Thursday 5/6/10 Commodity Ideas

Opening Note:
With the U.S. waking up yesterday morning to the alarming videos from the Greek riots the market broke sharply prior to the U.S. open, but quickly took a turn for the better erasing losses in many supportive markets by mid-day. Although the macro market did deflate later in the day it is now clear that taking the market lower is going to be a battle as many markets saw an increase in long positions yet again on a price break. The move down in Equities over the last two days, although small in comparison to the wipe out in some Commodities, was one of the largest two day declines since the recovery began, so it is understandable that the market did need a rally breather before a move lower could continue. The majority of this new long allocation is suspicious to me and is coming at a time in markets like Copper and Crude Oil when there are already huge long positions that are net losing on their investment. While buying these dips has worked a number of times throughout the recovery I believe that coming after a nearly 60 day rally in Equities that this time is different. Fundamental bulls can point to recent economic data and earnings that are improved over last year's numbers and show signs of growth, but I feel that much of this growth we are beginning to see was already overshot by the long running stimulus plans and bubble-esque rally continuation within the market. Just as fundamental bears complained on the year long rally that "we aren't seeing signs of improvement" I believe that the tables have now turned where we will begin to see more growth, but prices will not continue to rise along with the news. Friday brings another Unemployment Report, so I expect a slow down in some of the recent volatility we have seen, but unless the Report shows an astronomical decrease in Unemployment (which it will not) I believe that the number will be uneventful and the market will continue lower throughout the month.

Buys to Watch:

Sells to Watch:

Nasdaq (and other Stock Indexes)- With the Dow as the strength and the Nasdaq as the weakness of the sector over the last few days I am more interested in continuing to sell the Nasdaq than the other Indexes. As the strength of the recovery the Nasdaq has a lot more room to move to the downside among the indexes. The recent strength and weakness reversal in the sector should be alarming to the Bulls as a market in a Bullish mode should continue to hold the strength and weakness relationship on a price break as well. Because the market has had a large increase in volatility the Nasdaq on it's own has not provided great entry parameters to sell as it does not have the strength to rally into reversal zones. However, the Dow as the strength has found it's own zones and I am now using it as another indicator on entry on the short Nasdaq. A low volume zone in the Dow from 10906 to 10924 left from early acceleration yesterday acted as resistance on the mid-day high with the Nasdaq coming within points of it's 1970 resistance level that I used for a longer term trade buy stop. While I do not have a good reversal zone to sell on a rally today as the markets have already extended lower I recommend using a 15 minute chart with momentum indicators for short initiation. The Nasdaq still has a head and shoulders pattern intact with the breakout below 1991.5 and a projection to 1921.5, which is just initial, as I believe the market will continue lower. Note: It is difficult for me to accurately predict all of the swings and the maginitude of these swings at a single point in time like 8 a.m., so when the market looks like it is giving you easy money on a big move I recommend taking it for now and looking to get back in later as there are plenty of rallies still. I try to focus on catching longer term moves while maintaining a position, but once the Nasdaq dips to 1934 like yesterday and shows reversal signs the risk/reward for keeping your stop at 1970 to catch the other 13 points on the projection is not there.

Copper- Another initial report this morning of an increase in open interest in Copper leaves me shaking my head, but still feverishly bearish on the market. Shortly after I sent the newsletter out yesterday morning the Copper market broke to the $3.00 level and to over 17 cents lower on the day. On the intraday recovery in the market though, Copper was able to rally all the way back to nearly unchanged as new buying and short covering emerged on the dip. Like the Equities, I did not predict a huge break followed by a complete recovery on the day, so on the quick liquidation days I still recommend using a tighter stop once the market gives you a significant move and waiting for re-entry at a better spot. My long term buy stop placement near $3.1760 was hit overnight, but the lower volume zone between $3.20 and $3.22 for re-initiation that I provided yesterday was the resistance for the market's highs overnight. With a large number of open long positions that are net losers of at least 15 to 40 cents thus far I believe that more liquidation is in store for the Copper market with a least a test of the weekly swing low from $2.81 to 2.85.

Crude Oil- It is easy to forget that Crude Oil was trading above $87 on Monday and has dropped nearly 10% this week from the highs, but I still believe that the gas should be on for shorting this market. The huge price drop has caught a number of longs off guard, but the most extraordinary thing about the market right now is that this break has not been on long liquidation. The initial report on open interest this morning again shows an increase in the Crude Oil market with an estimated 47,000 new longs entering yesterday. This number is likely to be revised lower later in the day, but this still leaves around 200,000 open long positions initiated since March 30th that are holding losses. The market is treating this recent break similar to the other ones on the recovery by buying aggressively, but after such a long run and with fundamental fear entering the market I do not see how these new longs get bailed out by higher prices this time. Below $78 the weekly front month of Crude is below all of the traded price from both March and April and does not have good support to hang its hat on anymore. If there is a significant portion of discretionary money in this 200,000 contracts then I expect a rolling wave of long selling that should carry Crude at least to the $70 area by the end of the month if prices hold below $78.

Put on the Radar:

Notes:

Currencies- The Euro has now reached my initial 3rd leg projection range from 1.2750 to 1.28, but has already extended below this morning. On a weekly chart for the Euro drawing a trendline from the lows in November of '05 to the lows near November of '08 produces a trendline range from 1.2667 to 1.2722 that could provide some support, but I still recommend trading the Euro from the short side as there is no sign of reversal from the recent action. I still have a projection of 85.25 on the Dollar Index, which is becoming increasingly closer, but I am waiting for a break into the lower volume area from 84.32 to 84.28 for long initiation. Overnight the Canadian Dollar reached my initial bearish cup and handle projection of .9626 likely providing little time to exit for profits, but the market is likely to head back to this level today as the Macro picture continues to weaken. Lastly, I still have a bearish cup and handle projection on the Australian Dollar to .8884.