Tuesday 6/22/10 Commodity Ideas

Opening Note:
The market started off yesterday morning on a positive note on the back of news that China will use a more "flexible" policy with it's peg of the Yuan, but this exuberance was short lived as the macro market took a down-trending dive throughout the rest of the day. The Equity Indices broke in a clean line while Crude Oil, Gold, and Silver had violent stop-running breaks just before noon (CT). This morning the Chinese Yuan has appreciated another .23% at last check and the market is beginning to look at this "flexible" policy as somewhat of a joke. It is apparent from the last two days that China has no intention of a free-float for the Currency and will control it's movement, on what appears to be more of a concession prior to the G-20 than any sort of market moving change of policy.

This morning the macro market is lower in almost every supportive market, but only to a moderate degree thus far with the Energies and Metals the biggest losers. With the FOMC meeting taking place over the next two days and some housing data over the same time frame the market looks like it will take a wait and see approach. I do not think anyone is actually expecting much change from The Fed, but their individual word choices will be poured over with little consequence to follow in my opinion. The housing data this week and jobs numbers, with Unemployment next week, are now what I am focusing on as "the fundamental recovery" touted by the Bulls is beginning to look like a dying piece of evidence in their market defense.

Right now I find myself being caught up in the chop and randomness of the large sideways market, so I will not be placing any trade ideas in the Buys or Sells category until there is a real trade that I can get on with conviction. Looking at most of the daily charts across the market I am finding either strictly sideways markets or directional moves that are now way over-extended and inadequate to jump on. Furthermore, after analyzing a large sample size of relationship trades I have found only a few to really keep on the radar and none that I can make a strong case for at the time being. I personally struggle with sideways market action as I trade directional moves with volatility best, but give back the profits from my good trades on the false patterns and breakouts. I still believe that the macro market is in the midst of a sizable bearish move that should at least extend over the next four months and would now like to focus more on trades that take advantage of a deflationary move and decline in prices. I suggest dialing down size, making less trades, and focusing on taking profits earlier as directional moves have been rare and short in duration lately.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Equity Indices- All of the Indices gave back early gains on a 15 minute chart down-trend that lasted throughout the day and saw the Nasdaq perform the weakest. Over the last couple days I have noted that the S&P 500 has a bullish consolidation breakout that projects to 1169, but after yesterday's poor action the market is again testing the 1103 high from the same range it looked like it departed from. I still am looking for the S&P 500 to at least have a rally test of the 61.8% correction retracement level falling between 1145 - 1150, but a test of this level is now looking more skeptical. All of the Indices on their daily chart are now very close to producing sell signals on their Stochastics indicators near overbought territory, while all still maintain a range on their RSI within a bearish trend range as well. A close below 1103 for the S&P 500 would likely indicate another move lower through the sideways range and a possible test of the large base as the market is likely overbought at the time being. Remember that for the last couple weeks the market has also been buying with conviction despite some very discouraging Economic numbers and reports. For right now I have no intention of trading the Equity markets, but the S&P 500 is still the leading indicator for the market and should always be on your radar.

Metal Sector- Gold, Silver, Copper, and Palladium to a lesser degree have all had a moderate to substantial increase in Open Interest over the last few weeks. This increase in open interest has come while Gold, Silver, and Palladium have increased in price on a slight uptrend, but Copper has really acted more as a laggard. Yesterday both the Gold and Silver markets had a large stop-running price break as liquidation took over after another failed Gold attempt at a leg higher. Gold is now testing it's long term up-trend from the low March 25th to the low April 22nd that sits at $1235.3 today after about 15 tests of this line. I would take two closes below this line as a signal to exit any Gold longs and also as a sign of weakness for the entire sector on what could be a violent swing lower. This open interest that has entered the Metals appears to be a longer term position allocation, but when the market begins to liquidate and the small winners turn into double digit percent losers you often find a very large move lower. I have had a substantial liquidation in the Metals on my radar for the last 3 months and I believe that the Gold market's rejection of it's up-trend may be the start of this move. I recommend looking for bear strategies in the Metal market going forward and holding off on long entry into these markets.

