Wednesday 5/19/10 Commodity Ideas

Opening Note:
Yesterday morning the low volume zone from 1140.25 to 1144 in the S&P 500 acted as a top for the second day in a row on the stock market open as Equities reversed lower after a nearly full day rally. While I was moved to believe that the market had a stronger possibility of continuing higher yesterday, this was clearly not the case as supportive markets tumbled after the U.S. open and into this morning after this resistance level held. The fact that this corrective rally on the bear market was less than a full day in length time wise shows weakness for any bullish case. Furthermore, the Commodities I listed as evidence for a short term base like Crude and the Euro again tumbled yesterday with the Euro falling below the major support from the it's lows in '08.

Now on day 12 of the recent bear market I expect that we have at least another week and some change on this volatile drop in prices, with the "Flash Forward" spike lows looking like a target for Equities on the move lower. The weekly chart bullish trend for the stock market is also now testing it's limits as the RSI indicator is testing the lows on the range of this bullish trend that could signal a shift to a weekly bear market soon. I continue to recommend selling rallies in supportive Commodities at least for the next week.

Buys to Watch:

Sells to Watch:

Australian Dollar- Like most of the markets that showed strength on the recovery over the last year it was only a matter of time before the Aussie Dollar gave in to the bearish pressure. Money chased the Currency higher on the inflation and recovery trade, but the weekly chart has finally caved in with a break below the swing lows from February on the weekly chart. In what is very close to a double top pattern on the weekly chart the Aussie broke below the breakout level of .8547 this morning resulting in a projection to .7764. Because this move is on the weekly chart, confirmation of the pattern will not result for a number of days. However, with the macro picture continuing to weaken I believe that you can step into some shorts for the market on rally pullbacks. Right now I have .8500 as a good level to execute an initial short on a pullback towards the breakout level with .8526 - .8536 having some minor resistance to place a stop above. Otherwise, explore the June Puts that have 16 days until expiration for less risky entry.

Crude Oil and Copper Flag Patterns- I am grouping these two markets together today because they have been two of the worst performing Commodities as of late, but I do not have great nearby entry levels on a short position. I was looking for a rally yesterday in Crude into the mid $76 area for the opportunity to sell, but this area was never reached. However, with a flag continuation pattern lower for Crude that projects to $70 for the July contract (that I speculate has the strong possibility on a continuation to $60 within the next 2 months) I still am looking for short entry on Crude. There is a lower volume traded area from $72.94 to $73.36 with some higher volume trade at $73.75 that should act as resistance if Crude is able to form a rally.

For Copper I am still using the flag pattern on the July contract that projects to $2.67. I am focused on the $3.0850 to $3.1010 level with resistance near $3.1250 for entry. Although the market came close to this level on the rally yesterday, it was not entered and no new entry levels were created as of yet. Entry on this trade can be made on a 15 or 60 minute chart reversal though as well. Be aware that Copper has found support just above the $2.90 level on multiple occasions now, so a break through this level could be more difficult.

S&P 500 (or other Stock Indices)- The S&P appears to be the middle man and best indicator of the Stock Indices for right now, so I suggest trading it over the others. With yesterday's break a buildup of trade was left above the 1130 level, which I now am using as the new strong resistance level and a good area to short the market against. Keep in mind the "Flash Forward" level of 1056 as a potential projection for the bearish move. For the Dow I also have a similar level to the S&P at 10,560 that should act as strong resistance with a trade buildup above it. For the Dow this "Flash" level is 9,840. Lastly, the Nasdaq continues to trade all over the board as the strength one day and the weakness the next, so I am waiting for more continuity before using this market as an Equity short. The Nasdaq was the best performer on the corrective rally over the last year and I often like to isolate previous strengths (ie. Copper, Aussie Dollar) as the better shorts on macro moves lower, but the Nasdaq needs to show consistency.

Put on the Radar:

Palladium- Palladium is one of the thinner markets that I follow, so take this into account if you decide to enter the market and adjust your size accordingly. First it is necessary to look at a weekly chart of Palladium and see how large the rally in the market has been since December of '08. Palladium has outperformed nearly every market that experienced a significant break on the recovery and it has done so on all time levels of open interest that can be attributed to the entry of an ETF into the market. Now looking at the daily chart you can see the bearish cup and handle pattern with a breakout level of $485 today that has a projection to $420. I think it is a good idea to wait another day before entry and to use caution as the market trades thin. Another option I was exploring is using Platinum (another strong, but thin market on the recovery) as a hedge against the Palladium as the differential chart between the two has a similar move with Palladium leading the way lower.

July Soybeans- July Soybeans officially have a projection to $8.58, but with Corn fundamentals pulling the market higher and little action in the Grain complex lately it is turning into a molasses trade. July Beans only have significant support levels at $9.30 and $9.20 nearby, so the trade may accelerate below. However, with much of the macro market rolling with directional volatility I believe that Beans should be put on the back burner of markets to trade for the time being.

Notes:

Natural Gas- As I cautioned yesterday, the Natural Gas market can be volatile for the price that it is at and acts spiky with a number of failed reversals. This happened again yesterday as the bullish breakout from the market's sideways range was rejected with a close below $4.424 on another fake out. Always wait at least a day for confirmation on the Natural Gas for the time being as the fundamental picture for the Commodity is still very bearish.

Euro Currency Monthly Breakout- The Euro has temporarily set off a monthly bearish cup and handle pattern with a move below the support and swing lows from November of '08. Below 1.2326 the market projects to .9508, which takes the Euro back to levels near it's inception against the U.S. Dollar. There is plenty of speculation that the Euro will outright fail, but I am not over-excited to jump on this bandwagon just yet. With this being a monthly pattern you need to wait until at least the end of May for the initial breakout and until the end of June for confirmation and there is a lot that could happen in between.