Tuesday 5/4/10 Commodity Ideas

Opening Note:
Continuing the trend of volatile swings on little news the Equities had a strong reversal day yesterday with the Dow closing over 140 points higher despite a late day price fade. While all you will here if you turn on the news is that this is the largest daily gain in 2+ months you will not hear that this rally failed to even eclipse the highs from Friday when the market fell over 170 points on little news as well. Price volatility on a daily basis over the last week is nearly triple what it was on the majority of the 3 month rally, which is concerning for current market bulls as it shows indecision, fear, and usually a reversal in the price trend. Talking with fellow trading friends over the last few days I feel like each day the conversation has turned to "how goofy these markets are" and "unless you are on a screen watching all of the sectors you may not realize how messed up all the fundamental and technical relationships are". Right now there is a serious tug of war between the fundamental bulls and bears, technical traders, dip buying programs, and passive long term investors that has many markets trading sideways volatility while disregarding whatever story there is, whether fundamental or technical. On a down board today I can clearly say that with Gold being nearly the only Commodity higher thus far that the rest of the market is taking note of the loss of equilibrium and connection and putting their money into Gold for safety. Although many markets are still in a range, with many flirting with the bottom of this range today, I recommend playing the supportive market Commodity markets by selling rallies and positioning for a leg down by using longer term options as I believe that at least a moderate month of bearish corrective trade is on the horizon after the 60 day rally.

Buys to Watch:

Gold- Gold continues to post higher closes day after day on increasing open interest on it's 3rd leg rally. Gold has a daily head and shoulders projection to $1244, but also has a projection to $1208 on this third leg higher providing a range on expectations. Much of the interest in Gold recently has come as a run to safety from increasingly volatile Equities and weak European Currencies along with the use as a spread or hedge against a short position. Open interest increased another 12,000 contracts yesterday and daily Stochastics for Gold maintains a positive mode. As a note of caution though, the daily Stochastics and RSI have both moved into or near their overbought territory, but this is not a truly concerning indicator until it provides a sell signal. If you are holding Gold on the longer term move I believe you can move your stop placement to just below the $1177 lows from yesterday's trade that acted as support for the market overnight. For long entry on a day trade I have a "single print" low volume zone from the rally overnight from $1184.6 to $1185.5 that has stronger support from $1178 to 1182.

Sells to Watch:

Copper- Copper is now officially below all of the traded price for the months of March and April as the July contract is now below it's own low of $3.3090 and the weekly front month contract low of $3.2775 for March. Copper has become one of the leading weaknesses among all Commodities as it's relationship to Equities and the rest of the Metal complex has completely disconnected as it has drooped lower. Copper is often referred to as one of the better Equity direction indicators and it is telling a pretty grim tale so far with a reversal below all the trade over the last two months. Despite this moderate drop thus far, Copper still has a lot more bearish fuel in the tank as I still show over 25,000 (17+% of the entire market) outstanding long contracts that are definitely net losers since their addition since the beginning of March. The true question is how much of this money is passive and unmoving despite a drop in prices? I expected more liquidation of these losing long positions thus far, so I am slightly concerned that this is longer term money that is strictly allocated to Copper no matter what. However, this Copper market is not like the Wheat, where prices have barely recovered since The Great Recession and money is willing to sit long and withstand breaks on bigger prospects. Copper was one of the strongest markets on the entire recovery as it mostly outpaced Equities the whole way and open interest is just a smidge off the record breaking all time highs from January. I believe that this fundamental continuation on the recovery trade is being entered in Copper as an opportunity to "buy the dip", but that prices will continue lower and longs with any sort of discretion on where to invest their money will be forced to sell their up to 10% losing investment so far shortly. Daily Stochastics for Copper is entering the extremely oversold area, but still remains in a negative mode. However, the weekly Stochastics provided a fresh sell signal just below overbought territory last week. The next support level for Copper is from $3.20 to $3.22 on it's way towards a likely test of the $2.81 to $2.85 previous low on the weekly chart. For short entry there is a lower volume zone from roughly $3.2950 to 3.31 and I believe that on the longer term trade you can definitely move your stop up to the $3.35 level if not $3.33. Note: You can also use a long gold or long equity position as a hedge on an initial short position for Copper and remove once you have some room on the profit side.

Put on the Radar:

Heating Oil- I have had Heating Oil in the buy section for the last two days, but the fundamental short term Crude picture and price action over the last 24 hours have me spooked on any long entry prospects for the time being. The daily head and shoulders pattern had a breakout of $2.2925 and has a neckline value of $2.2955 today. With the June July Crude Oil spread reaching the critically awful short term demand price of -$3.25 with prospects of continuing lower I believe that the Energy sector will have an extremely difficult time holding prices near the $87 recovery highs as the investment driven buying is way overextended beyond actual demand. While the Gulf Oil Spill may continue to raise open interest in the Energies on future expectations I believe that this lack of short term demand and rally failure yesterday will outweigh any investment in near term Energies. I recommend selling Energy longs for the time being, but if you are stubbornly bullish there is a low volume zone in Heating Oil from $2.3084 to $2.3112 to place an exit stop below. Heating Oil is the best long of the sector I believe still as it continues to gain on Crude and open interest rises daily. I would keep this low volume zone on your radar and if Crude is able to hold it's price level somehow then you can look at getting long again.

Stock Index Head and Shoulders- I am a pretty big believer in the harder they come, the harder they fall principle, so I am more apt to look at selling the Nasdaq on the bearish head and shoulders pattern after it is initiated. The Nasdaq has the largest projection of the Indexes with a breakout neckline value of 1991.5 today and a projection to 1921.25. Second best in my opinion is the S&P 500 with a breakout value of 1175.00 and a projection to 1135.75. I recommend waiting for the breakout on these patterns as Equities have obviously traded their volatile sideways range, but with prices below 1180 on the S&P I predict that the move is likely to happen.

Notes:

Currencies- I have voiced my frustration over the Currencies volatile sideways action over the last few weeks, but it looks like a downside breakout on a number of these ranges is prime to happen today. The Euro has created new lows on it's third leg down move and maintains a projection range from 1.2750 to 1.28 on this move. The Australian Dollar has also traded slightly below it's volatility range from .9100 to .9300 this morning along with the Canadian in it's .9800 to 1.0000 range. The Canadian and Aussie moving below this range is a bearish signal and correlation for Equities and Commodities as the Dollar is finally moving higher on something other than Europe.

July Soybeans- I ran out of time but I have a sneaky daily head and shoulders pattern that projects to $9.56 3/4, so check it out with your own analysis.