Thursday 5/13/10 Commodity Ideas

Opening Note:
Large volume resistance levels in the Stock Indices acted as a magnet yesterday and again overnight as Equities were pulled higher without much of a break yesterday and into this morning. All of these resistance levels that I listed yesterday have at least been temporarily eclipsed, but in the case of the Dow and S&P 500 are still trading near the top of the resistance range. Equities have pulled higher on a solid recovery this week, but the Euro has continued to weaken after a spiky rally on Monday. The weakness of the Euro is a signal to me that the rest of the World is not taking this European bailout package and it's protective policies on the Euro very seriously. I have heard some analysts say that they believe that this package has isolated the contagion to Europe now and that the U.S. is safe, but with the U.S. contributing 17% of IMF funds and actually footing the bill for a larger portion based on usable currency (ie. some people do not except Venezuelan Pesos) you can be sure that the U.S. is already on the hook for tens of billions of dollars if not more. Let alone the U.S. balance sheet on it's own and the possible repercussions if this Trillion Dollar package is not enough to cover all of the dominoes in Europe.

With Equity direction still uncertain as daily RSI maintains a bearish mode, but with prices moving through resistance with ease I am uncertain of short term macro direction over the next week. Commodities other than precious metals and the Euro continue to point towards a slide in the market, but the relentlessness of Equities on the corrective rally makes it difficult to attempt a short position on supportive markets. I still feel strongly that we are in the process of reversing the bull market of the last year into a bearish one, but this does not mean that you should sell everything today. With a number of contradictory moves across the market I recommend continuing to size back on trading until overall direction becomes clearer.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Buy Gold - Silver Ratio (Gold - Silver/2)- The spread has a bullish base trend dating back from September of '09 that provides a value for today of either 240 or 247 depending on which points you choose to draw the base from. The spread also has a nice base of traded price between the 235 and 251 values also to provide support. On a short term scale the spread has also produced a double base over the last two days around the 255 level. I have already covered the fundamental reasons behind the trade over the last few days, but it is mostly based around the volatile, and I believe out of line, price action in the Silver market lately. The massive correction in the spread back to the base of this range provides the opportunity to buy on a dip against the 255 or 251 level and only risk to around 240 at the most for the opportunity at a move to 300 - 320. It is likely that this trade may form a longer base around this level, so waiting a little longer on entry may actually be prudent to see if the precious metal markets do indeed form a top around this level with a break in the Silver market likely being the fuel on the spread trade.

The Gold - Euro - Equity Paradox- It may seem like I'm ragging on analysts a bit lately, but with an office move at the beginning of the month I am now glued in front of the business news channel all day without a choice. Over the last two days I have heard a number of analysts tout the continuation of Gold to a much higher level while also calling for Equities to continue to strengthen on the larger recovery picture. If you hear an "expert" doing this I recommend plugging your ears temporarily as, unless they are referring to just a day trade, these are completely contradictory statements. Gold is rallying on a "run to safety" trade mostly out of the Euro as it continues to weaken, but also out of Equities. For Gold to continue higher to the $1400 or $1500 level, as I have heard some calls for this, Gold will have to convincingly supplant the Euro as the second reserve currency for the world. The downfall of the Euro is incredibly bearish for the global Equity markets and this definitely includes the U.S. as we do not live in an isolationist country. I understand adding Gold as a hedge for an investor to a portfolio loaded in Equities, but to go out and say buy more Gold and buy more Equities right now is the type of thinking that provides opportunities for astute traders and is not a solid approach for the trader or investor going forward.

Crude Oil Weakness- Crude Oil broke below the $74.50 level this morning prior to it's open, which is the level that the market has had a quick rally bounce off of each of the last four days. As I have continually noted, this move lower in Crude has not been on a liquidation of long positions and on many lower days the open interest has continued to increase. With an incredible amount of roughly 150,000 open longs now out at least $8 on their purchases above $82 I can not imagine that there will not be some long selling going forward. This morning the nearby June - July spread is trading around the -$4.75 level, which is the lowest price value the market has ever seen excluding the debacle from the beginning of '09. While the contango is based on price, which is much higher than the historic charts in the 80's and 90's this is an example of a market where the fundamentals continue to collapse at an inflated price. The swings in Crude have been tricky and I do not have a good level to enter on a short currently. Crude continues to lose on a percentage basis to Equities though, so selling Crude versus buying Equities is a possible option on the trade as the ratio chart between the two broke out last week and has skyrocketed since.

Notes:

Precious Metals- With Energy prices collapsing, the Grain sector having a very unproductive seasonal rally, and Softs mostly range bound or weaker, much of the discretionary investment money has piled into the precious metal trade. Finding a decent rate of return in Commodities has been difficult this year and with Gold and Silver rallying the open interest has largely piled into these markets in a frenzy to try to catch profits, especially over the last week. While there is the run to safety trade mentality I believe that a bit of this recent rise in prices can be attributed to speculation money that is catching the tail end of the three month Gold and Silver move. With these markets seemingly rallying whether the macro market is supportive or weaker I continue to recommend caution on entering an outright long in either market as momentum appears to be waning.