Monday 5/3/10 Commodity Ideas

Opening Note:
After a strong recovery in the Stock Market Thursday, Equities tumbled again on Friday as rumors of a Goldman criminal case and European solvency concerns fueled the bearish action. While Equities were sharply down this was not the case for most Commodities as the Gulf Oil spill inflated Energy prices and confirmation on Chinese Corn purchase rumors rallied Grains. While Gold and Silver also advanced, the Currency sector has become quite a hot mess, as previously stable markets like the Canadian Dollar have become wildly volatile and The Euro sits in a volatile range, but can not hold any decline in prices for more than a day. On Sunday the Eurozone agreed upon a bailout package to aid Greece, but the World reaction thus far has not been very positive. Overnight the Macro market is slightly positive, but with a small range thus far. Today is the first of the month, so I will be holding off to watch the opens across the market to see if the money flow is back on with The Fed extending it's cheap money stimulus plan. After the break on Friday all of the Equity Indexes are sitting near a breakout on a bearish daily head and shoulders pattern that projects to the first bearish correction that Equities have had in nearly 3 months. While equities seem really heavy I am looking at trading from the long side for the Energy markets until the Gulf Oil leak is resolved. While it is clear from the wide contango that demand for Crude is not there at these prices I do not see much to take the sector lower with all the concern in the market.

Buys to Watch:

Gold- The daily head and shoulders pattern in the Gold is still working towards its $1244 projection as it is again slightly higher today after gains on Friday. Open interest continues to rise in Gold and is approaching the all time highs of roughly 585,000 contracts from January of '08. The open interest continues to add fuel as Gold is being used as a hedge against the risk trade and as a substitute for the weak European Currencies. The daily and weekly Stochastics indicators also both remain in a positive mode for Gold. Looking at the daily chart I have the Gold continuing on the 3rd leg up on it's rally from the lows of this year, and as a contradictory projection from the head and shoulders, I have a rough projection on the 3rd leg to $1208. Keep this number in mind as it approaches this level and tighten up the risk on the trade between the two projections if prices extend there. I do not have a good low volume zone for entry today on the Gold, but there is some support around the $1170 level that should hold prices on a break. If you are holding a long term position on the Gold move I believe that you can safely move your stop up to $1167 and likely higher later in the day if the market continues to rally.

Heating Oil- I had both the Heating Oil and RBOB in the buy section Friday on their head and shoulders pattern, but with my slight lean towards the Heat over the RBOB as a better buy I will take a smidgen of credit on the better move and recommend using the Heat for long execution going forward. The Heating Oil had a head and shoulders breakout on the daily chart Friday with a neckline of 2.2935 and a projection to 2.4149. Today the upsloping neckline has a value of 2.2945. The Heating Oil has gained significantly on the range bound spread between itself and the RBOB and also is rallying in relation to the Crude Oil. Open Interest has risen sharply in the Heating Oil on the recent rally as well, as opposed to the RBOB Gas, which has sat fairly steady. Daily Stochastics for all the Energy markets are in a positive mode that supports bullish continuation as well. With the Gulf Spill highly unresolved and Oil continuing to leak I believe that it is still prudent to play the long side for the Energy sector. I have a small low volume zone in the Heating Oil just below the daily price range for the market today between 2.3085 and 2.3105 for long entry on a break in prices, but I feel that it is unlikely that new lows are in store for today unless Equities take a rough tumble.

Sells to Watch:

Copper- (Roll contract month to July) On Friday Copper was again the weakness among the metal sector as it closed lower on the day despite higher prices in Gold and Silver. I have not been subtle about my opinion that there are over 27,000 open long positions in the Copper that are net losers with a break below the March price lows and that the market could see a 50 cent break off of it. For the July contract the lows in March were 3.3090 as opposed to the 3.2900 for the May contract. However, I am using the weekly chart lows from March of 3.2775 as an area that should force some long capitulation. Surprisingly open interest actually rose 2,000 contracts on Friday on the price break as buying dips is still the trendy thing to do, but this is a different technical situation in a thin market. I rarely watch business television, but on Thursday I actually heard a Fast Money lunch time contributor say he was bullish emerging markets and that he was buying Copper as a way to play the fundamental idea. I think that this open interest is coming from fundamental traders and long term position investors that are unaware of the technicals and still buying Copper on a recovering economy trade. Copper has continued to weaken compared to Equities over the last couple months and with the thin market I believe that Copper should test the early February lows of $2.8110 on the weekly chart as longs sell out of their position. As a hedge on short entry you can buy Equities against the Copper and remove the long Equity side if liquidation begins.

Put on the Radar:

Equity Head and Shoulders- The S&P 500 and Nasdaq have the technically better looking bearish head and shoulder patterns right now, but with the larger projected move and closer breakout level I believe that the Nasdaq is the best potential sale. The Nasdaq has a neckline breakout on the head and shoulders pattern of 1991 with a projection to 1920.75, while the S&P breakout sits at 1175.5 today with a projection to 1136.25. I am sure many people remember the failed bearish head and shoulders pattern from last July that rocketed the market to new highs, but I believe that the mentality of the market and Index prices are much different now. After nearly 3 months of straight rally action the market is in need of a break. Bullish confidence is also at new highs on the rally as market participants have been trained to "buy dips and buy the sell signals" as that has what has pretty much worked over the last year. Volatility has continued to increase lately as well, which is another technical signal of a potential reversal in prices. I recommend waiting for the breakout on entry as the market continues to swing on the slightest bit of news and can be choppy, but have more confidence in selling this breakout if it occurs than other sell signals that have failed over the last year. "Dr. Copper" as an indicator of market direction is also saying that this sell off is likely to happen.

Notes:

Australian Dollar- The breakout on the continuation wedge pattern failed on Friday after rallying with strength earlier in the day, but later falling with Equities. After failing on the initial breakout attempt I do not feel chasing subsequent attempts is worthwhile at this time. As I stated in the Opening Note I am not a fan of the Currency Sector for the time being as much of the trade has become a volatile range that is traded on rumors and ruled by the shorter term chart trader on movement. All I know is that I would rather sell the Yen than anything else in the Currencies, but I am staying out of the sector until direction becomes more clear.