Thursday 9/16/10 Commodity Ideas

Opening Note:

Yesterday
From the get go yesterday morning it was pretty much a straight buy day as money flowed into most of the Commodity Sectors to carry the weaker morning market back to gains in many cases. The S&P 500, led by the Nasdaq, again tested the 1120.50 Bullish head and shoulders breakout level and managed to close 1/4 of a point (Yes 1 tick) above this level as buying re-entered the market in the late afternoon. Most of the Commodity markets with high Equity correlation experienced similar buying throughout the day with Crude Oil and Copper finding a strong bid even though they were trading weaker in the morning. The Yen was the headline news on the Japanese Currency Intervention as it settled on its lows over 3 1/2 points lower without much of a bounce. Lastly, the Crop markets experienced a stall in fresh buying for the first time since Friday's report as Cotton settled lower on the day and Corn failed to mount a strong test of the $5.00 level.

Today
The markets are kind of mixed this morning with Equities, Energies, and the supportive foreign Currencies (other than the Euro) slightly to moderately weaker this morning, but the Metals and Softs are strong. I can clearly say right now that Crude Oil and RBOB (Gas) are VERY weak in relation to every other market as the fundamentals of the Sector look to finally be driving the market while Equities remain range bound and directionless over the summer. I can also say that the market is establishing a pretty steady pattern as there is some heavy allocation going on most mornings throughout the first half of the month and basically since Bernacke suggested that The Fed would be willing to do more quantitative easing if necessary.

PPI and Jobless Claims were just released with the numbers slightly Bullish, but the markets have actually sold off the first 5 minutes after the release after an initial high frequency rally pop just prior to the report. This is contrary to how the markets have reacted to data over the last few weeks as there has been buying directly following almost every number regardless of its impact. This could be a shift in momentum and I still believe that the Equities fail on this rally breakout. I suggest remaining on the sidelines on Bullish trades unless the S&P 500 is able to make a convincing close above 1120.50. and looking for macro short opportunities while this resistance holds.

Buys to Watch:

Sells to Watch: (Copper off the Sells)

Crude Oil (still quoting October for today)- Crude came into yesterday morning's open down $2 on the day, but what followed was nothing but buying as the intraday uptrend took over without much of a pullback at all. Several days ago I wrote that these people allocating into Crude are dip buyers that will be adding to their already large position as the price falls and this seems to be the real case. On Tuesday there was now a confirmed rise in open interest and I imagine today's preliminary report of an increase of 35,000 may even be revised upward. The way that you get this open interest increase along declining price is the only time that the market really rallies is when these guys come in and buy the crap out of the market, but the market price falls apart during the lower volume times. What we now have is 130,000 new longs since August 27th from a price between $71.53 - $78.04 with the market currently sitting right in the middle of this range. Are these buyers really that confident that the Equities make new highs for the year and that Crude is going to $85? And are they willing to hold their longs if Crude moves below $70?

Crude Oil has now produced consecutive Harami Bearish and Hanging Man Candlestick patterns that signal $78 was likely a reversal top. Stochastics for the daily chart also is confirming a crossover sell signal with the price action thus far today. The nearby spreads continue to weaken with the Nov - Dec spread moving below -$1.50 this morning and lower than the front Oct. - Nov. spread. I am now moving the stop loss on this trade to just above the higher volume $76.25 level that acted as resistance intraday for the market yesterday with new entry based upon this stop level on a rally. The long term objective for the market is $61.50, but the on this individual trade it remains a see-as-we-go proposition as it is dependent on liquidation from caught longs.

Sometimes the best trades are the toughest and I can tell you that the $1.50 rally from lows to highs yesterday was not particularly fun, especially when the market went high frequency around 12:30 pm. I know Goldman has updated its target for Oil this year to above $80 and in the media I continuously hear that you need Oil exposure...blah blah, but right now the fundamentals, technicals, and macro relationships are saying that Crude is the weakest market out there. It may be tough with allocation continuing to come into the market, but the market setup looks like it will provide a big payoff if you sit through the temporary pains.

Put on the Radar:

Canadian Dollar- Still sitting on the radar today as the 2 week uptrend from the low Sept. 1st - open Sept. 8th is still intact with a value of .9709 for today. The Australian Dollar appears to be unexcited about going after new highs for the time being after it nearly reached my 3rd leg objective for its rally move earlier in the week. The Aussie topping would support the sale of the Canadian Dollar on a move back toward the .9360 low of its range and possibly out the bottom on the large bearish pattern. So, keep this on the radar until the recent uptrend is broken and more parameters will be explained then.

Corn- First I want to clarify that yesterday's "weekly" objective for Corn means weekly chart objective of $5.50, meaning within the next few months and not by tomorrow. With that cleared up, I think that Corn is going to need more buying to enter today for the market to hold off a 30 - 50 cent pullback. All of the indicators are deep in overbought territory and a decline in price will likely produce sell signals in Stochastics and RSI. In kind of an awkward correlation, I also recommend keeping an eye on the Cotton market as a loose indicator for Corn. The Cotton and Corn daily charts look nearly identical over the last couple months as they do have acreage competition. The fundamental and demand stories for the two are basically unrelated, but I believe that the allocation and entities doing the allocation may pull the trigger to liquidate around the same time as they group them in a similar category. Cotton is open throughout the morning, so if you see a large sell off I would use it as a warning in Corn. Cotton is strong today, so no worries this morning.

Notes:

Copper- It was a good setup with great risk/reward, but the market is not cooperating right now with short positions. The $3.48 stop level on the trade was triggered early last evening and after an evening sell off the market has made a strong rally since the European open to rally above $3.51. I believe that some of the enthusiasm for the Metal sector is spilling into Copper today as many of the other correlated markets are not stronger today. Palladium has now reached my 3rd leg rally objective for the market of $551, which could mean that a top is near for the Industrial Metals. If Copper is unable to hold a rally above the $3.5345 swing high then this trade may be revisited soon.

Platinum- Although I have watched it for a long time I have never traded Platinum as the market is very thin, but I thought it was worth noting that the market is testing a Bullish cup and handle breakout today. Above $1607.5 the market has an objective range from $1711 - $1723. Platinum has been the dog of the entire Metal sector, sitting in a range for most of the summer. Like Copper though it looks like the rest of the Metal enthusiasm may be catching up to Platinum though, so buy a small position if you wish on confirmation for the pattern.