Friday 9/24/10 Commodity Ideas

Opening Note:

Yesterday
The macro market was choppy and mixed as early day buying turned into selling in the afternoon. After beginning the morning weaker, the Equity markets and many of the supportive Commodities were able to turn positive on the day temporarily, but once the S&P 500 reached the 1130 resistance wall it led a macro sell off. The important thing to note from yesterday is that on two separate tests the 1117 - 1121 support level in the S&P held as well as the $4.94 - $4.96 support level for December Corn. These pivot points will likely lead the individual Equity and Grain trade directionally and in both cases it still looks like the trend remains Bullish.

Today
The market is moderately stronger with a move lower in the Dollar Index supporting almost everything other than the Fixed Income Sector. Gold traded above $1300 overnight, but as CNBC will likely cover this development for 30 minutes of each hour I will leave Gold discussion alone for today and let them burn the story out. Other than Euro strength overnight after poor European Economic data yesterday there is not much that is noteworthy though with many of the markets sitting in no man's land in between support and resistance as of 7 am.

Unless otherwise noted, when I put trades in the Buys or Sells sections they usually are at least expected to be 2 day positions. While I only write once a day I could easily claim this morning that the letter (theoretically) and myself (in actuality) are holding a Long Nasdaq and Corn and Short Dollar Index position. However this would be false as I, like most other active traders would, covered my positions once I saw signs that the stock market was headed for a sizable sell off in the afternoon that would turn all day winning positions into losers. As the Equity and Grain trades sit near pivot points the markets are more likely to have violent swings until they decide upon a clear direction, making holding a position all day and especially overnight difficult right now. The moral of the story is taking your profits when you have them and getting out of the market when it begins to feel uncomfortable is probably the smart move right now even if the trade has not reached its objective. You can always get back in tomorrow.

This morning the Equity and Physical Commodity markets are doing the early morning creep higher in anticipation of the stock market open. Over the last 18 months this usually indicates that there will be continued early morning buying through at least 9:30 am. I believe that after yesterday's correction that we will see more Bullish market action today as the markets look for strong weekly closes and the Dollar weakens.

Late Note: Not a great Durable Goods number at 7:30, but a quick snap rally in the stock market followed. This is usually the high frequency programs attempting to stick it to the shorts. It is pretty clear that the algorithms are aiming higher today though adding to the Bullish case for this morning. It looks like this will be a push higher, so do not expect much in the way of pullbacks either.

Buys to Watch:

Nasdaq- I realize that yesterday's letter was sent a little late to take advantage of the low volume zone between 1964 - 1969 yesterday and I apologize. It is very clear that the Nasdaq strength trend continues as it settled higher on the day while both the S&P 500 and Dow settled lower. The longer term objective for the Nasdaq is from 2080 - 2135 on the Bullish cup and handle pattern. It appears that the market is trying to run out all the shorts and establish a strong weekly close, so I believe that we could see the market really run today. Previous resistance from 1995 - 1997.50 now is support for the market as a higher volume price level to purchase against and place a stop below on a pullback.

December Corn- I decided to liquidate my long position yesterday after the 10:30 am Informa report. The report showed an increase in planted Corn acres, but less than the market expectations (Meaning less Corn than expectations, Bullish for Price). While you would expect a rally the market had difficulty holding its price and sold off back towards the $4.94 - $4.96 as Soybeans led the Grain markets. This morning is a different story though as Corn is the strength among the sector after the high volume support level held again overnight. Corn has the most Bullish fundamental story among the Grains and the best chart technically. I believe that the Bean strength yesterday can be attributed more to an unwind in the popular Long Corn vs. Short Bean trade that has worked over the last couple months as profits were taken and positions liquidated yesterday.

Corn still has the weekly chart objective of $5.50 and may be establishing a new rally leg towards this level with a strong close today. With the Dollar much weaker this morning and the other physical Commodity markets rallying while the Corn market has been closed I expect that there will be fresh buying that enters on the open this morning. If the market is able to hold prices above $5.01 today I would take this as an additional sign of strength.

Sells to Watch:

Dollar Index- The Dollar Index looks like it finished a corrective rally overnight as it is much lower this morning while every Foreign Currency is trading higher. The market was a difficult short to hold yesterday as a late day rally emerged to re-test the moderate resistance level from 80.33 - 80.44 that I suggested yesterday. The longer term 2nd leg objective for the market remains at 75.00. On a pullback today you can look to enter shorts against higher volume resistance from 80.00 - 80.10.

Put on the Radar:

Buy December Bean Oil vs. Sell December Soy Meal (Oil - Meal to chart)- The daily chart has now built a technically strong Bullish cup and handle pattern that is nearing the breakout level. Above 1359 the spread has an objective of 1693. On the record I recommend waiting for two higher closes to confirm the pattern, but between you and me I will likely put on an initial position on the day the Oil share moves above 1359. The execution ratio is Long 5 Bean Oil vs. Short 3 Soy Meal to account for contract size. As I also believe that Grains will continue higher you could also use a ratio of 2:1 to produce a little more Long exposure on the trade.

Notes:

Bonds- If you used the late note suggestion of using a trailing stop on Bonds then you are probably out of the market with a good profit. For right now I suggest staying out of Bonds. I view this Bond move as one that should continue to be Bullish, but with the Equities and Physical Commodities strong this morning I do not think being Long Bonds is a good position for right today. I am looking for a pullback into the 131.12 - 131.26 lower volume zone with support from 130.30 - 131.07 before looking for re-entry.

Crude Oil- Crude Oil's intraday swings have made holding a position in the market difficult regardless of direction. The momentum on the Bullish moves also seems to be higher than on the Bearish swings. I suggested that passive traders look at establishing a short position with a stop above the highs Sept 14 - Sept 21 trendline, but I do not believe that this is a position you can hold any longer. Although Crude Oil remains a weakness among the macro market, Dollar weakness and Equity strength continue to encourage a rallies in Crude.