Thursday 4/29/10 Commodity Ideas

Opening Note:
The Fed announcement came and went without much market reaction yesterday as rates were kept steady as expected. While The Fed did upgrade some language on economic growth they did add some more ambiguous language highlighting more possibility of rate hikes in the future. The FOMC's hands were pretty much tied during this meeting as European debt downgrades and the potential financial reform bill have recently pressured the market making it it difficult for them to augment their wording much without possibly adding to the bearish market movement. With the nearly free money policy extended for at least another month, without a hint of when it will end, it is crucial to watch money flow for the end of this week and the beginning of May next week to see if investors are still willing to play the risk trade with conviction. Taking prices higher has chiefly been due to investment this year, but as prices have sagged over the last month in Commodities and Equities new participation in the market has waned. There has been buying of Equities and supportive Commodities and foreign Currencies since the European open overnight as part of a corrective rally after Monday's rally failure and Tuesday's significant break. However, these rallies must continue with follow through to new highs for me to change my current stance that rallies are better sold than followed. The recent dip in prices has only kept open interest steady if not higher in a number of weaker Commodities for this month, meaning that there are a number of people sitting with net losing positions currently. Thus far I believe that the rally today could provide some good opportunities to sell as it appears to be mostly corrective rather than due to strength.

Buys to Watch:

Gold- The recent Gold rally has been fueled by a run to safety trade as it is being used as a substitute for weaker European Currencies and protection on falling Equity and Commodity prices, so it is not curious that it is one of the only markets slightly lower today on a higher board. Open Interest rose substantially again yesterday while both the daily and weekly Stochastics indicators remain in a positive mode providing further evidence on the daily head and shoulder projection to $1244. Overnight the initial support point of $1164.7 provided a bottom for the market, but if prices were to dip below the weaker support from $1161 to 1162 they would likely settle in the lower volume area from $1157.2 to 1160.4. This lower volume area provides a good long entry point for today and is also a good spot to place stops below if you are looking for the larger move to new highs. Yesterday was a new contract high close for June Gold since early December of '09 indicating continued strength in the market.

Sells to Watch:

Copper- Like Gold, Copper is one of the only other Commodities that is lower on my board this morning as I am writing. In the newsletter yesterday and mid-morning update I noted that open interest has risen significantly since the beginning of March, but with a more steady level over the last few weeks. However, with the 16 cent drop in prices on Tuesday and very little recovery since, Copper is sitting dangerously close to the March low of $3.2900. This low was traded exactly twice in March making it a little more distinct as a bottom. Although there was a minuscule drop of just over 2,000 contracts since the beginning of the week, if prices were to fall below this support level there would still be over 27,000 contracts outstanding (nearly 18% of the market) with a net losing position since March. I believe that a domino effect could occur below this level as longs sell out of their positions and in a thinner market this could have drastic consequences that could easily lead to a test of the base from February 5th of $2.8290. The low volume sell zone above the market from 3.3870 to 3.4490 was rallied into on the lower portion, but did not provide a great time frame for execution. If the market were to rally back into this zone I would not hesitate on selling, but if not then a confirmation of prices below $3.29 would provide good entry on the breakout. While the daily Stochastics has slowly moved negative over the month of April and is sitting near oversold territory the weekly Stochastics is very near providing a sell signal in overbought territory after hanging there for most of the last year.

Put on the Radar:

Stock Index Resistance and Possible Sale- Throughout the past year's recovery the Nasdaq has been the clear strength of the Equity Indexes, but has become troubling as the weakest performer over this week. The S&P 500 does have some room to catch up to the Nasdaq and Dow as it has acted weaker after the release of the Goldman suit and has acted slightly stronger over the last 48 hours on the Tuesday tumble recovery. I have low volume zones as a point of reversal and sale execution that correlate in all of the Equity Indexes from Tuesday's bearish acceleration, but as of this morning only the S&P has decisively entered it's own. The level for the markets are S&P 500: 1195.00 - 1200.50, Nasdaq: 2024.75 - 2035.25, Dow: 11059 - 11116, for all the June futures contracts. As it has performed the weakest recently I believe that the Nasdaq is the best sale of the bunch, but I would rely on the S&P resistance zone as an indicator, as if the S&P were to rally above it's zone the probability of the Nasdaq holding it's own zone would diminish. Use these levels for longer term low risk sales this morning or just as an indicator for market direction on a failure at these prices or a rally above them.

Heating Oil- Despite Crude Oil playing dangerously close to the $80 level that could liquidate long positions below it, the Energies have rebounded nicely over the last 24 hours with Heating Oil being the clear leader of the sector. On CQG if you enter symbol HOECLE you can see the Heating Oil vs. Crude Oil Crack spread that has completely exploded lately causing the Heat to be the strength. The Heating Oil has a head and shoulders pattern on it's daily chart with a breakout value today of 229.25 and a projection to 241.39 cents. Open interest has risen with strength in the Heat lately and has continued to increase in Crude over the last few months. This is a good potential buy on the breakout, but beware of the recent two point downtrend in Crude Oil that has a value of $84.93 today and resistance in Crude from 85.02 to 85.45 that could stall or reject a breakout.

Notes:

Euro Currency- The Euro is about as resilient as they come right now as it repeatedly refuses to hold lower prices while testing the previous old low close of 1.3266. This old close still acts a psychological resistance, but there is a lower volume range that continues to 1.3285 and has acted as a more accurate top for the market today. The Euro's third leg down still has a projection range from 1.2750 to 1.28, but as the market is very news driven and has some intervention support I am still holding off on executing a short until a move lower is more confirmed.

Australian Dollar- The strength of the Currency sector along with the Canadian on the recession recovery has a continuation wedge top on it's daily chart with at least three points on the topside trend. The breakout value is sitting at .9260 today and provides a rally projection to .9471. As Australia is a resource and Commodity based economy this breakout could indicate continued strength in Equities and Commodities over the short term.