Thursday 5/27/10 Commodity Ideas

Opening Note:
After a sizable break on the close yesterday on rumors of Chinese liquidation of Euro holdings the market has rebounded strongly overnight on European gains and squashing of these initial Chinese rumors. Despite finally posting a close in the Dow below the psychological 10,000 level yesterday the market has found a way to rebound again off of the base that appears to be forming. With the February lows now tested in the S&P 500 and many other supportive markets and relentless bullish reversals off of this base I believe that if the market can clear the next level of strong resistance that there could be a decent rally recovery after the month long move lower.

I am specifically keeping my eye on some key technical levels in the Stock Indices, Fixed Income, and Currency markets to evaluate whether this is just a weak test before continuation lower or if the market has a little more bounce in store. With the Euro continuing to test the weekly lows from '08 near 1.23 and with a new low close for recent action yesterday I believe that this market may be the short term key. As I have speculated for the last week and a half, I feel that global governments and the EU are seeing the same thing that I am and will protect the Euro around this base, especially as we go into the monthly close tomorrow. A move below 1.20 signals a move to .95 to me, so I am expecting that the market should see a little bounce going forward with a move above the high trade last week of 1.2674 meaning a move to roughly 1.32.

However, I remain fundamentally bearish and believe that this protection plan for the Euro will likely come up short in the long run with a move lower on the horizon for the overall market. With such a violent swing down over the last month it is likely that the market needs a bounce to get new longs in the market and clean out some of the shorts. I am beginning to see the initial formation of some large topping patterns in both the Metal and Equity sectors that could use a larger rally here for facilitation of a better trade in the future. There should be a slowdown in some of the bearish global news, but I believe that the World has too many nations wrought with debt problems that will emerge as we go forward. I recommend lightening up on short positions for the time being until the magnitude of this short term rally is better understood, but still focusing on the larger bearish picture with a 4-5 month macro move lower underway as I see it now.

Buys to Watch:

Sells to Watch:

Heating Oil and RBOB Crack Spreads- I do not have any of the volatile outright markets on my trade list for the time being, but these Energy Crack Spreads have set up some good looking bearish patterns to trade in the meantime. If you have access to CQG to see the Heating Oil/Crude spread enter HOECLE and for the RBOB/Crude Oil enter RBECLE. Right now the Heat Crack Spread has a bearish head and shoulders pattern on it's daily chart with the neckline from the lows on May 10th to May 20th having a value of 924 today. A breakout below this level today projects a move to 622. The spread has already bounced off of this level today so it may need another day or two if it is to be set in motion. However, when you keep the same neckline dates of May 10th to May 20th on the RBOB/Crude Spread you can see that this market already has a breakout below 1147 yesterday with a projection to 802. For entry on this trade there is a good low volume zone from 1062 to 1106 with larger volume resistance near 1120 with another low volume area from 1140 to 1152 with larger volume resistance at 1175. This higher level has already been reached on the trade overnight, so I believe that entry on a rally into this lower zone is now a good level for short entry.

Put on the Radar:

Key Indicator Levels- I already discussed the important Euro level in the Opening Note, but I also have some other levels that should indicate whether this recent rally is just another small fakeout or if we could see a continuation higher to about halfway back on the recent break. For the S&P 500 the 1097 - 1105 level is important as it is a low volume reversal zone and also the 10% correction, 200 day moving average, and psychological 1100 level. A correlated level in the Nasdaq is from 1845.5 to 1857.5. I have a reversal breakout level for the Nasdaq at 1840 that has a projection range from 1914.5 to 1925, which would non-coincidentally fall into the range of a 50 to 61.8% correction on the recent break. The Nasdaq would likely be the strongest Equity Index on the recovery rally and I would not have a problem jumping on with some small size if the market rallies above this low volume zone and the larger volume 1865 level.

I have had the Bond market on a weekly cup and handle breakout above 123.25 with a projection to the 133 to 134 level for the last few days, but the market has now formed a bearish reversal and is testing this breakout level today. There is a large low volume level in Bonds from 123.01 to 123.31 that the market is sitting in currently. A break below 123 would signal to me that a pullback near the 120 level would be in order on a 50% pullback in conjunction with the Equity Indices.

Finally, I am watching the supportive Currency markets of the Australian and Canadian Dollars. The Canadian Dollar has already rejected it's weekly breakout level of .9274 over the last few days on a strong rally. The Aussie Dollar is in the midst of a large weekly bearish cup and handle pattern with the old breakout level of .8547, but now has a daily chart reversal above .8345 that has a projection range from .8625 to .8641. There is larger volume resistance for the Aussie around .8404 that has provided the highs for today, but I believe that it is a decent buy above this level with a smaller size on the rally continuation.

In Summary, watch these levels across the different sectors as an indicator for direction over the next couple weeks. If you are still looking to enter short positions these are all good levels to do it against, but I am waiting for confirmation at these levels to set up a game plan going forward for the next week and month. If the market macro market is able to rally through then I believe that we can expect a 50% correction on the recent break before becoming a good macro short again. If these levels continue to hold, then I expect a move below the February lows shortly in most of the supportive markets. As I said in the Opening Note, I am seeing the beginnings of some large topping patterns across the sectors and a 50% rally back would likely facilitate a better trade on a larger move lower.


Notes:

Copper- Refer to yesterday's newsletter for my explanation on why I want to short Copper and possibly use a Gold hedge. To help you get a similar picture to what I am seeing I wanted to provide the lines that I have on my Copper chart at the time being. On the daily chart connect:

High May 10th to High May 13th
High May 10th to Close May 13th
Low May 17th to Low May 21st
Low Feb 5th to Low May 17th

What you now have on your daily chart is an extremely large topping pattern similar to a head and shoulders as well as a bearish continuation triangle with two potential top trendlines. This shorter term triangle has had a bounce off of the lower top trendline for the last four days, but is threatening to rally above today and likely to the higher top trendline. It is a decent low risk trade to try a small initial sale against these top trendlines, especially if there is a rally to the next line for early entry on a possibly huge trade. A breakout below this triangle would set off the larger topping pattern that has an 81 cent projection, which points to the $2.10 to $2.15 level depending on the day. However, if this triangle does in fact fail on a larger macro rally I expect Copper to come back into play at a later date on a strong bearish head and shoulders pattern.