Wednesday 6/9/10 Commodity Ideas

Opening Note:
Although the macro market did trade lower in the morning hours yesterday, my concern that a 2 day rally was emerging now is confirmed with the market firmer this morning after closing on it's highs yesterday. Although prices are trending higher this morning, I do not take this move as a very bullish signal as the majority of this move appears to be short covering. The Equity action over the last 24 hours is also not very impressive, with the S&P 500 struggling for a long time just to hold a rally above the 1061 level. If you are bullish it is not a difficult trade to jump in front of the strong 1040 support, but buying above 1075 and 1100 has continued to fail. I believe that we now are in the last little rally prior to finally taking out the 1040 support on a fast move lower over the rest of June.

Yesterday I listed a number of low volume and resistance zones for re-initiation of short positions and it looks like the market will continue to gravitate towards them today. Some of these levels are wide and require a little more risk, but they should be great opportunities for early entry on this large break that I believe is coming for the rest of the month. I recommend using patience and maybe only executing a smaller portion of your normal size when attempting shorts at these levels. Once the S&P 500 closes below the 1040 and 1036 levels it will be on cruise control for 865 - 900, with this breakout level providing another opportunity to enter the Commodity deflation and risk aversion trade.

Sidenote: I have done a lot of searching throughout the options markets for downside plays, but have found that premium across almost every market is at ridiculous levels. I only recommend using call or put spreads as the risk of owning such high implied volatility is likely to come back and bite you. I recommend sticking to outrights for the time being and using strength and weakness spreads as a hedge if you are looking at a larger move instead of spreads. Although I still do not like buying Gold as an outright position I do believe that it is the best hedge as a long position along with the Canadian Dollar against other shorts across the market.

Buys to Watch:

Gold vs. Silver (Gold - Silver/2)- With Silver having a strong reversal this week that has outpaced the Gold market a good opportunity has emerged in this differential trade. Although the market traded above $350 early Monday it has now fallen back to around the $320 level this morning. The differential chart is in the midst of a large bullish move with a great base and support. There is some strong support around the $310 with a large low volume zone stretching all the way from $315 to 343. If there is a pullback in the area from $312 to $315 I would jump all over it with very little risk on the trade and a potentially large reward. Looking at the weekly chart, the spread is on the verge of a large bullish head and shoulders pattern with a breakout level of $345 this week and a projection to $492 on a massive spike. Going forward this is a great spread to keep on your radar as it should become an easy long term position. The execution ratio when trading this differential is 1:1 Gold:Silver. Sidenote: The Gold/Silver weekly chart is also on the verge of setting off a large bullish head and shoulders pattern with a move above 70 projecting to 82 this week. This would test the high spike from late '08.

Sells to Watch: *These all could hit their sell zones near the same time

Copper- Copper has traded as the weakest Metal and arguably weakest Commodity over the last few weeks and I believe that it is the best sale going forward on the larger break that I believe will occur. New longs are now entering the market with another 8,000 contracts added to open interest between 3.10 and 2.80. However, most of these longs are now losers and if prices move a bit lower I believe that a new large wave of liquidation will begin as open interest is still just off record highs. The Copper daily chart is now broken out on a large head and shoulders pattern that has a projection range from $2.12 to $2.32. There is a good low volume zone from 2.8850 to 2.9130 for short entry, but the higher volume resistance for stop placement does range higher from 2.93 to 2.96. However, there are a number of strong support trendlines that fall between the 2.91 to 2.94 range that should provide additional strong resistance. I like the Copper the most of any of the shorts and believe that if you are going to have any position it should be this one.

Crude Oil- I do not currently have a decided projection lower for Crude Oil, but I believe that a move below $60 is definitely on the horizon and I want to be short the Crude. Crude does have what could be a base forming on it's daily chart as it has yet to make a new low below the early May move, but this is not a confirmed move higher until a move above $75.72. Like Copper, Crude Oil has had one of the larges increases in open interest over the last year and has a whole lot more fuel in the tank with another move lower to fuel a large amount of liquidation. The RSI and Stochastics momentum indicators also maintain a bearish trend range and could be on the verge of setting off a new sell signal. There is a good low volume zone for entry between $73.56 to 74.04 with stronger resistance from 74.22 to 74.50. I would lean towards looking for the higher end of this low volume zone to cut down on your risk.

Australian Dollar- Like the Crude Oil the Australian Dollar appears that it could be forming a base for a larger rally, but this is not an issue until above .85 with momentum still in a bearish mode as well. There is a good low volume zone from .8326 to .8368 with some older high volume resistance from .8370 to .8400 with some continuation higher on more recent resistance to .8440. Like the Crude Oil I suggest waiting for a higher level in the low volume zone for execution as there is a larger risk area for stop placement.

Put on the Radar:

S&P 500 Direction and Resistance- The initial trendline from the February lows to the "Flash Crash" is sitting at 1063.5 today. It acted as resistance yesterday and this morning, but as I speculated yesterday it did not hold. The next level of high volume resistance is from 1070 to 1076, which provided a top on the market early last week. This level would make sense to hold, especially for the levels on the markets listed in the sells to watch category today. However, if it does not hold then a move to the area from 1088 - 1100 is likely on another test of the 200 day moving average. The Nasdaq has also begun to perform weaker in relation to the Dow and S&P 500 over the last two days, which is another bearish signal. I am leaning towards the 1075 level holding today with a move below the 1040 level coming soon, either later this week or by the beginning of next.

Silver- Silver failed yesterday on a test of the high volume resistance levels I gave yesterday on what was the right shoulder of it's bearish head and shoulders pattern. I still believe that an egregious error has been made by investors in the Silver market as they have incorrectly invested in what they think is a store of value, but is rather an industrial metal with nasty price break under deflationary pressures. I am sitting on the sidelines in the outright market for the time being and waiting for another breakout on the head and shoulders neckline at $17.765 today before initiating a short. As I explained in the Buys to Watch though I do like Buying Gold vs. Selling Silver now.

Sugar- Sugar has been a dead story for the last couple months, but the after forming a consolidation range over the last month it is now on the verge of a bullish breakout. Above 15.75 cents I have a projection to 17.68. Stochastics produced a buy signal a few days ago and the RSI is also testing the topside range on the recent bearish mode as a potential reversal signal. This market may also have the potential to rally a bit higher above the projection if momentum gets churning.

Notes:

Natural Gas- The allocation in the market appears to be over after the market failed at a test of the $5 level. I had a projection to $5.138 for the market, but I no longer feel that this is a worthwhile trade. The $4.800 level I suggested as support for long entry failed shortly after the open yesterday as well, confirming my opinion to exit the market.

Cotton- If you do not normally watch Cotton it is worthwhile to pull up a daily chart now to witness the massive short covering rally that has occurred over the last two days. The low volume zone I provided yesterday for re-entry of a short position failed near 78 cents on the close yesterday, so hopefully you were able to exit prior to this morning if you were holding a short position.