Thursday 4/8/10 Commodity Ideas

Opening Note:
Weakness in the core Commodity sectors of Energies and Metals from yesterday continued overnight with Equities beginning to fall after a poor consumer credit number that was much lower than expectations. After the strengths of the Energy and Metal sectors, Heating Oil and Copper, reached their initial projections they failed to continue on a rally after posting new contract highs leading the rest of the sector down. The Dollar is also stronger this morning as the Euro threatens to make new lows below the previous low trade of 1.3266. The bullish cup and handle pattern on the Euro/Yen Cross (a good market direction indicator) has now been negated and looks like it is on a push and fail pattern as it failed to reach it's projection out of the consolidation range and is likely headed for a test on the bottom side of the consolidation from the previous two months. All of this market action is pointing towards a potential macro leg down beginning after the nearly unbroken 2 month rally in the Equity market. I suggest playing the short side on the Equities, Metals, and Energies for right now rather than the buy.

Buys to Watch:

Sells to Watch:

Swiss Franc (and other European Currencies)- The Swiss Franc has an almost double top pattern that has set off this morning with a breakout level of .9307 and a projection to .9089. This morning the Swiss is equivalently weak to the Euro, but the Euro on it's own has the weakest individual chart right now as it is already below the consolidation levels from February and early March. If this pattern is confirmed by a lower close today and tomorrow I like shorting the Euro more as it is approaching new lows. I have a projection on a new third leg down from 1.2750 to 1.28.

Put on the Radar:

Gold- Gold has a large head and shoulders pattern that had a breakout yesterday at $1135.2 and that has a projection to new contract highs at $1244.6. Technically the chart looks very strong as open interest has flooded into the market on the recent rally. Yesterday alone open interest rose over 22,000 contracts, a 4.4% increase. The recent rally on the failed bearish head and shoulders pattern has been very strong and has a nice uptrend base that it has rallied off of. The Stochastics and RSI values do remain in a strong uptrend, but are heading into overbought territory on the rally. Right now resistance in Gold lies at the old high close for the year of $1153.9 and the high trade of $1164.1. While the technicals remain strong I have a lot of fundamental and relationship issues with a continuation on the Gold pattern right now. As I stated in the opening note it appears that Energies, Equities, Currencies, and other Metals are not supportive of this Gold move as a commodity with the rest of the macro picture looking tired. Gold was the weakness in the metal sector on the rally from the February lows and has remained that way until this 2 week push so I am skeptical of what caused this recent change. One could argue that this is a store of value as an alternative to the weak European Currencies, which could be partly true, but as the Currencies tumbled in mid-January so did the Gold. The Gold was stronger in comparison to the Euro, but it definitely was not strong on it's individual chart with the market running into it and I do not understand why this action would be different now. In my opinion, other than just technical strength, this really only leaves a "run to safety" theory on the Gold rally. The markets are not too weak right now with Equities still near their highs, so unless this is a preemptive run on another catastrophe I can not find a good reason for this Gold rally other than it was straight-up oversold on it's own or just a head and shoulders pile in. This leaves me skeptical of the Gold's continuation on this pattern. Trade Idea: Volatility seems pretty cheap on the Gold market right now so I am looking at options strategies for entry. With the market hanging around $1150 again today I like buying the $1100 put and $1200 call strangle. Yesterday you could buy it for around $6 with 19 days still left until expiration, which seems cheap to me. While it is possible the market hangs around the $1150 level for a little while I believe that there should be a strong continuation or rejection soon and this trade leaves you open to volatility either way with the option of covering the losing side of the trade after the move is more certain.

Equities- I have been skeptical and concerned with the rally continuation on the Equities for about three weeks now as I believe that the now 2 month rally is overdue for a correction. Yesterday the market had one of it's most sizable down days throughout the rally based off a poor consumer credit number that was way out of line with expectations. Despite this number Equities still had a nice recovery bounce prior to the close to make it only a moderate down day. Consumer spending makes up a large portion of the national economy so I look at this poor number as very important and a good indicator that fundamentals are not as strong as many believe. As we head into the summer it is likely that the Fed will release the lock on near zero interest rates and end some of the borrow cheap and invest large game that has been going on for some time. Once interest rates begin to rise the market should begin to fade with less money flow support. One of the biggest red flags for me is the standard reasoning for the continuation for this rally of "There's still so much money on the sidelines and money will continue to flow in" and "Buy dips because that's what has been working". While supply and demand are the basics of a market and new money flow into Equities is that demand the Equity markets are beginning to feel a bit like a Ponzi scheme (do not intend for the bad connotation, but rather the ideology and set up) where new money in is providing profits right now for the earlier money. I am also skeptical of any market where investors and traders are trained to do a certain strategy regardless of the situation, like buying dips. Unless the fundamentals of the consumer begin to catch up to this strong rally I think that the Equities will start a larger correction.

Japanese Yen- Both the monthly and weekly chart of the Yen are beginning to look very bearish with a possible reversal upcoming on the strong rally from June of 2007. The monthly chart has had a strong uptrend, but this was violated on the March monthly close from last month. Furthermore, the weekly chart has a cup and handle topping pattern with a breakout of 106.79 and a projection to 100.12. The Yen is tied to the interest rates on an investment carry trade, so I take this recent weakness in the Yen as an indicator that interest rates are nearing the point that they will begin to rise. I have my eye on the large low volume area on the Yen between 109.20 an 110.34. I am beginning to look at positioning for the rise in interest rates and I believe that the Yen is a strong part of that strategy. While I only have confirmation on the first time that it occurred it appears that the Japanese government is protecting the global value of it's exports by devaluing it's currency around the 115 level, which it has failed on a spike each time it has reached these levels. Because you have this artificial boundary on the market and the Yen should fall on interest rate increases I am looking for a rally into this 109 to 110 zone to sell 114 or 115 calls on the far out December contract to collect premium.


Notes:

Cocoa- While I still believe that the Cocoa is on a push and fail pattern that takes it back to a test of the lows near $2750 I no longer like selling a rally into the $2920 to $2942 resistance level. Because the Cocoa has moved for than halfway back on the projected move a rally back near the previous highs could be a sign of strength, so I am taking it off my trade list.

Grains- In what is potentially an oversold market the Grains had a sharp short covering and stop-running rally yesterday just after noon on news that China was purchasing Corn. Hopefully the rally was quick enough that you did not have time to sell Corn in the report gap as the market rallied above any nearby resistance on the rally. Taking Grain prices lower has been a struggle this Spring on poor fundamentals, and I think this strong rally is an indication that it is time to focus more on the buy side of the market. Caution: The Wheat market looks like it may be primed for a strong short covering rally if bullish fundamentals emerge. Open interest has continued to strongly rise throughout this year on weaker prices as most of the world is on the bearish train for Wheat. A strong rally could set off a much larger chain of unwinding.