Thursday 7/15/10 Commodity Ideas

Opening Note:
When I woke up this morning my first two thoughts were "Damn, it's like a convection oven outside already" and "This looks like a pretty awful day to be trading". At 6:30 am now both of these statements still stand.

Yesterday was mostly a sideways range day for the supportive Commodity markets with swings back and forth as fundamental news was released. While Earnings have mostly beat expectations thus far the Economic releases continue to be disappointing with the Fed Notes yesterday confirming the speculation that they would downgrade their forecast on the recovery (Really? The Fed's not behind the curve at all again...). This provided a small break in prices, but after finding support the Equities were able to again close just slightly higher on the day. With so much negativity already baked into the market according to some analysts in the media I would not be surprised if their response to a catastrophic natural disaster right now was "Well this is not positive news for the market, but the market was expecting a large-scale disaster such as this".

While the supportive markets were mostly range bound yesterday the Bullish reversal by the Fixed Income Sector was the most notable move for the day, showing divergence from the correlations across the market that pointed towards further gains on the macro rally. After a lower day on Tuesday, that temporarily negated the Bull trend for the market, Bonds were able to reverse higher on a positive 30 yr. auction and the extension on the timeframe for economic recovery from the Fed. The fact that now both the Yen and the Fixed Income markets refuse to move much lower does not agree well with much more continuation higher in Equities or Commodities. Although money can flow into both the risk and risk aversion assets at the same time, the general relationship over the last few months has been an inverse between Equity and Fixed Income prices and I do not believe that this will change going forward over the rest of the year.

Right now I sit here a bit befuddled at the current macro picture and honestly do not have any trade ideas that are in play today. The supportive markets are again all higher this morning, although only slightly, with the Dollar Index the largest decliner and the Fixed Income markets hanging tough and only slightly lower. The S&P 500 is pretty much stuck in a range for right now between higher volume support and resistance. With two fairly weak attempts at an assault on the volume resistance I believe that the Equity and Commodity markets may come under a bit of pressure over the rest of this week, so I expect more two sided trade today and tomorrow and honestly do not see any reason to take part in it. However, the path of least resistance over the rest of this month still appears to be higher so I am still looking for buying opportunities over the short term.

With mostly a range trade over the month of July, despite some big swings, I am making a temporary rule that I absolutely must have confirmation before entering a breakout on a pattern trade. Part of my trading style is front-running some of these likely patterns with low risk and larger reward, but all that this approach is producing right now is chop. I have a few trades that remain on the radar for now and I recommend waiting with me on the sidelines for confirmation on the move prior to entry. I personally plan on leaving early today and would recommend the same for any trader that does not specialize in trading ranges.

Buys to Watch:

Sells to Watch:

Put on the Radar:

S&P 500 (what to look for today and tomorrow)- The S&P 500 is stuck in a range between higher volume support and resistance that is creating a choppy swing trade between the levels. The higher volume support for the market falls between 1069 - 1081with the 1069 - 1075 portion being stronger on the more recent trade. Meanwhile, the high volume resistance lies between 1105 - 1114. Yesterday my low volume buy zone between 1082 and 1085 acted as a base on both market dips throughout the day and the Dow level between 10,256 - 10,277 has acted as a base now 3 times in the last 24 hours. However, this base now looks only good on temporary moves. Between 1098.25 and 1103.25 there is a low volume zone that is a great place to take profits on long positions as the market has failed each time it has reached this zone and confronted the high volume resistance. I believe that the market is now likely to make a stronger test of the higher volume base over the rest of this week so I encourage taking profits on long positions and limiting expectations on trades to levels between this range.

Australian Dollar- As I am now waiting for definite confirmation on pattern breakouts I am moving the Aussie to the Radar from the Buys section. The low volume zone from .8722 - .8730 with higher volume support from .8672 - .8712 provided support on 3 dips over the last 24 hours, but the market still refuses to hold a trade above the .8772 breakout level. Above .8772 the Australian Dollar has a projection of .929 on a large move that may last over a month. Rather than attempt to front-run the move I recommend waiting until there is a clear rally above the breakout level.

December Soy Meal- The August contract for the Meal was in the Buy section for a number of days last week, but with the decline in the Aug - Dec spread and the the Aug- Nov Bean spread the August contract is no longer the desirable way to play the bullish Meal trade. The December Meal chart has now finally begun to catch up to the Bullish characteristics of the Meal front months and provides a longer term way to ride the trade higher. Today the Meal is trading above the $279.8 breakout level that provides an objective of $307.1 on a confirmed move above this level. I am waiting for two consecutive closes above this $280 level prior to looking for entry on the Bullish move.

Notes:

September Cocoa- The fundamental story for the Cocoa is a short term demand increase that is tied to large open interest still remaining on the front month July contract as it nears expiration, especially in London. Although this story is short term bullish, most of the fundamental reports I have read for the market still do not predict a much larger bullish move, so this technical trade should sit in the notes section for now. Technically the chart projects a move to $3348 above $3144. Yesterday the market settled just above this breakout level at $3153, but today the trade has not had bullish acceleration while it has had the chance. I am not a big fan of this trade yet, so there is a reason it is in the Notes unless conditions improve.

Euro and Swiss Franc- The European Currencies have acted impressively over the last few days and today the Swiss Franc has a measurable Bullish pattern breakout. Above .9553 the market has an objective of .9730. I also know that the Euro is now above many stop levels for shorts ranging between 1.28 - 1.2850 as short covering still appears to be leading these Currencies higher. On a bullish head and shoulders pattern formed at the base for the Euro I have an objective of 1.3090, which is a level that could coincide with the Swiss Franc objective and be a good level to take profits.