Thursday 6/24/10 Commodity Ideas

Opening Note:
On the heels of the worst new home sales data since records were kept the stock market suffered an early decline, but even after a downgrade on economic conditions from the FOMC Equities were able to find support and close just slightly lower on the day. Although the Equity markets found support from the higher volume price trade from 1077.50 to 1080.50, other correlated Commodity markets showed further signs of weakness. Crude Oil suffered a $2 drop in prices as the overbought market declined and the market leader Gold had a close that violated it's support trend yesterday of $1237.7. It now looks likely that the 1130 trade on Monday in the S&P 500 near it's 50% retracement level is the top on the right shoulder of the market's massive bearish head and shoulders pattern. With the Metal Sector set to suffer liquidation with another close below Gold's support today, Foreign Currency markets and other supportive Commodity markets providing overbought sell signals, and the Fixed Income markets advancing in price all indicators are pointing towards the market falling below the major support level. Below 1040 in the S&P 500 projects a move between 865 - 900 in what should be a swift decline and likely only the second in what could be multiple waves lower.

This morning the macro market is weaker mostly across the board with Equities, Australian Dollar, and Silver leading the decline. Furthermore, risk aversion assets in the Fixed Income markets and the Japanese Yen are all higher and advancing on what appear to be large advances projected from their weekly charts. The day to day moves within the market, and especially Equities, continues to be less predictable with the leader/laggard in each sector shifting nearly indiscriminately. Still, there are now a number of directional trades that are in play in some of the individual markets. I believe it is now time to begin stepping into some of these trades with more confidence and once the larger decline emerges you can dive in full force. For right now remain picky with smaller than normal size until the S&P 500 confirms a move below 1040.

Buys to Watch:

Bonds- Bonds have outperformed in their inverse relationship with the stock market as they continue to rally in price despite Equity rallies. Again yesterday the Bonds rallied throughout the day even though the stock market closed just below it's lows on the day. With a close above 125.00 the Bond market now has a bullish cup and handle pattern as well as a confirmed breakout above it's triangle consolidation. The cup and handle projection is 127.17 while the triangle pattern produces an objective near the 129 handle. For entry today there is a lower volume zone between 125.16 and 125.20 with higher volume support below from 125.15 to 125.09. This level has been tested twice this morning, most recently after the Jobless Claims report and has held thus far. However, if this support does not hold then there is also a lower volume zone between 124.30 and 125.00 as another spot for long entry.

Japanese Yen- The Yen is a risk aversion Currency that performs well as a run to safety asset in the face of a weaker macro market. To view the large bullish head and shoulders pattern on the daily chart you must use a chart that uses a rollover of the contract at expiration (a continuous chart). Using the Close March 3rd or the High May 5th and connecting the neckline to either the May 20th high or May 21st Open you receive a range of breakout values from 111.59 - 112.00 today. Using these variable breakouts you therefore have a projection range from 118.5 to 119.4. This morning the market has rallied above the lower neckline, but has struggled near the 112.00 level. Because this is such a large pattern with plenty of opportunity for entry I recommend waiting for at least one if not two consecutive closes above the 112.00 level. As a note of caution, the Stochastics indicator for the daily chart is near overbought territory and close to producing a sell signal that could stall the market temporarily on an advance.

Sells to Watch:

Silver (with Gold Indicator)- Using the trendlines detailed in yesterday's letter the Silver market has a "buy the trend" value today of $18.40 and a bearish head and shoulders neckline breakout at $18.07 As I have noted in the past, the Silver market looks primed for a strong liquidation move from an over-saturated long position that will are near being net losers on their position. On the move below $18.07 the market has a projection to $15.47, which I speculate may not necessarily be the end of the break in the market, but rather the first leg. This morning on the open the market had a flow of liquidation, but on the heels of some supportive reports at 7:30 and buying in the Gold market Silver found a way to rally 25 cents back. Silver is a tough and frustrating short to hold right now as the Gold market artificially leads Silver higher at times and there appears to be protective buying and further allocation in the Metals right now. A small initial attempt at a short near the $18.40 level with a tighter stop would be okay for today, but it may be prudent to wait for a move below $18.07 and a confirmation lower close in Gold that violates it's own trendline. You may also buy 1 Gold for each Silver short as a hedge if the market looks like it could rally off of a Gold move, as this spread trade on it's own is likely to work as well going forward.

Put on the Radar:

S&P 500- Yesterday afternoon and again this morning the S&P 500 has found support at the high volume support level from 1077.50 to 1080.50. If the market continues to hang near this level I believe it is unlikely to hold for much longer with a move and test to the next support level at 1063.50 as the next stop for the market today.

Gold- Gold managed to close below the "buy the trend" support line at $1237.7 yesterday. Today this same line has a level of $1240.0, with a close below this level signaling to me that the uptrend for the Gold market is now over. Gold has the largest Open Interest in it's history at the time being, with a number of governments and huge market players severely long the Commodity. Watching the trade ladder over the last month I have repeatedly witnessed what appears to be a protective buying program for the market on this trendline and each time that it dips below. This morning there was again a significant inflow near the open using "scare buying" tactics to run the market higher, so I expect there to be a battle today over the close. If Gold is unable to recover this trendline I expect the Metal Sector to experience a wave of long liquidation and lower prices over the coming month.


Notes: