Thursday 4/15/10 Commodity Ideas

Opening Note:
As in most instances following strong dip buying over the last year the macro market was stronger yesterday with follow through of strong gains in Equities and Energies. Closing just off it's highs yesterday the market is slightly weaker this morning with a break in the Euro being the most notable move overnight. We saw Tuesday and again yesterday that the real movement in the market is the flow of money still with or without a side of fundamentals and technicals throwing in some influence. I have found that this money flow has become even more unpredictable as the recovery has proceeded and seems to come in from the long side when technicals appear to be weakening or in the process of confirming a reversal. This unpredictability has left me a little shell shocked lately as I can usually grasp a technical or fundamental buy or sell, but struggle with guessing when an investment bank is going to pull the trigger to buy a currently weak market based on long term entry. With so many false pattern continuations I am going to work right now on paring down the trade suggestions to only the strongest as I know that trading technicals right now can get you chopped up. As we are now entering the 50th day of the February reversal rally I could write an essay on why I have fundamental issues with the recovery, but still find that right now the best trade is waiting for the 9 to 10:30 a.m. bottom in the stock market to buy the dip and ride it until there are signs of weakness. I really did my due diligence overnight and this morning, yet still was unable to find a solid trade for execution today, but do have some trades and relationships to keep on the radar screen.


Buys to Watch:

Sells to Watch:

Put on the Radar:

Metal Weakness- Over the last couple days during the dip buying rally the Metals have notably not kept pace with the Equities and Energies. As I have repeatedly noted the Gold has a large bullish head and shoulders pattern with a breakout confirmed above $1135 and a projection to $1244. However, I have kept Gold off the buys list during this time waiting for a close above the high trade on its range for the year of $1164.1. The Gold has tested and failed three times at breaching this level with the most recent occurrence yesterday. Although open interest has continued to rise in the core Commodities of Gold, Silver, and Copper in this sector the prices in the markets have refused to budge to the upside despite the long interest over the last week. On a daily chart both Gold and Silver are on the verge of producing a sell signal on the daily Stochastics in overbought territory, while the Copper already has a confirmed sell signal that is advancing lower. Silver has now reached it's third leg projection range on the two and a half month recovery from $18.30 to $18.60. I have my eye on two indicators of further weakness to begin short initiation right now. The first is the Gold to Silver ratio (Gold - Silver/2) where I am looking for a reversal on the trend of Silver strength. Because Gold is used as a store of value and safety from Commodities, Silver usually performs weaker on a sector move to the downside, so a reversal to Gold strength should be a good sign. I am also using the base speed/trend line on the Gold rally beginning in late March, which by connecting the lows from March 25th and March 31st you receive a value of $1144.3 today. If one indicator sets off the other should as well and this will be the time to begin looking for short entry in Metals.

Buy Grains (November Soybeans Indicator)- I had the Grains on the buy list yesterday, but after a failure to on a breakout rally from the recent range I am downgrading them to the radar. The Soybeans right now look to be the leader if a recovery rally is to be mounted as both the old crop July and new crop November beans are both sitting just off the highs on their tight range since mid-January. The November Beans are the closest to their breakout level above $9.50 and actually made a sneaky new high close a half cent higher despite their rally failure yesterday. However, for this to be a real story I believe that the old crop Soybeans need to be stronger than the November and need to find their own rally, making them the must have indicator if Grains are to start a short covering rally. There could be some weakness today after the spike failure in the Beans and Corn on the short range trade, but there appears to be momentum building on the export/demand side as prices have rallied back after a pretty awful supply/demand report at the end of last month.

Notes:

Ten Year Note- The Ten Year Note had the strongest bullish head and shoulders pattern among the interest rate products in my opinion, but has failed after repeated rally attempts and negated the rally pattern. The last real hopes for support are around the 116.06 level, but with Bonds moving lower I believe that this is no longer a buy and could possibly be a short term sell as there is little support in the market until the 115.27 level. While it is a less attractive head and shoulders the Five Year Note still has it's pattern intact, but I have little hope for bullish continuation now as well. The tipping point for me on this trade was yesterday when Bernacke used the same language of "extremely low" and "extended period of time", but the fixed incomes could only produce a pedestrian rally followed by failure. It looks like these markets are just not buying what The Fed is continuing to sell. The Fed's tone should change in the coming months as interest rates are likely to unlock some time by the fall and the failure of fixed income prices to rally leads me to believe that the short side of this trade should be played going forward.

Euro/Yen Cross- The Euro Yen Cross is potentially creating a double top pattern on it's daily chart after weakness in the Euro overnight. The market originally had a bullish cup and handle pattern that failed at this same level after reaching only 2/3 of it's projection. The Cross is often used as an indicator of market direction, but with the Currencies again having little to no tie to the outside markets I would use this information as a side note on your directional opinion.

Australian Dollar- The Aussie is still broken out on it's weekly head and shoulders pattern, but is still under pressure on it's daily chart as it had difficulty producing a strong rally above resistance on it's high spike. Unless the market is able to rally and hold a close above the .9300 level today I believe that it is a good fade against this level. Stochastics on the daily chart has flirted with a sell signal in overbought territory the last couple days and the failure to make new highs should be seen as a rejection reversal awaiting confirmation on a down leg.