Thursday 4/22/10 Commodity Ideas

Opening Note:
With the S&P 500 and Dow Equity Indexes failing to at least trade above their previous highs on a 2 day pullback attempt for the first time since the rally began in early February the macro market experienced a bit of weakness towards the end of the day that has carried over into this morning. Much of the bullish earnings data over the last week has been overshadowed by the Goldman civil case and now a number of poor earnings reports are beginning to drag the vulnerable market lower. Increased volatility over the last week is another technical indicator for a market reversal as the S&P looks to possibly be forming the strongest double top formation of any of the indexes. While the Grains, Softs, and Fixed Income sectors have a number of individually bullish markets right now the rest of the market sectors with higher correlation to Equities are also looking like better sales. With Copper leading the way down the Metals look very top heavy as the overall lagging sector on the rally of over 50 days. Energies have also looked weak for the last two weeks and have trended lower despite the inflow of new longs into the market. Finally, the Euro continues to trend lower as well and is nearing it's previous lows. Although the strength of the correlation between the Euro and the overall market is weaker than normal, a break below the consolidation on a new leg down should also drag the U.S. market with it. I recommend looking to sell rallies in the supportive macro sectors for the time being and to focus on the individual strengths like Soy Meal in the markets that grow as buys on dips.


Buys to Watch:

July Soybean Meal- With the large daily head and shoulders pattern still strong with a projection to $307.5 the Meal remains the best buy in the Grain sector. Open interest continues to pour into the Meal despite a slight drop in the Soybeans over the last week and maintains a positive mode on the momentum indicators. Although November Soybeans reached their initial projection range yesterday before the close I still believe that the Meal is a good buy against the strong uptrend on it's daily chart. With the outright Soybeans reaching their projection one might wonder where the rest of the move in the Meal is going to come from, but it appears that the answer is the Oil Share (Bean Oil - Soy Meal). The Oil Share has a cup and handle top formation with a breakout of 1121 and a projection to 825 with roughly another 200 ticks of move left on the downside. This is a good trade on it's own as a sale on rallies (5 Oil vs. 3 Meal for execution) and contains some of the juice that should further propel the Meal. There is a low volume traded support zone for long entry in the Meal from $288.2 to 290.5 that was left from the acceleration on yesterday's open that was barely ticked into overnight. The uptrend on the daily chart rally has a value of $278.9 today that also supports long entry on a break into this zone.


Sells to Watch:


Put on the Radar:

Cotton- Cotton is still broken out on the strong daily cup and handle and weekly flag patterns that have projections of 89.08 and 95 cents respectively. The market had extreme volatility yesterday on the huge opening rally and subsequent break throughout the day, but still look like a good longer term buy on these trades. I do not have a great entry point on the market right now, but the 85 cent level seems to have provided good support near the daily breakout and should now be looked at as support. With Cotton being very thin at times I recommend taking chunks out of the trade when you have a good rally like the one from yesterday's open or playing the longer term rally with longer term out of the money calls.

Cocoa- Cocoa seems to be in a grind higher mode for the time being on it's cup and handle pattern with a strong technical base. Like the Cotton I do not have a good long entry zone for the time being, but trade near the breakout level of $3033 on yesterdays open should provide support and be a good base to buy off of on a pullback. With daily and weekly Stochastics still providing a positive mode for momentum the market is still a buy on the pattern projection to $3231.


Notes:

November Soybeans- November Soybeans reached their initial projection range from $9.86 to $9.92 1/2 yesterday with a high trade of $9.87. The Soybeans still have a strong uptrend, but momentum indicator are becoming tired in overbought territory and open interest growth is slowing in the Beans. While the uptrend is intact I still recommend playing Soybeans from the buy side, but reducing your expectations on rally continuation higher. To create a trendline with a tighter fit I am drawing from the low trade on March 31 st to the low trade on April 15th that has a value of $9.59 1/4 today. I am waiting for a pullback to support from 9.63 to 9.65 as a base for the trade.

Ten Year Note- Although the rally from early April has been slow and unconvincing in my opinion the Ten Year still has a strong uptrend that has facilitated long entry. Today the trend base has a value of 116.275. I have a difficult time recommending a buy on the market right now, but the daily head and shoulders has a projection to 117.235 as a spot to take profits against as the value approaches if you are long.