Tuesday 6/1/10 Commodity Ideas

Opening Note:
With the Downgrade of Spain's debt rating on Friday the macro market broke into the weekly close and has continued lower into this morning as Europe has reacted to the news. If you have paid attention to the European debt story this is not a surprising news item, but it is now another link on the chain of troubling news that continues to tighten around the market. As we now begin the official summer months I believe that it is now more a matter of time rather than if the S&P 500 will breach and hold a move below the February lows on a nasty looking topping pattern.

There are a number of different time and price action scenarios that could lead to this move, but pretty much any way that I look at it right now I am seeing a move in the S&P 500 to 865. Towards the end of last month after the market bounced off of the 1040 level I believed that a larger right shoulder could be made over the next few weeks on the massive head and shoulders pattern that could be forming. However, recent market action continues to be weak with Commodities and Equities having a very difficult time holding gains on rallies. I believe that it is still likely that the market finds another burst of support as it nears the breakout level again with Unemployment and other reports the focus for this week, but I now think that this could be only a brief couple weeks before the larger break comes.

With the Euro continuing to sag and other supportive Commodity markets in the midst or on the verge of also setting off large topping patterns, I believe that the market is a month into a 4 - 5 month bear market move. Going forward I believe that Crude Oil, Copper, Equities, Silver, Palladium, Australian Dollar, and the Euro are the most vulnerable markets that have the best potential for a significant price slide. My focus will likely be on these markets for the next few months and I continue to recommend selling rallies in supportive markets and maintaining a bearish macro position. An S&P 500 move below 1040 should open the flood gates again as a second leg lower on the overall move begins.

Buys to Watch:

Dollar Index- This is a smaller pattern in comparison to the large move that the Dollar Index has had recently, but a bullish cup and handle pattern with a breakout of 87.55 has a projection to 89.205. The market has already tested this breakout level overnight with a failure spike, but could position itself for another attempt today on a weak market opening. It is likely though that this pattern does not come into play until this evening or tomorrow. I recommend waiting until after the breakout for entry, but keep an eye on the low volume area from 86.88 to 87.04 with larger volume support around 86.70 as an indicator of market strength if it is able to hold. If there is failure again near these recent highs then the Dollar will likely have a double top reversal pattern.

I am also keeping the Dollar Index monthly chart on my radar for the time being. If this small daily chart pattern is completed it would mean a test of the 89 level highs from late '08 and early '09 that is also a breakout on a bullish cup and handle on this longer term chart. Because the Dollar Index does have a larger weight towards the Euro than other foreign Currencies it is understandable why the move has been significant for the Dollar, but could point much higher over the next year. A breakout above 89.71 projects to roughly 105 on this pattern.

Sells to Watch:

Cotton- Cotton has been in a slightly upsloping consolidation range for the last 3 months, but finally had a bearish breakout close below this range on Friday. What I am measuring as a bearish head and shoulders pattern with multiple shoulders on the daily chart, using the lows from April 9th to May 6th, had a neckline breakout Friday below 80.13 that has a projection to 72.66. There are a number of similar support trends that you can draw on this Cotton chart, but most fall close to just below this 80 cent level. Overnight and into this morning the market has battled with this 80 level making entry right now risky. Cotton has had a number of false patterns over the last few months, so I recommend waiting until at least tomorrow for confirmation on the move before entry.

Australian Dollar- The Aussie has been on and off my sell list and radar for the last few weeks, but with a confirmed hold on the weekly bearish pattern I will now be leaving it on the sell list unless the pattern is negated or a strong daily reversal emerges. The weekly bearish cup and handle pattern set off below .8547 two weeks ago and has a projection to .7784. While the market appeared to be on cruise control for this projection a daily chart bullish reversal caused a short covering rallied that topped out Friday at .8537. I had a daily chart pattern projection to the mid- .86 level, but this was negated by the market action overnight. The Aussie has been extremely volatile and directionally challenged over the last week and a half, so I recommend using caution prior to entry. However, I do like the low volume zone from .8400 to .8440 near the highs overnight as an opportunity to enter a short position a the larger move with a risk of only 100 to 150 ticks on the weekly pattern. Using put options for entry on the liquid September contract is also a good idea for entry on a rally.

Put on the Radar:

Copper (refer to 5/26 & 5/27 entries on my blog for reference)- I still have Copper in the bearish continuation triangle pattern on it's daily chart. The base trend from the lows May 17th to May 19th has a level of $2.9825 today for the breakout. The bearish topping pattern for Copper from the base Feb 5th. to May 17th also has a neckline at $2.9235 today that projects to the $2.10 - $2.15 range. I do not recommend jumping into a short Copper position for the time being, but refer to the next passage for earlier entry on the trade.

Buy Gold and Sell Copper (Gold/Copper to chart)- I also referenced this idea in the 5/26 newsletter, so please refer to it for the whole package description. I held off on recommending an outright buy on this ratio, but I now believe that it is a good buy on a break. Right now the weekly chart for the ratio is just beginning to breakout on what I believe will be a large Copper break. Sitting near 400 (Gold = Copper*400 on an ounce per pound basis) I think that the chart is forming a large spike rally with an initial projection to 550. I have a low volume zone for the ratio between 391 and 395 that provides a good short term entry level for the trade. With the chart now having an upsloping support trend and some higher volume trade I believe that you now only need to give the ratio to around 380 for stop placement on the excellent risk/reward longer term move. Because I believe the majority of the move will be on the larger Copper break I recommend using a 1:1 Gold to Copper execution ratio that should provide an even larger profit, but slightly more risk on the move. The safest way to play this is to wait for entry on an individual Copper chart bearish breakout, but with such a good chart and entry level on this ratio I believe that there is a good opportunity now.


Silver and Gold- My disdain for the short term Precious Metal bulls has been clear over the last few weeks and I believe that Silver is now technically forming my bearish opinion on the market. Using the lows from May 5th and May 21st on the Silver daily chart you can see the large bearish head and shoulders pattern that I believe is forming on the market. Silver has incorrectly followed the Gold market over the last month as a run to safety trade and is now over-valued on a short term basis in my opinion. The Gold - Silver differential (Gold - Silver/2) has shown price action consistent with my opinion over the last few weeks as I believe that we are experiencing deflationary pressure where Gold should continue to gain on Silver as the macro market weakens. The Silver head ans shoulders pattern has a breakout level of $17.245 that will not come into play today, but keep this pattern on your radar going forward as it projects a $2.60 move lower post-breakout that points towards $15.

Also keep the Gold daily chart on your radar as well. Gold rallied after encountering one of it's bullish trendlines a week and a half ago, but I believe that the price of Gold should also fundamentally break with deflationary pressures after a 3 wave bull market has already been completed with the move to $1250. The Gold also is forming an upsloping bearish head and shoulders pattern in my opinion that uses the same neckline dates of May 5th and May 21st as Silver. However, a move in Gold above the $1251.4 highs would negate this pattern. I believe that with Gold now trading near the $1230 level that this possibly provides a good opportunity at short entry in silver near the top of it's right shoulder that is forming. Silver had a small breakout attempt above it's recent highs early last night, but with Gold likely topping out soon I believe that you can now make a fairly safe bet by shorting Silver with a stop if Gold does take out it's highs from last month. The risk would likely be close to 40 cents, but this is on a $3.50 move providing great risk/reward. This is strictly do at your own risk for the time being though.

Notes:

**I ran out of time today, but I will discuss the longer term moves in Bonds and the Euro tomorrow.