Crude Oil- Crude Oil was acting as one of the stronger markets on the recent macro rally, but after a weak test of $80 has fallen hard over the last 24 hours. Today the daily chart Stochastics is producing a sell signal near overbought territory, which could signal the end of the rally unless it can make a valiant recovery by the close today. A move and close below $76.86 for the August contract would confirm a reversal for Crude Oil. After having one of the largest price breaks since late April I believe that going forward Crude is one of the better sales on the possible bear move with deflationary pressures, so I will focus on it as a weakness once the Bullish correction is confirmed to be over.

Currency Markets- With the exception of the Japanese Yen (which is a different animal) all of the Foreign Currency markets have or are on the verge of producing sell signals on their daily Stochastics indicators. The British Pound and Canadian dollar already have produced their own, with the rest of the markets now looking like they are only a day or two away as well. When you add up that the Metal markets look like they may undergo liquidation, the Energy and Equity Sectors are nearing sell signals, and Currencies are now in the process of developing sells as well, you can see a correlated weakening macro story. After examining all of the Currency markets as well as the cross-rates I can not find a trade or market that I am excited about for the time being, but keep an eye on the daily chart Stochastics for these markets as a macro indicator.

Bonds- The Bond market is still in a triangle consolidation pattern after briefly testing and rejecting it's bearish breakout yesterday. Today the lower consolidation line sits at 123.08 with the neckline on the bearish head and shoulders pattern at 122.31 with a projection to 117.02. Meanwhile the upper range line is at 124.12 with a move above 125.00 yielding a projection to 127.17. The market is nearing the apex of the triangle consolidation that hits on June 29th, so any breakout should now be discounted with a move to the projection less likely as the coiled momentum in the market is now being lost. It is possible that this could be just a sideways market that extends beyond the triangle range, but a breakout within the next two days could still prove to be decent move. With the macro market looking like it could continue to fall over the next few days with so many sell signals provided I am leaning towards a move higher in Bond Prices.

Gold Relationship Trades- I actually did do the homework I discussed earlier by examining a breadth of inter-commodity relationship charts. After looking over everything these are the charts and markets that I came up with that have the best future potential. As I am looking for a bearish market move with deflation, buying Gold against weakness is a great spread that should provide the best risk reward going forward. Most of these ideas show up better on the weekly charts as longer term moves, but some have better daily chart stories. I only suggest looking at these charts for the time being and waiting for execution at a later date:

Gold/Copper- Best seen on the weekly chart this ratio chart could be forming a significant spike that rivals the spike formed in late '08. This has been a longer term trade idea that I have provided in the past and the time for re-entry is now nearing again.

Gold/Crude- This has been a favorite of some guy whose name begins with a "G" that also writes a daily letter and I have to agree with him that it is soon time to put this ratio spread back on. Earlier I noted that Crude will likely be a future market weakness and this spread takes advantage of this opinion with a hedge.

Gold/Silver- The daily chart is in a larger triangle consolidation, but I believe that the breakout of this chart will likely be to the upside fueled by liquidation in the Silver market. I have long felt that the Silver market is abnormally extended for the time being and that the industrial metal story for the Commodity will take over at some point causing liquidation among the community that is buying it as a precious metal.

Gold+Dow- This is a contrary-relationship trade, in that Gold is usually a store of value away from Equities, that could be forming a head and shoulders pattern. The fundamental move that would be derived from the initiation of this bearish pattern on the weekly chart would be exactly a large bearish move in Equities with a deflationary move in the Gold market as a hedge. As money out of the stock market would likely flow into Gold it is actually a short in Gold that would act as a hedge for this relationship as Buying Gold and Selling Equities would be a "double exposed" position.

Notes:

Yesterday's Trades- Both the long Gold and long Nasdaq trade suggestions failed yesterday as the market declined throughout the day. Gold no longer has a bullish pattern projection and with the market now failing at a higher rally for the third time I do not like the idea of staying long Gold. The Nasdaq long entry level between 1915 and 1921.50 with support to 1908 held strong for a number of hours until the early afternoon yesterday. After failure at this level I also no longer like holding a long Nasdaq position and will be staying out of this market for the foreseeable future as it remains a choppy trade.