Friday 7/16/10 Commodity Ideas

Opening Note:
Led by an opening break the Equity markets cleared out some of the weak longs in the first hour of trade, but found support on their higher volume base to rally in the late afternoon to settle only slightly lower on the day. This again was an impressive performance from the Equity markets as positive Earnings reports have trumped the weak Economic data and concerning macro troubles around the globe. The Equities have been the leader in the macro market over the last few days and I have expressed optimism that they have good potential for short term continuation, but as of this morning I am concerned that this is not likely not the case anymore as a number of factors are pointing towards a top forming and ensuing move lower:

First off, the risk aversion markets of the Japanese Yen and Bonds now have reversed to maintain their climb higher, and in the Yen's case have now rallied to new highs on the move. The Dollar Index, one of the other risk aversion markets, has come under significant pressure over the last month, but is now entering some higher volume support between 80.50 and 82.50 that should provide a good reversal opportunity for the market.

Next, I will go into greater depth in the Notes section, but I have about 7 different supportive markets across the Currency, Energy, Metal, and Equity Sectors that now look like they are possibly forming bearish head and shoulders patterns on their daily charts. The first few could be coincidence, but to have 7 that fit this basic pattern is not accidental.

Furthermore, the supportive markets like the Australian Dollar, Crude Oil, and Copper that ran higher in front of the Equity rally have given back strength lately. All have had futile attempts at taking out the previous swing highs for their individual market and have fallen into more of a laggard mode in relation to the Equities. The rally patterns had sizable projections that would have pointed to a large macro rally, but after 9+ spike failures in the Australian Dollar over the last 4 days I do not believe that the 10th attempt has a strong possibility of a rally breakout.

Finally, the S&P 500 is trapped against higher volume resistance ranging from 1105 - 1114, the 1130 level that is the 50% retracement level from the April highs, and the roughly 1145 level that coincides with the 61.8% retracement level from these same highs. Sure there may be attempts at taking these out, but the fundamental support for the market is waning along with momentum. I seriously doubt the Equities ability to continue above all of these resistance levels for the time being.

This morning the market is pretty close to even across the board with a rally breakout above 115 for the Japanese Yen, further short covering in the Euro near the 130 level, and subsequently a lower Dollar the most notable moves. For today I believe that it is likely that the market will remain rather range bound heading into the weekly close, but as I have made the case already, the momentum in the market has shifted from a bullish mode back to a bearish tone. With most markets still remaining in a range bound trade I do not feel that this is the time to begin making large longer term bets one way or the other because the possibility still remains that the macro market moves higher or lower, with the move likely having momentum after this consolidation buildup. However, the probability that the move is lower has now increased.

Buys to Watch:

December Soybean Meal- I know that I am waiting for 2 daily closes for confirmation on the move, but when the Meal has over a $10 rally on the breakout I feel pretty confident that the move will hold. The December Meal rallied above the $279.8 breakout level yesterday with a close above $290 and now has a projection of $307.1. The December contract again outperformed the August contract yesterday, which also gives more confirmation that this is the better long term market to play the Meal rally in. For initiation of a long position today there is a small low volume zone between $287.4 - 287.8 with higher volume support 286.4 - 287.2. This is not the greatest entry level, but with the market hanging higher overnight without much of a pullback I wanted to provide this higher number. If the market does provide a larger pullback then the range from $281.6 - 286.0 is all a low volume zone for long entry with higher volume support from 279 - 281 for stop placement below. It is also important to keep an eye on the November Soybeans. Right now I have a smaller projection for the Nov Beans of $10.00, but the market did close above the $9.87 swing high from April yesterday, which could point towards a move near $11 if momentum maintains.

September Cocoa- I put this one in the Buys section with caution. The September Cocoa now has two consecutive closes at or above the breakout level of $3144 and now has a projection of $3348. Cocoa has moved higher early this morning and the two previous days of trade now provide some good support to purchase against. There is a lower volume zone between $3156 - $3174 left from this morning's rally with higher volume support ranging from $3126 - 3154 for stop placement below. I am strictly waiting for this pullback level and placing my stop just below this higher volume support upon entry because below this level the market easily has the ability to fall over $100. There is also resistance in the market between $3225 and 3256 that will provide some pressure on the market if it is reached. This is my least friendly trade suggestion for the time being, so I recommend using smaller size for execution.

Sells to Watch:

Put on the Radar:

S&P 500- The S&P 500 is still in the range between high volume support and resistance. The resistance still remains between 1105 and 1114 with the low volume zone between 1098.25 - 1103.25 being a good level to take long profits or to enter a short position fade against the resistance levels. The higher volume support still falls between 1069 - 1080 with the stronger portion between 1069 - 1075 being a good level to take short profits or enter a long position fade against between 1076 - 1081. Per my essay in the Opening Note (with great transitional paragraph intros I must add) I believe that we are now more likely to take out the support level than the resistance level, but this range will likely hold for at least today.

Australian Dollar- The Aussie has been on the radar as a potential buy for well over a week, but momentum in the market appears to be shifting meaning that it is no longer a buy. Over the last four days there have been at least 9 attempts at a breakout above the .8772 level, but each rally has ended in failure. It is now very unlikely that there will be a successful move above the breakout. I still recommend keeping this market on your radar as an indicator, because a move below .7600 would mean that the support has fallen apart and the macro market will likely travel lower with the Aussie.

Japanese Yen- In my confusion over the last couple weeks my opinion of the Yen shifted to more of a potentially Bearish correction on the Bullish move, but since finding support at the low volume level between 112.12 and 112.54 the market has taken off on a rocket fuel rally. This morning the market has held a rally above the 115 resistance level that would now point towards a resumption of the earlier objective of 119 for the market. Along with the Bond market I know believe that you have to look at the Yen as market to strictly only look for buying opportunities.

Notes:

The 7 Supportive Market Bearish Head and Shoulders- The markets are: Crude Oil, Dow, Palladium, Platinum, Silver, Canadian Dollar, and Peso (yes the Peso is supportive). With each of these markets putting in an initial top on what could be a right shoulder over the last few days it appears that the macro market's momentum is also losing steam.

European Currencies- You say tomato...I say short covering. Yes the Euro, Pound, and Franc will all higher yesterday again, but this is not to be taken as a supportive move for the macro market. The European Currencies were the most popular short over the first half of the year and this recent break appears to now be nothing more than temporary short covering lately. I know that the violation of the downward trend for the Euro yesterday between 1.28 and 1.285 caused a number of shorts to cover, which has continued into today. However, I believe that these markets will now lose bullish steam. The Euro has a projection of 1.3090 and the Franc a projection of .9730. I believe that these are great levels to take profits on long positions if they are reached and also levels to start looking at shorting these Currencies again.

Bonds- With the reversal and resumption of the upward trend in the market I believe you have to look for further buying opportunities going forward. The weekly chart for the Bonds still has a pattern projection between 133 and 134, which along with confirmation from the Yen is now the next target area. There is a good low volume level between 127.01 - 127.11 with higher volume support at 126.25 - 126.26 for stop placement. This is a great setup, but before placing the Bonds on the Buy list I would like to see a rally above the 128 resistance.