Friday, June 18, 2010

Friday 6/18/10 Commodity Ideas

Opening Note:
Despite the bearish CPI and Jobless Claims numbers yesterday that led to an early tumble, the Equity markets were able to recover with some late afternoon allocation. This morning the markets are fairly quiet with Crude Oil and Copper sticking their heads out as the losers and no real winners on my board yet today (actually, Gold just ran stops...so it's the winner). Today is options expiration for Equities, so we can expect the likelihood of less volatility and also the possible pull of the S&P 500 towards the high volume 1100 level.

In one of my comment sections in yesterday's letter I discussed how I was seeing money flow into both risk and risk aversion assets at the same time this week. After discussions with a number of people yesterday I have come to the conclusion that the story right now is just money chasing a yield wherever it can. As Bond yields decrease money is flowing into the Equity and Commodity markets, which is likely helping to boost some of these markets for the time being. The question will be what happens if the yield curve continues to flatten and we come under deflationary and contraction pressures in the macro market. Some Fixed Income groups are beginning to purchase Equities in the hopes that they will provide a better return, but this could be a conundrum. While the Equity and Commodity markets are performing better for the time being after finding technical support and new allocation the interest rate markets are beginning to look like yields could continue lower over an extended period of time, which signals another recessionary move. For the time being I recommend keeping the Bonds, Gold, and S&P 500 chart up on your screens to compare them on a daily basis to watch where the money is going, as the relationship between these markets has moved contrary to earlier trade this year.

I am slightly conflicted this morning about where the market is heading next week. While there are some stronger projections in the Equity Indices the supportive correlated markets like the Australian Dollar, Crude Oil, and the Euro appear to be tiring. Equities have also floundered over the last two days, but still manage to maintain a close above their critical support levels if there is to be any continuation. However, many of these markets are sitting in overbought territory on their daily chart Stochastics and also maintain a bear trend range in their RSI. I am not willing to make a large bet either way, but I still believe that the market has a little more rally next week as the Equities are hanging tough. I still maintain that the market is in a large bear move that will last over the next four months at least and the time is soon coming to again position yourself for another leg down in the macro market.

Buys to Watch:

RBOB vs. Crude Oil- To start, I would like to note that the moves between these energy markets, like the Grains and other sectors, are driven by fundamentals among the actual production of the Commodities (think like the Soybean Crush). So, with very little knowledge of the actual story I recommend doing some research prior to entry as I will do myself. The RBOB vs. Crude Oil spread (easily viewed on CQG symbol RBECLE) has a bullish cup and handle breakout above the 1344 level with a projection to 1605. There is a good low volume area from 1336 to 1384 for entry on a pullback today, but with the market still much higher there should be plenty of time to place some calls to your Energy trading friends. The Heating Oil vs. Crude Oil spread also rallied much higher yesterday on a similar pattern and actually had more strength yesterday. However, the Heat has already reached it's projection so the RBOB Crack Spread is the one to focus on now. The Crack Spreads are a market that I am adding to my repertoire and learning more about, but I recommend using smaller size when trading them as I will be doing myself due to my unfamiliarity with the market.

Sells to Watch:

Copper- Copper has been the biggest dog of any market over the last three days after the bearish housing data on Wednesday and CPI number on Thursday. This morning it is again the laggard on my entire board and has now re-initiated the large topping pattern that is best described as a bearish head and shoulders. To form the neckline draw a trendline from the lows Feb. 5th to both the lows on May 17th and May 20th. What you have is a small range neckline with a band of resistance now today at the breakout level between $2.9150 and 2.9350 with a pattern projection range from $2.12 to $2.32. When looking at the daily chart you should also make sure to take note of the Open Interest for the market. On this recent macro bounce there has been new inflows into the Copper market on what I have heard TV analysts coin as "the Copper market is cheap" and "this is a good way to play the emerging market trade". However, CPI is saying deflation and home building looks like it may stall as the housing market may not have yet found a bottom. The majority of the money that has purchased Copper over the last few weeks is now holding a losing position in the worst looking market out there. I do not think that this is a "fake-out breakout" this time, so I personally am short already and planning on adding at proper levels.

