Wednesday 8/25/10 Commodity Ideas

Opening Note:
Well...I'm back, feeling well rested, and ready to get back to the market commentary. Everybody needs a break from time to time and I am afraid the lack of vacation, undertaking of new work opportunities, and overall lack of sleep was turning me into more of a market zombie than any sort of market analyst. However, I can say that I truly missed writing about the markets and with some new changes in my schedule I am full on the newsletter train once again. I am working on some new updates to the newsletter to hopefully include charts (with my lines, projections, and patterns) and possibly some changes in the schedule and timing of the letter, so I will send an update once I reach some conclusions.

Since Last Time
The last letter I wrote was my essay on allocation that I believed would lead the macro market back to its highs for the year, but since then a lot has changed. The Fixed Income markets have continued on their torrid rally, the S&P 500 ran into a wall when it encountered the "right shoulder highs" around the 1130 level, the Grain market found some serious demand and global weather issues, and the Currency markets have now reversed from the "beat up the Dollar trade". If you have kept up with my letters since when I began back in January you probably noticed that I have been pretty bearish on the general market direction and almost bordering on "perma-bear" status (not the actual truth...I bought the crap out of everything the 1st half of '08). The market finally looks like it has a high probability of finally setting off the large Bear move that I have waited on for months...and months.

**I will write an update to piece together the overall picture because I have a lot to say, but a lack of time this morning. Just know I'm a full on Yogi Bear right now.

Yesterday
Yesterday the macro market was weaker, but not as bad as it could have been. Equities slid lower off weaker global markets and the poor Existing Home Sales numbers released at 9 am (CT), leading the rest of the market along with them. However, the market did make a strong bounce off of its lows early in the day to trade sideways for much of the day until the close (thus the not as bad as it could have been). Both the Fixed Income markets and the Japanese Yen skyrocketed yesterday to new highs as the risk aversion trade continued its run higher, while the supportive Commodity markets like Copper, Crude Oil, and the Canadian Dollar stood out among the losers. On a very odd note though, both the Gold and Silver markets started out much weaker after their opens, but exploded higher basically out of nowhere with Silver rallying 60+ cents in an hour. I do not comprehend the real story in these Metals right now, so I recommend just flat out avoiding them for the time being.

Today
Although Equities, Foreign Currencies, and the other Supportive Commodity markets traded moderately higher overnight they are sitting back near their lows as of 7:15 am with Copper, the Canadian Dollar and a correction in the Yen the weakest markets this morning. Of moderate importance there is the New Home Sales number this morning that I expect will not have "an upside surprise" to lead the market higher today. There also are a number of Economic numbers to be released over the next week and a half that continue to beat up the Equity markets without Earnings to beat the Doctored Expectations. I expect the macro market to continue to move lower over the next week and a half as these number are released. I am flat out selling any rallies in the Euro, Crude Oil, Canadian Dollar and the Nasdaq for right now and I recommend looking to sell rallies in the supportive markets for the next 8 days.


Buys to Watch:

December '10 Corn- It feels like the entire world is on the Corn/Grain trade right now, but after yesterday's sizable price break I feel more confident stepping into some new longs in Corn. Right now Corn is on the 3rd leg of its rally with a target now of roughly $4.70 on the rally from the $4.05 base level. For this target to hold true the major support from $4.05 to $4.11 needs to hold strong though. For long entry there is a very attractive low volume zone between $4.17 - $4.19 with moderate support at $4.15, but with more major support below this level from $4.05 - $4.11. I personally already purchased some yesterday at $4.17 with risk now to just below $4.15 and will look at entry again near $4.11 if this level is reached.

**In addition I also like the July '11 - Dec '11 Corn spread still. I believe that this spread is also setting up a 3rd leg higher currently with a target area between 32 - 37 cents premium July. This spread takes advantage of the acreage battle over Wheat & Beans versus Corn planting acres next year as well as the growing demand story for Corn worldwide for a brief fundamental summary. There is strong support between 15 - 15 3/4 cents for the spread, so with the open this morning likely around 16 - 16 1/2 cents this is a good low risk play on the Bullish Corn story as well.

Sells to Watch:

Copper- The Bearish pattern in Copper was set off yesterday, negated overnight, but yet again set off with more conviction this morning. Below $3.2310 Copper has set off a Bearish topping pattern with a projection of $3.0720 on the smaller move. Copper has held up as one of the stronger Commodities in the face of weaker Equities over the last couple weeks, but the market can have great momentum once it commits to a move and catches traders off guard. Overnight the market had a small bounce off of the $3.2310 level and without a definitive resistance level I am using a price just above this breakout as a stop loss for the trade.

Put on the Radar:

Longer Term Moves That You Look Great-

Euro- The uptrend for the Euro has now been broken and I believe that the Currency is now embarking on its 2nd Leg lower on the large move below parity with the U.S. Dollar. This 2nd leg has the longer term objective of 1.10. I covered my short Euro position yesterday morning just after the Existing Home Sales number and am looking for short entry again as well. Optimally I would love to sell the Euro in the low volume area between 1.2730 - 1.2800 with resistance above to 1.2825, but the 1.2750 level appears to be acting like a strong top. Right now the trend in the market is to buy the Euro on weak U.S. economic data (not sure why...and I think these guys are off their rockers), which is working out as a terrific sale if you have the patience to wait an hour after a weak number. I took advantage of this at least 3 times over the last month, so look for a rally after Home Sales today or any of the other Economic numbers this week to jump on the short Euro.

Crude Oil- Like the Euro I believe Crude Oil is embarking on its own 2nd leg lower with an objective of $61.50 for this leg. Crude Oil has acted the weakest of any Commodity over the last couple weeks with the rally bounces minimal to non-existent. Finding a rally in Crude Oil has been extremely difficult and I really do not have a great level to sell for today. I personally gave up trying to find a rally last week and bought some Sep. $71 puts, but with volatility rather high already for Oil it is difficult to jump into the options market right now. If you get a decent rally sell it.

Dollar Index- As the inverse of the Euro trade, I am strictly looking to buy the U.S. Dollar now as the Bear trend has now reversed Bullish. The 2nd leg higher for the Dollar Index has a longer term objective of 94 now. I have a bullish trendline from the recent base that sits at 83.16 today, which I am looking for as an entry level if the Dollar breaks this morning.

**I have basically been trading in and out of all of these markets while only looking to sell Crude and the Euro and Buy the Dollar Index. Options provide a way to keep an initial position for the move, but I am focusing on catching 2- 3 day moves in each of these markets on the moves. It may be tempting to look at the move in Crude and say "This can't go any further without a pullback", but I seriously encourage only looking at these markets as strictly one direction trades

Notes:

Bonds- I am out of time, but just do not try and pick a top on the Bonds. The market is on a crazy rally higher that does not seem to have an end. I continue to look at buying the dips for a 1-2 day profit. Yes, the Fixed Income markets are likely a bubble, but this is a longer term Bubble that shows no signs of stopping anytime soon and will likely take away all of the top-pickers money before they are right on the trade.