Tuesday 4/6/10 Commodity Ideas

Opening Note:
After the Unemployment Report on Friday much of my focus has now turned to money flow at the start of this new quarter. As the recovery rally has progressed for over a year now the monthly inflow of new money into the markets has become an event that is almost taken for granted and much of the life blood on it's continuation. While Equities have had opening rallies with new allocation for the first two full days of the month the case has not been the same for Commodities. On Thursday April 1st Europe woke up and allocated to Commodities, which was continued on the U.S. as well. However, with Europe on holiday yesterday there was no buying in the early morning on Monday, which was followed by a lack of allocation in the U.S. as well. I believed that this morning Europe would likely would wake up and begin allocating to Commodities again on the open, but this as well was not the case overnight as they were more interested in shorting their own currencies. Although some Commodity sectors like Energies and Metals did post gains the last couple days I believe that much of this move has been on the coattails of the Equity market with Energies being the most highly correlated and therefore the strongest. Taking into account this money flow analysis, the Energy sector completing it's daily cup and handle pattern and the Metals showing signs of slowing I am now weary of being long these core Commodities. I am focused on the large head and shoulders pattern on the daily chart for the Gold right now as an indicator for Commodity direction. I will discuss this further later in the newsletter, but if Gold does rally to new highs it has wide implications across the market that could start a huge bull rally. I instead am looking for a failure on this pattern to confirm my belief that a new leg down will begin in the market.

*Due to this uncertainty right now I do not have a great deal of trades, but I am formulating a large one using the fixed income market and the Yen which I will discuss later today on a supplemental newsletter and would appreciate feedback on.

Buys to Watch: With Energies completing their pattern projections and Metals fading I do not have buys right now

Sells to Watch:

Japanese Yen- With strength overnight likely related to a rally in fixed income and a pullback on the Euro/Yen bullish pattern the Yen is firmer thus far for a second day. While I do not have good sell entry levels right now I am focusing on the resistance from 106.44 to 106.75. The daily chart has a topping pattern that was set off below 108.60 that has a projection to 104.10. The bigger story however, which I will cover more later, is the bearish cup and handle pattern on the weekly chart that was set off on Thursday. The cup and handle has a breakout value of 106.79 with a projection to 100.12. Stochastics for this chart provided a sell signal three weeks ago and along with RSI remain in a bearish mode and supportive of the trade. The earlier resistance level correlates nearly perfectly with the breakout on this cup and handle so I am looking for a confirmation of failure at these levels to explore some options strategies for playing this larger move.

Put on the Radar:

Gold- By drawing a neckline across the highs in the June Gold from January 11th to March 3rd you can see the large bullish head and shoulders pattern that has formed on the daily chart. On the descending neckline the pattern has a breakout value of $1135.7 today with a projection to $1245.1. As I stated in the Opening Note I do not have confidence that this is a pattern that will set off and continue and am therefore looking for a rejection or negation. Yesterday the Gold made a weak attempt at the breakout level, but has failed further on this attempt overnight. Gold has been the weakest performer in the Metals sector on the rally since February so I would take a reversal to strength as an indicator that Commodities should begin a very strong rally across the board and into the Summer. Much of Gold's strength during the final quarter of last year was created by the removal of corporate price hedges in the market that set off huge technical patterns and money flows. This rally however did not have much of a good reason for occurring other than the release of hedges and a money run, so I take this weakness in Gold as a correction to a fair price in relation to the rest of the macro market with all else equal. If Gold is now close to an equilibrium market price I take the rejection of this pattern as a bearish sign for Commodities and the overall market.

Notes:

Crude Oil and Heating Oil- Crude Oil has now come within 20 ticks of it's $87.18 projection and Heating Oil has more than completed it's projection to 225.13 cents. I recommend taking profits on longs for now and taking some time to reevaluate the market as I obviously have some bearish overtones running through my head. I know that many people only trade the Crude in the Energy sector, but to show my analysis on why I believed Heating Oil was the stronger buy take a look at some of the relationships across the sector and how they added value to the Heating Oil trade. On CQG enter RBEHOE to see the RBOB (Gas) market versus the Heating Oil and you can see the huge break in the market that favored the Heating Oil. Furthermore, on CQG enter HOECLE to pull up the chart on the Heating Oil versus Crude crack spread that shows margins on creating Heating Oil from Crude and notice the strong three day move favoring Heating Oil to Crude. By keeping these market spreads on your radar you can add value to the trade by playing the stronger market unless you are bound by liquidity issues to the Crude.

Silver- Yesterday I said that I would give the Silver one more shot on the buy side today, but after weakness overnight I am giving up on it. The new leg up on Silver still has a projection from $18.30 to $18.65, but with Gold already bouncing around it's head and shoulders breakout I do not believe that a strong continuation on the Silver rally is likely. I actually am keeping the idea of shorting Silver in the future on the back of my radar based on the Gold market and broader Commodity picture.

Copper- As Copper is tied to the Silver and Gold in the Metal sector I would recommend taking profits on Copper longs and reevaluating the market. The continuation triangle pattern on the Copper still has a projection from $3.72 to 3.75, but the prospects of a strong rally to these levels look diminished. I was expecting the market to have a much stronger rally out of the pattern as it was already above it's highs, but it has sat fairly sideways for the start of this week. The good news is that this was most likely a profitable trade from most possible entry points, so ring the cash register for now as you can always get back in later.