Monday 5/24/10 Commodity Ideas

Opening Note:
An opening rally Friday was followed by another late day run that saw the macro market close convincingly higher for the first time since May 12th. Friday morning the S&P 500, along with some of the Fixed Income and Currency markets, touched the base of the "Flash Forward" numbers nearly two weeks after the initial crash. Although some other markets like the Dow, Nasdaq, and Yen have come close they have not officially touched their own flash levels. I am using the S&P 500 as the leading indicator for the time being though and consider these initial projections on a move lower now met as an overall group.

This morning the market is lower led by a weaker Euro and growing concerns surrounding Spain. However, considering the break this morning is only a portion into Friday's gains and with initial "Flash" projections now met I believe it is time to lay off initiation of some shorts on the market for a few days and possibly for the rest of this week. While the market was initially entering the bearish move over the last month I suggested a very aggressive short trading strategy, but with more two-sided volatility and some larger technical support now met I will be pulling back to wait for better spots and a possible short covering rally. With both Dow and S&P 500 weekly RSI indicators now sitting at levels below all of the values over the last year's bull market with the weekly charts for Equity markets now trading in a bearish mode. I continue to believe that rallies in supportive Commodities are to be sold, but at a less aggressive clip for the time being. Be more patient now to wait for stronger initiation levels as after a small rally I believe the market is going lower in line with the weekly bear trend.

Buys to Watch:

Bonds- The longer end of the yield curve has been the strength on the Fixed Income price rally, and with Bonds recently gaining on the also strong Ten Year I believe the Bonds are the best buy going forward. The weekly chart for the Bonds now has a confirmed breakout on the weekly cup and handle pattern with an initial breakout above 123.25 with a projection range from 133 to 134. Higher volume support from 124.02 to 124.09 provided a base for market prices overnight as it did Friday as well. It is possible that this level makes the longer term base, but with my expectations that the macro market will have a short term rally I am waiting for stronger initiation on the Bonds. There is a large low volume section from 123.01 to 123.31 that the market has yet to pullback into that would provide good long entry. A pullback to this level would indicate a temporary negation of the cup and handle pattern, but since this is a weekly pattern a couple days trade into this zone would not be as concerning. The cup and handle pattern often has a test of the initial breakout level and with my longer term opinion that Bond prices will continue to rise I think this is the safest play. Sidenote: I also like some of the longer yield versus short yield spreads to continue higher. Look at both the Bonds vs. Five Year and Ten Year vs. Five Year spreads for another way to play lower rates and a yield curve flattening.

Sells to Watch:

Australian Dollar- The Australian Dollar had a strong price reversal rally on Friday, but with the weekly cup and handle pattern still having the large bearish projection to .7784 I am looking for ways to cautiously short the market. Because the Aussie Dollar moves highly correlated to Equities I am looking for more sizable rallies for short entry. The low volume zone form .8342 to .8380 that I have listed for the last two days has still only been slightly entered on a rally Friday, so I am focused on this level for short initiation with some stronger volume resistance at .8404. Both RSI and Stochastics are still in oversold territory for the Aussie daily chart and may need a small rally to become less oversold. However, the weekly chart for the Aussie is now clearly in a bearish trend with both momentum indicators showing this reversal now. This means selling the market should be the profitable direction to trade going forward with a move to .7784 being roughly halfway back on the bull rally of the last year.

Put on the Radar:

Nasdaq and S&P 500 Sale- Although the Equity Indices are lower this morning I am expecting them to display some strength as the week progresses. With the S&P 500 being the most reliable indicator for the sector, I am looking for a rally into the low volume zone from 1097 to 1105 for new short initiation. When looking at all of the daily charts across the sector you can notice that the Nasdaq came the furthest from meeting it's "Flash Forward" projection thus far, although it's flash move was proportionally much larger than the others. Still, I am a big proponent of shorting the strongest market on the way up as it usually has more downside momentum on the reversal, especially if the market's have become inflated. The Nasdaq has a low volume zone from 1845.5 to 1857.5 that should correlate with a move in the S&P to it's own low volume zone. So, I recommend waiting for a confirmation of the move in the S&P and executing a short position in the Nasdaq at this time.

Euro Caution- Last week I threw out numerous warnings on shorting the Euro and I still feel that the short term downside for the Euro is not worth the risk currently. The market has the largest break this morning of any of the Currencies, but with violent swings on news, rumors, and government intervention I do not want to participate in the market. With weekly chart support around the 123 to 125 level from the lows in late '08 I would need a decisive breakout below this level to think about shorting the Euro. The monthly chart projects to .95 if this break does occur, but I believe that government protection and stimulus packages should float the Euro around this level to slightly higher for the rest of this month and likely throughout June.

Notes:

Sell Pound vs. Buy Euro- This trade worked very well up until Friday morning when it reversed hard and has continued to move the opposite direction today on the weaker Euro. Although the market traded near the .18 level it has already reversed to slightly above .20 this morning making almost any entry level over the last three days a small loser. If you have entered this position I recommend removing it for the time being. While I believed that using the Pound and the Euro would provide protection against the Euro's erratic swings I was wrong as this morning's action has shown. With the market bouncing off the .2040 resistance level I still think that the spread will move lower, but the risk is too high and the trade too cutesy for the market right now. I am removing it from my sell list and radar.

Gold- The swings in Gold have been erratic over the last couple weeks as rallies and breaks appear to pop up at odd times based on large player's entry and exit in the market. The bullish daily bottom trendline from March 25th to April 19th sits at $1184.5 today with a close below this level confirming a rejection of this trendline and a move lower based on Friday's low close breakout. However, if you have recently traded this market you can tell that it is a tough trade for the time being as the bulls and bears lock in a volatile range battle. Over the last two days I have suggested some trade ideas for the market and a level on Friday, but none have been successful so far with the early highs on Friday being taken out mid-day. I do not recommend entering a long term position in Gold for the time being and only trading it on a day trade level. I fundamentally believe that Gold is in consolidation before a move lower, but I am removing the market from my trade list and radar for the time being.