Wednesday 4/28/10 Commodity Ideas

Opening Note:
The downgrade of Greek debt sent the markets tumbling yesterday as investors flocked from riskier Commodity and Equity assets. The public filleting of Goldman Sachs also did not help any rally's cause as it is clear that the new bank regulation bill is a priority for the government and not short term bullish the market. This afternoon the FOMC makes their announcement and I believe will keep the similar stance of extremely low rates for an extended period of time. Overnight a number of Commodities and Equities markets were weaker on the European open, but have rallied back in a strong way. The Equity Indexes and Crude Oil may not show much of a change for the day on the board, but the Nasdaq is already sitting near the highs of it's already large 20 point range and Crude near the highs on it's $1.50 range. The market has correctly anticipated most of the large announcements this year, like the FOMC and Unemployment Rates, and this strong rally since 4 a.m. tells me that there are a number of bets being placed on The Fed keeping the same wording. The exodus from the risk trade has convincingly reversed this morning as nearly every supportive Commodity is at least slightly higher while Fixed Incomes, Yen, and Dollar futures are significantly off their highs overnight. If the "low interest rate/nearly free money" policy is renewed another month there should be a battle between the bullish investment money and the European contagion and other fundamental bears for the month of May. I am still sticking with my opinion that we will see the markets continue on their extended rally as Bears tire of markets that refuse to significantly break and the overwhelming money flow drives the market. Note: Carrying positions through the FOMC announcement is extremely risky and I recommend a flat approach as there could always be a curve ball. Take this into account when looking at entry on trades today as the prospects of a large move are reduced during U.S. trading hours.

Buys to Watch:

Gold- Gold appears to be in a win-win situation right now as it is the "Go To" Commodity for safety on a macro market break like yesterday, but also finds some support when the market is higher. Despite options expiration yesterday the market was able to rally nearly $20 towards the end of the day after entering the low volume reversal zone from $1144 - $1152 that I noted for long entry yesterday on a "run to safety" trade. Although the market has given back much of it's late gains from yesterday as the risk trade has reversed I still believe that Gold is a strong buy on in the midst of it's head and shoulders pattern that projects to $1244. Open Interest in Gold rose over 21,000 contracts, or over 4%, yesterday and with a recent buy signal on the daily Stochastics and a positive mode for the weekly indicator has plenty of fuel to continue. The Gold to Silver ratio (Gold - Silver/2) staged a decisive reversal on the Gold rally yesterday and Silver weakness that should continue to see continued gains in Gold's favor as well. For today's market I have an initial support level from $1161 - 1163 that has provided the lows for the market thus far today, but also have another lower volume zone from 1157.4 to 1160.4 below this level with more initial support from 1153.4 to 1156.8 for a good level for long re-entry or establishing a larger position. If you are looking at holding the trade long term on the larger move I recommend using a stop below the lower support level for today.

Sells to Watch:

Copper- Copper snuck by yesterday as the absolute worst thing on my board after closing over 16 cents lower on the day. I need to double check the number, but right now I am actually showing an increase in open interest on the break from yesterday? All I know is that if the price breaks below $3.2900 every single long that has bought Copper since the beginning of March will be a net loser, with this being nearly 25% of all outstanding positions! This has massive long covering break written all over it. I have a large low volume zone from acceleration yesterday from 3.3870 to 3.4490, but I recommend waiting for the upper end of this range on short initiation today. Copper has performed the weakest over the last month in the Metal sector and is reversing as one of the strengths during the recovery to one of the current weaknesses. If this long covering break occurs it is a fairly ominous sign for Equity rally continuation as the Copper is often a leading indicator for the market. I find it a little odd as well that I heard a great deal about Copper's strength as an indication of continuation on earlier rallies, but have heard not even a peep about it's weakness lately....hmmm.

Put on the Radar:

Euro Currency- The Euro convincingly closed below the previous low close of 1.3266 in the consolidation range indicating the beginning of continuation lower on a it's third leg down. I have a projection range for this third leg down in the Euro from 1.2750 to 1.28. However, the Euro has acted stronger this morning, rallying over a full point off of it's base on a trending rally after the European open, so I am still hesitant to place it in the sell column for right now. The market has psychological resistance at this 1.3266 level as it failed on an afternoon rally around this level yesterday, but does not have a great low volume resistance level until stronger resistance near 1.3285 from yesterday's trade. I am holding off on looking for short entry on the Euro until it is more clear that there is further continuation on the leg down.

Cotton- Cotton has had a nice rally this morning on it's open, but continues to sit in a consolidation range above it's breakout from last week. This could be a holding pattern for building momentum, but I am becoming concerned with continuing to stay long. I recommend reducing a long position in Cotton for the time being if not completely exiting. If you wish to stay long the market at least a little then I still believe longer date options are the best tool. The daily cup and handle pattern still has a projection to 89.08 and the weekly new leg up to 95 cents, but I would definitely need to see a new high close by Thursday to stick with the trade.

Notes:

Soy Meal and Soybeans- The Grain sector tumbled with the rest of the market yesterday on the Greek debt downgrade rendering my low volume entry points all but obsolete on the break right through them. With Corn and Wheat beginning to reverse lower I am removing any buy suggestions for the Soybean Complex for right now. Both the Meal and Bean markets have confirmed sell signals on their daily Stochastics in overbought territory and the November Beans reached their initial breakout projection indicating that the market needs a corrective break before further advance. I still have a projection to $307.5 for the July Meal on the head and shoulders pattern and with Bean Oil still vulnerable relative to the Meal I will be looking for long entry opportunities on the Meal as we go forward.

British Pound- The Pound is like the slightly better looking ugly step-sister to the Euro right now, meaning I'm still not buying it. The market toyed with the cup and handle breakout of 1.5186 overnight that has a projection to 1.4874, but has since recovered. Like the Euro, the Pound slings around on the mood, rumors, and government intervention of the day, so it is a tricky trade and I would have to wait for strong confirmation on the move to execute the sale.