Friday 7/9/10 Commodity Ideas

Opening Note:
Yesterday the 7:30 am (CT) Jobless Claims report set an early tone of gains in Equities and Commodities that despite trending lower after the first hour of trade were able to mount an impressive late afternoon rally to close back near the early highs for the day. The Australian Dollar again led the gainers along with Crude Oil while the risk aversion assets like the Bonds and Yen finally had a decent sized break as the laggards, confirming the 3 day inflow into riskier assets was not an errant move. The macro market story however took second fiddle to the Kevin Costner-like (the guy's a movie star and he's nearly single-handedly cleaning up the Gulf) Grain sector. Further short covering in Wheat and Corn and a complimentary Soybean rally in the sector fueled continued gains and new breakouts above consolidation ranges prior to this morning's crop production and supply/demand reports.

I have had an inner-debate over the last 48 hours whether trying to catch the bullish side of this recent rally should be in my game plan and whether it is something that I should recommend to readers. I continue to be fundamentally and technically bearish going forward for the rest of the year, but if the Bulls are right this could be the reversal that shoots the market to new highs as relentless shorts are caught in their positions. So, I have put together a contingency plan (The Where Are We Going Special) in the Radar Section that should outline and provide confirmation on whether this is a Bull move to jump on or a new top to Fade.

This morning the macro market is pretty mixed with the Canadian Dollar and Coffee sticking out as the biggest winners and Bonds and the European Currencies the laggards. When I say leaders and laggards I would also like to note that even the movers are small thus far. The market direction for the day remains uncertain to me at this point, so again there are only a couple trade suggestions for today. I still recommend trading smaller for the time being and taking profits when you have them as the intra-day swings counteract much of one's ability to hold positions through the noise.

*Grains and Cotton have Crop Production and Supply/Demand Reports this morning. Both of my current trade ideas are among this group so please check out the reports for yourself prior to following the suggestions. As I do not have time to pour over the reports prior to sending this letter I will send a follow up prior to the Grain open at 9:30 CT if there is a significant change that will effect the trade ideas.

Buys to Watch:

August Soybean Meal- The August Soy Meal had a new 2nd higher close above its bullish breakout level of $293.9 yesterday further confirming the new market projection of $324.7. As stated above, there are significant Grain reports that will effect the market, but with the Grain Sector rallying on all cylinders the Auggie Meal was able to rally to $303.7 before falling in the last 10 minutes to settle at $297.6. This left a spiky top on the daily chart that is a bit unsettling along with the fact that RSI for the daily chart has climbed into overbought territory for the time being. Furthermore, the November Soybeans, which are leading the way among the Soybean Complex, rallied above their own swing high breakout level of $9.47 1/4, but were unable to hold a close above this level leaving the door open for a rally failure in the market. However, Stochastics for the Meal chart remain in a positive mode that is not yet overbought making the RSI move less concerning, as it can hang up in this O.B. territory for a while, and the chart still looks great. I will not recommend levels for entry today as the open after a report is very dicey, but I am still maintaining my stop level below the $289.2 high volume support level for the time being and will be looking for further entry as long as the report is satisfactory.

****Late Note- Initial report for Grains and Soybeans looks moderately bearish. Be careful on entry into Meal today.

Sells to Watch:

December Cotton- December Cotton was on the Sell list Wednesday, but after strong buying entered across the entire macro market the bearish breakout for the market was negated. Despite the macro rally December Cotton still positioned itself as a laggard among the Commodity Sector and with a price break yesterday settled with a low close below the 74.09 cent breakout level. The market now has a projection to roughly 69 cents on the dot. While the Grain Sector is closed during the release of the 7:30 am (CT) report, the Cotton market is open so it should be reliable to enter the market once the report is released. There is not a great level for entry this morning, but placing your trade around a stop level just above the 74.60 higher volume resistance is a good idea and be aware that the market has found support near 73.65 both of the last two days.

