Friday 5/21/10 Commodity Ideas

Opening Note:
With bullish news that the first half of German Parliament passed the bailout package this morning we are still seeing Equities and most supportive Commodities weaker this morning. This is another bearish sign as the market has continued to fall despite any of the EU's bailout packages to provide stimulus and support to it's debt problem. There has also been a fairly wide range in many markets overnight with the Australian Dollar trading 280 ticks, the S&P 500 trading 23 points, and Gold trading nearly $20 in range. This increased non-directional volatility means that you may need to lighten your size temporarily to hold the positions. But, I still recommend selling rallies in supportive Commodities for at least another week on this initial move lower.

I also wanted to add a very basic historical analysis on the indicators from the base of the '08 crash and the more recent indicators on the impending debt problems that have caused a more recent top on the market. Looking at the Euro, Bonds, and the S&P 500 over this time frame we can see that they bottomed in Nov '08, Dec'08, and Mch '09 respectively. Take this into the time frame now the Euro peaked in late November, the Bonds in late December(disregarding a minor spike in early April due to rising rates positioning), and the Stocks in late April. I would argue that this is a much different situation than the one in '08 with interest rates held at such a low level, stimulus pumped into the economy, and the overwhelming opinion that Europe is the problem as opposed to the U.S. However, these indicators line up in a very similar manner repeatedly if you look back at other waves. The darkest wrinkle about this situation is that the Euro has only just begun to bottom (if it is at all), and the Bonds look primed to rally another 8 handles higher at least. This does not bode well for Equities as it signals that we could have at least a 5 month drawdown on hand and this is the reason that I do not believe that the Equities must travel with the Currencies each day. Although one could argue that the Euro is an unfair indicator, you can also plug in any volume traded foreign currency other than the Canadian Dollar into this time frame to see the top in November.

***The second half of German Parliament has passed the bill, but very little bounce in the Equity or Commodity markets. This is an incredibly bearish signal for action today and in the future.

Buys to Watch:

Bonds- With yesterday's close above 123.25 and all of the trade overnight and into today above this level I now have a confirmed bullish cup and handle pattern on the weekly chart. The pattern projects from 133 to 134 with a spike on the weekly high from March 16th of '09 being a likely target at 133.195. As Bonds are already much higher I do not have a great level for entry today. There was a large low volume zone from 123.01 to 123.30, but this was not even entered overnight, which shows great bullish momentum in my opinion. Keep this on your radar and either look at call spreads or wait for a pullback for entry as this move will be confirmed with a likely higher close today.

Sells to Watch:

Australian Dollar- The Aussie Dollar is in the midst of it's bearish cup and handle pattern on the weekly chart. As today is Friday, the breakout will finally be confirmed on the chart with the close today. The pattern had a breakout of .8547 and a projection to .7764. Although volatility has increased with much larger pullbacks on the bear move, the Aussie continues to move lower overall. The low volume zone that I gave for entry on a short position yesterday from .8342 to .8380 with resistance for stop placement at .8404 acted as the high for trade overnight as the sizable rally pullback topped at .8345. I do not have another good entry point for today, but recommend still exploring the June Put options and selling rallies.

Sell British Pound vs. Buy Euro- The explanation on the trade is a little lengthy and will become redundant if I continue to throw out the spiel, so please refer to the sell section from yesterday's letter or on my blog for the fundamental story if you need it. Technically this trade has worked nearly seamlessly over the last 24 hours since I wrote about it on the sell list. The low volume sell zone that I provided yesterday from .2000 to .2014 was nearly entered on a rally that sat just lower for most of the middle of the day with a high of .1983. Towards the market close the spread finally broke lower into the European open overnight, leaving a good low volume zone for short entry on a pullback from .1896 to .1926. This zone provided the highs for the trade overnight at .1921 and the cross rate has now trade down to near .18. I still have a projection on the cross rate to .1368 below the 60 minute chart breakout of .1838 and recommend looking for pullbacks to sell.

Put on the Radar:

Sell Gold and Silver- Because Gold did not close below $1180 yesterday I am moving this trade to the radar as I am less confident in the move. However, with a large break in the early evening yesterday and failure on a rally higher Gold is now in violation of it's trendline from the lows of March 25th to the lows of April 19th that sits at $1182.1 today. With deflationary action and a weaker market across the board I believe that both Gold and Silver were over-allocated recently based on their better performance in relation to Equities and other Commodities. Although the Gold acts as a store of value to an extent, this does not mean that the outright price rises on macro breaks. With a lot of top buying and open interest still sitting near the recent all time highs I believe that with a confirmation below this trend that Gold will travel to the $1110 to $1115 range. Because Silver also is over-inflated in my opinion and usually acts worse than Gold on breaks I recommend executing a half short Silver and half short Gold position if you choose to execute. I do not have great entry values for today, but I believe that you can enter your positon by backing in your risk based on a stop in the Gold market just above today's highs at $1186. I believe this should be a liquidation move and should be quick, so if you do not see the desired amount of volatility on the break then I would exit and wait for another trade.

Euro Caution- Over the last week it has been very tough to hold a short Euro position with short covering rallies popping up each day. This is pure speculation, but I believe that there is some protective buying of the Currency through Government intervention to uphold the 1.23 level that could continue for some time. I know that if I was trying to boost my Currency I would do it in a similar fashion, by picking a strong base support level and really pushing the long side to use short covering to my own advantage. I recommend removing short positions for the time being and waiting for a decisive break below 1.23 before entering again. A move below this level projects to .95 on the monthly chart, so giving up that 2 or 3 points trying to stay short for the time being should not be significant. If you are still bearish the market and Europe I recommend looking at the Short Pound vs. Long Euro trade in the Sell section as it simulates a short Europe position in a hedged manner that takes intervention out of the equation.

S&P 500 and other Indices- The S&P 500 has now traded within a point and a half of it's "Flash Forward" level of 1056. I believe that this is an initial projection for the market and with continued bearish signals and indicators I still want to be short the Equities. I now switch my recommendation to shorting the Nasdaq as opposed to the S&P 500 or Dow, but I still like using the S&P as my indicator market for entry and exit in the others as it has acted more reliable. I do not have a great level for entry today, but 1069.50 - 1070.25 in the S&P should act as resistance if it is met on a rally today. I may not repeat it everyday as I do not always have good entry levels, but I continue to hold a short the stock market trading position.

Notes:

Japanese Yen- I have a range projection for the Japanese Yen from 112.18 and 113.14. Over the last couple months I have thrown out different ideas on ways to short the Yen, but I strongly recommend staying away from those thoughts for right now. With Bond prices looking to climb much higher the Yen could also see a larger rally and I would like to see topping action before considering a short position.

Crude Oil- Crude Oil has now met all of my large, but short term projections with the June contract move to $65 yesterday and the July now trading to $70. However, the super large open interest position in the market that is holding signficant losing positions is now only beginning to really unwind their long position. I recommend keeping an eye on the open interest in the market as a barometer on when to exit, but keeping a smaller short position in the Crude while the stock market continues to unravel is a good idea.

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