Monday 9/13/10 Commodity Ideas

Opening Note:

Yesterday
The market held firmer on Friday with the S&P 500 rallying to close on its highs as it tests the upper end of the summer range. A major pipeline leak and shut down provided the catalyst for Crude Oil to rally above the recent consolidation zone as the nearby spreads also snapped back in to show decreasing over-supply concerns. The Grain market rocked and rolled for the first half hour of trade, but once the markets found their equilibrium it was clear that Corn remains the strength, Beans the weakness, and Wheat the middle man, but with Corn likely the leader among the Sector regardless of direction going forward. Gold made a first close below its 30 day rally trendline, which could be setting up some liquidation in the market. And finally, the risk aversion markets continued to sell off in line with the Equity gains, but Copper was the outlier as it settled 4 cents lower despite nearly every other supportive market closing higher on the day.

Today
The market is strong again with the S&P 500 testing the Bullish head and shoulders pattern breakout of 1120.50 today. Nearly every supportive market is higher this morning with the Aussie and Canadian Dollars and the Euro leading the Foreign Currencies this morning. Copper, the laggard from Friday, is up 7 cents early exemplifying the market choppiness as the laggard one day can easily shift to the leader the next. Crude Oil is higher, but not as much as I would expect under normal circumstances as the supportive Currencies and Equities are a bit stronger in relation.

The Equities seem pretty adamant on a thorough test of the upper end of the summer range, so I expect that we could see a battle around this level that could last at least a couple days. However, the macro market relationships are not saying this Bullish pattern breakout is likely to succeed for the time being (I give a more detailed run down in the Notes). If the S&P 500 is able to successfully rally out of this range then we could see some good trading opportunities over the next month, but until the market makes a clear decision there remains little to do other than take the 12 hour market swings when they setup and wait on the sidelines for right now.

Buys to Watch:

Australian Dollar (Make sure you have December now)- The Aussie is strong this morning with a gap higher open yesterday evening. The market has now reached the head and shoulders base objective of .9198 and is plowing further toward the 3rd leg advance objective of .9416. I now suggest moving the longer term stop on this trade to around .9138, which is just below higher volume support left over the last two sessions. For new long entry the gap left over the weekend from .9170 - .9186 is a lower volume zone with a stop loss on the trade between .9138 - .9148 below higher volume support. The technicals for the market's daily chart remain strong and healthy for continuation despite being in overbought levels for Stochastics, which is not concerning for right now. If you are holding this long position in the Aussie I think it is also important to keep an eye on the S&P 500 for right now as it is sitting at a make or break juncture. If the S&P 500 fails to rally out of the summer range then it could drag the Aussie lower with it.

Sells to Watch:

Put on the Radar:

S&P 500 (and Nasdaq)- Connecting the high June 21st to August 5th for the S&P 500 creates the Bullish head and shoulders pattern neckline with a value of 1120.50 today. Above this breakout level the market has a projection to 1245 above the yearly highs. Using the same days the Nasdaq is actually already trading above its own breakout level of 1899 today with a projection of 2135 if the pattern is confirmed. To set these patterns in motion the markets must make two consecutive closes above the designated breakout, so I recommend waiting on entry either direction until we get some more clarity. If the patterns do initiate then I believe that the Nasdaq would the better buy as allocation has been stronger into technology over the recovery and it has the larger percentage gain on the pattern objective.

Corn- Corn held up very well Friday after the Bullish reduction in yields and establishing a new high close on the rally. There was large buying of Corn as a spread against both Wheat and Beans, with the ratio between the latter moving significantly Friday. Right now all of the short term objectives for the market have been met, so I am still waiting for a pullback in the market prior to looking for long entry. The base on the weekly chart for Corn projects a move to around $5.50, making this the longer term objective. Corn still has the strongest fundamental story among the sector and still looks the best technically meaning that I am only looking for buying opportunities in the market, but for right now I am waiting for a pullback to enter a longer term position.

