Friday 5/28/10 Commodity Ideas

Opening Note:
Following yesterday's huge rally in the macro market the range has been abnormally low overnight compared to recent action. The market is slightly stronger this morning, but it appears that most of the significant move and bookkeeping prior to the holiday weekend was done yesterday. I expect that the market will continue to rally today, but to a much lesser degree as shorts clean up positions heading into Memorial Day and the end of the month. Today's letter will be brief because unless you are already long the Australian Dollar, Nasdaq, or Crude Oil I believe that there is no reason to enter a position today prior to the long weekend and there's no harm in starting it a little early after a good month. I recommend just watching the action today and preparing for re-initiation of short positions towards the beginning of next month when this short covering rally shows signs of stalling out. I will provide some halfway back on the rally numbers to keep on your radar for next week. I personally plan on buying some puts on the market with some volatility a bit cheaper at these levels and recommend it if they are able to reach them.

*Roll your front month contract in the fixed income markets to September and your Gold to August.

Buys to Watch: If you are already holding a long position in the Aussie (or Euro or Canadian), Crude, or Nasdaq I believe that these will be the best performers to the upside today on a continuation of the short covering rally.

Sells to Watch:

Put on the Radar:

Projections on Rallies- The Australian Dollar has a bullish reversal pattern that has a projection range from .8625 to .8641. There is a lower volume area from .8406 to .8412 that should provide some support along with the higher volume pivot level that is now support at .8404. Also keep in mind that the weekly bearish cup and handle pattern had a breakout level of .8547, which could provide some interim resistance as it has for the highs thus far today. The Nasdaq has a rally projection range from 1914.5 to 1925 as the strongest Stock Index among the sector. There is a possibility if you take into account only yesterday's spike that you could have a base projection of 1898.25, but I still feel confident that the previous range is sufficient.

Halfway Back Numbers- I would rather error on the side of caution so for these numbers I am measuring the move from the highs in late April to the absolute low trade recently, while disregarding the "Flash Forward" spike if it was not reached in the described market. It is possible to also measure from the rally highs just after the Flash spike to the base this week, but you would get lower levels in most cases.

S&P 500 - 1126.75
Nasdaq - 1906.5
Crude Oil - $77.35
Aussie Dollar - .8665

I am using these numbers if they are reached as a point to purchase an initial short position in the options market. I would become concerned with this position if the markets rallied above the 61.8% retracement level as a mental stop for the trades. It is not necessary for the markets to rally this far prior to a move lower, so I will also look to execute a similar strategy if they show topping action. These markets have shown some of the largest short covering rallies over the last few days, which means they are likely to continue to be the most vulnerable as we move forward at much better initiation prices now.

Copper- Yesterday I provided my trendlines that I have on my Copper chart and as I suspected the lower top trendline for the triangle pattern was violated yesterday. Now I am looking for a move to the top trendline at 3.2280 today as a spot to watch and possibly attempt a small short position if the pattern appears that it will hold. If this happens today I still advise waiting until next Tuesday for initiation.

Notes:

Heating Oil and RBOB Crack Spreads- The Heating Oil completely rejected after touching the breakout of the bearish head and shoulders pattern yesterday, so it has not come into play yet. However, the RBOB Crack Spread did enter it's low volume zone from 1062 to 1106. Yesterday I provided a resistance range of 1116 to 1122 for stop placement above, but the market did trade to 1129 mid-day yesterday so there is a possibility that you were stopped out depending on the exact level. This morning the spread is back in the low volume zone after failing to continue lower. I recommend removing a position in the spread if you have one right now prior to the long weekend as the spread's performance is underwhelming thus far.

Euro- The Euro has had the most volatile trade among all of the markets overnight as the bulls and bears battle over the monthly close. My hunch is that the Euro will find a way to settle above the 1.2326 weekly lows from '08. However, I have to admit that the Euro's action has been extremely concerning and weak over the last few sessions. While other Currencies like the Aussie and Canadian and the Commodity and Equity markets have had short covering rallies the Euro has really had to work just to stay above this last major support level. My initial prediction is that it will not be able to hold above the 1.20 level as June progresses and we will see the slide to .95 begin. The Euro is the key to the longer term macro market move, which I already believe has a 4-5 month move lower underway just to catch up to the Euro's move thus far. If the Euro does fall to below par with the U.S. Dollar then all bets are off on where the market heads to, but it will likely be very disappointing to those who believe we made a bottom in March of '09.