Today there is a low volume zone from 2.8770 to 2.8905 for short entry with some higher volume resistance from 2.90 up to the neckline band. For today I am keeping my stop above this band, but with confirmation of a lower close today I will begin to move it lower. I do not believe that the Equity markets will be able to have a strong rally today with expiration, but Copper tends to move along with the Equities, even erroneously sometimes when it should not. Keep in mind that if the Equities really look like they are going to take off you can always use either Equities or either Gold or Crude Oil as a temporary hedge against the short Copper position.

Put on the Radar:

S&P 500 and Nasdaq- I do not recommend entering a long position in the Equity markets for today, so they will stay on the radar, but will move to the buys next week as long as today's close is acceptable. The S&P 500 has maintained a close above it's 1103 breakout level, with a projection to 1169, and has held tough in the face of some bearish numbers and poor action from outside markets. The Nasdaq now has also closed above it's own 1902.50 breakout level on the larger projection to 2036. The Nasdaq has outperformed the other Indices throughout the 14 month rally, so I believe it will again outperform to the upside and is the best buy. Today there is a higher volume support level at 1900 in the Nasdaq and a lower volume zone from 1895 - 1890 for good buy levels. For today I would like to just watch these though and wait for entry on Monday if they are able to support the market. Note of Caution: RSI for all of the Indices on their daily chart remains in a bearish range and the fast line on the daily Stochastics has now entered overbought territory, but is not on the verge of a sell signal. Also keep in mind that for the S&P 500 the 61.8% retracement level on the recent break is between 1145 - 1150 depending on how you measure it. This is an important level as the Bears will begin initiating shorts around this level, which may limit the upside potential of the market.

Bonds- Bonds are stuck in no-man's land right now. The bearish head and shoulders pattern that I have had on the radar for the last week still has not been initiated despite a macro market rally that "should" have set it off under the previous relationship scenario. However, the Bond market has remained very strong under the current market conditions and now has the possibility of setting off a bullish pattern instead. The bearish head and shoulders neckline from the low May 13th to the low June 3rd has a breakout level today of 122.22 that will likely not come into play today. However, the bullish cup and handle pattern for the market has a breakout level of 125.00 and a projection to 127.17. Although I know a number of fundamental fixed income traders that are skeptical of a move higher in Bonds, my weekly chart now has a confirmed breakout on RSI into a bullish mode and some patterns are now in play that project a rally to the 133 price level. With the recent strength I am more focused on the upside for right now as I believe it is a more likely move, but there should be a trade in the market in the near future.

Crude Oil- The Crude Oil market looked like a strength for the early part of the week, but after the poor CPI number yesterday the market reversed hard (although I'm not sure this is the reason). The upsloping recent daily chart trendline for the market at $76.75 was violated yesterday indicating further weakness. However, there is a final low volume zone from $75.30 - $75.52 with higher volume support at 75.15 for a last ditch effort on a purchase. This zone was nearly entered this morning and has supported the market thus far. If Crude is able to find further strength today then I would continue to look at the market as a buy for the time being despite it's poor action yesterday. Below $75.15 I would definitely give up on being a Crude Bull as the daily RSI is still in a bearish mode and Stochastics is a few ticks away from producing a sell signal near it's overbought territory.

Notes:

Gold- I have repeatedly ranted about my dislike for the purchase of outright Gold, but this morning the market has finally rallied above the $1250 level with some conviction. If the market is able to rally and hold above $1260 then I have a projection to $1292. I still believe that it is an over-saturated market without a real fundamental story other than deflation and a gut reaction run to safety. I still have a large move in the market back to the $1000 to $1050 range on my horizon, but to $1292 first it looks like.

Foreign Currencies- The British Pound, Canadian Dollar, and Australian Dollar all have nice bullish projections and are the best buys on the Equity and macro rally if it continues. The leader/laggard continues to shift daily, so picking one is difficult. If you would like to get long the Currencies it may not be a bad idea to do a blend of these.

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