Thursday 6/17/10 Commodity Ideas

Opening Note:

**I had too many comments and notes this morning and very few trade ideas so the newsletter took on a different format. Just for today and back to the norm tomorrow.

Intro
Like I expected yesterday, the Equity markets were able to recover after an early morning falter with the S&P 500 posting another close above the 1103 consolidation high confirming a bullish reversal and move higher for the market. The S&P 500 now has a projection to 1069 with the Energies, Foreign Currencies and these Equity markets now leading the way with the highest potential reward for a long position. The macro market found strength overnight on the European open with most of the supportive markets now trading higher on the day. Although I still believe that buying this rally is a good short term trade, I am acutely aware that the market is throwing up some HUGE red flags that are saying that this is a short lived rally in a large bear move.

Computer Programs and the Market
While the Equity markets have performed extremely well lately this rally has short covering and a bullish fakeout written all over it. If you have been active in the markets lately you surely have noticed that the amount of computer program activity is astounding. Many of these programs are set up to take advantage of human psychology and literally take away YOUR money by using fake size, fast moves, and illogical behavior to induce the fear mechanism within the trader. Many of these programs are also set to run the market as far as it can in the direction of least resistance. Just pull up a 15 minute chart of the S&P 500 from this current rally and throw some trendlines on the market. As long as there is not overwhelming resistance put up by the market these programs are able to defend these uptrends when they hit the designated support level and "force" the market higher through even the stronger resistance. By repeatedly protecting these levels the programs help form a chart and pattern that causes shorter term traders and the rest of the market to look at it favorably to buy the market themselves. This way the traders are "fooled" into doing most of the heavy lifting for the programs as well, making the programs positions work even better and push the market directionally.

Odd Volume Characteristics
The amount of volume larger lately in comparison to the start of they year, but the interesting thing is that on the up days and the down days the up vs. down volume has been well over 90% in the direction of the move that day in many instances. Until recently this was not a common phenomenon, which has the directional market pushing programs M.O. written all over it as they run over the individual trader. Nothing about this move says that this is fueled by the investor. I believe that the market just found support from the correction dip buyers and at some technical levels and the game has now reversed as it is easier to go higher.

Market Buying Risk and Risk Aversion
The inter-Commodity relationships right now are also saying that something is very wrong with this bullish move. While Equities and some individual Commodities have been able to rally in a convincing fashion, so have the risk aversion assets. Put up a daily chart of the S&P 500, Bonds, and Gold next to each other and notice that while the Equities have exploded that both Gold and Bonds have sat relatively sideways to only slightly down. This means that money is flowing into both risk aversion and risky assets over the last week on a contradictory move.

Metals on the Verge of Trouble
In addition, the Metal Sector has very odd action that contradicts it's own historical properties as well as the Equity market in what could be setting up a significant price break fueled by liquidation in the Metals. Pull up weekly charts for Gold, Silver, Copper, and Palladium and notice that all are at significant historical levels of open interest with most hitting new all time highs over the last few months. Now looking at a daily chart, notice the rise in open interest across these markets over the last 1 - 3 weeks without a significant move higher in prices and in Copper's case a break in prices. While Gold is the historical "safe haven" for money all of these other metals are incorrectly being bought as a store of wealth when they are in fact industrial Metals that correlate much higher to the actual economy and demand (including Silver). Add to this that the market appears headed for a potentially large deflationary move (indicated further by the CPI data this morning) and you have a disaster waiting in the wings as the World liquidates out of these Commodities once the ball gets rolling. The Metals are usually one of the first indicators of a large move for the macro market, and right now Copper is leading the way lower on what could be the beginning of a much larger bear move. If the open interest that is holding losing positions and the ones holding winning positions become losers then watch out for the liquidation dominoes because they could be bigger than we have seen.

Currencies
Finally, if you want to buy the market on a longer term move then I believe you also have to step up and say that you would also like to buy and hold the Euro as well. The flight out of the Euro and other foreign Currencies and into the Dollar has been sharp, but this is the move along with interest rates that caused the move lower in Equities since late April. Whether the fundamental stock investor or economist believes that the European debt situation, Chinese bubble situation, or U.S. debt situation is contained at a certain level it is the sharp flight from risk that also causes the Equity markets to fall. We live in a global market now, where the money is invested on a global basis and is completely intertwined. The large investment houses and Funds look at this web in the same way, which is why when we have a big story you see the Soybean and Wheat market trading off of Crude Oil, which naturally is not a normal fundamental correlation. Another leg lower in the Euro and other foreign Currencies signals at least another leg down for the macro market. Looking at the daily and weekly chart of the Euro right now I have no confidence that this is the definite bottom and it actually looks like it is just a relief rally on a bearish continuation.

Notes:

What To Do Today and For the Next Week
This morning bearish CPI and Jobless Claims numbers were released, but after only a brief break in the market buying came back in to both Equities and Commodities. Again, another very bullish signal when there is buying regardless of poor news. The Nasdaq, Foreign Currencies, and the Energy Sector have the best charts and projections so they are the best buys on this shorter term bull trade. Right now I myself am flat because I honestly do not have any good levels today to enter a position, or else I would provide them. I am spooked right now by the contradictory action across the market as well, leaving me hesitant to jump into anything at least for today.

The path of least resistance is up for right now, but I recommend reducing trading and position size for the time being. The market is saying too many things to make a real clear distinction right now and I believe that it is a chopping ground for the individual trader. I also recommend liquidating Sugar longs and not buying Copper under any circumstances for right now even if it is "cheap" or "a great way to play the emerging market trade".