Tuesday 4/13/10 Commodity Ideas

Opening Note:
After a strong gap higher opening on Sunday evening on supportive Greece news the macro market gave up much of it's gains by the close Monday and is modestly weaker again this morning. I still have the same sentiment as yesterday regarding this market action as when the market gapped higher I expected a supportive rally to ensue yesterday. This failure to hold higher prices is a signal to me that the Commodity and Equity markets are temporarily tired of the crawl higher game and should continue to weaken on a moderate leg down. While this leg down applies to most of the market I believe that the Currencies right now are caught in a sideways game of false breakouts and rumors. Right now I am keeping a number of the currencies on my radar, but recommend keeping your stops tight and your opinions loose as the market has reversed it's look on a dime. Overnight both Gold and Silver were the leaders on the downside move followed by Crude Oil. I still believe that Crude Oil is the safest and best sale right now specifically because of the May spread action, but was taken by surprise yesterday by what appeared to be continued buying allocation on the open in the Crude. On their earlier opens the Metals fell like rocks and the Equity markets only had a brief rally that was quickly negated. I will still have the Crude as a sale today, but caution about the open because this was the only Commodity that I saw strong allocation in on it's open yesterday. I recommend continuing to look for stronger sales and weakening macro market trades as I believe that this temporary break will continue into a moderate leg down correction.

Buys to Watch:

Ten Year Note- Along with the Bonds (and I guess you could also say the five years) the Ten Year Note has a bullish head and shoulders projection that has temporarily set off this morning. To create the Head and Shoulders draw a neckline from the highs on March 31st to April 8th. The pattern has a breakout value today of 116.075 (not coincidentally the lows so far) and a projection to 117.235. As I also stated, the Bonds have a similar head and shoulders pattern that was set off yesterday at the 115.26 price with a projection to 117.23. I feel more confident in the ten year note right now because the technical look of the pattern is much cleaner and has a smaller right shoulder than it's left, usually implying more explosive qualities on the pattern. Stochastics for the Ten Year remains in a positive mode as well, supporting this upward momentum continuation. There is support in the ten year to 116.07, but there is a larger low volume area below this that could allow prices to fall much further, so I recommend keeping the stop pretty tight on this trade for right now. Sidenote: I am beginning to look at trade ideas and positioning in the fixed income markets for the rise in rates that should begin in the near future. Right now I technically like the base on the Bonds versus Five Year aspect of the yield curve (Bonds*3 - Five Year*7 to chart). I am keeping my eye on the gap in the chart from -457.29 to -457.19 as a spot to attempt buying a small initial position in this spread for a longer term trade.


Sells to Watch:

Crude Oil- To see why I am excited about the short on the Crude Oil market just pull up the May-June and May-July spreads for the market and notice the dramatic cliff fall that they have taken over the last week. Over the last year during the recovery each time that the nearby 1 month spread has continued below -$1.00 the outright Crude Oil market has experienced at least a moderate break in prices. With the May contract now seemingly having a top that has led to four consecutive losing days I believe that another moderate to larger corrective leg is underway. Although open interest has continued to rise in the market at a fast pace over the last two weeks, including yesterday, the price has not followed this allocation. Stochastics provided a sell signal for the market in overbought territory on Friday that was confirmed yesterday as well. As I stated earlier, use caution in the market right now because there still is long entry in the market on the open, even if other Commodities do not have the same allocation. I do not have a solid projection for the market right now, but I am targeting a move into the huge low volume acceleration zone from $80.84 to $81.80 with a possible test of the lows on the last consolidation range just below $80. There is minor resistance from previous low spikes and overnight trade from $84.06 to 84.26 today. The next moderate support levels for the market on it's way to this acceleration zone are from 83.30 to 83.66 and 82.54 to 82.70.

Cotton- I am taking one more shot on the Cotton as a sale today as it has sat in a consolidation range below the breakout after setting off on Friday. The topping cup and handle pattern on the Cotton had a breakout of 79.27 with a projection to 75.58. The Cotton has sat in a range trade for the last month and a half, during which time open interest continued to increase until the most recent sell off. While the possibilities of a large amount of longs caught are diminishing it still appears that the Cotton has a lot of room to take prices lower on a move from this consolidation. On a rally I have a small low volume zone for short entry from 79.43 to 79.62 with minor resistance above from 79.63 to 79.85. It is important to keep your stops pretty close on this one though because above this resistance the market looks like it has potential to rally at least halfway back up the range to 80.55.

Put on the Radar:

Gold- The large bullish head and shoulders pattern with a neckline from the highs January 11th to March 3rd appears to be coming under some trouble over the last 24 hours. The pattern had an original neckline breakout value of $1135 with a projection to $1244, but is now having difficulty making a settlement value above the $1164.1 high trade for this year and upper end of it's range. The chart does still have a very nice technical uptrend on the recent two week rally with open interest continuing to gain daily on the move. However, the related Silver has now reached it's third leg bullish projection from $18.30 to $18.60 and has experienced a stronger failure over the last 24 hours than Gold. As Silver is usually more closely correlated to "Commodity Moves" I take this Silver rejection as a sign of potential topping and further weakness for Commodities and possibly Gold as well. The Gold found support overnight in the moderate lower volume support zone from $1148 to $1150.2. Below this level there is also a better support gap from $1139.6 to $1143.8. Right now I am watching the speed line from the lows on March 25th to March 31st as an indicator of rejection on the bullish Gold move, which has a value of $1140 today. Although I have ranted about my fundamental and relationship issues for the Gold I will upgrade the trade to a buy on the larger projection with a close above the yearly high of $1164.1.

Notes: I am using this to discuss the Currency sector right now and it's potential moves. I do not believe that the Currencies are a good sector to trade currently, but these are future ideas.

Euro- The Euro has a bullish cup and handle pattern with a breakout of 1.3593 with a projection to 1.3903. Because the Euro has had so many false breakouts, legs, and patterns lately and is being traded mostly on Greece rumors and daily news I recommend staying out of the Euro right now. If you are bullish the Euro and would like to buy the idea I would look at buying the Pound right now as it has a stronger base and chart right now than the euro and has been less affected on the daily Greece news.

Australian Dollar- The Aussie has a bullish head and shoulders pattern on the weekly chart with a breakout last week of .9153 and a projection to .9851. However, the daily chart for the Aussie has me slightly concerned technically as well as fundamentally because it should fall on a Commodity break. Stochastics produced a sell signal in the Aussie yesterday in overbought territory that is looking for confirmation today. I am keeping an eye on the low volume resistance level above the market from .9239 to .9267 to gauge if the market will continue higher on the weekly or reverse out of this area. The Aussie is closely correlated to the Canadian fundamentally, so an Aussie rejection could also mean trouble for the Canadian.

Japanese Yen- As I stated a couple days ago I am still looking for the Yen to travel back into the acceleration low volume zone from 109.18 to 110.34 to look at selling 114 or 115 calls for the far out December expiration month. I will discuss the fundamental and technical reasons more in depth as the market approaches these levels, but keep it on your radar.

Dollar Index- The Dollar Index has a cup and handle topping pattern with a breakout at 80.52 with a projection to 78.98. Because the Dollar has been skittish and in a range like the Euro I do not have strong confidence in this trade, but recommend keeping it on your radar as it will likely reach it's projection with a close below 80.00.