Friday 7/2/10 Commodity Ideas

*Extra Early Pre-Unemployment Edition: Why do I wake up an extra hour earlier than my normally ridiculous wake-up time? So I don't look like an idiot spending 2 1/2 Hours working to have the number make my observations obsolete. So enjoy and Happy 4th of July!

Opening Note:
From a macro trader's perspective let me tell you that yesterday was one of the oddest allocation and realignment days at the start of a quarter that I have ever seen. The Dow dipped into triple digit losses to recover to nearly even by early afternoon, Gold and Silver finally began their puke like I have been expecting for months, the U.S. Dollar got pounded while European Currencies rallied, Energies fell apart, and huge short covering continued to rally Corn and Wheat post-report. What does this all mean? It means that there is a lot of uncertainty out there right now and the general theme for yesterday was unwinding of both short and long positions all over. What this did was swing many of the correlations within the market, with the large Dollar Index break in conjunction with large Metal and Energy price breaks seemingly the oddest move. Much of this was caused by the large unwind of the popular Long Gold vs. Short Euro Gartman trade that was liquidated in mass yesterday.

While many traders have been short the Grain Complex (specifically corn and wheat), European Currencies, and Equities it appears that while much of the market has become bearish the money is even fleeing the short positions prior to today's Unemployment Report and possibly for this Quarter. Meanwhile, the long liquidation of some of the popular investment Commodities in the Metal and Energy markets was apparent right on the stock market open. About a week ago I predicted that this Gold trade has become so overloaded (and seemingly manipulated on the close to barely maintain the Bullish trend) that there would be an initial $60 drop on the day the bubble burst. Well Gold fell over $45 by late afternoon yesterday as the Silver market also burst on an over-allocated and arguably uncharacteristic trade for the fundamentals of the market.

Today nearly all of the market is expecting a Bearish Unemployment Report, but the question is if it does come out Bearish is this a Bullish sign on an overloaded short the market trade? The jury is still out and this morning and I am coming in nearly flat as yesterday's action left me saying "Thank you I picked the right markets, but get me out of here". I still maintain a Bearish stance on the macro market with the S&P 500 maintaining its head and shoulders pattern below 1033, but when these patterns fail it is usually on a 2 - 4 day dip below the breakout where the market finds a base and then shoots back out the top. Yesterday the Equities set up the "trendline of death" to slowly tick the shorts out of the market and rally from it's lows back near the open, which could be a sign of a temporary base and subsequent failure on the pattern. Also, why is Copper not following or leading the market lower? For right now I recommend continuing to trade with smaller size and only initiating short positions on supportive Commodity markets. Markets will be thinner today due to the long holiday and there is no harm in waiting till the dust clears Tuesday to enter positions.

Going forward the Best Buys are: Bonds, Japanese Yen, and Gold as a spread against a short position in another market. Going forward the Best Sells are: Nasdaq, Copper, Silver, Palladium, Crude Oil, and Australian Dollar.

Buys to Watch:

Japanese Yen- The Japanese Yen still maintains it's bullish breakout above 112 on the large head and shoulders pattern with a projection that ranges right around the 119 level. The Yen was an early strength yesterday and while it did manage to close well it did so after falling 80+ ticks off its high. For entry today there is a low volume zone between 113.70 to 114.02 with some minor higher volume support near 113.54 and better high volume support near 113.26 for stop placement. This low volume zone was traded into overnight and found support already on the minor support level thus far, but would still be a good spot for long initiation today if it is pulled back into. The Yen daily chart is becoming slightly overextended though with Stochastics close to producing a sell signal for the daily chart and RSI also reaching higher into overbought territory. Furthermore, the Yen has struggled near the 114 and 115 levels when it has reached them as the Japanese Government likes this level to intervene and devalue its Currency (I think they are setting up to get run over if they are trying it again this time). So, I suggest using a smaller size than normal for the new purchase of Yen.

Long Term Spread Trades- As yesterday was extremely busy for me trading-wise I did not have the time to work out the execution ratios for these spreads, but this may be a good thing as Gold liquidation may continue with volatility over the short term. Although Gold did have an initial strong liquidation yesterday, these trades are based on a deflationary weakening economy that should work for a number of months where Gold should hold its value better than the weaker markets. Keep these on your radar as a weekly chart and we can explore them again on Tuesday to decide if it is the right environment for entry.

Gold/Crude Oil
Gold/Silver
Gold/Copper

Sells to Watch:

Nasdaq (with S&P 500 indicator)- Below 1781 the Nasdaq has a confirmed breakout on the bearish head and shoulders pattern with a projection to 1479. The S&P 500 also still has this same pattern as well that is now confirmed with another close below 1033 with a projection range from 856 -870. In the Opening Note I expressed concern about the possible negation of this pattern with a short term base possibly setting up and leading to a short covering rally. Another note of temporary concern is the "death cross" that is approaching where the 50 day moving average crosses the 200 day moving average showing one of the most recognizable Bearish patterns. It is very possible that the market finds some temporary support as the Bulls have a last gasp at saving the market meaning some gains in Equities for the time being. However, while these patterns are still broken out on Bearish patterns I am still willing to step in at good spots to short the market with a smaller than normal position. The Nasdaq should continue to be the weakest Equity Index and the low volume zone between 1739 and 1755.50 with higher volume resistance near 1762 for stop placement is the level to get short at today.

Silver- Silver finally set off the bearish head and shoulders pattern with a close below $18.30 that has a projection to $15.75 on the large move. Today this neckline is sitting at $18.32 with a close below this level confirming the pattern. Today there is some volume resistance at $18.115 that has provided a top on the market overnight, but a good low volume zone from $18.13 to $18.24 with higher volume resistance at $18.25 for initiation of a short position. I know that Gold also has had strong liquidation, but Silver should be the better longer term short trade as the Fundamental story for the Commodity is one that falls harder with deflation and a weaker economy. This move lower in Silver is likely to be extremely fast, so I recommend getting on it when you have the opportunity.

Crude Oil- Crude Oil has a projection to $70.96 with the confirmed reversal below $75.17. It is also likely that the market is now in the midst of a second leg lower on the large bearish move that projects to $58 - $60. For short entry today there is a low volume zone from $73.30 to $73.92 with higher volume resistance near $74.52. This low volume zone was barely breached overnight and as it is rather large I suggest waiting until the market nears the top of it before entering a short position on a rally.

Put on the Radar:

Palladium- There is a VERY large topping pattern in Palladium that is on the verge of breaking out. Because Palladium is such a thin market and I'm not sure if anyone that reads this letter actually trades it I will lay off of a description today as I am running out of time and come back to it on Tuesday.

Notes:

Bonds- Bonds found another rally yesterday morning, but the market now feels like it is on it's last breath for the current rally prior to the pullback. The bullish cup and handle pattern has been reached at 127.17 and the 129 triangle projection was also nearly reached yesterday afternoon. I recommend liquidating longs for the time being. On the weekly chart I project the Bonds to rally near 133, so this will likely be a long position to revisit in the future.