Tuesday 5/5/10 Commodity Ideas

Opening Note:
The volatile swings in the range bound market over the last two weeks finally concluded yesterday with a decisive reversal breakout signifying a top on the market at least for the short term. Nearly every supportive Commodity was lower on the day including even Gold with Crude Oil, Silver, Nasdaq and Euro leading the way down among the sectors. Although there was a slight rally yesterday afternoon to close a little off of the lows, the bounce was minimal and almost my entire board of supportive Commodities is red this morning. One of the biggest questions that will decide the size of this break is how much of this money is strictly long term and passive? While I can already see liquidation beginning in the extremely caught Copper market I was also nearly as concerned about the Crude Oil market a week ago. Like Copper there were massive amounts of long positions added since March and with prices just slightly lower all of these longs become net losers, which could fuel another liquidation break. While these Commodity markets are the most alarming thus far, if you put the Crude Oil or Copper chart up against any of the Stock Indexes you will see that as the strength these Equity markets were driven much higher and faster than the Commodities. Whether or not this is money that scares or has the opportunity to liquidate will drive how far Equities fall, but yesterday's break was minuscule compared to the amount that it would need to fall to catch up with some of the most correlated Commodities at or near their March lows. Because I have a number of bearish projections that are in the midst of their pattern or just beginning I believe that this is a break that is beginning a 20 day move to the downside. I recommend selling rallies in supportive Commodities for the time being.

Buys to Watch:

Gold/Silver Ratio- (Gold - Silver/2) While I do not recommend long entry on this position currently I am placing it here for position management on the mid-morning trade idea and because it is a great spread for playing continued downside performance on the market. The trade suggestion yesterday went out when the market was trading near the 270 level on the cup and handle breakout above 265 that had a projection to 290. Last night the market traded to the 290 level around 7:30 p.m., but unless you were sitting at your computer you likely did not have the ability to exit. The market proceeded to break to around the 278 level overnight, but has rallied back to around 285 this morning. I believe that it is likely that the market travels back to 290 today before it reaches 278, so you can use this as a stop loss or just take profits currently. I also believe that having a small position in this spread is not a bad idea if you are trading longer term as I believe it has much more bullish momentum over the next few weeks. Note: For those of you unfamiliar with the Gold/Silver Ratio I look at the 265 level, for example, as $265 in the Gold market because this is how the spread ticks dollar-wise. So, this move from 270 to 290 using 1 long Gold and 1 short Silver is equal to a $20 Gold move, or $2000 per 1 lot.
** After I wrote this paragraph the spread has rallied to 300 after the Metal open...good thing I send the letter around 8...I recommend taking profits on the market short term now, but to look for long entry on pullbacks.

Sells to Watch:

Stock Indexes (Nasdaq)- The Nasdaq has been the worst performer of the Equity sector over the last few days as the bearish head and shoulder patterns across all of the indexes have set in motion. The Nasdaq had a breakout value of 1991.5 and maintains a projection to 1921.25. The Nasdaq does have some resistance near the 1970 level, which held the highs for the market overnight. However, there really is not much good resistance again until the 1991 level. With the market already lower on the day I believe that you can move your buy stop to the 1970 level as I believe that there should be bearish continuation over the day. The S&P 500 pattern had a breakout value of 1775 and has a projection to 1135.75. The low volume zone from 1174 to 1176.75 acted as resistance for a high on the market range today and I believe can now be used as a buy stop on the larger move. With fast markets and few obvious support and resistance points being provided on the continuation I believe using a 15 minute chart for entry is the best method for the time being as with the markets already lower I do not have great points of entry. All of these projections are initial projections as well and I believe that the prospects for continuation below these levels is fairly high.

Copper- I do not usually implore people to hold a trade if they have a winner, as exit is a personal decision, but that is how strongly I feel about the short Copper right now and how caught I believe the long market participants are. The initial open interest report last evening only showed another couple thousand contracts liquidated, but this number will likely increase when the definitive reports are released. Going off this initial number there are still over 21,000 outstanding longs (out of 145,000 total) that are holding a position that they entered at a price at least above $3.2775. Early this morning there was a wave of liquidation across the market making Copper one of the worst Commodities on my board this morning. I still believe that Copper is heading for a test of it's lows from February in the $2.81 to $2.85 range and with the move this morning you can lower your longer term buy stop to just above the $3.1760 level. A market rally above this level would likely continue into another good low volume reversal sell zone between $3.20 and $3.22 for a short position re-initiation. This market is just beginning this liquidation wave, as it took much longer to initiate than I expected, so I recommend staying short the market despite the huge sell off over the last two weeks.

Put on the Radar:

Sell Crude Oil- The nearby June-July spread is awful signifying poor short term demand in a market that I believe has been significantly propped up by investment above the fundamental supply and demand prices. Like the Copper I expressed concern a week ago about the large amount of open interest pouring into the market that was adding to a net-losing position on the fundamental recovery and risk trade hopes. The initial open interest report for Crude Oil again showed an increase in open interest yesterday (which I believe will be adjusted lower) making the total nearly 200,000 longs that have entered the market since March 30th that are all holding losing positions. This looks like a market like the Copper that is setting up severe punishment for those following the buy the dip and buy the sell signal trade and I expect a wave of discretionary money long liquidation. Below $78 prices are well below the range from March and I believe that a test of $70 is very likely, so I recommend continuing to sell rallies despite the large break.

Notes:

Gold- Gold is no longer a good outright position as a long after my stop level of $1177 was hit yesterday as well as a number of others below this level. Gold is the best market to use as a long hedge or spread to buy against weakness like Silver to better hold the position. I do not recommend purchasing outright Gold for right now.

Bonds- Yesterday I suggested a sell the Equities and sell the Fixed Incomes relationship trade, that I still believe could be profitable, but the Bond market now has a bullish cup and handle breakout on it's weekly chart. The cup and handle pattern had a breakout range from 119.18 to 119.28 and has a projection range to 124.20 to 125.08. Although the rally in the Bonds has not impressed me much in relation to the stock market break I still recommend trading outright Bonds from the long side.

Currencies- Just when I really give up on the Currencies and their volatile range do they really start kicking into gear on a lower continuation. Both the Canadian and Australian Dollar have broken out of their consolidation range and respectively have projections to .9626 and .8884. Both of these Currencies are highly correlated to Commodity prices and have been the strengths on the economic recovery over the last year. I take this reversal in direction as an indication that this macro break is not just a European story anymore, but rather a global issue. I still have a third leg down projection on the Euro from it's initial move from 1.2750 to 1.28, but this projection is beginning to look rather small compared to the move that I believe is still in it's initial stages. I recommend continuing to sell rallies in the Euro through this third leg projection as it will likely extend further. Finally, I have a projection of 85.25 in the Dollar Index based on the daily head and shoulders pattern that was set off yesterday. The Dollar Index is finally rallying based off the decline of Currencies other than just the weak Euro, Franc and Pound. This shows great strength and an actually tighter correlation to the Commodity and Equity markets.