Ooops..the real post Thursday 7/8/10

Opening Note:
Well, yesterday was the short covering rally that I was concerned about on Tuesday, but failed to predict in yesterday's letter after the rejection of Tuesday's similar attempt left me more comfortable entering short positions. Buying came into the market starting at 7:30 CT and continued throughout the morning and again in the afternoon. Watching my quote board and a number of trading ladders from different sectors I can also tell you that from 9:30 - 10 am CT that large money came into nearly every Commodity market across every sector to literally buy a piece of nearly every supportive market (including the recently less correlated Grain and Soft markets).

Yesterday's rally has now negated the large bearish top on the Equity markets for the time being and, as I warned earlier in the week, could become a rocket shot higher for the market. Especially when they are blatantly obvious as this one was, head and shoulders patterns have a tendency to reject their pattern by creating a short term base below the breakout level and propelling higher with momentum on short covering. I believe there is a good chance that the short covering continues over the next week as opportunistic Bulls take advantage of what now looks like a temporarily over-crowded short the market trade.

However, I am in no way ready to call these lows from last week the bottom of the market decline or a long term base to purchase off of. For right now I believe that we will see some sideways trade with continued short covering, but until the S&P 500 is able to hold a close above the 1130 (50% retracement level) and 1150 (roughly 61.8% retracement level) I am not too excited about pushing the bullish side. For most of yesterday the risk aversion markets continued to hold their value well in comparison to the large move higher in the riskier assets and still are only slightly lower today.

I still strongly believe that this rally is another sidenote in a large bearish move that is in motion for the macro market that will lead Equities and Commodities lower likely over the rest of the fiscal year. However, I no longer recommend only entering short positions in the supportive markets for the time being and actually feel that this rally has good continuation prospects over the next week. In the Radar section today I describe in greater depth a few markets to keep your eye on as indicators for the duration of this current rally, but for right now I do not have many market patterns or trades on my radar. I continue to encourage trading smaller size, especially now that the market is back in the No Man's Land Trading Range.

Buys to Watch:

August Soybean Meal- The Soy Meal has been a strength among the Grain Sector throughout the last couple months as Corn, Wheat, and Soybean Oil have lagged until recently. But, with renewed strength in the Grain Sector since the June 30th Stocks and Acreage Reports and Soybeans garnering a decent rally yesterday the Soy Meal is beginning to look like an attractive buy that finally has some upside momentum possibilities. The front month spreads have traded at a premium over the back months for the majority of the year making the less liquid August contract the better buy than December for Meal. Yesterday's strong rally and continuation this morning established a breakout above the $293.9 high trade from April 22nd and established a new high close above this same date, marking a the highest close since early January for the contract. The market now has a projection of $324.7 for the August contract. For current entry I will be holding off on entering a full position for the time being, but will structure my purchase this morning based around higher volume support between $289.2 and $290.4 with a stop just below this level. Please be aware that there is a crop production and supply/demand report for the Grain complex tomorrow that can severely effect the market. For this reason I am only looking to enter a minimal initial position and will not be carrying it through the report unless some profit cushion is established prior to tomorrow.

Sells to Watch:

Put on the Radar:

Risk Aversion Markets- Throughout most of the macro rally yesterday the Bonds, Ten Year Notes, and Japanese Yen all held their prices very well relative to the rally in Equities in Commodities. In contrast though, they are all moderately weaker this morning, and more so than one would predict in comparison to the slight rally in the macro market thus far. I removed Bonds from my Buys column late last week under concerns that they were tiring on their rally and today I am removing the Yen from the Buys as well, but the lack of downside movement in these markets still makes me believe that we are not out of the woods on this bearish move. We shall see how the market rally progresses today and the rest of the week, but unless the risk aversion trade unwinds alongside the rally I would proceed with caution when buying.

Australian Dollar- The Aussie Dollar has moved in a tighter correlation to Equities and Commodities than the other Currencies over the last few months and is a good barometer market to keep an eye on as well. The Australian market received some positive upgrades on growth and unemployment recently which has propelled the Currency higher on its own, but the rally over the last three days has been strong and actually preceded that of the market yesterday. The swing high for the Aussie had a high trade of .8772 with a high close of .8675 that is now being tested today. These highs correlated time-wise to the 1130 level in the S&P 500 and if the Australian Dollar is able to hold a rally above .8772 it projects a move back to the highs for the year and would be a good indication that U.S. Equities could follow this path.

Notes:

Yesterday's Trades- Every trade that I suggested yesterday was negated by mid-morning as strong buying sent the market above all of my stop levels. Even the less correlated Cotton and Coffee markets found buying enter the market around 9:30 that continued throughout the rest of the day. The Yen was able to hold on until the afternoon, but also fell in price as my only Buy suggestion for yesterday. I am not interested in looking for bearish macro trades for the time being as the rally is likely to continue, so I no longer recommend executing any of the directional trades from yesterday's letter.