Tuesday 5/11/10 Commodity Ideas

Opening Note:
Supportive markets are weaker this morning after enormous gains in Equities yesterday after the European bailout package was announced. While the Dow is trading around 100 lower (which I almost just referred to as slightly...hey volatility) the concerning market to me is the Euro. Despite trading above 1.30 early yesterday the market reversed hard by last afternoon and again overnight and is now back to trading below 1.27. If this bailout package was really being taken seriously I would expect this downward pressure on the Euro to have subsided much more than it has as protection of the Euro is part of the plan. With fundamental news and fear still ruling the market right now, both of which are very close to "wild cards" for me, I am still laying low for a while as technical indicators and support and resistance have not acted as reliable lately. Holding the long-running belief that we are trading prices that are still artificially inflated by over-stimulated investment rather than fundamental recovery, I am still apt to play the short end of the trade for right now. But, with the recent volatility and unpredictability of the news I am waiting until I can really get my hands around a trade. I have long believed that being bearish the macro story is the hardest trade in the world because you have all stimulus and fundamental intervention against you. Therefore, until direction becomes more clear and volatility slows all trade ideas will be on the radar or in the notes for the time being.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Stock Indices Support- I have correlated low volume zones in all of the Equity Index markets that could provide support for a bottom on the trade today. For the Dow it is 10,588 - 10,624, S&P 500 1139.25 - 1144.00, and Nasdaq 1911.50 - 1918.75. After reaching each of these zone all of the indices have had an initial rally bounce, meaning the daily range bottom could already be in. This zone also includes a portion of the volume trade prior to the crash on Thursday making it again slightly stronger support.

Crude Oil Open Interest?- Crude Oil has me extremely perplexed right now because it does not seem to matter what is happening with prices as open interest continues to rise on up days and down days regardless. After a rally bounce on the European bailout yesterday the market has weakened throughout U.S. trading hours yesterday and again overnight. There is some initial support on a first attempt lower from $75.32 to $75.44 that has provided the lows thus far, but will not be as supportive on another encounter. With the nearby June - July Crude spread still sitting on it's lows near $3.70 without much of a rally bounce the short term fundamental supply and demand story also remains poor. Crude Oil also remains one of the weakest performers (if not the weakest) over the last week as it has experienced little price recovery from it's lows. Open interest in the market is now only 20,000 contracts off of it's all time highs from the summer of '07, but since March 30th over 230,000 open positions are all net losers on their Crude long position with over 160,000 of them long from $82 or higher. It is apparent by now that almost all of this money is passive and long term, so it does not look like it will add to the price decline with a sell off for the time being as I previously expected.

Gold Caution- I have a projection range on the Gold rally from $1208 to $1244 for the third leg move and the daily head and shoulders pattern. With the old Gold high sitting near $1230 I believe that it is now likely on a "destiny" trade that Gold goes on to at least make these new highs. However, with Equities, Energies, and supportive Currencies lower this Gold rally is mostly being fueled on a run to safety from Equities and the Euro. With a deflationary market environment Gold prices should begin to come under pressure soon, as Gold should hold strength versus other assets, but should not necessarily show an outright individual price increase. Open interest in Gold has skyrocketed to all time highs now to over 597,000 contracts from 466,000 contracts on March 30th on an over 28% total increase. With this third leg of the Gold rally now having increased volatility and interest I believe that it is near creating a top before deflation begins to take a grip on prices. I still believe that owning long Gold versus short another Commodity position is a good idea that should continue to work, but be cautious with outright longs now as I believe their time is close to falling.

Silver Prices Out of Line- Yesterday I proposed a sale in Silver as a fade against resistance in the low volume zone near the old highs from last week. Prices held nicely in the zone until this morning when they exploded out of the top on the open. Silver is chasing Gold higher right now, but in my experience this is contrary to the Silver market's and Metal relationships normal price action under similar macro circumstances. When Equities and Commodities come under pressure so does Silver usually. Gold is used as a run to safety from risky assets and as a store of value, but in the past this was not Silver's fundamental use. Being a thinner market, Silver usually has a sharper fall than Gold on macro breaks as it did on Tuesday and Wednesday of last week, but this V bottom rally of nearly $2 is unprecedented and I believe is based on an incorrect assumption that if Gold is good then so is Silver. In the previous paragraph I voiced my concerns about holding a long gold position for much longer, and I am waiting for a signal on a Gold top to sell Silver because I believe it has a much higher value than it should at the time being. I would not recommend jumping in right now though as the market is clearly cleaning out any shorts.

Notes: