Thursday 7/1/10 Commodity Ideas

Opening Note:
Although yesterday's market action started off slow (except in Corn) if you stuck around till the stock market close you witnessed a fireworks display as the Equity markets were efficiently dismantled, in almost a calm matter, setting off the large bearish head and shoulders pattern in the S&P 500. This pattern paints an extremely bearish outlook on the entire macro market for the rest of the summer as it points towards another round of global liquidation and de-leveraging that will look similar to the break in late '08. With another lower confirmation close today in the S&P 500 I feel confident that the deal is pretty much sealed as Currencies and Fixed Income have pointed towards this move for months and the risk indicator markets like the Euro/Yen have slid below their old bases from the crash in '08.

Now this is not a stock investors or wealth management newsletter, but rather a letter for Commodity traders that have much more ease in going short a market and when trading should leave emotion at the door in regards to sentiment about a higher stock market. I apologize in advance if I come off at times like an eternal pessimist that wants to plunder Main Streets 401 K's and the Economy to collapse, but this is not my personal beliefs. Believe me I want nothing but the most sincere prosperity for the economy and I personally know how hard it is to find a job right now (who knew the supply of waiters was way beyond demand).

That being said, the entire macro market is starting to look very similar to the garbage it was in the second half of 2008. The difference this time is that as traders we have a clearly laid out blueprint of the general order of market liquidation among the individual markets and sectors. Those that have read my letter for a while have likely noted that my track record definitely dips at times when there is sideways trade or a lack of a real story, but when I get on a roll it keeps coming and makes up for the chop. With a directional move with volatility on the horizon I think it is more likely that this could be on of the makeup times.

I have had a difficult time fundamentally sitting on the Bullish side of the trade even over the last year and a half that saw a decent market rally. Since the dip in the market in early January I have thought long and hard about the game plan for another liquidation scenario and here is a general synopsis of what I am looking at for the next month or two from the Buys and the Sells Sides. Going forward the Best Buys are: Bonds, Japanese Yen, Dollar Index 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. My trade ideas over the coming months will likely trend around these ideas.

This morning the Jobless Claims number was weaker than expectations and led the market lower, but notable to me is that Commodity markets like Copper, Crude Oil, Gold and Silver all found bounces along with Equities after the initial fall after the report. Use caution with these markets this morning. Today is the start of the 3rd Quarter and there is the possibility that there is some new allocation in the market (don't know if I'd be doing that now). I also believe that there have been traders front running this potential allocation and have been propping up some of these Commodity markets in advance. We could see some new inflows around 8:30 CT, but this could also be a setup for a puke by the front runners as the markets continue to liquidate.

Going forward for the rest of the summer I recommend only holding short positions in the supportive macro markets. Now that the S&P 500 has set off the bearish head and shoulders pattern we need to wait for confirmation on the move, which would likely best be met by a weekly close on Friday after Unemployment below this breakout level.


Buys to Watch:

Long Term Trade Ideas- I need to work out the execution ratios for these trades, but for long term traders I recommend buying Gold as a spread against some of the Commodities that I believe will be the weakest performers going forward. In times of deflation and a weaker macro market Gold acts as a store of value away from the riskier assets. I believe that Gold will likely experience a decline in it's own outright price as well, but will hold it's price much better than these other assets. Look at a weekly chart of these relationships as they are advancing on what I believe could be another large spike similar to the one in late '08 and I will work on the execution parameters.

Gold/Crude Oil
Gold/Silver
Gold/Copper

Japanese Yen- The Japanese Yen is on a bullish head and shoulders pattern that had a breakout level of 112.00 and has a projection to the a range around the 119 level. This morning the Yen is on a tear higher as a risk aversion asset that really broke out just before the Jobless Claims number. For entry today I am looking at buying a pullback into the low volume zone left from this early rally between 113.64 and 113.96 with higher volume support for stop placement ranging between 113.14 and 113.56.


Sells to Watch:

Crude Oil- I am still keeping this trade in the sell section, but proceed with caution this morning as the market continues to rebound on large buying as there could be some allocation this morning. However, Crude Oil has a confirmed reversal below $75.17 that has a projection to $70.96. There is a small low volume zone for short entry between $75.06 and $75.10 with some smaller higher volume trade from $75.14 and 75.38. But, the larger high volume resistance level is from 75.38 to 75.88. Both Stochatics and RSI for the daily chart remain in a bear market range and show a continuing decline in momentum and price.

Nasdaq (with S&P 500 indicator)- The Nasdaq has a large bearish head and shoulders pattern similar to the S&P 500 that actually was set off a day prior with two consecutive close below 1781 now projecting a move to 1479. As noted in the Opening Note, the S&P 500 has set off it's own bearish head and shoulders pattern below 1033 yesterday that projects to 856 - 870. For entry today there is a large low volume zone in the Nasdaq left from yesterday's break on the close between 1739 - 1755.50 with high volume resistance near 1762 for stop placement. The Nasdaq should be the weakest performer among the Equity Indices going forward, as it was the biggest gainer on the way up, and I believe is the best short. A close above 1033 today in the S&P 500 would make me reconsider holding this short position however even if it was working.

Put on the Radar:

Metal Sector- Gold has now violated it's nearby upsloping trendline with 3 consecutive closes meaning that liquidation is now on the horizon for the Metal markets. Below $1232 today Gold sets off a small bearish head and shoulders pattern that will likely take the market below the $1225 level, which would confirm a bearish reversal. However, I am still more interested in shorting the Silver market as it is more of an industrial metal that is uncharacteristically being propped up on buying in the market as a precious metal. Silver continues to post (what I believe are manipulated) closes just above it's own individual nearby uptrend, which lies at $18.60 today. Below $18.295 today Silver sets off a bearish head and shoulders pattern that projects to $15.75. With still large open interest in the Metal Sector I believe that once Silver sets off this pattern that the move lower will be extremely fast, so be ready to hop on it.

Notes:

Bonds- I no longer recommend a strong entry into the Bond market from the long side, but purchasing a half or quarter position should still be a good trade going forward. The Bond market has met it's 127.17 bullish cup and handle projection and is looking a bit over-extended on the daily chart. But, there still is a triangle projection for the market to 129 and as long as the Equities continue to weaken we should see gains in bond prices. This morning there is a high volume support level from 127.11 - 127.12 for small long entry and stop placement below if you are still holding a longer term position.