Thursday 8/26/10 Commodity Ideas

Opening Note:

Yesterday
While my prediction that the Economic numbers would continue to disappoint was correct the market reaction to these numbers came as a surprise yesterday. Durable Goods and New Home Sales fell well below expectations, but with the Equity market and a number of Commodities already moderately lower on the day it was in fact buying that entered the market after the initial reactionary price break. The Fixed Income markets and Japanese Yen followed in line as well with Bond prices falling 2 full handles off their morning highs. The EIA Crude Inventory number came in well above expectations (highly Bearish), but an explosion in price followed after Crude dipped below $71 on a test near October contract lows. Finally, the Metal Sector appears to be the allocation of choice right now as money continued to flow into both Gold and Silver (another 55 cents up in Silver..wtf?) as well as the base metals like Copper and Palladium, which appear to have flow over from the precious metals and have acted stronger lately than other correlated markets.

A Little Analysis
Although you could put a Bullish spin on these price advances, I believe that yesterday was just a case of oversold markets bouncing. Throughout the Summer trading range we have seen violent price reversals like yesterday and it is usually when the Bull or Bear opinion becomes too widespread. Granted the talk of a double dip recession is now at the forefront of media discussions, but we are actually now beginning to see some of the hard data to back up this conclusion. It's one thing to have swings in opinion based on price action, but another when the evidence of a slower Economy is actually being presented While the dip buyers in the market got away with one yesterday I believe that this actually provides a good opportunity to finally enter some decent sales in the weaker markets as the Bearish data should continue for another 7 days.

Today
Overnight the Equity markets traded higher, but have fallen to new lows as I am writing at 7:10 am. Crude Oil and Copper lead the gainers of Commodities for right now, but the Fixed Income markets are trading moderately higher with the Yen rallying stronger this morning. The Jobless Claims number will have an impact this morning at 7:30 am., but I believe that it is likely that we now have a top on the Equity and Commodity markets for the day with lower trade to follow. 1059 - 1061 in the S&P 500 is a lower volume zone that has provided resistance overnight, but if the market is able to make new highs then the strong resistance at 1069 should provide a stiff top on any further gains. Crude Oil and the Euro rallied into some good low volume zones for short entry overnight, with the Yen falling into a good buy zone as well, so if these markets trade back into them there will be good opportunities today.

***Late Note- The Jobless Claims slightly beat the awful expectations, but the number was still pretty brutal on its own. There was an initial rally after the number, but Crude Oil has fallen $1 since with Equities slowly winding lower as well. There was selling on the Crude open, so I believe that we will see lower trade today with low potential for any buying to enter on the stock market open.

Buys to Watch:

December Corn- I would not call the Corn trade yesterday pretty, but the moderate support for the market at $4.15 held and provided a base for the market to rally off of into this morning. The Wheat market suffered a serious price break throughout the first hour of trade yesterday leading the Corn lower back into the low volume zone between $4.17 - $4.19, which provided a good level for new long entry. It is clear that the Wheat is the laggard of the Grain Sector for right now, so it is imperative to keep an eye on the December Wheat contract if you are trading Corn as a move below $6.77 1/2 could accelerate losses and drag Corn along with it. However, with Corn settling near $4.25 this morning there is a potential Bullish Morning Doji Star candlestick pattern forming and RSI has now ticked back higher to show a reemergence of positive momentum. $4.20 now provides stronger support for the December contract that I believe will not be violated for today, but I still recommend maintaining a stop loss on the trade below $4.15 for the time being. And remember the objective of $4.70 on this 3rd leg.

The July '11 - December '11 Corn Spread also held its support level at 15 cents and is higher this morning trading above 17 cents. I believe that you can still look for entry on this trade today if the market pulls back to 16 /12 cents this morning with the 3rd leg objective on the trade still between 32 - 37 cents.

Finally, although the Grain markets have been relatively uncorrelated to the macro picture I have noticed a higher correlation over the last 2 weeks on the macro weakness. Keep an eye on Crude Oil and the S&P 500 because a substantial break in these markets could actually cause Fund liquidation out of all Commodities including the Grains. I believe that this may have led the price break on Tuesday, which is the first time in a number of months that there has been this relationship.

Japanese Yen- This is strictly a shorter term day trade without a specific objective other than a rally test back near the recent highs. The Yen suffered a serious correction yesterday as the risk aversion trade weakened just a day after making new highs on the move. This morning the Yen pulled back into a lower volume zone from 117.86 - 118.10 that does not have great higher volume support below it, but has found support near the low end of this range on several tests. I recommend using smaller size than normal on this trade, but with the Fixed Income markets finding strength off of a similar support level and the Equity and other Foreign Currencies possibly finding a top for the day I believe that this is a low risk day trade worth taking.

Sells to Watch:

Crude Oil- Crude Oil has the longer term 2nd leg objective of $61.50 and yesterday's rally into today provides a nice setup for new short entry into the market. Crude Oil has been the absolute strength among the entire market over the last 24 hours, but it is running into a strong wall this morning that not even the high frequency programs have been able to break through. Between $73.24 - $73.52 there is a low volume zone with higher volume resistance from $73.60 - $74.12. I had a resting "hope and pray" order at $73.42 that I got hit on while I was in the shower this morning, but a rally after the Jobless report this morning also sent the market into this resistance this morning. I recommend using a stop just above the higher volume resistance and looking for another test near the $70.35 swing lows before taking profits.

Euro- The Euro has the longer term objective of 1.10 on the 2nd leg move. Overnight the Euro made new highs on the recent trade on another test of 1.2750. There is a larger low volume zone from 1.2732 - 1.2790 with higher volume resistance above to 1.2838. However, this 1.2750 level continues to act like a wall for the market so I do not believe it is likely that the market travels into the higher end of this range. I recommend looking for at least a test of 1.25 on the 2 - 3 day trade before taking profits.

Put on the Radar:

Buy Dollar Index- The Dollar Index has weakened slightly over the last 3 days, but is finally finding a decent spot for long entry. There is a lower volume zone between 82.70 - 82.84 with higher volume support to 82.52 for stop placement on the long entry. This zone was dipped into overnight, but only slightly and briefly. A break back into this zone should be bought with an eye on a test of 85 for profit taking on the trade. The longer term objective on the 2nd leg rally for the Dollar remains at 94.

Notes:

A Tip For Equity Trading- I always watch all of the main domestic Equity Indexes throughout the day and a new trend has emerged that I believe is helpful. While the leader/laggard of the Sector has been a revolving door over much of the last few months the Nasdaq Index has emerged as the volatility and direction indicator among the Sector no matter what the direction. This was evident yesterday as although the Equity markets were weaker the Nasdaq was the leader among the Sector and what followed was a sizable rally off of the base. Conversely, on days that the Equity markets have suffered the Nasdaq has been the weakest performer in the Sector as liquidation out of this leader over the recovery (and out of Apple...which looks really ugly right now) leads the market lower. If you see a weaker market with the Nasdaq the best performer then watch out on your shorts and if you see a stronger market with the Nasdaq the weakest then watch out on your longs.

Copper- What a crappy swing in the market on my short opinion. Copper was a laggard market on Tuesday and coming into Wednesday as well, but when the macro market bounced so did the Copper...and violently. The market rallied nearly 13 cents over a 24 hour period taking out my $3.2310 stop level by yesterday afternoon. Copper is definitely no longer a short, but rather a neutral for the time being as I believe that some of the Metal excitement has spilled over into these industrial metals.