Tuesday 5/25/10 Commodity Ideas

Opening Note:
While I believed that there could be some bounce in the market following Friday's higher close I was again proved foolish on my caution as the S&P 500 closed 13.5 points lower and traded another 34 lower already overnight. The fundamental concern today is still over more European woes and the side story of North Korean threats. Equities are now beginning to test the February dip lows and their lows from this calendar year. This technical and psychological level could provide some support for the short term, but I believe that we will continue lower shortly. With the weekly charts for the Stock Indices now just confirming a reversal into a bearish mode after their year long bullish run I believe we have at least another 5 months to go on this bearish move.

The concerning thing to me is that although I have heard speculation for nearly a year about the Chinese housing market bubble I have yet to really here much concern about this story in the media thus far. If you also take into account the U.S. debt now built up that was to be offset by growth and tax hikes that is not yet a front page story, you start to get a feel for how bad this so-called "correction" could really be. With the year long market rally led by stimulus on the recovery story I believe that the macro market is still over-valued for the time being and recommend selling rallies in supportive Commodities going forward.

Buys to Watch:

Bonds and other Fixed Income- I suggested a cautious entry level yesterday in the Bonds, but with the late break in the market yesterday followed by this morning I was left in the dust. The Bond market traded back down to the 124.08 price, but did not break below into the low volume zone in the 123's for a shot at a great buy. However, this move did keep the large weekly cup and handle pattern intact that still has a projection range from 133 - 134. Today there is a small low volume range from 124.29 to 125.00 with larger volume support from 124.19 to 124.22 for stop placement. This is a good lower risk entry on a much larger move, but if this level does not hold then I would revert back to the 123.01 to 123.31 low volume zone as the next spot for entry on the large move. I believe that you can also look at using call options for the move with the move likely completed by September.

The Ten Year Note is also now battling with it's weekly cup and handle breakout today above 121.215 that has a projection to 127.145. The Five Year Notes are also nearing their weekly breakout of 118.21 that has a projection to just under 123. When looking at this line of projections I believe that with the earlier breakout and stronger likelihood of completion on the longer yields, that you can also look at buying some of the long vs. short spreads on this longer term move as a hedged bet. I recommend using the Bonds or Ten Years though if you are just purchasing an outright.

Sells to Watch:

Australian Dollar- This morning the Aussie Dollar has the largest break of any of the major Currencies percentage-wise, but unfortunately a rally into the low volume zone I suggested never occurred yesterday. While the market did trade to .8321, the cautious entry level above .8342 was never met. Still the Aussie has a weekly cup and handle chart pattern that projects to .7784 and that is now over halfway complete on this move. For short entry today I have a low volume area from .8116 - .8150 with higher volume resistance from .8176 to .8182 for stop placement. Above this level I also have a strong resistance level from .8250 to .8276 with the area just below this from .8232 to .8250 being a good entry level if this first zone does not hold.

Put on the Radar:

Euro/Yen Cross Rate (Symbol YR on CQG)- As the Euro continues to weaken and test it's lows from late '08 so does this key directional indicator cross rate. The Euro/Yen today is below the lows from Oct. '08 and Jan. '09 of 111.83 on a decisive move this morning. This is a touchy indicator because it does include the volatility of the Euro, but a breakout below this level is extremely troubling for the macro market. As I stated in Friday's letter, I believe that the Equity and Commodity markets tend to run about 5 months behind the Currency markets and if this is a reliable indicator it is saying that we test the lows from '09. In contrast to this, I believe that with stimulus and tighter restrictions in our markets that we are in a different place than two years ago, but do not ignore this cross rates signal.

Copper- Copper has been like the fly on the back of my neck over the last month and a half because every time I think I have gotten rid of it it seems to come right back to me each time I look at the chart. All you need to really do is look at a weekly chart for the market and put up open interest and volume. You can see that more than almost any other market over the last year Copper has had an astronomical rise in open interest and volume compared to any period in it's history. Also factor in that Copper was the "darling" of the inflation, emerging market, and housing recovery trade along with the fact that it was stockpiled by China and many other buyers and I believe that you have a loaded powder keg ready to blow. Copper has held up well in relation to many Commodities recently based on the Metal Sector's strength, but I believe that this is an unfair grouping for Copper to travel in as it is not as strong of a store of value and an industrial metal. With the "supply" of Copper still high with the stockpiling and huge open interest for the market we could see a massive exodus of long positions from the market.

The options market for Copper is pretty much non-existent, but I still would like to be in the market for some downside. If you look at the Gold/Copper chart (the ratio) on a weekly scale you can see that during the last major market break that Gold held up significantly better than Copper and that this chart now looks like it is beginning a rally breakout. I am exploring buying some Gold so that I can sell some Copper with the option of removing the Gold hedge once the market begins to move.

Canadian Dollar- The Canadian Dollar is broken out this morning on a weekly cup and handle chart below the .9274 level. For the chart I have a projection range from .8479 to .8768. This may be fundamentally difficult sale for some as Canada has one of the better standing economies, but this is strictly a risk trade. The Canadian Dollar is entered as a way to play macro growth and Commodity inflation and with the market strength now broken out on weakness there could be massive movement out of the Currency and into the U.S. Dollar as the market is surprised. I have a nearby low volume zone from .9306 to .9338 with resistance to .9352 for entry on a rally. There also is another zone from .9382 to .9408 with resistance to .9432 that provided the high overnight and is a great sale on a rally as well.

Notes:

Stock Indices- I continue to recommend selling rallies in the Equities, but with large volatility from day to day it is difficult for me to accurately produce a good zone for a sale that will be hit. However, take into account that the February low for the S&P 500 on the weekly chart is 1040.75 and for the Dow it is 9791. These levels will be tested today and are one of the last major support levels before we begin to see a pullback to halfway back on the entire year long rally. I also recommend using the NASDAQ Index for Equity shorts as I believe it has the most downside potential of all the groups as it was over-invested on the recovery trade.