Tuesday 7/6/10 Commodity Ideas

Opening Note:
On a low volume day Friday that included another poor Unemployment number there were swings higher and lower with the conclusion being a weekly close confirming the bearish head and shoulders pattern for the S&P 500, yet some base support building over the short term for the market. The only real positive cases that I can make for the macro picture right now are that there is some short term support, Copper is not leading the way lower for the time being with it's sideways trade, and the majority right now is bearish (this really is not a bullish point other than if you blindly assume the majority is wrong). This support is being built between 1012 and 1018 in the S&P 500 generally during the overnight lower volume session, but now has rejected two attempts at moves lower over the last four days of trade that has also consisted of low volume. Last evening the Equity markets dipped lower on one of these rejections, but since the Asian market open have moved on nearly a straight shot upward on little fundamental news other than an upgrade on Australia's economy.

The most interesting notes on the market right now are in some of the correlations and relationships across Commodities. We have seen several days over the last couple weeks where both the Equities and Dollar Index have moved lower in conjunction. This could be an initial indicator of a shift in opinion on the U.S. Economy, with U.S. spending and debt raising more concern and encouraging a flight from the Dollar. However, I see this move more as a short covering rally in the European Currencies for the time being that is moving the Dollar lower. If the U.S. was really raising concern about it's spending then we would likely see some of these "bond vigilantes" also entering the market and pushing interest rates higher on greater speculation of default, so this feels more like a move out of some short Euro positions for the time being on a relief rally. Although Commodities have also come under some pressure lately in the Metal and Energy Sectors, Copper is clearly in more of a sideways range and as a good leading indicator is not pointing towards lower trade for the time being. Lastly, both Bonds and the Japanese Yen both look like they may be nearing exhaustion on their recent rallies and ready for a relief break in price over the short term.

Still, while the Equity markets maintain their bearish head and shoulders patterns and both the weekly and daily charts for supportive Commodities are pointing towards lower trade I remain Bearish and maintain that only short positions should be entered in supportive macro markets. Because I have been mostly Bearish in my dialogue lately I wanted to provide some devil's advocate opinion above on the potential that the macro market has a short term bullish move, but with higher volume resistance and good low volume levels for entry on short positions I believe that this rally today is another good opportunity to sell. Going forward the Best Buys are: Bonds, Japanese Yen, 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.

Buys to Watch:

Japanese Yen- The Japanese Yen has been moving mostly in conjunction with Bond prices lately, but has outperformed the Fixed Income market over the last week in my opinion making it the current better buy. The Yen is still on it's bullish head and shoulders pattern with a breakout level near 112 and a projection now to around 119. For entry today I still recommend the lower volume zone between 113.70 and 114.02 with moderate volume support near 113.54 and higher volume support near 113.26 for stop placement. For long entry on the Yen I still recommend using a smaller position size than normal though as the daily chart is beginning to show signs of slowing with Stochastics now potentially producing a momentum sell signal in overbought territory. However, this low volume zone has provided support thus far again this morning.

Sells to Watch:

Nasdaq and S&P 500- I still believe that the Nasdaq is the better sale of the two markets, but with the leader/laggard for the Equity markets swinging on a daily basis I will provide levels for both markets. Both markets are broken out on large daily head and shoulders patterns with the Nasdaq having a projection to 1479 now and the the S&P 500 projecting to 856 -870. For the Nasdaq today there is a low volume zone between 1739 and 1755.50 with higher volume resistance from 1756.60 to 1762 for stop placement. For the S&P 500 there is a low volume zone between 1028.25 and 1032.50 with higher volume resistance ranging from 1033.75 up to 1039. As both markets have already entered their respective sell zones this morning I am currently waiting until the U.S. open this morning prior to entry to see if there is more short covering to follow early. As a note of caution, both markets are also near producing buy signals on their daily Stochastics indicators, but still maintain a bearish trend for the time being.

Crude Oil- Crude Oil has a projection to $70.96 on it's bearish cup and handle reversal that has yet to reach it's objective. There is a large low volume zone ranging from $73.30 to $74.18 for short entry again with a range of higher volume resistance above the market from $74.39 to $74.59 for stop loss placement. Crude has been one of the poorest performers among the Commodity Sector over the last few days and is again one of the laggards on a day when the macro market is much firmer, so it is still a good short at the above levels.

Silver- This morning Gold is the weaker market as Silver tends to travel more with Equities, but I still believe that with the large bearish cup and handle pattern in place that Silver is still the better sale. The Silver market still has a large amount of open interest that it can liquidate and with a projection to $15.75 now and a busted uptrend the market is one of my favorite shorts for the time being. If the market is able to rally to the low volume zone left between $18.12 to $18.365 this is a good level for short entry with resistance above between $18.44 and $18.54. However, I believe it is less likely that Silver does rally to this level so using a 15 or 60 minute chart for an approximate top is probably the better option for short entry. Liquidation among Silver in Gold has tended to come both near the market's open as well as the Equity open and prior to the market's close at 12:30 CT over the month of July, so these are good times to focus on front running for short entry. Drawing some weaker trendlines among the spiky lows for the market provides some support levels that could temporarily stall the market at $17.50 and $17.30 for today.

Put on the Radar:

Soft Sector Trades- September Coffee, October Sugar, and December Cotton all have potential trades on their radar right now, with the Coffee trade currently looking the most promising. For the September Coffee there is a bearish reversal pattern that has been temporarily set-off and negated this morning with a move below 160.10 projecting a move to 150.95 on the daily chart. October Sugar has a bullish continuation pattern with a move above 16.68 providing an objective of 18.24. The Sugar market has basically traded above this breakout level for all of the trade this morning and overnight, but be aware that Bullish moves in the market have not come easily lately with a number of them rejected over the last couple months. Finally, while Cotton's front month has acted bullish on nearby demand, the December contract has had a more recent bearish move that could set off a reversal pattern with momentum below 74.08 projecting a move back to the 69 cent level. Overall, I like the Coffee trade here the best, but use caution as the market has been volatile lately.

Notes:

Euro- The Euro has a confirmed bullish head and shoulders pattern that has a projected move of 130.89. As I stated in my opening note, I believe that much of the bearish move in the Dollar Index is tied strictly to the rally in the heavily weighted Euro among the Index, which looks like it may have continuation higher still. I am completely uninterested in trying to Buy the Euro for the time being as I would love the opportunity to get short at around this 131 projection rather than try to catch any rally, but I am keeping this rally objective on my mind.