Wednesday 5/12/10 Commodity Ideas

Opening Note:
After beginning yesterday lower, Equities were able to mount a rally throughout the morning, but eventually faded in the afternoon to close just above their opening values. The Stock Indices failed after their first encounter with some strong resistance and high volume trade from last Wednesday and Thursday prior to the crash in the late afternoon last Thursday. Yesterday showed a significant drop in the daily range for Equities and was the lowest magnitude move from the previous day to the close that we have seen in May as well. The extreme spike in volatility this month may finally be calming as the European bailout package has temporarily quelled the fear in the market. While Gold has gone parabolic on its rally the last couple days as a run to safety I believe that this may mean a top in the Gold market today, at least temporarily, as the Euro has stabilized and volatility decreased.

I am having a difficult time finding a compelling fundamental argument from a macro-picture professional (not an equity trader on TV) right now that paints a pretty picture on the future as more debt is thrown at existing bad debt as a solution to the global problem. While it is possible that a short term rally could find a way to make new highs in the market again this Summer, I feel it is unlikely as I believe we have already shifted out of the bull rally of the last 14 months. I have correlated major resistance levels in the Equity Indices that were touched yesterday, but should continue to serve as a short term top on the market. As long as these resistance levels hold in the short term I am a seller of Equities and supportive Commodity markets. I am still cautious of volatility and still will be keeping trade suggestions on the radar until I find a more reliable trade.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Stock Indices Resistance- The correlated high volume resistance zones that I have for the Indices are as follows: Dow; 10,834 - 10,892 S&P 500; 1164.50 - 1172 Nasdaq; 1958 - 1968.50. Index prices rallied into the lower half of these zones yesterday, but did not really threaten the tops of the zones. I would not be surprised if there is another attempt over the next two days at these levels though. Overnight Equities have rallied since the European open, but at more of a crawling pace than we are used to lately. I do not believe that they will have the steam to continue higher to threaten these levels today, but I would wait for values to climb into the resistance before entering a short position.

Gold- Gold is now in the parabolic stage of it's rally as investors are jumping over the cliff to chase it higher. I have finally heard tons of chatter about the Gold market on media networks with strong buy recommendations now going out as Gold reaches the 17th day on it's 3rd leg rally move. My original projection range for this third leg rally was from $1208 to $1244, with the top of this range now being met this morning with a complimentary spike above the psychological $1245 level already. With the decrease in volatility and stabilization of the Euro and other weak markets I believe that the fundamental story for a run to safety is drying up and so should the gold rally. Add to this that most moves revolve around the 20 day average and the fact that Gold has reached all of it's technical projections and I recommend liquidating outright Gold positions, but still support owning Gold versus riskier assets or other Commodity shorts. As a final note, the RSI on the daily chart for Gold appears to be creating a double top reversal at the overbought 75 level that signals a potential reversal to a bear move.

Buy Gold/ Sell Silver (Gold - Silver/2)- I believe that this is the best trade out there right now as the Silver market has violently followed the Gold on it's rally since Friday. When looking at the daily chart you can easily notice the outstanding amount of volatility over the last two weeks, which is mostly due to the swings in the Silver market. As the macro market began to fall in the beginning of last week Silver suffered a large break of nearly $1.80 on Tuesday and Wednesday, but miraculously recovered on Friday beginning a $2.50 rally from it's base to today. As I have harped the last couple days, Silver is not usually used as a store of value and suffers a decline in price, like it did early last week, when the macro market weakens along with Metals like Copper. I can understand the run to Silver as those looking for safety see Gold at all time highs and are squeamish to buy new highs, but this is an incorrect assumption about the market that I believe should have a strong correction. The Gold/Silver Ratio has a strong base built up between the 235 and 251 level that was tested yesterday by a 255 close, but has strengthened a bit today off of this support. I am looking to purchase a dip below the 260 level as I believe a correction to 300 if not 320 is not far away as Silver should experience a larger break if Gold forms a top.

Notes:

Crude Oil- Note that the June - July Crude spread is now sitting at -$4.00 and that the July - Aug spread has widened to a low of -$2.25 this morning. The next monthly contango is already widening to an abnormally bearish level for supply and demand showing that the fundamental story for Crude continues to be weak. Crude has a tendency, especially over the last year, to completely ignore this fundamental story though and trade along with the macro story. Crude being the weakest performer across the market over the last week and a half would make me awfully timid if I was holding a large long position in the market. My early open interest numbers were incorrect yesterday as they were later revised to a slight liquidation later, but there are still well over 150,000 contracts holding at least a $6 loser at the time being. If Crude finds a close below the $75 level I still hold out hope that there could be a wave of long liquidation in the market providing a good short opportunity.

Corn- On a rally breakout from it's consolidation range I have a projection range on the July Corn market from $3.85 1/2 to $3.88 with the swing high from March 18th providing resistance at 3.87 1/2. With a strong performance overnight and this morning it may be hard to take advantage of the move on long entry, but this is a good range to take profits if you are long.

Soybeans- July Soybeans have "single prints" on the market profile until the $9.71 3/4 level and a double print profile above that to $9.75. With some stronger initial resistance above this from $9.76 to 9.78 I believe that this stronger resistance is a good level to sell against on the corrective rally with the Soybean complex still in a larger bearish mode.