Friday 5/7/10 Commodity Ideas

Opening Note:
Despite seeing a $2.00 fat finger liquidation in Wheat and the fast markets of '08 I can definitively say that yesterday was the craziest market I have ever seen as not just stocks, but markets across the board reacted to a so far unexplained computer stop-loss program gone haywire. For my purposes I am disregarding the last 500 points lower in the Dow as there was no liquidity once the buy side was blown out and many trades are being cancelled below this level. Still, a 500 point drop at one point in the day shows how all of the fear we saw in the market just over a year ago can come back into the market with just a few volatile down days and some protests on tv.

Some in the media and fundamental camp attribute the fall yesterday to worries over Greece and Europe (which is a big portion of the fear induced) or on the computers, but in my opinion the market was set up over the last 13 months for a fall such as this and all it needed was enough dominoes. By extending the nearly free money policy for way too long The Fed has encouraged investors to go out and buy everything under the sun in an attempt to stimulate and rally the economy, stock market, and assets. By way of this long running stimulus though the government has created what has looked and felt like a bubble rally across the market that has just made the initial pop.
I think one of the big issues that we need to examine here is what exactly is The Fed's job? If it is strictly to make the stock market go higher then I would say they have done a phenomenal job. However, as I have expressed my alliance with the one dissenter (Hoenig) in the FOMC, I believe that smoothness of recovery is just as important as the recovery itself for longer term health and The Fed should have been strongly suggesting if not already slowly raising interest rates. As in most cases (ie. 2008-09) when a market is over-valued on it's underlying assets you normally see a much larger correction than necessary, which resets much of the recovery process and creates enormous amounts of volatility and panic. The passing of the Greek Austerity Bill was not a surprise to the market, nor was the unfolding European contagion story. What we saw yesterday was an over-stimulated market that was fed a "V shaped recovery" story for the last year and what happens when the right catalyst breaks down this wall.

With the Unemployment Report out now I can conclude that I continue to be bearish on the overall market as I believe that yesterday's break, although sharp, was just a part of a larger correction. Non-Farm Payrolls were slightly better than expectations, but Unemployment is still at 9.9%. In my opinion who even really cares about the Unemployment right now because there are much bigger fish out there. I recommend continuing to sell rallies in supportive Commodities going forward.

Buys to Watch:

Bonds vs. Five Year Notes (Bonds*3 - Fives*7 to chart)- On the Tuesday mid-morning update I put this trade on the radar on the large bullish head and shoulders reversal pattern that had broken out. Based on the highs from December 31st and March 19th the neckline for the pattern has a value of -452.22 today with a projection on the pattern to -443.21. I have a low volume zone that the market has pulled back into this morning for long entry from
-450.00 to -451.12 on a break into the acceleration from yesterday's debacle. The Fixed Income market has obviously become very volatile and this is a longer term trade projection, so I recommend executing a smaller position than your normal size if you choose to.

Sells to Watch:

Nasdaq (and other Stock Indexes)- The market is likely to be volatile again today as fear and "value buying" battle each other across the market. But, despite the sizable break throughout the week I am still in the market to sell rallies, although selectively and in my spots. The Nasdaq again was the worst performer yesterday with the Dow the strongest, so I am still watching the Dow as a strength indicator for execution in the Nasdaq. For the stock indexes I have correlated low volume zones: Dow- 10,576 - 10,688 with some old initial resistance at 10,630 with lower vol again above this from 10,664 to 10,698. S&P 500- 1136.25 - 1144 with a double-print continuation to 1147 as well as some good resistance from 1144 to 1147 from March, but that is less reliable. Nasdaq- 1912 - 1931.75 with the area from 1921.25 - 1929.50 being more jumbled and with more trade. It is difficult for me to get a good feel this morning as to whether we will see a rally or a break out of the box on the open this morning, but I am still waiting for the Dow to encounter the 10,630 level before initiating a short in the Nasdaq market, which may struggle to find it's own. Note- All of my projections on the head and shoulders reversal pattern on the stock indexes have been completed, but I am still a seller until we get below the lows from March and head towards a test of the February lows. I believe that the stocks are in the initial stages of a 20 day move lower.

Crude Oil- The opportunity to sell Crude Oil looks like it may have already happened today, but I am still a seller until a test of $70 and do not think that it is unreasonable to believe that we find $60 again in the next couple months. Crude Oil has a low volume zone from $77.50 to $78.22 that reversed price action earlier creating the $78.19 high. You can use a 15 minute chart now to look for short entry on a rally, but with rallies still occurring even on the darkest plunges I believe there will be another opportunity next week.

Copper- With Copper only having a little move to the downside yesterday on the tumultuous fall I am downgrading it on my list of markets to sell, but still believe that it has the most bearish potential of any metal. There still are around 15,000 longs holding net losing positions of at leas 15 cents and the fundamental picture for emerging markets and world wide construction has definitely been downgraded as well. Copper has traded in a range between $3.20 and $3.00 that continues to narrow, so I believe that the market is building momentum on another leg down. A rally in the $3.17 to $3.20 range would provide good opportunity for short entry as I believe that Copper is still heading for at least a test of the February lows from $2.81 to $2.85.

Put on the Radar:

Gold / Silver Ratio (Gold - Silver/2 to chart)- The Gold/Silver ratio sneakily has had one of the best moves of any market this week as Gold has net rallied and Silver has net broke. On the Tuesday mid-morning update I suggested the trade of buying the ratio around the 270 level on a projection to 290, which was likely at least 300 before you even had the opportunity to take profits. However, the market has continued to extend and traded all the way up to the high 320's yesterday afternoon and is sitting near this level again this morning. The market is now approaching the weekly head and shoulders breakout of 332 1/2 next week that has a projection to roughly 455. To form the head and shoulders use the weekly highs from July 6th '09 and Feb. 8th '10. This trade may come into play next week on this rocket fueled trade as Stochastics will likely also provide a buy signal near oversold territory on Monday.

Notes:

Gold- I have a projection range on Gold for it's 3rd leg rally and head and shoulders pattern from $1208 to $1244, which was entered briefly yesterday and overnight. The market has a tendency to get over-excited about Gold rallies as they usually result in a decent sized break following. It is pretty clear by Commodity and Equity price action that the economy is rather deflationary at the time, which usually has a negative impact on Gold prices. Gold is the "run to safety" gut reaction for the market and usually holds it's price well on breaks, but this does not mean that it is the best outright position to hold. I strongly recommend using Gold as a long hedge against short positions in the market if you feel that it is appropriate, but I expect that Gold has likely at or near it's high on the rally and would recommend selling outright long positions now.

Japanese Yen- Over the last month and a half I have written a number of times about the bearish reversal qualities of the Japanese Yen and the government intervention around the 114 to 115 level to keep exports competitive. Well, yesterday the market went into overdrive mode and rallied nearly 6 handles all the way up to the 114 level on the Fixed Income and run to safety explosion. Even in the early evening yesterday you had the opportunity to sell the Yen at the unprecedented level of 111 as most of the market was focused on the Equity debacle. Sitting around 108 now I do not recommend selling the Yen for the time being, but I am still keeping my eye on selling the December 114 or 115 calls to collect premium on time decay as the market is weaker than the correlated fixed incomes and should begin to trade lower in the near future on the negated monthly trendline.