Opening Note:
Equities yesterday found a tighter range compared to more recent action as the market rebounded mid-day to settle just below my breakout point on the daily chart for the S&P 500. While Equities ended up rather quiet it was weakness in the Metal Sector and strength in the Energy Sector that took center stage in the macro picture. Following the new Australian mining tax and downgrades on expectations from Freeport-McMoran the entire Metal sector found a weaker trade as a fundamental story emerged to help form the bearish top in the Metal sector I have speculated about for a week. Meanwhile, the Energy Sector was boosted by bullish stocks reports and an oversold marketplace that was begging for a rally. These two slightly correlated sectors send mixed signals in their direction, but other than Gold, the Metal Sector is usually more correlated to macro moves and can be used as a good indicator prior to a macro move. I believe that Energies could see more rally bounce, but if Silver and Copper breakout on their massive topping patterns then I believe that it is just a matter of time before the rest of the macro world follows.
As I stated yesterday I believe that there is a fork in the road today, but with both paths likely leading to the eventual bearish breakout on a large macro top with a significant downside move and deflationary trade to follow. Equities are sitting very close to their breakouts this morning, so it seems more likely to me at the time being that we could see a small rally today after the number. I personally will jump on the rally in Equities and Crude if it occurs, but with a tighter leash on my stop and limited expectations on the rally to my projections. However, if this rally does not occur today I would take this as a very bearish signal and recommend preparing short positions with the Metals being the first markets to jump into. There is a wide range of estimates on the Unemployment number with many being revised higher over the last couple days. It is possible that the market is already pricing in a huge number and the trade could turn into a buy the rumor and sell the fact situation. Below 1040 on the S&P 500 I have a projection range from 865 - 900 with the macro market sliding with he Equities.
**7am Note- Since I began writing this letter Equities, Commodities, and Currencies have all experienced a volatile price drop. This is odd action in my experience prior to an Unemployment number. The Euro is leading the way lower as it has just made new lows. I am getting a very bearish vibe from this action as longs are running for cover prior to the number. I now expect that we could see a collapse after the number if it is now extraordinarily high.
Buys to Watch:
Natural Gas- With a bullish stocks number and increased market interest following the Gulf Oil Spill, Natural Gas had a bullish breakout above it's consolidation range yesterday. The breakout level of $4.587 has a projection to $5.138. With the daily RSI for the chart also now broken out of its bear market range the momentum indicators are also showing Nat. Gas as a buy. There is a nice "single print" low volume area from 4.610 to 4.630 with some higher volume support near 4.588 and more below from 4.564 to 4.574 for stop placement on the long entry. However, below this level the market would negate it's bullish consolidation breakout and would likely travel to the next "single print" low volume area of support from 4.474 to 4.530, which would not be a good place for entry at the time.
Sells to Watch:
Cotton- Despite coming into the day a bit higher Cotton was able to again close on it's lows as it approaches the 78 cent level. The bearish consolidation breakout had a breakout value of 80.13 and a projection on the head and shoulders pattern to 72.66. For entry today there is a minuscule low volume area at 78.78 with mixed higher volume resistance above to 79.16 for entry. However, there is some higher volume trade near the 78.60 level that has already created a barrier on the highs in the market today. If you "need" to get into this market then I would recommend a smaller contract size fade of this 78.60 level on a rally, but prefer waiting for a rally to the 78.78 level despite the possibility of not getting filled.
Silver- Like I stated in the Opening Note, the fundamental story of mining taxes has sent the overbought Silver lower on the right shoulder of the head and shoulders topping pattern. For the last two days I have listed Silver in the sell section with a caution label as a sale against the higher volume resistance from $18.54 to 18.64. This high volume zone held beautifully as resistance on the formation of this right shoulder, with a good opportunity to get in even yesterday at $18.40, and has now pushed Silver nearly to it's breakout today. The large bearish head and shoulders pattern has a breakout today of $17.685 with a projection to $15.085. Stochastics put out a sell signal on the market yesterday as well. Gold also has a similar head and shoulders pattern that is forming after the violation of a significant trendline overnight. The Gold has a breakout level of $1176.6 today with a projection to $1088.9. Equities having a make or break day today could effect the Precious Metals, but they have moved lower lately on macro strength as well as weakness because the are overcrowded trades. So, keep an eye on the Metals price action in relation to Equities to make the call on whether to stick with the trade or not after they have broken out.
Copper- Yesterday Copper had a downside breakout on the continuation triangle pattern on the daily chart. Although the market mounted a late day rally on Equity strength yesterday the Copper is now one of the weaker markets again on my board. It is now very close to the very large topping pattern breakout level of $2.9075 today that has a projection range from $2.10 to $2.32. I am now using the base trendline on the triangle pattern at $3.01 today as a stop on a short position. I recommend initiating a full position short after confirmation on the large breakout for Copper as the market is historically still near all time highs for open interest and should have a massive liquidation of long positions. I also still like buying Gold vs. Selling Copper as a hedged trade that I will now group with the Copper. Please refer to my blog and yesterday's letter for an explanation on this ratio spread.
Australian Dollar- The Aussie is in the midst of a bearish cup and handle pattern on it's weekly chart with a breakout value of .8547 and a projection to .7784. However, the market has set up a base on it's daily chart to rally off of for the last week and a half making it a difficult short to hold on to. The base trendline on this chart has a value of .8412 today, which created the lows overnight, but has been rejected this morning as the Aussie has tumbled since 6 AM. The Aussie continues to show weaker action over the last three days in comparison to many other correlated markets so I believe it is fair game to get back in short if this move below this trendline is held after the Unemployment number. However, if the Equities do find a significant rally then it is likely that the Aussie will follow. In this case I have a cup and handle rally pattern for the market with a breakout value of .8537 that has a projection to .8809.
Put on the Radar:
Equity Indices Rally Projections- The S&P 500 is the best indicator for the Equity Sector right now, so I am keying all of my trade entries and exits off of the market. For execution if the S&P does breakout today on a rally I prefer to enter in the stronger Nasdaq market or may use a 50/50 blend of the two markets. The Nasdaq projection is also based off of it's own chart, but likely has a stronger rally if the S&P begins it's pattern. The projections are as follows:
S&P 500- Above 1106.75 to 1146.25
Dow- Above 10,277 to 10,582
Nasdaq- Above 1874.25 to 1924.25
Crude Oil- Crude Oil has a rally projection of $79.80 above $75.72. I believe Crude is one of the better buys if the stock market is able to rally above it's own breakout.
Notes:
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