Wednesday 7/7/10 Commodity Ideas

Opening Note:
Despite the S&P 500 trading over 26 points higher yesterday morning shortly after the open the market fell apart after reaching higher volume resistance to trade back to nearly unchanged and close only moderately higher on the day. The tell tale sign of this collapse after some early morning short covering was not only in the great execution setup for short entry, but the fact that risk aversion markets like the Yen and Bonds began trading higher with momentum, indicating that 26 points up in the S&P was not likely to hold. Meanwhile liquidation continued in the Gold market as the bubble of the last few months begins to deflate, Crude Oil swung from strength to weakness along with Equities, and the Euro continued to rally as shorts exit the market temporarily. Overall, the day was a bit of a jumble again, as most of early July has been, and reinforces for the time being that taking profits when you catch a decent move is not a bad idea for right now. We are seeing the volatility, but continuation on moves on a day to day basis has not followed over the last week.

When I woke up this morning the macro market was sitting on its lows for the overnight session, but had traded back to test its highs by the time I began writing this letter. The story again this morning is continued liquidation in both Gold and Silver and weaker Foreign Currency markets, although it still looks like direction for the day could be up in the air. Yesterday's action however was another prime example of why I believe that rallies in supportive Commodities should continue to be sold. Equities had almost every reason to rally from the start of a new week, technical support, and little fundamental news this week to derail a move higher, but still only managed to close slightly higher. With the S&P 500 and other Equity Indices putting up a resilient fight with some built up support from 1012 to 1018 there could still be some temporary sideways trade, but with risk aversion markets continuing to rally and the Metals indicating further deflationary pressure I believe that it is not long till the volatility turns directionally lower again.

I continue to recommend selling rallies in supportive Commodity markets (other than Grains right now in the growing season) and believe that the S&P 500 with a projection range of 856 - 870 on the head and shoulders pattern should be the indicator market on a macro move lower. For longer term traders I still recommend the Best Buys over the next few months are: Bonds, Japanese Yen, and Gold as a spread against a short position in another market. Also, going forward the Best Sells over the next few months are: Nasdaq, Copper, Silver, Palladium, Crude Oil, and Australian Dollar.

Buys to Watch:

Japanese Yen- The Yen was beginning to look tired, but with a new momentum buy signal possibly emerging for the daily Stochastics and the chart maintaining its climb higher the Yen will remain in the Buys column for a bit longer. The chart still is on the larger bullish head and shoulders pattern with the breakout level near 112 and a projection to near the 119 level. For long entry today I recommend purchasing near the higher volume support range from 114.32 - 114.52 with a stop placement below this range. Take note that the Yen is now encountering the 115 level, which has rejected a rally overnight as well as earlier last week as it is a sticky point. The Japanese Government has protected the 115 level in the past, but as of right now there is no indication that there will be any Currency intervention attempt. If on a market rally the Yen does stall out for a third time near 115 it would be wise to take some profits and possibly wait for re-entry after a breakout above 115 is confirmed.

Sells to Watch:

Silver- Silver is still broken out on the upsloping bearish head and shoulders pattern with a projection to $15.75. Silver has built up a bit of higher volume range trade between $17.74 and $17.84 that is now a good area to target for an initial short position in the market. This morning there appears to actually be some allocation on the open into both the Silver and Gold markets, but despite this allocation, I still believe that both markets are headed for continued liquidation, with some of this continuing to come on both the U.S. Equity market open and the Silver market close. Be aware that there are two support trends for the market near $17.50 and $17.30 that could be a temporary sticking point for the market on a break. However, once Silver breaks below $17.195 a double top/cup and handle pattern will also be set off that has a projection to $14.94.

September Coffee- With a close below 160.10 yesterday Coffee set off a bearish cup and handle reversal pattern that now has a projection to 150.95. The market has been extremely volatile as of late so use caution, but is a bit more calm thus far this morning. For short entry I recommend looking to sell against the beginning of a higher volume trade profile for the market at 159.10 with stop placement above this to the top of the higher volume trade at 160.50.

December Cotton- This trade was destined for the radar this morning, but after the bearish breakout on the open this morning it has been moved to the sell column. While front month July Cotton continues to have short term demand the deferred December contract is falling apart with conviction on a break that has now set off a bearish reversal pattern that resembles a double top (although not really). The move below 74.09 sets off the pattern that I am measuring an objective for using the left side high that points towards a move to 69 cents. For entry today I am using the higher volume trade from overnight and placing my stop above 74.65 for a lower risk shot on this initial entry because if you wanted to really be safe you would have to place a stop nearly a full cent higher yet risking much more. There should be opportunity tomorrow to add to this initial position.

Put on the Radar:

S&P 500 and Nasdaq- The Nasdaq continues to be the best sale of the Equity Indices, but the S&P 500 is the leading indicator and the market that I am using to gauge entry. The S&P 500 has built up a large traded profile right at the 1023.50 level, which is now acting as sort of a mid-range level on this recent sideways trade. The market has rallied above this level as I have written this morning, but this mid-level range does extend up to 1026 as another bit of resistance for the market. The levels that I provided for the Nasdaq (sell zone 1739 - 1755.50 w/ high volume resistance 1756.50 - 1762) and S&P 500 (sell zone 1028.25 - 1032.50 w/ high volume resistance 1033.75 - 1039) acted as a top yesterday for the market rally although they were traded into the upper portions of their resistance. I believe that if Equities are able to mount a rally today into these levels again that they are good sales again with an emphasis on the Nasdaq.

Notes:

Crude Oil- Although Crude Oil never ticked all the way to my $70.96 projection it came very close and as it is acting as a market strength this morning I am suggesting liquidation of short positions in the market for the time being. Although you could have parked a jumbo jet in the large low volume zone I provided for short entry yesterday it did act as a top for the market on a roughly $2 break in the market. There is a bit of fundamental uncertainty surrounding the future for Crude Oil in regards to the Gulf Oil Spill, real supply/demand, and the moratorium on drilling in the Gulf, so there could be some unexpected moves on a day to day basis as investors place future and current bets. I still believe that Crude is on a path towards a second leg lower near $58 - $60, but with some short term support in the market I recommend waiting prior to shorting the market again for the time being.