Commodity Ideas Wednesday 7/28/10

Opening Note:

Yesterday
Although the Equity markets were able to close right near their previous settlement yesterday I would not necessarily consider this a win for the Bulls when you take into account how strong the market was heading into yesterday's open. While nearly every correlated/supportive Commodity market was trading higher yesterday at 8 am. the Crude Oil market along with the Gold and Silver markets led a wave of liquidation that carried over into the rest of the market. Another poor consumer confidence number, that was back near the lows for this year in February, did not help the market much at all either, but the real market sell off was fairly evident even before this number.

Metals
The Gold and Silver price breaks were the largest movers of the day, but the most interesting note about the move was that it actually came on option expiration day. Option expiration tends to find higher volume traded strike prices that act like a magnet with volatility and the expected moves oftentimes falling just after they expire (I know this all too well). As for continuation lower in Gold I expect the market should find support short term between $1140 - $1151 although I still believe there is likely at least another wave lower to around the $1100 level that will follow after a rally pullback.

Risk vs. Risk Aversion
Another note from yesterday was that although the macro market traded weaker from the stock market open, and sat relatively flat, the risk aversion markets like Bonds and the Japanese Yen fell concurrently when the recent inverse relationship suggests they might rally during this time. There have been times when they have not necessarily had the same magnitude of movement in the opposite direction during the day, but this was one of the more blatant moves in the same direction I have seen lately. I suspect that with the individual Bond and Yen charts now providing numerous sell signals and both looking overextended on their rallies that this was more of a focus on the individual markets rather than a significant change in correlation. Do keep an eye on this relationship on a day to day basis to see if there is a possible reversal emerging.

Currencies
I was excited yesterday morning as the Canadian Dollar, Mexican Peso, and Euro/Yen all had set off Bullish breakout continuation patterns, but as the Energy, Metal, and later Equity markets fell apart so did these Currencies. Along with the strong break in Crude Oil, that negated its own Bullish projection, this is not a positive sign for short term continuation higher for the macro market.

Today
The market is mixed this morning with Wheat the most notable gainer this morning while the Australian Dollar sticks out as the weakest. The Equity markets did have a brief rally overnight near the European open, but around 4:30 am suffered a price break along with most of the other correlated markets. With the Currency and Energy failure yesterday coupled with some strong resistance on the old Equity swing highs it looks like it will again be difficult for the market to see significant gains today. Moreover, the spike highs left from yesterday's trade in some of these markets show potential for a technical reversal while momentum indicators are also on the verge of producing sell signals in these markets. Bullish momentum looks to be in trouble for the short term, so I recommend lightening up on entry into Bullish macro trades for today. I think it is likely that we are now on day 2 of a 2 - 3 day pullback in the market, so looking for re-entry on the long side should be the trade tomorrow.


Buys to Watch:

Australian Dollar (but wait for larger pullback)- Yes the Australian Dollar is the weakest market coming into this morning, but it still is the best looking supportive Currency chart. The Australian Dollar experienced a sizable break at 8 pm yesterday evening, but all I was able to find on Australian news overnight was a report about a fine against a monopoly telephone company and something about copper wiring...I do not think this was the news item that broke the market. Looking at a daily chart for the market a shorter term trendline on the Bullish move connecting the low July 6th - July 19th low provides a 4 point trend that has a value today of .8829. It just so happens that there is a a low volume zone from .8796- .8848 with the patch from .8796 - .8818 being optimal and with higher volume support from .8760 - .8786, which is back near the original .8772 breakout level for the Aussie. Two consecutive closes below this trendline would blatantly tell me that the rally is over, but this level looks like a good risk/reward trade on the 2 day pullback in the market with the projection to .9297 still intact.

Sells to Watch:

Corn- Again, this Corn trade is strictly technical as there still are concerns about short term demand, yet potentially huge yields still battling on the fundamental story. Below the $3.86 1/2 the market has an objective of $3.62 1/2 on the Bearish head and shoulders pattern. The market did trade lower throughout the day yesterday, but Corn is again higher this morning along with the entire Grain Sector. Optimally I would like to sell Corn on a rally to $3.85 - 3.86 1/4 against the higher volume resistance for the market between $3.86 1/4 - $3.89 with a stop loss just above this level. Above $3.89 the Corn market would no longer be a short. Note: There is a bullish morning star candlestick pattern that could be forming today if the market is able to hold its current level throughout the day, which is a Bullish signal.

Put on the Radar:

Bonds- Bonds have negated their longer term Bullish trend from the lows early April, but there is another shorter term Bull trend that the market is battling with right now. From the May 13th - June 21st lows there is a trend that provides a value directly at the current lows for the market at 126.06 today. Momentum for Bonds remains negative with a clear Stochastics sell signal earlier this week while RSI for the daily chart is currently testing its own lows from the dip on July 13th. I believe that you can expect an initial move to near 123 in Bonds, which is also the 31.8% retracement level from the April lows. Late Note: Despite a small rally in Bonds after the weaker than expected Durable Goods number the Bonds are lower on the day while Equities are also lower...another Bearish sign for Bonds.

Euro/Yen Cross (Euro/Yen to chart)- The Euro/Yen Cross was in the buy section yesterday, but after failures in a number of related Currencies I want to move it to the Radar for right now while still mentioning that I think that it looks good. Today the Cross is seeking confirmation on the Bullish head and shoulders pattern that provides an objective of 119.34 with another close above 113.27. Today the Euro/Yen has given back overnight gains, so waiting for confirmation is a good idea prior to jumping in.


Notes:

Canadian Dollar- After an early initial breakout above .9726 the market failed hard after the Equity open. The market is no longer in play on the Bullish trade.

Crude Oil- With the move below $78.55 and now weaker trade thus far today the Crude Oil no longer has a Bullish pattern projection and I do not recommend owning it anymore.

Mexican Peso- Like the Canadian Dollar the Peso is no longer broken out on its Bullish pattern with two spiky highs left yesterday and again today overnight and I no longer recommend being long.