Tuesday 6/29/10 Commodity Ideas

Opening Note:
After a less than spectacular rally attempt yesterday (that I thought could have some legs) the S&P 500 failed near the moderate 1180 resistance level to fall back and close lower for the fifth day of the last six. This morning the U.S. market is well lower on weaker markets across the globe and some European banking fears as repayment of loans and concerns about Spain added fear to the markets. As we close up the 2nd Quarter and head into potential 3rd Quarter allocation and Unemployment on Friday it is now technical concerns that may rule the market in spite of Fundamental news regardless of whether it meets or beats expectations.

Think of the break in the market in May as the shrimp cocktail to what will occur in the markets once the S&P 500 sets off its large bearish head and shoulders reversal. I will go into further detail in the Radar, but below 1033 the S&P 500 has a projection range from 856 - 870 on what is likely only the initial wave on subsequent moves lower. With Currency and Fixed Income markets leading the way, Equity and Commodity markets have traded weaker for the last couple months. But, with large open interest still residing in the market on inflation and correction buying, many markets are now primed for large moves lower fueled by liquidation, deflation, and an overall weaker economy. Namely Silver, Copper, and the rest of the Metal Sector are sitting on large sums of open interest on a store of wealth trade (run to safety) and inflation trade that is on the verge of bursting and will likely see the swiftest move lower in the short term. However, as we have seen in the past, once the liquidation ball gets rolling no market is safe as the correlations tighten and fear rules.

Going forward I recommend only positioning yourself for short positions in supportive Commodities, meaning only being long Fixed Income, Dollar Index, Japanese Yen, and Gold vs. Another short position as a spread. It is possible that the market finds a bit of support over the rest of this week and possibly into next as some last ditch buying enters, but it could now be any day that the move lower begins and I do not wish to be caught on the wrong end once it starts. I still recommend using a smaller than normal position size when trading for the time being, but once the S&P 500 confirms a move below 1033 I encourage ramping up bearish market trades.

**Grain Stocks and Planted Acreage Report tomorrow so use caution and reduce Grain positions

Buys to Watch:

Bonds- Bonds still have a projection to 127.17 on the bullish cup and handle pattern that was nearly reached this morning with a high of 127.08. The market also has a bullish continuation triangle projection to the 129 handle, but this one is less reliable because the chart nearly reached the apex of the triangle prior to initiating the pattern. Bonds have weakened over the last couple hours and are heading towards a lower volume zone for initiation of a new long position. This low volume zone sits between 126.15 to 126.24 with higher volume support falling from 126.05 to 126.13. If you are already long I recommend using this higher volume support as your stop area now as well or taking profits for the time being if you are unwilling to risk this much. On a daily chart the momentum indicators are beginning to look a bit overextended as they head into overbought territory, but are not near producing a sell signal making the market a good buy still.

Japanese Yen- The Japanese Yen is now broken out on a large bullish head and shoulders pattern above 112.00 that projects to around the 119 price level. There are a number of different necklines that you can use for this pattern, but with the magnitude of the move today the market is now trading above all of these breakout values. Although the two confirmation closes over the last two days for the Yen were a bit sketchy, settling right near 112.00, I believe that you can now enter a smaller initial position on a pullback in the market. There is a low volume zone stretching between 112.12 and 112.54 with higher volume support between 112.12 and 111.95 for stop placement on the trade. For the time being I will only be entering 1/2 or less of a normal position for myself as the move is larger and longer in duration and wait for another higher entry level to initiate the rest of my full position. As a note of caution, the Japanese Government has a pattern of intervening to deflate it's Currency near the 114 -115 level, which may repeat and cause difficulty for the long position.

Sells to Watch:

Australian Dollar, Canadian Dollar, or Euro- I do not encourage going out full force and shorting all of these Currencies today, but each individual one has an unconfirmed bearish reversal that has set off today. In my opinion the Aussie Dollar is the best short going forward as it has more volatility on average than the Canadian and a weaker fundamental story due to Government tax hikes. The Australian and Canadian Dollars also have a stronger correlation to Commodity markets and with a liquidation and deflationary move on the horizon for Commodities these may have the better short term move. I do not have time today to list all of the entry levels or projections, but I recommend treading lighter in them today and taking another look tomorrow.

Put on the Radar:

S&P 500 (the leading market indicator)- First off, looking at a weekly chart for the S&P 500 draw a trendline on the chart from the low the week of Feb. 1st to the low the week of May 24th. This produces a breakout value on the bearish head and shoulders pattern of 1035.50 today. Now keeping this same neckline turn the chart into a daily and see that this same line has a value today of roughly 1033. This is the main line that I am using for confirmation on my bearish pattern, but there are still a number of different values that you can receive by connecting different levels. The main support band falls between 1033 and 1045, which could provide support over the short term, but with a convergence of bearish indicators, fundamental news, and technicals I believe that it is only a short time until the pattern is initiated. The head and shoulders pattern has a projection of 856 and to complete the range of expectations I am using 870 as a move based on the higher necklines. The S&P 500 is the weakest Equity Index chart and the leader on the downside for the time being among the sector. It is also the main indicator for the macro market.

Gold- With a third failure on a rally attempt above the $1250 high from Mid-May the Gold market again violated it's nearby upsloping trendline yesterday with a value of $1244.8. Today this same line has a trend value of $1247.1, which the market will again likely try to close above to maintain the trend. However, I think that after this third failure that Bulls have to now be concerned with holding long positions. There are a number of topping patterns that one can draw on the market now, but a move below $1230 and $1225 would confirm a reversal in the market and likely lead to sizable liquidation in the market from the current all time highs in open interest. While the Gold market likely will move lower as an outright position I am more interested in shorting the overbought Silver market once a Gold reversal is confirmed. Silver has a trendline of $18.49 that has provided the lows thus far today and still has a bearish head and shoulders pattern neckline at $18.15 that projects a nearly $3 move lower. Wait for confirmation on the Gold reversal before entering any short position in these markets.

Notes:

Crude Oil- The low volume entry zone I provided yesterday between $77.60 and $78.00 held throughout the day yesterday, but failed yesterday evening as global market weakness sank Energy prices. Crude Oil is no longer a good buy and is actually nearing a reversal confirmation below $75.17 that projects to $70.96. I believe that the Energy markets will suffer a significant price decrease over the coming months, so I recommend only looking for entry on short positions going forward.

Copper- Like the Crude Oil, Copper held it's support level throughout the day yesterday, but gave up last evening below the $3.0450 level. Copper is now on my radar as a longer term short position with large open interest providing strong liquidation potential.