Wednesday 6/2/10 Commodity Ideas

Opening Note:
After a strong Equity opening yesterday the macro market fell apart by the end of the day to close near it's lows. The first day of the month has historically been the strongest gainer over any other day the last 13 years, so this failure to hold gains despite an inflow of money is troublesome. One of the few positives that I can take away from the recent Equity action is that the technology filled Nasdaq has been the strongest index as it was on the 14 month rally. However, I am finding very little evidence to hang your hat on when you look at the macro relationships across the market.

"Dr. Copper" has acted as a weakness over the last few days and is on the verge of setting off a large bearish topping pattern. The Euro is being held steady through government intervention at one of its last major support levels prior to a move to parity with the U.S. Dollar. The Euro/Yen Cross, which is a strong indicator for risk appetite and future market direction, is testing it's lows from '08 and '09 and on the chart looks a lot like what our stock market may look like without any stimulus pumped into it. And finally, the same cyclical pattern with Currencies, followed by Fixed Income, followed by Equities and Commodities is again setting a similar time pattern with Currencies pointing to a much larger move lower already.

While Equities are up slightly as I am writing this morning a number of Commodities and specifically the Metal Sector is lower on the day, which could indicate a broader reversal lower today. As I believe that Commodities and Equities are just beginning to catch up to the larger macro move that has already begun, I continue to recommend selling rallies in supportive markets and maintaining a bearish macro position for the next 4 months.

**Metals like Silver & Copper were one of the key indicators I used in predicting the January market break. This morning they have sold off with conviction on their opens. When the Metals begin to go it is not long before the other Commodities begin to follow as well.

Buys to Watch:

Sells to Watch:

Cotton- Cotton was on the sell list yesterday on it's bearish breakout from consolidation, but had a note of caution attached to it. I can safely say today that the caution on the trade is now removed with a 2 day confirmation and a move below all of the nearby support trends for the market. The breakout for Cotton on the head and shoulders pattern was Friday at 80.13 and has an aggressive projection to 72.66. I say aggressive because this is the head and shoulders pattern projection, while the chart could be interpreted in other fashions that still project a move to at least 75 cents or lower. There was a great opportunity for entry mid-day yesterday on a rally pullback to the 79.50 level, but with a lower close and a continuation lower overnight it is unlikely to reach this price level again for the time being. There is a small low volume zone on the trade overnight from 78.94 to 78.99 with some larger volume resistance from 79.00 to 79.18 for short entry on an intraday pullback. If this level does not hold then I would look for a move to 79.54 to 79.66 for even better entry. If you already have a short position than I believe you can move your stop up to the 79.18 level above today's highs to lock in profits while safely holding the position.

Australian Dollar- The Australian Dollar is still on it's weekly bearish cup and handle pattern after holding the .8547 breakout level on a test last week. This pattern has a projection to .7784, which is roughly halfway back on the large rally since March '09. Yesterday morning I provided a low volume entry level between .8400 and .8440 that was entered several times throughout the morning with a high trade of .8424 that eventually closed at .8300 on an afternoon break. The market is slightly higher this morning, but the higher volume resistance from .8370 to .8398 has held strong as the market only came close to bumping it overnight. On a longer term position trade if you are already short I believe that you can move your stop up to the .8400 level for sure or the more risky level near .8370 if you wish to lock in more profits. Selling a rally against this higher volume resistance is good intraday entry today, but if a larger rally does emerge then I still like selling the Aussie between .8400 and .8440.

Copper (refer to 5/26 and 5/27 entries on my blog for reference)- Copper is moved from the radar section to the sell section now as it is on the verge of setting off the bearish daily chart patterns. As I stated in the Opening Note, Copper has acted as one of the weaknesses in the overall market over the last few days, which is a reversal from some of the strength it showed towards the end of last month. This morning Copper is testing the lower boundary/breakout on it's continuation triangle pattern with a value of 2.9890 this morning. This pattern in turn would set off and confirm the much larger topping pattern that I have for the market with a breakout of 2.9065 today and an adjusted projection range from $2.10 to $2.32. This projection range is adjusted on the upper end based on a new trendline I added from Feb. 5th to May 5th lows. This trend has Copper already broken out on a large head and shoulders pattern at 3.0550 to provide the top end of $2.32. Copper is the market that I have had my eye on the most as a potential fire sale, so one way or the other I recommend getting a leg into a short position in this market.

Sell Copper vs. Buy Gold (Gold/Copper to Chart)- Yesterday I provided an entry level on the trade from 391 to 395, but the intraday low only reached 397. Today the ratio is trading up to 408 currently and is really beginning to gain steam on the breakout rally that could become a large spike. I have an initial projection from 515 - 550 on the rally to the major resistance on the spike from '08. I still really like the 391 - 395 level on the trade, but now with Copper on the verge of breaking out on it's massive head and shoulders top I am afraid that you may need to get in on this trade now before it really starts going. I have a weaker low volume entry zone from 404 - 406 today on an intraday pullback and with an upsloping support trend I believe you now only have to give the trade to just below 390. It would be wise to establish a smaller initial position of roughly half of what you want at this level and add more later on a continuation or a pullback to the lower entry level if it is reached again. I recommend using a 1:1 Copper to Gold execution ratio, which will provide more profit upside on the Copper break and with a smaller long Gold position in a market that I also believe will break in outright price. I believe this trade can be expected to be around 6 - 8 weeks for completion.

Silver (but caution)- I am also moving Silver to the sell list, but with the caveat that the pattern is not near it's breakout and this is a more speculative idea. I stated in the radar yesterday that I believe Silver is beginning the formation of a right shoulder on a large daily chart head and shoulders pattern. Yesterday afternoon and into this morning the market has fallen confirming a probable top on a right shoulder if there is one. The Gold market has also dropped over the last 24 hours as it attempted a fairly weak rally at it's $1251 highs from last month. Silver has a large volume resistance level from $18.54 to $18.64 now that can be used as an area for stop placement on an initial entry into the market. The head and shoulders top has a breakout value today of $17.63 that will likely not come into play, but I feel that the market is now headed straight towards it with a projection to $15.03 on what should be a fast move. I am looking at using either the $17 or $17.50 puts for an initial position as well, but this is not as conducive or liquid a market if you have substantial size. I recommend using about 1/3 of a full position that you would normally use on entry into Silver for the time being and add to this position after the head and shoulders breakout.

Put on the Radar:

Using the "Flash Forward" Spike on and S&P 500 Head and Shoulders Pattern- The "Flash Forward" spike happened and by all accounts now it was not a computer error. It may not be pretty, but when you connect from the lows on Feb. 5th and May 6th you receive a breakout line that has continually been unsuccessfully tested, but is sitting dangerously close this morning at 1062 and has a projection to 900. I am still using the 1040 breakout on the large head and shoulders pattern as a safety play, but might add a smaller initial size below the 1062 level once it is broken and adjust my projection range on the trade to 865 - 900.

Euro- The Euro continues to hand around the 1.21 to 1.23 level on extremely high volume, but little volatility in comparison to it's recent action. This says to me that there is some huge buying that is stepping in and it is not a hedge fund or traders. I still recommend waiting for a confirmed break below the 1.20 level before initiating a short position in the Euro as this protection trade could continue for a while. Below 1.20 I have a projection to .95 on the monthly chart. Currency interventions have been historically unsuccessful, so I believe that there is a decent probability that this continuation lower will happen in the long run.

Notes: