Friday 5/14/10 Commodity Ideas

Opening Note:
While the stock market made a great recovery over the first three days of the week it finally ran into trouble yesterday as the 1175 level in the S&P 500 derailed the rally train. Although I had my eye on the high volume profile area just below this level as resistance it was this lower volume level just above the profile that halted the market. If you recall, 1175 was the original level in the S&P that set off the bearish head and shoulders pattern leading to the quickest 10% correction ever, so it is not surprising that there was little bullish fight left in the market when it reached this level yesterday. All of the daily chart RSI indicators for the Stock Indices remain in a bearish mode after yesterday's break, as a test of the upper bear market boundary failed on the indicator. Although the market has already come close today, the next level of support in the S&P 500 ranges from 1141 - 1144 with a break below this level likely resulting in a move to 1130.

While Equities look to be continuing in a bearish mode there are a number of Commodity markets that have already pointed towards this macro continuation lower and are better sales on there own than the Equities. It is no secret that Crude Oil has been the weakest market since the beginning of the month, but I also now have Copper with a downside breakout below its consolidation range and Soybeans testing their slightly upsloping trend/support base. The Dollar Index is also continuing higher with the European Currencies yet to establish a support base and the Dollar also again gaining on the strong Canadian and Aussie Dollars since early yesterday. The weekly chart on the Equity Indices (and macro picture) is now in the process of testing the reversal level from a bullish to bearish mode, and with the short term outlook now negative I believe that the reversal will be completed. I recommend selling rallies on supportive markets for the next few days as correlation has returned to the market and it is negative.

Buys to Watch:

Gold vs. Silver (Gold - Silver/2)- This trade is based on the fundamental idea that as a store of value and as a reserve currency Gold is historically always the better choice among the precious metals. Thinking about it literally, there never was a "Silver Rush" in California and at the current value you would need to hold 63.5 ounces of Silver to equal one ounce of Gold, which is a much more difficult way to lug around your money or to store in a vault. The market is ignoring this fundamental difference between the two metals right now and treating Silver like it has the same function as Gold. While the two are obviously correlated in price to a degree, Silver travels more with the economy and other Commodities as the price falls more than Gold on weakness. With the volatile swing to new highs in Silver that begun last Friday I believe that the market is incorrectly valuing this Silver with the Gold market. With Gold reaching all of it's rally projections and momentum slowing on the rally I believe that the precious metals are heading for a reversal in prices currently or in the near future.

Whether you draw a trendline base on the daily chart from the lows from September 16th of last year or April 5th of this one you will roughly get a support value today of $248 for the spread. While I had this trade on the radar the last two days I noted that dips to the $255 and $251 levels are good areas to buy based on the support base from $235 to $251. Yesterday a dip to the $255 level was followed up by a continuation to 250 and with the trend base now sitting at 248 I believe that these are great buying opportunities if the market dips to these levels again. On the rally I believe that a corrective move back to the $300 to $320 level will follow shortly with a break in the Silver market leading the way on the move in the spread. Note: For execution purposes on the differential the spread is 1:1 Gold/Silver as the contract sizes of each product are lined up at 100:5000 to even out the size and price discrepancy. However, a friend pointed out to me that the actual ratio (Gold/Silver) is this 63.5 ounces. If you are trading larger quantities you can use this to your advantage possibly by executing 4 Gold : 5 Silver, which should add value on a break in the precious metals with more short Silver exposure, but can also hurt you if the spread move comes on a Gold rally.

Sells to Watch:

Copper- If you have been reading regularly for a while you can remember that during my initial concern about the macro market I noted both Crude Oil and Copper as the weakness markets that were indicating a potential fall. After a strong initial break in the Copper led by long selling the market has found a consolidation rally off of the $3.00 low, but with a fairly steep uptrend has now broken out of the bottom. Whether you call the pattern a flag or a continuation triangle the projected bearish move is again very sizable and this time points below the swing low from the February break between $2.81 and $2.85. To form the lower boundary on the pattern draw a trendline from the lows on May 5th to the lows on May 7th to receive a breakout value today of $3.2030 that as a flag or triangle projects to $2.67 on a continuation of the leg down that began on April 26th. As an upper boundary you can also draw a top from the highs on May 10th to May 13th to receive a value of $3.2560 today. While I recommend waiting another day for confirmation without the risk or carrying a position over the weekend, if you prefer to sell rallies and want in now, there is a lower volume zone from 3.1860 to 3.2020 that is a good short entry level with a stop above this upper boundary. Copper has been the weakest Metal of the sector by far and has had very little corrective rally on it's move lower compared to other markets. Although there is not the same fuel on the break, with many shorter term longs already exiting the market, and the projection is rather large and less likely to be completed, I still believe this is a good pattern and market to sell.

Crude Oil- Crude Oil is like the less attractive sister of Copper right now, meaning she's all yours if you want to buy into that. When given the same pattern treatment as the Copper market from it's May 7th base you will see that the market is already broken out to the downside two days ago and continues lower on a projection to roughly $65. The feature that makes the Crude so unattractive right now is the massive build up of losing long positions and open interest that has yet to liquidate, but is just now beginning the process I believe. Crude swings have been volatile despite the drop as the move from 10:45 am to 12:15 pm yesterday afternoon displays on the $2.00 rally. However, while one might attribute the losses in Crude yesterday to losses in the stock market when looking at the overall day it was in fact Crude Oil that led this dip lower in the market on it's own. The real damage in Crude came on the break between 1:00 pm to the 1:30 pm close, but Equities did not begin their second break of the day until 1:30 when you examine a 15 minute chart.

The fundamental story with the contango and supply/demand is less important right now for the Crude market as over-invested money on the recovery story that continued to buy dips is now in deep water and driving the market lower as it runs for the hills. There is base support for the Crude market near the $70 psychological level, but ranging up to $71.50. Taking the market below this level could be a temporary battle, but with the amount of long selling that could unwind I see the move to $65 as attainable with the possibility of an extension to $60 still. I do not have good entry levels currently for the short, but I recommend using a 15 minute chart with momentum indicators for entry and waiting for the market to form a rally spike above the level you are looking to sell as Crude often gets excited and over-shoots the runway.

Put on the Radar:

**I am out of time for today, but I figured it was more important to focus on the potential buys and sells than the radar. On the radar I now have a potential downside breakout in July Soybeans below the trend and a double top that is potentially forming in the Pound vs. Euro cross rate that has a fundamental wrinkle to it.


Notes: