Friday 6/11/10 Commodity Ideas

Opening Note:
It took me a little while to really embrace the idea, but after yesterday's action it is clear to me now that this is not a market that is suitable to trade for the time being. You may have noticed the paring back of trade ideas, which should be a sign to pull back one's participation in the market, but the trade seems to find a way to trick you into "understanding" the move. While support and resistance held up relatively well across the correlated market for the last few weeks, this was not the case yesterday as the S&P 500 decided to repeatedly trade over and under what I believed was an important intermediate level around 1072. Meanwhile, an early morning rally breakout from the recent strength of Crude Oil slowly squandered as it ticked back into it's sideways range despite the strengthening of the rest of the macro market throughout the day.

With the marketplace very correlated at the time being and the leader and laggard of a sector seemingly shifting day to day (Copper was the laggard yesterday, yet the strength this morning) I have decided that I do not want to participate until there is a clear and confirmed move from this sideways action. This basically means until the S&P 500 finds a move below 1040 or above 1103 my participation will be limited to less correlated markets like the Softs and Grains and to confirmed moves on patterns. Right now the best moves are coming on Fear rather than anything else and in my experience I find myself on the wrong end of fear moves too often with my limited risk and size. I have no desire to begin selling rally breakouts and buying market breaks out of consolidation, as experience has taught me that this is an even better way to reduce your trading account. So, I will be sitting on my hands for the time being and recommend the idea to others, especially if you have found yourself getting chopped over the last week. Let the Bulls and the Bears battle it out on this volatile, yet tight range and save your ammo so you are ready to jump back in when a clear winner emerges from the rubble.

Buys to Watch:

Sugar- The Sugar market has basically no correlation to the macro market for the time being, so I am less concerned about entry into the market right now. Sugar continues to be on the verge of a bullish breakout above it's month long consolidation range. A move above 15.75 cents projects to 17.68 with the possibility of a larger continuation on a correction in the oversold market. The daily chart RSI has now rallied above the recent bear market trend range and Stochastics for the weekly chart is now moving out of oversold territory with a positive mode after producing a buy signal 3 weeks ago. However, the weekly chart still remains in a bearish mode overall and the amount of time it is taking for the market to breakout is becoming concerning. Sugar has had ample opportunity over the last three days to rally above it's consolidation range, yet just does not seem to have the steam to complete the move. Prior to entry I now need a confirmed close above the breakout level rather than attempting a purchase the during the initial breakout.

Sells to Watch:

Put on the Radar:

Coffee- Coffee has an enormous breakout rally today. My fundamental knowledge of the Coffee market is non-existent so I plan to do some more research today before looking to enter the market to find out what the story is. However, the market has set off a smaller cup and handle pattern rally out of consolidation that has a projection range from 143.65 to 147.05. Furthermore, the rally today is so substantial that it is toying with a close above a larger consolidation range high of 141.45 that would provide a projection to 152.65 on a test of the highs from December. There is not a great risk reward entry level at the time being, but depending on the close today I will hopefully be able to come back on Monday with an explanation for the rally and a good risk/reward trade idea.

Gold- Gold continues to bounce off of it's bullish trendline on a trade that remains strong mainly on technical support rather than fundamentals for the time being. The trendline I am using on the Gold market daily chart is from the low March 25th to the low April 22nd. This may seem unconventional to those who believe you draw from one low to the next low so there is no violation, but using this trendline actually provides the market support despite some temporary violations. For this line there is no confirmed violation of two lower closes and you actually now have about 10 points of interaction with the market. You can notice the two bounces nearly exactly off of the line over the last two days, at $1218.7 today, as well despite strength in the macro market and a flight from the "run to safety" trade. If you are holding a long position I recommend using this line with two closes below as an exit signal rather than just waiting for the lower line the sits near $1198 today.

Silver- The neckline is at $17.82 today. The fundamentals and correlation to other markets for Silver is unlike anything I have witnessed for the market. Some days it rallies with Gold on the run to safety trade (which I believe it is not) and on other days it rallies with the Equities because it is an industrial metal (which makes more sense to me). Basically there really is nothing much more to say until it violates the head and shoulders neckline or begins a new rally leg. I just believe that when a market rallies no matter which direction the market moves without having a good fundamental story on it's own that something is wrong and it is likely to eventually reverse.

Crude Oil and Australian Dollar- Both markets were nearing their rally breakout levels, but both have failed this morning after a poor retail sales number this morning. Prior to this however, both markets were lower on the day despite most other supportive markets trading higher this morning. This reversal of strength to weakness is a signal to stay out of these markets for the time being, but keep them on your radar as a barometer for movement in the risk trade.

Notes:

Copper- Copper has a low volume zone from 2.8850 to 2.9130 with some stronger resistance from 2.91 to 2.96, but the market action over the last 12 hours has me concerned with trying to hold a short position. While Copper was the weakness among the Commodity markets for the last month it is the strongest market on my board this morning other than Coffee. While it is still possible that this short position trade works I think that the swings in Equities and other markets have made it too risky to trade Copper for the time being. I recommend exiting the market and waiting for the macro picture to become more clear.

Buy Gold vs. Sell Silver- Although the trade had what appeared to be a great setup and risk/reward potential it was quickly dismantled yesterday morning as the differential slammed through the $310 support level. There is not a good story or position in this spread anymore for the time being, so I recommend holding a flat position.