Wednesday 4/21/10 Commodity Ideas

Opening Note:
With Equities driving the way yesterday the macro market again had another day higher as strong reversals in supportive Currencies and Commodities like the Canadian Dollar and Crude Oil continued higher after looking poor two days ago. Equities were the clear strength again and were followed by Crude Oil for the most part, but after a strong morning the Metals notably lagged behind the rest of the pack after failing to rally once they reached their low volume traded areas simultaneously as a sector. While Energies and Metals are now sales on rallies the Grain sector is beginning to heat up and should now be played from the buy side as big money is looking at the sector as cheap relative to the rest of Commodities. The fundamental of under-appreciated Chinese demand that appears to be growing also adds another bullish wrinkle to the Grains. With the European Currencies continuing to trade their own fundamental story the Currency sector has very few correlated players to the rest of the market with the Australian and Canadian Dollars and the Yen being the best macro base trade right now. The market is still in a relatively sideways volatile trade for the last couple weeks, so I still recommend picking your spots and taking profits when you cover a decent move as continuation has been fleeting at best on moves over two days.

Buys to Watch:

July Soybean Meal- July Soybean Meal has the strongest chart in the Grain sector right now and has a bullish head and shoulders pattern that was set off last Thursday with a breakout of $278.3 and a projection to $307.5. As Chinese demand continues to grow and money flows into the Soybean Complex open interest has continued to rise in Soy Meal and Soybeans. While I do not have a strong entry point in the Meal right now I would focus on the lower speed line on the recent rally for Meal that has a value today of $284.9 and plan the trade around the two days of support based around $280 to $282.8.

November Soybeans- Like the Meal the Soybeans are also positioned for a rally continuation right now and after the breakout above $9.49 1/4 now have a projection range from $9.86 to $9.92 1/2. Open interest continues to pile into the Soybeans and the chart looks technically strong, but be aware that daily Stochastics is close to producing a sell signal in overbought territory. Like the Meal I do not have a great entry spot for the Beans today, but would make the trade based around the support from 9.54 1/4 to 9.57, which held as the low yesterday on a pullback. Sidenote: After a break in the Corn and Wheat markets on Monday following the SEC filing against Goldman Sachs both markets rebounded nicely as worries that the long Goldman fund would have some liquidation were mostly forgotten. I still recommend buying breaks in both of these markets and in the Grains overall for that matter.

Cocoa- Cocoa placed a high close yesterday above the breakout level of $3033 that now has a projection to $3231 on the cup and handle pattern. The chart has a great technical base right now and both weekly and daily Stochastics have produced a confirmed buy signal that is supportive of the rally. A break from the highs overnight prior to the open this morning has left the opportunity to enter currently based on the support to the 3013 level. However, prices below this level could travel much lower into the low volume acceleration from the rally yesterday morning down to the $2970 level for another entry point.

Cotton- After failing to rally above it's consolidation range on two weeks ago Cotton has now strongly rebounded and posted a higher close yesterday above the range with strong follow through today. This breakout represents is also represented on the weekly chart as a whole new rally continuation leg after a flag pattern. The initial pattern on the daily chart had a breakout level of 84.24 cents and has a projection to 89.08. However, if this is the start of a whole new rally leg on the weekly chart the market also has a weekly projection on a new leg to the 95 cent area. I would base entry right now around the base from overnight trade and yesterday's close and to look for breaks to buy rather than extensions. Cotton can be a thinner market at times, so do not jump onto a boisterous rally like the one on the open this morning, but wait for the pullbacks.

Sells to Watch:

Put on the Radar:

Sell Metals- I am still hesitant to move the Metals to the sell category for right now as they can travel with the strong Equities, but the sector was definitely the lagger on the macro rally from the morning yesterday. The low volume traded zones that I had for each Metal market were all hit simultaneously yesterday with the values of Gold $1143 - 1146.5, Silver $18.01 - 18.15, and Copper $3.5380 - 3.5570 and all served as the highs yesterday and again overnight. With open interest heading the strongest into the Gold market right now as a safety hedge I believe that Copper and Silver continue to be the best sales as they have less long interest for the time being and usually perform better on breaks. A third entry into these low volume areas could mean trouble for their prospects of holding, so I recommend using them as an area of resistance for entry on rallies, but to use caution if they approach these highs with strength. All of the Metal markets have a negative mode on Stochastics momentum indicator and should be played on the short side.

Notes:

Crude Oil- Although the Crude Oil was one of the stronger Commodities yesterday I still believe that selling rallies are the best way to play the Energy sector for the time being. Crude has repeatedly struggled around the $84.50 level the last 24 hours, but I am waiting for a rally to the $84.82 - $85.08 lower volume traded zone with resistance above from 85.08 to 85.32 before attempting a sale.