Thursday 7/22/10 Commodity Ideas

Opening Note:
Yesterday
Boy...the stock market is not very friendly to Bernacke right now. Although the market was already trading slightly lower yesterday it was a mid-day break prior to Bernacke's speech that sent the market lower to close without a hint of a rally for the second half of the day. While this was happening the Fixed Income markets exploded inversely to new highs while the supportive Commodity and Currency markets fell apart along with Equities.

Today
Now jump to this morning...the Dow already has triple digit gains, Copper has continued higher on its torrid pace, every Currency on my board is at least moderately higher (except the Dollar), and nearly every supportive Commodity market is also trading higher. However, the Fixed Income markets really are not seeing much of a price break thus far and the Yen remains slightly higher on the day as another risk aversion market. The main driver this morning is more earnings beating expectations and a positive PMI number out of Europe that has overwhelmed the Bearish sentiment of yesterday's uncertain comments out of Bernacke, but we shall see if Jobless Claims or Existing Home Sales this morning take apart these gains.

Important Correlations
A few things are important to note among the inter-commodity correlation web. We still remain in a very tightly correlated market for the time being, but there is again some divergence among the Bullish and Bearish pull for right now. Pull up a daily chart of the Bonds and slap a trendline on it from the low April 7th to the low June 16th and notice that this Bull trend has not had two consecutive closes below it for this entire time. There are times when money flows into both Fixed Income and Equities, but this is not an instance where that correlation is in play. Fixed Income, being the largest worldwide market, tends to lead Equities and not the other way around. The fact that we are beginning to see some scary levels on these Fixed Income markets again does not paint a Bullish picture for the Equity markets. If the Fixed Income tends to lead and has a straight uptrend over the last 3 1/2 months while Equities have sat sideways over the last couple months we could see a lagging move lower in the stock market on the heels of this current drop in interest rates.

However, over the last 3 days Copper has completely taken off on a genuine rally and this morning the Australian Dollar has finally made new highs after repeatedly failing on its 8 previous attempts. Although the market now looks like it is fading after the Jobless Claims number, both of these are positive short term signs that could lead the macro market higher for a short period. Crude Oil and some of the other Metal and Currency markets are not showing the same voracity though, so take these signs with a grain of salt at least for today.

Day Trade is the Smart Trade
This market action over the last 24 hours is again why I feel that day trading is the way to go for right now. If you did sell the Dow yesterday afternoon you went to bed with a triple digit winner, but woke up with just about a scratch this morning despite your excellent analysis. With overall positive Earnings reports and overall negative economic reports lately we have a bi-polar sideways market that is difficult to predict and shifts on a 12 hour basis. Focusing on shorter moves and taking profits when you have them should continue to be the way to trade for the rest of this month.

**Late Note- The market has recovered nicely since the weaker than expected Jobless Claims number. Although there was not much buying on the Metal open the Energy market has seen big buying enter since it's open. With the Stock Market now hanging near it's high it is very possible that there could be an early rally. However, between 1077 - 1079 for the S&P 500 there is resistance as well as from 1086.50 - 1091, so I do not expect the rally to continue much higher.

***European Stress Tests Released Tomorrow
Buys to Watch:

December Soybean Meal (and the Grain Sector)- Seriously...throw me a bone here. I have been on the Soybean Meal rally for a couple weeks now, as it has the best technical looking base and fluid chart pattern among the Grain Sector, but despite having good support the market just can not seem to hold a rally. The cards have not fallen right for the market on a number of different occasions now as well, as again this morning the Grain Sector is higher but the Bean Oil is leading the Soybean Complex. Right now if you are still long Meal you need to keep an eye on the Oil Share chart (Dec. Bean Oil - Dec. Soy Meal) to decide whether to hold the Meal position. This spread has set up a base, and looking at a 60 minute chart if it is able to rally above 1125 it looks likely that continues to at least 1250 in favor of the Bean Oil. It is also possible that it heads back into this base range, so until the spread has a rally breakout I would stick with the Meal for the time being.

For entry in Meal the higher volume support is still between $279 - 281 and the longer term projection is to $307.1 for the market. With the lows overnight at $283 in the Dec. Meal I now will not hold a long position below this level and will instead look for entry in either a long position in Soybeans or Wheat (Wheat rally above $6.00 today should maintain the Bullish move). Overnight Wheat, Beans, and Corn are all higher, so if Meal is unable to sustain prices above the overnight lows then the trade is dead to me and I would rather find more action by watching paint dry, water boil, or playing with sticks.

Sells to Watch:

Put on the Radar:

Copper- Call me skeptical or a chicken, but I am still waiting on long entry into the copper market. Just two days ago the Copper was on the Radar as a sell, but after the last few days the market has reversed to a Bullish breakout. The market has an objective of $3.2150 that is already in play with the move above $3.07 yesterday, but overnight the market rallied above some higher volume resistance from a previous swing high that now provides a larger objective of $3.3210. This previous high volume swing high of $3.1230 now provides support for the market from $3.1040 - 3.1150 for purchase against, but the near term support from yesterday does not fall until $3.0880 - $3.0980. This means that stop placement does have a pretty wide range, so I recommend waiting for a pullback to near the $3.12 level if you are looking to buy Copper.

Euro- The Euro is higher...much higher this morning on the positive news out of Europe, but the market is running into some stronger resistance from the possible reversal top in the market. I am not convinced as of right now that the Euro has made a definite short term top, but the stretch of low volume trade between 1.2838 - 1.2872 has reached the upper end of this range this morning. There is high volume resistance falling between 1.2884 - 1.2906 for stop placement above on a low risk trade possibility for today. I again am not positive that the Euro is moving much lower, but I expect a move to around 1.27 at least on this 1:6 risk/reward proposition if you can sell it near the upper end of the low vol zone. Be aware that the European Stress Tests are set to be released around noon tomorrow, yet I have heard rumors that they may be released even earlier. Unless you already have a sizable profit I would not recommend holding a position in the Euro.

Bonds- Bonds found a strong rally on Bernacke's "Unusual Uncertainty" comments and made a new high close yesterday as it maintained another rally bounce off of the upward trend. There is now a good low volume zone left from yesterday's rally between 128.11 - 128.23 with the lower end from 128.11 - 128.17 being the preferred level for long entry. Yesterday's higher volume support falls between 128.03 - 128.09, but the previous spike high for the market has higher volume support that begins at 128.13 with a significant patch of support down to 1.28. The longer term projection on the weekly chart is still to 133 - 134, but consistent with the day trade philosophy I recommend riding the rally and taking profits after momentum emerges and begins to fail on the 15 minute chart. Looking for profits around a test of 130 is a good level to look for.

Notes:

September Coffee- I know very little about the fundamentals of the Coffee market, but the report that I received yesterday predicted a Bearish move in the market as much of the previous rally was on Fund allocation that has dried up without a real Bullish story in the physical market. Below 156.85 Coffee has an objective of 143.80 on the Bearish cup and handle reversal. Yesterday afternoon before the 12:30 (CT) close the market did break below this 156.85 level, but strong buying emerged just below this level as 1 Lot Iceberg orders rallied the market to close just above 157 and maintain the close above the breakout. Protective buying? Bullish Fake Out? No Real Story? I am not sure, but with a tight stop I would not mind looking at this one again if it dips below 157.