Tuesday 5/18/10 Commodity Ideas

Opening Note:
Despite trading over 22 points lower on the day before mid-day yesterday the S&P 500 was able to mount a rally to close less than a point lower on the day. Overnight the Index is slightly higher and has built a base on a 60 minute chart that looks like it now has fuel for a rally continuation. A bullish head and shoulders pattern was set off just before the European open at 12:30 am on the 60 minute chart with a breakout of 1135.75 that projects to 1162.75. With the S&P now struggling with the low volume area from 1140.25 to 1144 that provided a high yesterday, it now looks that with just a little more rally the market should be able to move forward with the projection. A number of other supportive Commodities like the Euro, Crude Oil, and Copper that have acted the weakest over the last couple weeks also have formed a similar base from yesterday and into this morning. This leads me to believe that the macro market could see gains over the next 24 to 36 hours as some of the weakest markets need a rally before a continuation lower can resume unless this nearby resistance can hold the market.

With this most recent shift on the daily chart to a bearish mode only heading into it's 11th day for the S&P 500 after the downside breakout on May 4th, I still believe that there is more downside to come on this daily chart move. However, after testing the lower boundary on the bullish mode for the weekly RSI yesterday and failing with the bullish mode remaining intact, now is not the time to push short positions. While I still like selling rallies in these supportive markets I recommend closing out short positions for the time being, if you have not already, and waiting for better resistance levels to re-initiate.

Buys to Watch:

Natural Gas- First off, I want to recommend waiting at least one day before initiating a long position in Nat. Gas for confirmation on the breakout. The market can be extremely volatile based on the price and has a tendency to be spiky lately on strong reversals. However, Natural Gas finally has a bullish breakout above it's sideways range high of $4.424 that has a projection range from $4.881 to $4.993. Both the RSI and Stochastics also now have a breakout above the bear market high trend for the momentum indicators giving a signal on a reversal to a bullish mode. With the market sitting just above the breakout level today on a low volume trade without much support, I recommend waiting for confirmation on this move and looking for pullback entry tomorrow, which I will provide if applicable.

Sells to Watch:

Put on the Radar:

S&P 500- The critical level of 1175 in the S&P 500 acted as resistance Thursday of last week as it reversed the market, so I am again looking to the S&P as the first indicator for market direction right now. As I said in the Opening Note the 60 minute chart bullish head and shoulders pattern had a breakout level of 1135.75 at 12:30 am early this morning and has a projection to 1162.75. While the market still needs to overcome resistance from 1140.25 to 1144 I believe that it is now likely that the market continues higher for the next day. However, do not become too overly bullish on a continuation above the projection just yet. From 1160 to 1165 the S&P 500 has a lower volume trade that bumps up against some high volume trade that should act as resistance from 1165 to 1175. If the market is able to complete the pattern, the projection then becomes a good area to initiate a short position against this resistance and for the market to resume it's daily chart bearish mode. While it is possible to jump on board the rally above 1144 if it occurs, I am only looking to short the market in compliance with the bearish trend on the daily chart and do not want to get stuck in a long position when I am looking for continuation lower if the projection is not reached. I recommend sitting on the sidelines for the time being and waiting for a set up at this projection level or elsewhere to get short again.

Crude Oil (roll your front month from June to July)- With the previous front month of June much weaker than July it is a little different now to look at the front month of Crude as adjustments need to be made to expectations and projections. While the June contract had a projection to $65, the July contract now has a projection to roughly $70 based on it's individual daily chart on the flag continuation pattern. Like the Stock Indices, Crude Oil has found a similar base since yesterday afternoon and has rallied nearly $2.50 since finding a low. With both RSI and Stochastics on the daily chart sitting in extremely oversold territory based on yesterday's close I believe that it is now time to let Crude have a breather on a rally. If you were short yesterday you have hopefully already covered, but I recommend doing so for the time being if you have not already.

I am currently waiting for a rally into the large low volume zone between $76.10 and $76.84 with some higher volume initial resistance from $77.02 to $77.36 before looking to initiate a short position again. This level for the July contract correlates price-wise to the level I listed in the June contract yesterday that was only briefly entered before prices reversed $3 lower yesterday. If the market is able to find even more strength on this current rally then there is also another smaller area from $78.10 to $78.16 with some much stronger volume traded resistance around the $78.50 level. Like the S&P 500 I am only looking to initiate short positions in the Crude Oil market for the time being in compliance with the bearish daily trend and recommend this stance rather than trying to catch a piece of a rally.

Copper- Like all of the markets above, I am still bearish Copper in line with the bearish daily trend and projection to $2.67. But, with the strong reversal rally since yesterday's close I recommend taking profits on short positions and waiting for a larger rally to re-initiate. Similar to Crude Oil, I still have my eye on the level from $3.0850 to $3.1010 that was briefly entered yesterday and acted as a high. With some higher volume initial resistance at $3.1250 this is a good level to execute a short position, but if a stronger rally ensues there are also some smaller low volume entry points from 3.1380 to 3.1520 and 3.1860 to 3.1940.


Notes:

Buy Gold vs. Sell Silver (Gold - Silver/2)- Although the timing on this trade appears to have been correct with the Precious Metals finding a top and breaking over the last few days it is the strong action of the Silver that made this trade only a small winner on the larger expectation. After recommending buying dips below $260 in the middle of last week the spread was able to rally above the $280 level yesterday afternoon, but with a larger Gold break this morning than Silver is sitting back in the $270's. This is also after an odd Metal opening yesterday in which Silver rallied strongly on a failing macro market sending the spread dangerously close to the $263 level and below the $265 level where I recommended stop placement. If you are still long the spread I recommend taking profits and exiting the trade. While I believe that this is still a position that will work over the next couple weeks, it has not performed as well as I have expected with larger negative volatility as well. I think that your margin and time can be better spent on other trades for now.

I do still recommend a bearish stance on the Precious Metals of Gold and Silver as I believe they are still overbought on the run to safety trade. Since I really started barking about my bearishness on Gold Wednesday of last week the market has reversed and has begun trading lower on both positive and negative macro days as a reversal of it's previously always higher trend. Until this new trend convincingly changes I believe the Gold market is over-saturated and should be traded from a short stance as too many longs jumped in near the top and will likely be cleaned out as momentum indicators have given sell signals. I also still feel that the Silver market is highly overvalued based off of the Gold trade and should come under more pressure as Silver is not the "store of value" that Gold is and should correct lower to realign with the deflationary and weaker macro picture.

July Soybeans- July Soybeans confirmed a bearish breakout below the longer bullish trend that provides a projection to $8.58. However, the market was unable to accelerate much yesterday and found support multiple times at the $9.40 level. I believe that there is still a decent opportunity to initiate a short position near $9.52 against the stronger volume resistance from $9.54 - $9.55, but would only recommend a short at this level for the time being. With some more sideways support for Beans to travel below I think that the market may find a brief rally before another attempt lower on the pattern.