Thursday 5/20/10 Commodity Ideas

Opening Note:
This morning the U.S. is again waking up to large-scale protests in Greece that have sharply sent the market lower since 5:30 am. Nearly every supportive Commodity, other than a couple barely higher outliers in Grains, is significantly lower this morning already despite European and U.S. markets trading unchanged to slightly higher most of the night. Important levels in the S&P 500 will be battled with today as the 10% correction, 200 day moving average, and psychological support all fall between 1095 and 1100. As I am writing at 6:40 am the market has already traded below this range, but looks like it could test this level again today at some point.

I do not believe that this is just a 10% correction as the weekly charts for Equities and supportive Commodities are now just shifting to a bear market trend for this time frame. With a decisive close below 1095 in the S&P 500 I believe that you can be pretty confident that the Equity markets do complete a move to the "Flash Forward" levels from May 6th. With this sizable move coming within the last few hours it is difficult for me to provide reliable levels for entry today, but if you are short already I recommend keeping at least some of your position, especially with a close below 1095 in the S&P. Now on Day 13 of the bear market move I continue to recommend selling supportive Commodity rallies as I believe there is at least another week on the move.

Buys to Watch:

Sells to Watch:

Australian Dollar- Yesterday the weekly double top pattern for the Aussie was set off with a move below .8547 with a projection to .7764. In the newsletter yesterday morning I provided an entry level of .8500 with a stop above resistance from .8526 to .8536. This level was hit almost exactly on the dot as the intraday high was .8506, but I realize this occurred at 8 am while I did not get the newsletter out until about 8:15. So, if you missed out an initial position yesterday there is a good low volume zone from .8342 to .8380 with stronger resistance around the .8404 level as a good spot for short entry if the market forms a rally today or tomorrow. The Aussie has been the weakest Currency percentage-wise over the last two days and should complete it's projection in a swift manner as there is a lot of money that is busting out of this long term inflation and recovery trade. I still also recommend looking at the June Puts for the Currency with 15 days remaining for a less risky way to get short.

Sell British Pound vs. Buy Euro- I briefly mentioned this trade in the Notes section on Tuesday, but I believe that it is now in play. It is pretty much a spread of Garbage vs. Garbage, but the fundamental story is what makes the trade work. After dipping below 1.23 and all of it's support from the low base from November of '08 the Euro found a rally yesterday to push the Currency back above this important support level. Meanwhile the Pound has lagged behind the Euro on this downward push and still has a ways to go towards it's base of 1.34 from the same time frame. Below 1.23 for the Euro I have a continuation to .95 and it is obvious that the EU recognizes this as well. This is their last major support level to keep the Euro above par with the U.S. Dollar in my opinion, so I expect a hell-like fight from them. Meanwhile the new Prime Minister of England sounds just as happy to see the Pound deflate to improve exports for the country. Herein lies the fundamental protection versus non-protective policy that should make the trade work.

Technically a double top pattern was set off on the Pound - Euro cross rate chart that is best viewed using both a daily chart as well as a 60 minute chart. First look at the daily to see the identifiable double top pattern that appears to have a breakout below .2039 level. Now turn this into a 60 minute chart and scrunch it up to see that on the day with the .2039 close the market actually traded to .1838. You will also notice on this chart the build up of support recently around the .2025 level that the market has broken below this morning, which means that it is now in play based on the daily chart. I am using the 60 minute chart projection with a breakout of .1838 and a projection to .1368 for my expectations on the trade, but I believe that with the daily chart crowd now entering that you can enter on a rally as well. I am looking for a pullback to the low volume area from .2000 - .2014 for entry against this now resistance level from .2025 - .2040, but it is likely that using a 15 minute chart you can find a closer entry level in case the pullback fails as this is a longer term trade. This way you have early entry based on a misconception on the trade, but with much larger projection prospects than the naked eye finds. Note: Remember that the Pound is a half contract so 2:1 Pound vs. Euro for equal tick size entry.

Gold and Silver- If for some reason I have not helped you make money over the last couple weeks I hope I at least saved you some as I began warning a week and a half ago that Precious Metals were primed for a break based on deflation and an over-crowded market. While some "analysts" have continued to yell about how great a buy Gold is even until Monday of this week, I believe that it is now almost a great sale based on all the money that followed it over the cliff on the top-buying spree. Open Interest in both Gold and Silver remains near the recent highs on the "run to safety" rally, so there are plenty of longs to clean out providing greater downside momentum.

Looking at a daily Gold chart draw a trendline from the low on March 25th to the low on April 19th to receive a trend value of $1180 today. Also look at a Silver daily chart and note that below $17.08 the market is below all of the trade since the beginning of April. I had good entry levels on a pullback rally, but the $18.30 to $18.40 level in Silver and $1198 to $1202 level in Gold were the highs for the day and are now unlikely to be reached. For entry I now recommend entering a slightly smaller than normal short position with half in Gold and half in Silver, but only if there is a close today below the $1180 level in Gold, with the option of adding more as the market breaks. I believe that Gold will travel to $1110 - $1115 if this trend line fails and Silver should fall more in proportion, and thus the half and half position trade. Unlike some vague analysts I will also say that this move to $1115 happens by the end of the month if $1180 does not hold. Sidenote: I took the Buy Gold vs. Sell Silver trade off of my Buy List a couple days ago when the downside volatility due to awful buying in Silver became too high. But, for those keeping track still the spread is trading just a shade under $300 right now, which was the low end of my projection range. Keep this strategy in your back pocket for similar circumstances in the future as it is a great spread that almost always works even if you have to wait a little longer.

Put on the Radar:

Crude Oil- July Crude Oil has now just reached my projection level of $70 and with the June contract trading down to $67.55, and near the initial projection to $65, I believe that it is time to unwind some of the Crude Oil short positions. I still believe that Crude Oil has a move down to $60 in the next couple months, but with such a large move recently the rest of the way down will be much more difficult in Energies right now. I would not argue with keeping a smaller short position as I like being short almost anything, but I believe that there are easier moves to be had in the Currencies, Precious Metals, and Equities in the near future.

Notes:

Palladium- I listed Palladium on the radar yesterday as a sale, but recommended waiting a day for confirmation before entry. Unfortunately the projected move from $485 to $420 has already fully been met in what is one of the biggest and fastest moves I have ever seen that you will probably never hear about. From yesterdays open of $499.50 to today's low of $406, Palladium has fallen over 18.5% due to the large unwinding of an over-allocated ETF in a thin market. I have had a giant break in Palladium on my radar since the beginning of the year, so it is slightly disappointing to me that I missed out, but there's always a next time.

Equities Do Not Need to Move With Euro- I noted in my comments on the Pound vs. Euro trade that I believe the EU is doing some protective buying in the Euro against a major support level. Because of this I think that the Euro is artificially being inflated and could be for some time. Although both the Equities and Euro have traded very much the same direction on a day to day basis, they do not need to do this. I do not recommend using the Euro as an indicator of Equity direction on a short term basis right now. Pull up a daily chart of the Euro and S&P 500 and compare them to see that the Euro has been in major trouble while the U.S. stock market ignored this piece of evidence for a number of months. If anything the Equities are catching up to this Euro move right now, so they do not need to travel tick by tick.

Copper- Copper has been on my Radar or Sell list for most of the last month, but it is again finding a sticking point for support. It appears that it is setting up another flag or triangle continuation lower, so I recommend removing shorts for the time being and looking to re-initiate a short position below the bottom trendline near $2.9325 today.