Tuesday 8/31/10 Commodity Ideas (Better Late Than Never)

Opening Note: **Written at 7 am.

Yesterday
First off, I did realize that the date on yesterday's newsletter was one day off after sending it and I have rolled my clocks forward 24 hours to time synch. with everyone else. Unfortunately, this may have been one of the more exciting things that happened yesterday. The morning's Personal Income number came and went without much deviation from expectations. The oversold bounce that carried over from Friday into Sunday night in the supportive markets reversed with the S&P 500 settling 19 points lower on the day with Crude Oil also falling back below its support line. The most notable move on the day did come in advance to President Obama's midday speech on the Economy as Equities sold off slightly, but other than this recurring Presidential sell-off it was pretty much just a sluggish grind lower.

Today
This morning the macro market is again weaker with Equities trading modestly lower along with nearly every other supportive market to some degree. The Grain markets are moderately lower as the crop progress report came in unchanged for both Soybeans and Corn while the market was expecting a decline in the good/excellent condition percentage of the crop. The Bond and Japanese Yen markets have continued their impressive 2 day recovery since Friday's sell off to now trade back near the recent highs on the move. And finally, Copper as a strength market over the last several weeks has rejected an attempted breakout to new highs from yesterday's close that could signal continued weakness throughout the market as a leading market has failed.

With the quick dismantling of the oversold bounce and Bullish enthusiasm from Friday and the retracement back to the recent lows in Stocks yesterday I can not help but take a look at the weekly chart for the S&P 500 and realize how close the market is to setting off the ominous head and shoulders topping pattern. The market correlation web is pointing more towards this large Bearish move actually happening now as many of the constructive Currencies for the Equities now also appear to be topping and the risk aversion markets continue to carry steam on their trek higher. I go into more detail later in the Radar and Notes section of the letter to describe these distress signals, but even more so than yesterday I recommend looking to sell rallies in the supportive markets

Tomorrow is the first day of September and over the last decade there is a large statistical anomaly that greatly favors the 1st day of the month as a larger overall gainer than all of the other days in the month combined. Although I have a Bearish opinion of the market going forward it may be wise to take home a small long position into tomorrow and look to take profits near Wednesday's close.

Late Late Note (9:30): It is pretty clear today that much of the action over the last week and possibly heading into the beginning of this month is strictly volatility for the sake of volatility. Since I first began writing the letter this morning the swings in the market have made little to no sense when taking into account relationships, momentum, support/resistance, and magnitude of the moves. Some of this is due to bookkeeping for the end of the month, but today is not an isolated instance over the last couple months. August and early September are notorious for the low volume across the market, but with the emergence of more high frequency programs than ever the swings in the market have been more erratic and nonsensical on a day to day basis than over a time period I can recall since I began studying and trading the markets 5+ years ago. There are thousands of strategies that these programs use, but I have noticed that the market sweeping programs are becoming larger and more successful at causing liquidation and short covering rallies. This makes not only short term trading, but position trading much more difficult right now. Be careful, Be more picky, and Good Luck.


Buys to Watch:

Dollar Index- When I was doing my analysis this morning the Dollar Index was actually marginally higher on the day, but a rally in the Euro and Swiss Franc have pushed the Dollar back to new lows and actually into a decent zone now for long entry again on the trade. The Dollar has been in the Buy section for the last few days with the low volume zone from 82.70 - 82.84 targeted for long entry, but with the modest gains in the Dollar over the last few sessions I am actually moving the stop loss level on the trade up to just below 82.89. This leaves a small lower volume zone from 83.00 - 83.08 as the optimal level for new long entry on the trade with a very high risk reward. The Dollar Index formed a Bullish Morning Star candlestick pattern over the last 3 sessions and Stochastics is now nearing a fresh buy signal despite holding some negative momentum still. The long term 2nd leg move still maintains the objective of 94 with a target of 84.50 - 85 on this individual trade for an area to look at taking profits.

Sells to Watch:

Euro- Like the Dollar, when I was doing my analysis this morning the Euro was about unchanged on the morning, but has exploded since this time to encounter the high volume resistance between 1.2700 - 1.2750. The low volume zone for short entry sat between 1.2732 - 1.2790 on this initial trade, but I now would like to move my stop loss recommendation on the trade to just above this higher volume 1.2750 level. The Euro does have positive momentum right now according to the daily Stochastics, but like the dollar is nearing a possible crossover that would provide a fresh sell signal for momentum. If the Euro does in fact trade above this higher volume resistance it is time to take a fresh look at the market.

Put on the Radar:

S&P 500- The S&P 500 has now found support at 1037 three times in the last five days, which has produced a spike rally in the market each time it has been encountered. The rallies off of this base have continually failed, but this is obviously a significant support level over the short term. Below this the next moderate support falls from 1020 - 1023.

Looking now at the weekly chart there is the obvious large head and shoulders topping pattern that is forming in the market. For this week the breakout value sits at 988 and with a 196 point magnitude on the pattern the objective for the market would fall below 800. It is very unlikely that the pattern sets off this week, but it is now worth noting as the S&P 500 is now closer to this level than the 1130 high on the summer range.

Canadian Dollar- Along with the Australian Dollar the Canadian has the highest correlation to the U.S. Equity markets and the chart is now beginning to look concerning. The weekly chart for the Canadian shows a similar large consolidation range like the S&P 500 that could be forming a top. In comparison to the S&P the Canadian is actually sitting even lower in this consolidation range with a move below the support at .9360 looking like it may deal a devastating blow to the market to set off a Bearish collapse.

British Pound (also vs. Franc & Euro)- The Swiss Franc and Euro are much higher on the day now, but the Pound has maintained its weakness despite this European strength. With the possibility of another round of liquidation on the horizon for the macro market I think it is important to keep an eye on the Pound, especially in relation to the Euro and Swiss Franc. During the '08 market collapse the Pound actually ended up peforming weaker pound for pound (pun intended) versus both the Euro and the Franc. Much has been made about the situation in the EU, but the flow over into the much smaller British Economy that does not have Germany to support it could actually make the Pound the better market to short going forward if global de-leveraging emerges. The recent lows for the Pound sit at 1.5369, which the market has flirted with today that could also accelerate current weakness in the market as the uptrend for the market has clearly been negated.

Notes:

Corn and Soybeans- The Soybean market fell apart prior to yesterday's close below the $10.25 support that I was looking to hold, so the Soybeans are no longer on the Radar as a buy. Corn meanwhile traded lower overnight on a Bullish crop progress report that kept the Good/Excellent condition percentage for the crop at unchanged when the trade was expecting these numbers to be downgraded yesterday afternoon. Although I still think that the Corn market has a good chance to reach the $4.70 objective on the 3rd leg rally I recommend taking profits on longs for the time being as the $4.38 stop level was triggered on the trade. The July '11 - Dec '11 Corn Spread also traded below the 20 cent support line overnight meaning that I also believe that it is time to take profits on the trade and re-evaluate the market.