Wednesday 7/21/10 Commodity Ideas

Opening Note:
My prediction in yesterday's letter that we could see continued losses in Equities throughout yesterday proved to be exactly the opposite as the market promptly made a base around 7:30 as the risk trade was put back on across the entire market. The Australian Dollar, Copper, Crude Oil, and Gold all saw strong buying enter the market around the U.S. stock market open that continued on an up-trending line as the leaders for the market yesterday. Finding myself caught off guard on this strong rally I glanced at a few different market newsletters to see if anybody else had predicted the precipitous gains and what exactly they were watching, but all I really found was similar opinions to my own or vague references to sideways trade (if somebody does have an analyst that predicted a strong rally I am interested to see what they were looking at).

I put together a small replay to go over how this rally could be evident with the signals provided and hopefully find a proper conclusion:

To begin, Friday saw a strong bearish reversal in the macro market with Monday sitting in more of a sideways range trade. Although Monday was sideways trade, most of the supportive markets reversed to negative momentum and trend indicators with a strong correlation between the macro market. Monday evening IBM reported negative earnings that sent the market lower below the sideways range from earlier in the day with stronger support falling all the way at 1040 for the S&P 500 below 1057. After trading lower overnight weaker than expected earnings from Goldman Sachs and Housing Starts numbers were released around 7:30 am. This means technical support fell significantly lower with negative Bearish momentum, Earnings data was weaker than expected, and Economic Data was weaker than expected. Still, despite Bearish looking short term daily charts, the Metals reversed higher as buying entered on the open. This was followed by buying of Equities, most Commodity Sectors, and the Supportive Currencies (Aussie & Canadian for right now).

Now, one could argue that the S&P 500 found psychological support at 1050, but if you made this argument and bought off this level you have gotten run over at least 5 times the last 2 1/2 months. You could also say that the market was oversold after Friday's action, but I say erroneous as the daily charts are not saying anything near this assumption except possibly in the Metals. The one compelling argument that I can make and my conclusion is that the short term 15 minute and 60 minute chart momentum reversed to a bullish mode after forming a base. The way that the trade is going right now, it seems that regardless if the move is Bullish or Bearish the market pushes prices as far as it can as low volume allows the superior trading programs to really move the market right now.

In conclusion, I have to say that looking for anything more than a 24 hour trade right now is a difficult proposition. Trading technical patterns and support/resistance is very inconsistent as is the fundamental story from day to day. I have gotten worked over going with the breakout, fading against support/resistance, and looking for reversals. The only way that I have made money during July is going with these shorter term momentum shifts during the main trading hours and taking profits later that day. I believe we will continue to see sideways trade going forward for the rest of this month and recommend looking for these shorter moves rather than focusing on larger patterns or projections for right now. The short term technicals trump the daily charts for right now and I feel that this is the best indicator now to catch trades.

Buys to Watch:

December Soybean Meal- The Meal again held the higher volume support level from $279 - 281 despite lower Soybeans and Bean Oil leading the Grain Sector in gains yesterday. Although the Meal has sat near the bottom of the lower volume entry range from $281 - 286 for the last 36 hours it finally looks like it may have a decent base to rally off of as it has settled above $284 as of 7:15 am this morning. The larger projection on the move of $307.1 still stands, but there is now some lighter resistance at $288 and slightly heavier from $290 - 292 to compete with. Although Stochastics for the daily chart did produce a sell signal yesterday, this is looking more like a 2 day pullback on the Bullish move and with a nice base now should have momentum to rally. I expect Meal to see some gains today and will have a difficult time holding a long position any further if the market can not rally today. Also, make sure to have a fairly tight stop below the $279 level as the trade is no longer Bullish below this level.

Sells to Watch:

Put on the Radar:

Euro Currency- The Euro has fallen over the last two days, likely confirming a reversal in the market. Daily Stochastics produced a sell signal 2 days ago for the market and after an outside day down yesterday (a bearish engulfing candlestick pattern) the Euro looks like it is now ripe to look for selling opportunities. Because the Euro market still has some existing uptrends for the daily chart...one falling at 1.2760 today...I am waiting for a stronger reversal pattern and entry level to quantify risk prior to entry, but be ready to start shorting the Euro again.

Notes:

Copper- What a shift in Copper over the last 24 hours! At this time yesterday morning I was looking at a confirmed Bearish breakout on the triangle consolidation pattern, but after a 17 cent rally since yesterday's newsletter the market has a strong reversal with a breakout above the triangle consolidation. I think this pretty much proves that Copper is just not a market to trade for right now as the best trades in the market are made buying lows without support and selling highs without resistance. Above $3.07 the market does have a projection of $3.2150, but after repeatedly getting tooled buying Copper breakouts I am not interested in following this move. Copper is abundant in computer algorithms right now, so the moves extend further than expected and stop at unpredictable levels. Along with both Gold and Silver I do not recommend trading Copper for the time being.

September Coffee- Along with the Metals I also have most of the Soft Sector on my "markets to avoid" list for the time being, but I wanted to at least note the potential price break on a breakout below consolidation. Below 156.85 Coffee has an objective of 143.80 on a move below the last months sideways range trade. There is strong support from 157 - 159.40 so it is likely that Coffee will stay in this range, but it would likely have strong momentum on the move lower if it is initiated.