Friday 9/17/10 Commodity Ideas

Opening Note:

Yesterday
Yesterday was very slow with low volatility for most of the day until 2 pm. when the Equity markets exploded higher led by the Nasdaq with the S&P 500 settling above the 1120.50 breakout at 1122.50. While this is obviously an important development there were a few notable moves earlier in the day. Crude Oil continued its 3 day slide as the nearby spreads continued to move out pressuring the October contract to settle over $1.40 lower on the day. Meanwhile, Gold and Silver both made new yearly highs with Silver leading the rally. Pretty much all of the other markets fell into line with the Equity move with those mentioned being the extremes.

Today
Overnight the Equity markets rallied early with the Nasdaq climbing 20 points higher at one point, but have fallen back since 3 am leaving only moderate gains as of 7 am. Crude Oil is again weaker compared to the Equity and other supportive Commodity markets as the spreads have continued to move out with the October contract only slightly higher this morning. Both Corn and Cotton continue their parabolic rallies with December Corn rallying to a high of $5.11 3/4 overnight. Although these early gains were a sign of strength we are seeing a significant reversal in the markets that has happened over the last several hours. The Bond market has rallied over 1 1/2 handles from its overnight lows, the Euro has lost a full point from its overnight highs, and the strength that we saw in the Supportive Commodities is dwindling.

Today is probably going to come down to a battle in the Equity markets to establish not only a strong weekly close, but a confirmation settlement in the S&P 500 above the head and shoulders 1120.50 breakout level. While this looked almost like a certainty when I went to bed last night it now looks like today could be a choppy battle to regain positive momentum after the early morning sell off. Due to the overnight volatility and uncertainty surrounding the macro direction at this pivot point I am taking a wait and see approach for today because the macro relationships are a jumble with both Bullish and Bearish indicators this morning. As long as the S&P 500 maintains this breakout level for today and heading into next week I believe that you have to look at long positions for the macro trade, but with a failure to hold this 1120 level being a good indicator of long position liquidation following.

Buys to Watch:

Sells to Watch: (Crude is moved to the radar for right now as macro direction is uncertain)

Put on the Radar:

Crude Oil- I fully believe in Crude's weakness and its continuation as a weakness, but if the Equity markets continue on their rally then the best trade will not be an outright short position in Crude. While the Crude market appears to be following its own fundamental story more than any time over the last 18 months, the investment tendency in Crude continues to correlate highly to the stock market.

Overnight the moderate resistance level from $75.24 - $75.38 held strong for the October contract as Crude failed to rally with the same vigor as the Equity markets. The fact that this only moderate resistance produced the highs so far today is also a testament to Crude's weakness right now. Technically all of the momentum indicators point towards a continued drop in Crude prices and there is only some moderate support left before the real move in the market begins. A weak upsloping base trendline drawn from the low Aug. 25th - Sept. 1st provides a value today of $73.85 for the October contract that could provide support for the market for a time. Remember that the real money in this trade is based on liquidation of caught longs with over 100,000 still holding newly initiated positions since August 27th between $71.53 - $78.04 and a longer term target of $61.50 on the 2nd leg lower for the market.

I personally covered my short position after the S&P 500 established a close above the 1120.50 breakout level because I wish to see today's action prior to taking a position in the Crude market. If the S&P 500 settles below the breakout then the outright short on Crude is back on the Sells list. However, if not then I recommend:

Long Nasdaq vs. Short Crude- The Nasdaq is the strength of the Equity Sector as you will read below and it is the best market to use as a long position against a Crude short. To chart enter (Nasdaq/Crude) and look at the weekly chart. There is a strong weekly base that has formed over the last year that now is heading towards the top of the consolidation range and looks prepared to begin a rally with momentum. The correct ratio for the trade is between Long 4-5 Nasdaq vs. Short 1 Crude to take into account not only the ratio, but the volatility and contract size. Because the Equity markets are likely to battle today I believe it is wise to hold off on this trade until Monday. If the S&P 500 posts another convincing close above 1120.50 then this will be on the Buys. If not then outright short Crude is the best position.

Nasdaq and S&P 500- You have heard me talk about these Equity breakouts ad nausea over the last week so I will be brief. S&P 500 above 1120.50 = 1218 - 1245. Nasdaq above 1899 = 2080 - 2135. Wait on the S&P 500 for confirmation and then the Nasdaq is the one that you want to own.

As far as support today the S&P 500 really does not have much until 1121 and the Nasdaq has only minor support at 1945 until 1938 where there is higher volume support.

A few weeks ago I described an Equity crossover that I was using as an indicator on short term direction that popped up yet again yesterday so I will give a brief description. The Nasdaq is the leader among the Equity Sector and tends to lead the Sector whether Bullish or Bearish in volatility regardless of direction. If the Macro market and Equity Sector is higher on the day it should be the Nasdaq leading for right now, so if the Nasdaq becomes the laggard to the S&P or Dow then this is a Bearish indicator that may precede a sell off. In contrast, like occurred yesterday, if the Macro market and Equity Sector are weaker the Nasdaq should be the laggard market, so if the the Nasdaq becomes the strength compared to the S&P or Dow on a down board then this is a Bullish indicator that may precede a rally.

Notes:

Corn & Cotton- Both continue their parabolic rallies overnight with the Cotton looking as strong as ever as of 8:30 am and Corn rallying well above the $5 psychological resistance overnight. In no way do I suggest selling these markets, but I do recommend using a fairly tight trailing stop as they continue to defy gravity. The tops on the parabolic moves are always volatile, so be careful and keep an eye on both markets as liquidation in one will likely mean liquidation in the other.