Crude Oil- The leak in the large pipeline from Canada has now caused a 4 day shut down, which is boosting Crude prices over the last two sessions and has me now in a full crouch waiting to pounce. Open Interest rose again Friday making the new longs in the market nearly 150,000 since August 27th. This increase in positions is extremely high for the slow increase in prices and is looking like a potential liquidation trap with just a couple days of price drops locking this large interest position into a losing position. The short term cup and handle pattern has an objective of $78.25, which is the level that I suggest looking at the options market to enter an initial short position so there is more flexibility and ability to stay in the market than an outright sale. I still put Crude Oil on a 2nd leg lower objective of $61.50 and although the nearby spreads have moved back in I believe that the ample supply of Crude will be the fundamental leader for this move.

Gold- Drawing a trendline form the low July 28th - August 24th displays the base trend for the 30 day Gold rally. The market closed below this line for the first time Friday with a close below $1250.3 today confirming the end of this rally. Holding a short position in the Gold market is not necessarily an easy thing to do right now as you can see by the $15 rally swing Friday morning that had strong momentum. As there is not a clear Bearish objective for the market right now I simply recommend liquidating long positions with a close below the trend today and looking to enter shorter term Bear positions in the market to catch the $10 - $15 swings. If an objective emerges in the market though then Silver could be moved to the Sells.

Notes:

The Macro Relationship Web...Copper Could Hold the Key to an Equity Rally
The reason I do not think that this Bullish head and shoulders pattern will be set off currently has nothing do with the fundamental numbers or the S&P 500 chart, but rather the correlations between the markets. Right now I am using Gold, Copper, Australian Dollar, Bonds, and Crude Oil as my indicator markets to formulate my opinion:

Gold- Possibly setting up top for the market that could turn into a double top pattern to increase liquidation in the market. Gold does not have a strong correlation to Equities right now, but I still view it as a market that should travel more in line with Equities than inverse to them.

Copper- The summer rally has brought the market near the highs for the year, but after meeting the head and shoulders base objective of $3.50 the market has fallen back and could be making a top. Copper is strong this morning on a Chinese Industrial number, but unless it is able to hold a rally above $3.5345 then the trend for the market is will likely turn downward.

Australian Dollar- The Aussie Dollar has made an impressive rally and is nearing the 3rd leg advance objective of .9416. The Australian economy has had impressive numbers as one of the leading global economies as of late and is the leader of the Currencies right now. However, with a strong correlation to U.S. Equity markets it looks like the Aussie is near topping with a 2 leg decline likely following next.

Bonds- The market has fallen since making highs 2 weeks ago, but the Bullish trend is still alive and strong if the market is able to hold above the 128.16 level. I believe that this recent decline has been just a standard 2 leg pullback on the larger rally and that there is still another leg on the rally to follow.

Crude Oil- I have a 2nd leg lower objective for Crude of $61.50. Short term the market projects a rally to $78.25, but the trend still remains lower for the market over the medium term.

When you take all of these into account it looks like there is not a good catalyst among the supportive markets that would support a strong rally in the Equities. The leader among ths correlated Currencies looks to be topping soon, the Energies are a lagging Sector, the Precious Metals may have topped, and the Industrial Metals are not showing they are on course for a larger rally right now. In addition, the risk aversion trade in the Bond market is not dead and the strength in the Japanese Yen also supports this idea. The Equity markets can act independently, but with so many signals saying it is unlikely I am not betting on a successful rally to new yearly highs for the S&P 500.

The one thing that I can see that might change my opinion is Copper. If Copper is able to hold a rally above the recent $3.5345 swing high then the market could be on a 2nd leg rally higher that would mean a move to around $4.00 if it is a 3 leg advance. Copper has a tendency to lead the Equity markets, so I think it is critical to keep an eye on the market over the next few sessions because it could be the best indicator whether Equity continuation is likely or not.