Monday 6/28/10 Commodity Ideas

Opening Note:
After my first vacation on Friday in over 4 months I am back this week and ready to go, but the markets do not look like they have the same vigor. This morning there is a mixed bag of firmer and weaker markets with low volatility overnight that leaves the macro market pretty much at a wash. On Friday the story was higher Commodity markets, which looks like it should have some carryover into this week. Both the Metal, Energy, and some of the Currency Sector now project continuations on their short term rallies, which could give the rest of the macro market a boost as well in some of the laggard markets.

While Equities lagged last week, Crude Oil, Copper, and the rest of the Metal Sector found strength on what could be front running prior to third quarter allocation. While my patience has been tested in the Gold and Silver markets on the "buy the trendline" trade that happens nearly everyday, it does appear that this rally may be extended in preparation for new money flow into these markets. Even some of the Soft Sector like Cocoa and Sugar have begun their own individual rallies on what could be a similar front-run.

The real story this week is Friday's Unemployment Report and I expect the market to be calmer yet still treacherous in advance over the next four days. Wednesday marks the close of the second quarter and with bookkeeping done over the next three days there could be some odd market action as Funds realign their positions. Thursday also starts allocation for the 3rd Quarter, which will be an interesting indicator to see the magnitude of new money that enters the market with more concern among investors lately. With strong support in the S&P 500 nearby at 1040 it is unlikely that there is a catalyst to set off the large bearish move right now so I believe we will see more sideways action and less predictability for a while longer. However, if Unemployment surprises to the downside and 2nd Quarter earnings disappoint the Bearish move could be only weeks away that will set off a string of macro waves lower and liquidation in the market. I still suggest trading with smaller size for the time being and waiting for the larger bearish breakout before stepping on the gas. The choppiness in the market has been high in this sideways range and there is no reason to depreciate your account value on some of these false moves.

Buys to Watch:

Copper- With a close Friday above $3.0490 the Copper market now has a bullish cup and handle pattern that projects to $3.2535. Copper has acted as one of the market strengths over the last week as some bullish fundamentals abroad have counteracted the bearish home building data in the U.S. Some of this rally may also be tied to front running the potential allocation coming for the 3rd Quarter in the market. For initial entry today I believe that you can purchase against some higher volume support from the breakout level with a stop loss place near the $3.0450 level. The market had an explosive day on Friday that left a large range of low volume trade that extends all the way back to $3.01, so if this $3.045 level does not hold as it has overnight then their will likely be a test of $3. As a note of caution, Stochastics for the daily chart is extending near overbought territory, but is not in danger of producing a sell signal for the time being. The $3.25 projection is also on the high end of some of the technical projections, with a second leg advance for the market providing projections ranging from $3.17 - $3.20 as a level to also look to take profits if the market gives signals that momentum is slowing. Still, Copper is my best buy for the time being and has a good risk/reward on entry today.

Bonds- Bond prices experienced a temporary decline over Thursday, but the market closes have maintained the cup and handle pattern breakout above 125.00 with a projection to 127.17 and a triangle breakout with a less reliable projection to the 129 handle. The market has struggled with some of the higher volume resistance from it's earlier spike high on the rally near the 126 level, but will likely now have the rally momentum to continue higher above these levels. For entry today the higher volume support near 125.09 has provided the lower range on prices, with this being a good level to place a stop below on a purchase on a pullback. Bonds have continued to rally overall despite macro rallies or declines, but has been a little more choppy lately, so I rate this Bond trade as only the second best for the time being.

Crude Oil- This trade is strictly for today on a further price dip because the technical setup is spectacular on the market profile and other technicals. There is a low volume range from Friday's trade ranging from $77.60 to $78.40 with higher volume support from $77.48 to $77.60. If prices dip below $78.00 then I believe that this is a good buy today against this support as the market is unlikely to have enough momentum to trade lower for the time being. The potential hurricane's path has now been projected more towards Texas and is unlikely to affect much of the cleanup in the Gulf, which is why Crude has declined overnight. However, the technicals on the daily chart remain bullish with a move to $82 still on the radar. This is a good lower risk trade though that should be held for about 1 1/2 days as it is likely to rally off of this support.

Sells to Watch:

Put on the Radar:

Japanese Yen- I mentioned this trade on Thursday as well, but on Friday the market finally made a close above the 112.00 breakout level on the large bullish head and shoulders pattern. Using a continuous daily chart with rollover at expiration draw necklines from the close March 3rd and High May 5th to the May 20th high and May 21st open to receive a range of breakout values with the high at 112.00. This pattern projects to the 119 price level, but when dealing with a bullish stance on the Yen you need to take into account that the Japanese Government has repeatedly intervened near the 114 and 115 levels to deflate there currency to keep exports competitive globally. Because the pattern is large I am waiting for a second close above 112 today and looking for entry on the trade tomorrow.


Notes:

Gold and Silver- On Thursday I listed Silver in my Sells to Watch section, but after an early morning attempt at violating it's bullish support line the market found a strong short covering rally that continued Friday. This rally coincided with a rally in Gold that carried the market back above it's own support line. In my opinion the Gold and Silver markets are bordering on a large manipulation game along their support trends, which before you laugh I suggest looking up the February 5th whistle blower on Silver market manipulation by major trading firms. It appears that there may be some front running on 3rd Quarter allocation in these markets and with the Metal Sector performing well this year there could be some more allocation coming up in these markets. However, Gold continues to reject any rally legs higher along with Silver, so I continue to believe that neither is a good outright long position to hold. With open interest in the markets still near all time highs I will be keeping a large liquidation on my radar, but will wait for a confirmation on a bearish breakout prior to attempting a short position going forward.