Wednesday 4/7/10 Commodity Ideas

Opening Note:
While there has been some entry money flow across the market in Commodities and Equities as the 2nd Quarter of the year has begun I am concerned with Commodities lack of price acceleration off of this money flow. Both Energies and Metals have become stagnant as their Heating Oil and Copper strengths have failed to continue on gains despite posting new high closes this month. It is difficult for me to recommend selling these individual sectors right now without much resistance to place stops above them, but I am very hesitant about buying them on any continuation prospects and would much rather play the short side of the trade for right now. With the start of this new quarter the European Currencies are again getting beat up on what could be a downside breakout below support on a new bearish leg. This Currency move does not help the bullish Commodity cause as they have been more highly correlated the past month. Furthermore, what appeared to be a bullish cup and handle pattern on the Euro/Yen Cross rate is on the verge of being negated with a close below 125.13 (on the YR symbol CQG chart). Because the Euro/Yen cross is a decent indicator of overall market direction the rejection of this pattern and further weakness of the spread should also be taken as bearish the market. I still have my eye closely pinned on the Gold market right now as the bullish head and shoulders pattern has a breakout neckline that has been traded around for the last 24 hours. While I originally mistook this move in Gold as more of a Commodity story it appears that the Gold is being used as a substitute for some of the European Currencies. Regardless of the blend of it's fundamental story I do not have faith that the Gold will continue higher on this projection and recommend holding off on a long entry strategy. A rejection of this breakout should be another indicator of short term market weakness to follow. Yesterday I stated that I would send a supplemental newsletter with a fixed income and Yen trade, but I am still working on some of the ideas. This is a longer term trade that is not necessary to put on even this week, so I will send it out as soon as I work out some of the kinks.

Buys to Watch: I have none again today


Sells to Watch:

Swiss Franc (and other European Currencies)- The Swiss Franc has a double top pattern that is close to being set in motion. The pattern has a breakout of .9307 with a projection to .9089. While the bearish pattern is in the Swiss Franc market I am more interested in shorting the overall weaker Euro chart off of these pattern values. I still have a third leg down projection for the Euro from 1.2750 to 1.28 and as it is nearing its previous low close the prospects of this larger move are looking better. The British Pound is also still interesting to me as it is near the top of its range for the last month. The Pound was weaker than the Euro on the currency leg down from mid-January and I think that this is a pattern that could repeat on another leg. I am watching the next couple days in the Pound to see if it performs weaker than the Euro and therefore as the better short on a bearish move. Because it is difficult to stay short one of the European Currencies on it's own I would also look at possibly doing a spread on the short by buying some Australian or Canadian Dollar strength.

Cocoa- I was on the rally train for the Cocoa a week ago, but I was turned off the trade by excessive volatility swings and a lack of continuation on the pattern. It looks like the Cocoa could be moving on a push and fail pattern where the market has a directional projection out of a consolidation range that it fails to reach on a lack of acceleration and instead slingshots out the other end of its consolidation range. I would hold off on selling any sort of downwards continuation on the market like this morning, but there is a good area to sell if the market has a pullback rally. From $2920 to 2942 there is a good low volume price zone that has multiple days of resistance above it from $2948 to 2986. Although I do not have a good projection for this move I am looking for at least a test of the base around $2750 and at these levels there is good risk/reward.

Corn- While Soybeans and Wheat have rallied off their lows after the report May Corn has not had much of a bounce. I believe that the Corn is now the clear weakness of the Grain sector and is the best short. I am looking for a rally in Corn to the gap on the morning of the report between $3.50 1/2 to $3.52 for the opportunity to sell. I still have a bearish head and shoulders projection on the Corn to $3.30 1/2.

Put on the Radar:

Gold- Gold has a bullish head and shoulders pattern with a breakout level today of $1135.2 with a projection to $1244.6. While a move of this magnitude would be very supportive of Commodities it appears that the driving force behind the Gold is Currency. By looking at the Gold/Euro chart you can see that the market has continued to higher levels on contrary moves in both markets for the last four days of this month, which means that there is a market of people that are buying the Gold as a store of value away from the Euro and as more of a spread. The Gold has been the laggard of the Metal sector for most of this year, but since the start of this month it has finally had some open interest gains on this move. However, regardless of the fundamental reason or money flow this year I do not have confidence that the pattern will hold. I am sitting back right now and looking for signs of weakness to execute a short. Right now the May $1100 puts for Gold are offered around $3.50 with a Delta of around 15 and 20 days left till expiration. On a failure on the pattern I think that this is a good low risk strategy.

Notes:

Japanese Yen- The Yen has had two strong days off of the bottom of it's recent leg down and has traded a volatile sideways range today that continues to knock out short stops above the market. I do not see a good entry level to sell above the market right now until above 109, so I would recommend liquidating shorts for the time being and waiting for a better re-entry opportunity. The bearish cup and handle pattern on the weekly chart has a breakout of 106.79 with a projection to 100.12, but the market may need a consolidation rally prior to downward continuation.