the break overnight with a breakout value of $83.75 and a projection to $80.24. This morning the Crude has found support in the large low volume area from $81.32 to $82.16, which should provide some support as the market heads towards it's projection. The nearby spreads for the Crude Oil continued to weaken again Friday, but are stable this morning with the June-July spread still sitting around -$1.50, which is still bearish the outrights. Stochastics also still has a confirmed sell signal on the daily chart and is in a negative mode. There is a moderate resistance area on the overnight trade from 83.30 to 83.62 to initiate a sell against on a rally today. Sidenote: Heating Oil is the weaker market right now and could be the better sale as a product on this move. Also keep a potential move in the RBOB vs. Heating Oil spread on your radar. There is a bullish cup and handle pattern forming on the May daily chart with a breakout of 9.63 and a projection to 14.07 that favors the RBOB.

Australian Dollar- This is a very similar looking chart to the Crude Oil as the Aussie is based on a resource and commodity rich economy. Like the Crude the Aussie has a bearish cup and handle top that was set off overnight with a breakout value of .9160 and a projection to .9016. For initiation there is a moderate low volume area from the overnight trade around .9150 with better resistance above from .9185 to .9200 for stop placement. Although the weekly chart does have a bullish head and shoulders pattern currently the daily chart has also produced a confirmed sell signal in Stochastics with a continuation in a negative mode. As the Australian Dollar is more closely correlated to the Equities and macro picture right now I believe that it is a better play on a corrective leg than the European Currencies with their jumbled fundamentals right now.

Put on the Radar:

Silver (and other Metals)- After the largest break pound for pound in the market Friday I believe that Silver is giving signs today that it needs to rest for a little before becoming a stronger sell again. Right now the Silver has bounced off the top of it's previous consolidation zone from $17.50 to $16.50, but I believe that it will likely continue downwards for a test of this 16.50 base and potentially further to the 15.40 area assuming a downward correction in the macro market. The speed line off of the base of the rally for the silver sits at $17.37 today, which should also provide further support on the test. Gold right now is bouncing around the neckline from it's large daily head and shoulders formation that has a value of $1131.4 today. The Gold however has reversed in relation to the Silver and is now gaining on it (Gold - Silver/2) so I believe that Silver is the better future sale. There is a previous low volume support level from $17.75 to $17.825 that should act as resistance and a nice area to sell on a rally.

Fixed Income- The longer term fixed income contracts of Ten Year Notes and Bonds did not impress me on their rally on Friday as the shorter term yields outperformed them price wise. I believe that this corrective move on Friday could provide some opportunities on the yield curve spreads, which I am exploring and should have some trade recommendations on in the future.

Notes:

Cocoa- Cocoa is building a base cup and handle pattern that has a breakout of $3033 with a projection to $3231. Both daily and weekly stochastics have confirmed buy signals that support the trade and are in a positive mode.

British Pound vs. Euro- Looking at the differential chart (Pound - Euro) there is a bearish double top pattern with a breakout of 1759 and a projection to 1600. The Pound has performed worse than the Euro the last few days after failing on it's bullish consolidation breakout and if this pattern engages should remain the short term better sale.