Put on the Radar (The Where Are We Going Special):

To formulate a contingency plan on how to play this most recent market rally I have put together a group of markets that encompasses both riskier assets and risk aversion assets. I am using the S&P 500 market as the leading indicator for the Equity Sector as a reference point, the recent leaders among the risk assets technically in the Aussie Dollar and Copper, and the risk aversion markets of Bonds and the Japanese Yen. First I will describe what I am seeing in each individual market:

S&P 500- The S&P 500 has had an impressive rally over the last 3 days with only a minimal pullback, but it is now coming upon heavy volume and technical resistance. Between 1070 and 1081 there is a significant chunk of trade that has already acted as a pivot point for the market on numerous past encounters. Furthermore, when you measure the Fibonacci Retracement levels from the 1130 spike high to the 1003 base you receive a 61.8% retracement level of 1081 on the dot. Above this 1081 pivot point the market will likely rally to test the 1117 high close level and 1130 on on the most recent swing high and has a decent possibility on continuation above these levels.

Australian Dollar- As noted on yesterday's radar, the Australian Dollar is testing the .8675 previous high close and .8772 high trade from the last swing high. The Australian Economy has received positive news over the last week with upgrades on growth and unemployment, which has boosted the Aussie Dollar market independently above many of the other correlated Currency markets. This is the first market that is highly correlated to the U.S. Equity market to test it's latest swing high making it one of the better upside indicator for the macro move. When you measure the Fibonacci levels from the April highs in the market to the lows on the May dip you receive a 61.8% retracement level that is right at the previous .8772 high. Although the Aussie made a higher close yesterday above the previous swing high close it has fallen overnight and not had a significant attempt at the .8772 high. If the market is able to rally and hold a move above this high it projects a move back to the highs for the year above .92 making it one of the best buys.

Copper- Copper is in a triangle consolidation for the time being. To form the triangle draw a top trendline from the Close May 13th to the High June 25th and draw your own bottom for the time being as it is not really in play for the time being. This descending top provides a value of $3.0770 today that will act as resistance. Furthermore, there are "single prints" (extremely low volume area) from 3.0760 - 3.0830 with high volume resistance from 3.0840 - 3.0920 that should provide stronger resistance near this top trend. A bullish breakout from this triangle would likely mean a 50 cent move from the breakout level and likely point towards a test of the highs for the year.

Bonds- Bonds have faded over the last few days, but the market still has a strong uptrend intact. To form this trend draw a line from the Low April 29th to the Low June 16th to receive a support level of 125.29 for today. Like Copper, Bonds also have "single prints" on the market profile from 125.26 - 125.28 with some high volume support ranging all the way from 125.09 to 125.24 for further support. The Bonds are a risk aversion asset that moves opposite Equities for the time being, so support and resumption of the upward move would mean a break is likely to occur in Equities and Commodities.

Japanese Yen- Like the Bonds, the Japanese Yen has had a strong uptrend over the last month and a half as a risk aversion asset. Although the Yen does not have a good uptrend for the chart that is nearby there is a significant low volume "Gap" left between 112.14 and 112.56 with some higher volume support from 111.96 - 112.12. This low volume zone was one that I was looking to be filled a couple weeks ago as a good zone to buy, but was never traded back into. This area would likely provide decent support if it was traded into over the next few days.

**Putting it all together- So, taking all of these markets together as indicators it looks like the macro market is running into a significant wall nearby that should provide resistance for a move higher. It is likely that all of these markets move to test their individual levels at nearly the same time and I kind of like to look at the overlay between them as a spider web or balloon that stretches and bends but maintains for the duration. If these support resistance levels fail then I believe that you can follow the Bullish side of Equities and Commodities as the S&P 500 will likely test 1130 and the Aussie and Copper should be the best buys among the supportive markets. However, for the time being I am willing to step in with some small size at these "single print" and low volume areas with a small initial size to attempt a lower risk fade on the markets. I think that maintaining the risk/reward is crucial, so I recommend only stepping in once these markets reach their individual levels.


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