Tuesday 6/8/10 Commodity Ideas

Opening Note:
Although the macro market started out with a nice recovery yesterday morning after a poor opening Sunday evening, it still managed to sink throughout U.S. trading hours to close near the lows in many supportive markets. I now have the S&P 500 with a low close below my early short initiation breakout trendline that connects the lows from Feb. 5th to the "Flash Forward" low on May 6th. This head and shoulders pattern neckline had a breakout value yesterday of 1063.25 that projects exactly to 900, but it is appropriate to also add the larger projection of 865 to form a range of expectations on the move lower. The market is now seeking a second consecutive lower close today to confirm the bearish market projection.

However, I have become slightly concerned with the overall market action as a holder of short positions over the last 36 hours as supportive Commodity markets have continually found support and some indicator markets have reversed. The industrial Metals like Silver (which reversed hard) and Copper (which has found support) are some of the indicators, along with the Aussie Dollar, that are telling me to lay off for a while. Part of my cautiousness may be due to an over-investment in emotional capital in the hard reversing Silver market, but after a large break Friday and two failed attempts at a move lower I feel that the macro market may be temporarily oversold and looking for a rally to clean out shorts. I personally closed out the majority of my short positions mid-day yesterday as this concern sank in and actually *gulp* purchased a small long position in the S&P 500 this morning (but with a tight stop).

I am only looking for a 20 point rally in the market, but I believe that it is a good idea to temporarily lighten short positions and to look for a 2 day rally pullback before initiating short positions. There are a number of great low volume zones to re-initiate shorts at if you are patient and can lay off some of the nearby resistance levels. I still hold the medium term bearish opinion that the S&P 500 will be the leading indicator on a move to the 865 - 900 level in macro terms. I just recommend a little patience for the time being as the market delivers a little more hope for the bulls prior to slamming the door shut later this week.

Buys to Watch:

Natural Gas- The Natural Gas market continues to perform strong on it's bullish cup and handle pattern on the rally out of consolidation with another strong rally on yesterday's open. The cup and handle pattern had a breakout level of $4.587 with a projection to $5.138 that is becoming close to completion. Yesterday morning I provided a higher volume support level from 4.700 to 4.680 that was temporarily violated, but after a quick stop-run acted as the base for the large allocation rally on the market's open. Although it is likely too late to enter, there was higher volume support in the market from 4.875 to 4.844 with another support level near 4.800. The market appears to be driven by fund allocation as concern around Crude Oil's future has sent money seeking alternative energy investment. The best moves appear to happen near the open and close over the last few days, so look for entry about a half hour prior to the event for the best opportunity to capture them.

Sells to Watch:

Cotton- Cotton had a breakout level of 80.13 on it's bearish head and shoulders pattern that has a projection of 72.66. The market has consistently moved lower and has been easy to hold a short position, but I now believe that it is prudent to wait for a larger pullback before initiating another short position in the market. Yesterday's lower initiation value from 77.40 to 77.50 acted as a high, but I will now wait for a rally into the low volume area from 77.76 to 78.06 with higher volume resistance above to the 78.35. Both RSI and Stochastics are sitting in oversold territory for the market, with Stochastics close to producing a buy signal for the market. These momentum indicators are also saying wait for a little rally and reduce short positions in the market for the time being.

Copper- Copper continues to be one of the weaker performers among the broad market and is one of the few Commodities that is lower this morning. Still, I recommend reducing short positions in the market for the time being and waiting for a larger rally for re-initiation in the market. The large bearish head and shoulders pattern for the market has a projection range from $2.12 to $2.32 and is now confirmed on this move lower. The high volume resistance from 2.78 to 2.8050 has acted as a good top on the market for the last 36 hours, but now has tested on multiple occasions and is unlikely to hold much longer. There is a great low volume zone from 2.8850 to 2.9140 to enter a short position on a rally with a number of key resistance levels near this up to the 2.93 area. I will be waiting for a rally near this level to put my short position back on.

Australian Dollar- The theme for today is reduce and re-initiate, so for the Aussie I am looking for the low volume zone from .8326 to .8358. The weekly chart bearish cup and handle pattern still has a projection to .7784 on the longer term move. The high volume resistance level from .8200 to .8235 has acted as a top for the market over the last 36 hours, but like the Copper I believe that it may come under pressure and not hold the next time it is tested.

Put on the Radar:

Silver and Gold- The Silver market obviously had an enormous reversal day yesterday that was fueled by short covering despite the bearish head and shoulders breakout on Friday. Right now the market is testing some of the high volume resistance from the right shoulder from $18.39 to 18.44 and 18.52 to 18.64. Right now I am still fundamentally unconvinced that this is a logical move for the Silver market as it is much more of an industrial metal than the store of value that the market is using it as for the time being. However, I am not willing to fight the market with this sort of market action with short covering and allocation entering the market. I did peruse the options market for possible purchase of puts, but with volatility so expensive right now I do not think that this is a value play for the time being.

I am running out of time this morning, but I have the Gold/Silver ratio chart and Gold - Silver/2 differential chart on my radar on the weekly basis. Both are nearing large head bullish head and shoulders pattern breakouts right now, which will either mean a larger Gold rally or a sharp Silver break. They will not come into play today so I will discuss them tomorrow.

Notes:

Japanese Yen- The Yen has not been on my radar as it has underperformed in comparison to many of the other risk aversion markets, but I believe that it may now be oversold and nearing a good buy level. I am considering purchasing a small initial position in the market on a break into the low volume zone from 108.32 to 108.44 with higher volume support to 107.86. This is much more of a feel trade for me as the market appears to be coiling bullish momentum as we speak. The market should fundamentally rally if the macro market weakens and with a small risk I believe it may be worth a small shot.