Wednesday 4/14/10 Commodity Ideas

Opening Note:
After weak action overnight leading into yesterday and a sizable break on many individual market opens the macro market starting at around 9:30 a.m. had one of the strongest reversals in recent memory as huge buying entered on the dip. All you have to do is look at some of the gains in open interest yesterday to see that this was one of the largest mass purchasing efforts of the entire recovery rally. Right now there is a bit of a battle waging between economists on the prospects of inflation or deflation on the horizon and it appears that since the last two days of March that investors are betting huge on the inflation side. Open interest has relentlessly risen across the board, but especially in the Metal and Energy sectors over these last two and a half weeks regardless of whether prices increase or decrease. Equities look very strong again after a brief sideways consolidation towards the end of March and are continuing to prove that if you find a dip or a solid trend to continue buying. The fundamental story right now has as little to do with actual movement right now, which is why I would also caution being short the Grains. Although the story for Grains is pretty much bearish across the board almost all of the individual markets look to be building a technical base that could fuel a short covering rally in the sector with allocation potentially rolling in. Right now it is extremely difficult to make money or find a decent move selling any market, so you pretty much have to bide your time, look for buying allocation momentum, and watch for the 9 to 10:30 a.m. dip buying that often makes the intraday check mark chart.

Buys to Watch:

Ten Year Note- The Ten Year Note has a bullish head and shoulders pattern that was initiated yesterday and is looking for a confirmation close above it's neckline today. The neckline stands at 116.07 for today and the chart has a projection to 117.235. There is support in the market pretty much solidly from 116.07 to 116.13, but I would keep your stop tightly below this 116.07 level on entry because a failure below this level could cause a rapid price break to 115.275. Stochastics still maintains a positive buy trend on momentum supporting the trade.

Grains (November Beans) - With November Beans constructing a strong technical base and both Corn and Wheat continuing to reject lower pushes in price I believe that the Grain sector is primed for a move to higher prices fueled by more long allocation and short covering. Huge supplies in pretty much all of the Grains and increased planting have weighed on prices most of the last year keeping them relatively low compared to the recovery across the market, but it has been a painful struggle to make money taking the markets lower. With the strong technical base and the relative cheapness of the Grain sector compared to others I believe that big money is beginning to take notice leading to stronger long allocation in the near future. The Wheat market looks potentially more explosive than the others based on the large increase in open interest on lower prices this year, signifying that this is a massive short position based on the World supplies. November beans look like they may lead the way on this rally as they are sitting just off their highs since early January on a 3 month base range. The high close on this range is $9.45 3/4 and the high trade is $9.49 1/2 so look for a breakout to possibly occur today. By projecting from the base of this range a rally projection from $9.80 to $9.90 seems very feasible. Because almost all of the markets look like they have bullish potential I recommend looking at long plays on the individual markets right now rather than spreading between the Commodities until a possible rally becomes more clear. Although Corn looks like it has the weakest chart it still managed to close stronger than any of the other Grains yesterday, so I would stay away from spreading it short against a long Bean currently.

Sells to Watch:

Put on the Radar:

Gold- Gold still has the large head and shoulders pattern on the daily chart with a breakout level of $1135 and projection to $1244. Despite a day and a half break in the Gold market the open interest continues to rise despite the price action making this rally technically strong. I am still waiting for a close above the high trade of the year of $1164 to upgrade it to a strong buy on the larger move, but believe that it is now more a matter of time before it is able to continue above these resistance levels. Note: Silver has reached it's 3rd leg rally projection zone from $18.30 to $18.60 and has failed to rally above this 18.60 level. As the Gold is highly correlated to the Silver this could be temporarily bearish the Gold. Stochastics on the Gold has also produced a sell signal today in overbought territory, but has yet to be confirmed by a close, so be cautious in long entry on the Gold.

Notes:

Cotton- Cotton is now off my sell list after the large late day rally. The market did have a couple bounces off the moderate resistance level that I was looking at shorting against, but powered through it later in the day, covering all of the higher low volume area up to the next resistance area above 80.55. The trade was not very attractive after the market remained relatively strong and higher on the day despite the Commodity break on the open yesterday and finally gave up the bearish pattern and looks to remain in a range for the time being.

Crude Oil- The Crude Oil did have a strong break early in the day, but after reaching the moderate support level of $82.50 found a strong rally on massive long entry into the market. During the five day break in Crude open interest continued to rise despite falling prices and again increased a whopping 58,000 contracts yesterday. It looks like the large long position is unconcerned with a price break at this level and has a lot of money to continue allocating to the market, holding up prices. As I was watching the trading ladder yesterday I noticed that not only was the long entry relentless with huge orders, but there were a number of people playing psychological games with phantom orders and icebergs to almost scare the market price up. I do not think that you can fight this size of long entry so I recommend liquidating shorts and sitting on the sidelines for a little bit. Although the nearby spreads have rallied slightly over the last 24 hours they still are at dangerous levels for outright prices if they decrease further. Also, be cautious of the 9:30 report this morning if you are sitting long. It is expected that there will again be an increase in U.S. Crude supplies for the 11th straight week, which would be a new all time record and pretty odd considering the 2 month rally in prices. I still have trouble believing that prices will continue to rally, but can not recommend fighting money flow, so I am staying flat.

Aussie Dollar- I have a weekly head and shoulders pattern on the Aussie Dollar with a breakout last week of .9153 and a projection to .9851. Stochastics has a sell signal on the daily chart now in overbought territory and the market is currently fighting with the low volume area from .9239 and .9269 with some resistance above. If the market is able to close above these levels the Aussie will become a buy.