Monday 8/30/10 Commodity Ideas

Opening Note:

Yesterday
In the closing sentence of Friday's Opening Note I stated that I saw the possibility for both market liquidation and oversold buying. Because I meant this more in the sense of one or the either I was rather surprised when we saw both happen violently after the morning announcements. The GDP revisions were fairly uneventful on Friday, but the notes from Bernacke's speech at 9 am sent the market into a whirlwind with gut reaction selling followed by strong buying that emerged just 7 minutes later. The Supportive Commodity markets made spike lows with the Equities, Crude Oil, and Copper leading the buying spree that occurred thereafter through the weekly close. Meanwhile the risk aversion markets sold off sharply with Bonds falling nearly 2 1/2 handles off their morning highs and the Yen breaking more than a full point itself.

It is apparent that one could take away either a Bullish or Bearish spin from the Bernacke speech. Bullish being that the Fed is willing to enact more quantitative easing should the Economy worsen, but Bearish because the Economic outlook is not great and the effectiveness of the Fed's current tools is questionable. Personally I have a difficult time taking anything worth investing shorter or longer term capital from these notes and I believe that what we saw was a more technical oversold bounce in the market as opportunistic longs pushed the market and shorts covered into the weekend.

Today
The Supportive markets started out rather strong yesterday evening, but since then have reversed direction with the S&P 500 now 10 points off session highs and a few ticks lower on the day as of 7 am. The Grains are notably higher along with the Fixed Income markets, but other than that the trade is rather mixed around the rest of the market. This is an unimpressive follow through thus far after strong gains in the face of adversity on Friday and I believe that the markets are going to have to step it up today if they are going to keep the positive momentum into the beginning of September.

A number of the supportive market Sectors like the Foreign Currencies (except the Yen), Energies, and Equities all have rather fresh buy signals on their daily Stochastics indicators, with some from oversold territory. This means short term that the market may still have some more short covering to take care of, but when I look at the market correlation web it still looks like the macro market is generally melting lower towards another test on the large topping pattern in the Equity Indices that could exacerbate the negative momentum and losses in the market. We have at least a notable piece of Economic information each day this week with the Unemployment Report finale on Friday, so I rollover my tread lightly opinion from Friday into this week as I do not feel the market is convincingly heading one direction this week. However, I still feel that selling rallies in the weaker supportive markets is still the trade going forward as I expect the oversold bounce will run out of momentum sooner rather than later. Finally, keep in mind that Wednesday is the 1st of September, and the statistics say that the first day of each month is the strongest gainer in the Equities so plan accordingly to take home a long position tomorrow.

Buys to Watch:

December Corn- The Dec. Corn was not able to make a new daily high close Friday after falling below $4.38 3/4 later in the day. However, the market is again stronger this morning with higher volume support holding to create a nice base on Corn's march higher. The former resistance from $4.36 1/2 - $4.38 3/4 now becomes support fro the the market with new higher volume support from Friday's trade being left from $4.38 1/2 - $4.40 as a new spot to possibly add to the trade. A settlement today below $4.38 1/2 would be a negative signal for me and would suggest that taking profits and re-examining the trade would be a good idea at that point. But, with a fresh Stochastics buy signal on the daily chart I believe that Corn continues higher towards the $4.70 objective with a close above $4.40 being an indicator to add to the trade.

The July '11 - December '11 Corn Spread also continued higher overnight to new highs on the recent rally. 32 - 37 cents premium the July '11 contract is the objective for this 3rd leg of the spread with new higher volume support now left from 21/ 1/2 - 22 cents as a level to possibly add to the spread against. A move below 20 cents would signal that it is time to get out of the trade and re-examine, but like the Dec. Corn outright I feel strongly that the spread is on its way to the 3rd Leg target.

Dollar Index- The swings in the Yen over the last few days to not aid the Dollar's stability, but with the pretty trade setup still holding to form a base I believe the Dollar is now ready to build some gains. Although it has been traded into a number of times now, the former low volume zone from 82.70 - 82.84 still is the area to enter a long position with higher volume support down to 82.52 for stop placement below. The long term objective for the Dollar Index is 94 on the large 2nd leg higher, but I recommend looking for a move to 84.50 - 85 to look to take profits on this particular trade setup and then re-examining to enter a new long later. The Stochastics for the daily chart does have a negative momentum sell signal from a couple days ago, but RSI for the chart has set up a base in the Bull market trend zone that could provide fresh positive momentum with a day or two of gains. Finally, Friday's trade left a Doji candlestick (market closes basically at unchanged) that often signals a reversal with a higher close today providing a Bullish candlestick pattern.

Sells to Watch:

Euro- It has now been 3 days in and out of the trade entry zone for the Euro, but I feel as good about this Euro sale as ever this morning. On Friday the Euro finally traded convincingly above the 1.2750 level that had acted as a market top recently, but struggled to hold any sort of positive momentum anytime it has moved above this level. The daily chart for the Euro does still have positive momentum from a daily Stochastics buy signal crossover like many of the other comparable markets, but the Euro is again the weakest foreign Currency this morning with a close below 1.2714 today producing an Engulfing Bearish candlestick pattern. Between 1.2732 - 1.2790 remains the lower volume zone for short entry in the market with higher volume trade to 1.2838 providing resistance for stop placement above. The longer term 2nd leg for the market has an objective of 1.10, but a move below 1.25 is a good test to look to begin taking profits on this leg of the move.

Put on the Radar:

November Soybeans- Corn is the clear leader among the Grain sector, but Soybeans are following on a similar path. The 3rd leg on the Bullish move for Beans now has an objective of $10.83. I still recommend looking to buy Corn rather than Beans as the chart is stronger, but this is another encouraging piece of evidence for the Corn story and could be a good buy if you only trade Soybeans. There was some higher volume support left in the market from Friday's trade from $10.22 1/2 - $10.25, so looking for long entry on a pullback between $10.25 1/2 - $10.27 provides good risk/reward for long entry. On Friday I had the Soybean Meal on the radar as a possible sale, but with higher volume resistance above $301 now traded above the Meal is no longer a potential short for the time being.

Notes:

Crude Oil- Crude Oil was a frustrating trade to hold a short position in last week as the oversold bounce in the market continued for over $3.50 after the 9 am lows on Friday. This rally carried Crude back above the low trendline from the previous consolidation zone sitting at $74.49 today. Crude now has a confirmed Stochastics buy signal from oversold territory while open interest has also climbed in the market along with volume on this 3 day rally leg. Although the market does not have good follow through today and has already tested the $74.49 support line I think there are too many Bullish indicators to be looking for a short position in the market for the time being. Higher volume trade from $75.50 - $75.72 provided some strong resistance in the market so far on the subsequent rally attempts, so I actually remain neutral on Crude for the time being as continuation higher also does not look great right now. The 2nd leg objective of $61.50 on the longer term move still remains for Crude, so I will be waiting for some fresh Bearish signals in the future for short initiation.

Bonds- The Bonds fell over 2 handles off their early morning highs on Friday, but I am still not excited about trying to sell it or the other Fixed Income markets yet. The Bullish trend still remains strong despite the set back, so I still think that you should look at buying dips rather than selling rallies.