Monday 6/14/10 Commodity Ideas

Opening Note:
This morning the risk trade is again stronger after a higher weekly close last week and a good performance for the stock market on Friday. In Friday's newsletter I warned that the market climate, with sideways volatility that is nearly unpredictable on a daily basis, is a dangerous place for the time being and to move to the sidelines. I still stick by this statement as long as the S&P 500 remains range bound by the 1040 and 1103 levels. However, some of the risk barometer markets like the Australian Dollar and Crude Oil are now testing or have rallied above their own breakout levels. With the S&P 500 also nearing it's own range top it is possible that the short term moratorium on trading the correlated markets may be lifted by tomorrow. Until this time though I still recommend holding off on entry into the market even if there is a pattern breakout like the Australian Dollar. Above 1103 I have a projection for the S&P 500 to 1169, which will provide ample time for later entry on the move even if you have to wait an extra day. The S&P is the overall market indicator for the time being, so I need a confirmation in this market before I am willing to buy.

While I have been bearish to very bearish lately on a fundamental basis I have no problem jumping on the long side of a market rally if that is the direction the technicals say we are going. As the S&P nears the top of it's range I suggest looking for buy side trades on the correlated market for execution on a confirmed macro breakout.

Buys to Watch:

Sugar- The Sugar market remains relatively uncorrelated to the macro market so I have more confidence in entering a position in the market for the time being. On Friday Sugar closed above it's month long consolidation range setting off a bullish cup and handle pattern. The close Friday of 15.83 was just above the breakout level of 15.75 cents providing a projection to 17.68 cents. Right now Sugar does not appear to have an overwhelming amount of bullish momentum (dare I say moving like molasses) as it is only slightly up on the day thus far, but daily Stochastics for the market maintains a positive mode and the daily RSI also appears to now be broken out above the bearish trend range and on the brink of confirming a bullish reversal. Because the market does not have as much bullish momentum as I normally like to see I personally only have 1/4 of my regular position on for the time being and recommend starting off with a reduced entry size and scaling in. Thus far this morning the higher volume support level from 15.82 to 15.85 has provided the lows for the day, but below this level there is a low volume zone from 15.68 to 15.72, which would be a better level for entry on a pullback. Stop placement for the trade should probably be centered around the 15.45 level on the low end of the range of higher volume support below the consolidation breakout.

Sells to Watch:

Put on the Radar:

S&P 500- As I stated in the Opening Note, the S&P 500 has a bullish cup and handle pattern breakout above 1103 that projects a move to 1169. Today there is a high volume resistance zone from 1095 to 1097.50 that has provided the high of the range so far. With some of these risk barometer markets like the Aussie Dollar and Crude Oil already likely holding a move above their consolidation ranges it seems more likely that the S&P will trade above it's own range now. But, I still recommend waiting at least one day for confirmed close above it's own range prior to entry. I do not recommend holding a short position for the time being or trying to fade the market either.

Crude Oil- With a close above $75.72 the Crude Oil market has a projection to $81.93. The market already tested this level two days ago on a failed breakout, but has recovered for another test this morning. Although RSI for the daily chart does maintain a bearish trend range it is now nearing a test of this upper boundary and does have a postivie mode for Stochastics on the same chart. I suggest waiting until a confirmed close higher in the S&P 500 as well as in the Crude market before looking for long entry.

Australian Dollar and Canadian Dollar- Both of these Currency markets tend to move in a correlated manner recently, so I am grouping them together for the time being. The Australian Dollar is a good barometer for the risk trade along with Crude Oil, but the Canadian Dollar may be the better buy of the two with a less volatility. The Australian Dollar is now broken out of it's consolidation range on a bullish cup and handle pattern with a projection to .8896 above the .8448 breakout level. However, although it is much higher today the Canadian actually has a stronger rally pattern chart that already has a confirmed breakout. Above .9669 the Canadian has a projection to .9981 on it's own cup and handle pattern. Like Crude Oil I will be waiting for the Equity markets to show this macro move higher, but these two Currency markets should have the strongest upside, with the Aussie having more potential, but the Canadian being a less risky trade.

Bonds- By connecting the low from May 14th to the low from June 3rd on the daily chart you can see the bearish head and shoulders neckline breakout for the market. Below a value of 122.04 today the market has a projection to 116.07. The market is already substantially lower this morning, but if the Equity Indices do break out of their consolidation range with a rally the Bond market will likely set off this topping pattern.

Notes:

Coffee- I still do not have confirmation on what exactly caused the nearly 10% move in Coffee on Friday, so it will just sit in the notes section today. However, with a close above 141.45 last week the market now has a projection to 152.65, which would test the highs from December. The market did not pullback into the range yet today, but between 142.50 to 144.10 there is a large low volume zone that provides a good opportunity for long entry with some higher volume support below to the breakout close level. I will still do research to find out more about the fundamental story today.