Monday, June 21, 2010

Monday 6/21/10 Commodity Ideas

Opening Note:
Friday proved to be a day of odd market action as some early morning allocation led the way higher, but options expiration pressure stalled out the market to see it close nearly even on the day for Equities, but stronger for Commodities. At 8:30 on Friday there was a sizable inflow of new money across the broad market that started the ball rolling as the Metal and Energy Sectors saw the biggest jump in prices. Heading into this morning the big story is that China has eased their Currency policy allowing the Yuan to appreciate slightly against the Dollar. The Macro market is significantly higher this morning based on this news, but I still believe that the jury is out on whether this is a real news item to buy off of long term. With global pressure on China to adjust it's artificially low Currency peg, the country has made this concession heading into the G-20 meeting where they were likely to receive a great deal of further pressure. While some take this Currency move as a vote of confidence from China on the global recovery, it can also be viewed strictly as a move to relieve some of the trade tension. I think China's economists have been the most accurate in policy decisions over the last few years, so I would take a vote of confidence from them as a reliable indicator, but we shall see if this is merely just a concession.

This week there are a number of important economic numbers and the FOMC meeting announcement on Wednesday. I believe there is about a 0.3% chance that the Fed raises rates, so the meeting is likely to be uneventful, but the existing and new home sales numbers Tuesday and Wednesday should be interesting as the housing starts number last Wednesday was way below expectations.

Right now the momentum of the market is up and entry right now should be on the long side for the macro market. The S&P 500 is likely to at least advance to test the 1145 - 1150 range on the 61.8% retracement on the move earlier in the quarter from the top. The daily chart for the S&P also has a projection to 1169 as well on it's bullish cup and handle pattern and supportive Commodity markets like Crude Oil, Australian Dollar, and Silver are maintaining a move higher. I will be using a smaller than normal size for entry right now as the market remains less predictable on a day to day basis right now and I am more interested in setting up for another leg down in the market. Once the S&P 500 meets this 1145 - 1170 range is the time to begin shifting the focus back to the larger bear trend, but for right now I do not recommend fighting the allocation and momentum.

Buys to Watch:

Gold- The fundamental story for Gold right now is very tangled, but technically the market now has a bullish breakout with a new high close and a projection to $1292. The close Friday above the old high trade of $1254.5 produced this bullish cup and handle pattern. The Gold market appears to rally right now just because it can no matter what happens with the rest of the market. While the initial move higher in Gold was on an exodus from the Euro Currency and a run to safety from Equities and other Commodities, the Gold market has maintained it's strength in the face of a rally in these markets that it was used as a hedge against. Current CPI data and other macro indicators are also pointing towards a deflationary move that should have a negative effect on the outright price of Gold. While I believe that the market is over-saturated on a trade where most investors do not know what they are getting themselves into Gold still is one of the better buys out there. For entry I recommend purchasing around the higher volume support near $1257 with a stop below this level. Below $1257 there is a large low volume zone that ranges all the way down to the support near $1245, which may be a good level to purchase near the trendline, but would negate the projection higher. So, I believe you have to step in at this higher level with a tighter stop if you are going to buy for right now.

Nasdaq with S&P 500 indicator- The Nasdaq now has a confirmed bullish breakout above it's consolidation range like the S&P 500 and I believe is now the best buy of the Equity Indices. The Nasdaq has acted as the the strength on the macro rallies over the last 16 months, so I will stick with this trend for long entry. The Nasdaq is already much higher on the day, so you need to be patient, but there is a decent lower volume zone just below today's range thus far for long entry. Between 1915 and 1921.50 there is a low volume gap left over the weekend with higher volume support ranging from 1914.5 to 1908 for stop placement. The Nasdaq has an enormous projection on it's daily chart to 2036, but it is important to keep an eye on the S&P 500 as the leading indicator of the sector for guidance on a Nasdaq position. Once the S&P 500 hits the 1145 - 1170 range it will likely lose momentum and reverse, so this is a good zone to look for taking profits on a Nasdaq long.

Sells to Watch:

Put on the Radar:

Bonds- Bonds have been on the radar for both bullish and bearish moves over the last week, but today it is on the verge of setting off a bearish breakout on it's recent triangle consolidation. The lower consolidation line from the low May 13th to the low June 3rd has a value today of 122.26 with a projection to 116.29. This morning the market has already twice toyed with this breakout level, but has been unable to significantly move below it, so I suggest waiting for today's close on a confirmation of the move prior to entry tomorrow. It is still possible that the market will trade back into it's consolidation triangle today. Also, with the market now trading towards the apex of the triangle and the bottom support trend having a steeper upslope it is less likely that the market actually reaches the pattern's projection.

Crude Oil and Australian Dollar (move Crude front month to August)- I am grouping these two markets again as a market indicator package to keep on your radar. They are also still decent buys, but after a sizable rally are likely near overbought territory and due for a bearish move in the near future. Crude Oil for the August contract has a projection to $82.67 and this morning is struggling with the psychological $80 level. For Crude measuring from the high close to the low close I receive a 50 % retracement value of $80.43 and a 61.8% value of $82.87. Meanwhile the Australian Dollar has a daily chart pattern projection to .8896, but a 61.8% retracement level of .8765, which provided resistance on the highs today. Both markets have been highly correlated to the stock market, so they could provide some insight as to whether the 61.8% level for the S&P 500 will provide topping resistance or if the market will trade along it's pattern projection to 1169.

Notes:

RBOB vs. Heating Oil- On Friday I had this trade in the buys column, but the low volume entry zone I provided was traded through on Friday. Today the market is again trading slightly lower, so I believe it is no longer a good buy and recommend liquidation of long positions.

Copper- The band of resistance I provided for the Copper market from $2.9150 to 2.9350 was obviously violated overnight in a big way on the China news. Any time you mention China and Bull in the same sentence the market jumps on Copper, so this was poor timing for a short in regard to fundamental news. However, it was the action on Friday that initially made me concerned with the short position on the trade. If you look back at a 15 minute chart from Friday you can see that between 8:30 and 9:30 there was an increase in volume as allocation entered the market. This was not a notable size of volume in comparison to some other time frames, but it was if you take into consideration the price movement over this same time frame you can reason that this was large traded size for such a small price range. I was watching the actual trading ladder over this period as a number of 100+ lot offers sat above the market and 1 lot icebergs sat below scooping up and buying any sales from nervous short term traders with such offer size sitting above the market. I estimate that a large player scooped up somewhere around 2,000 - 3,000 contracts in a very tight range while psychologically scaring the market into hitting it's bid. This is clearly a winner for today, and with the Chinese news out I do not believe that you can step into a short in the Copper market as it should be less predictable. I recommend sitting flat in the market for the time being and do not recommend stepping into a long position at these levels.

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