Thursday 9/23/10 Commodity Ideas

Opening Note:

Yesterday
Early morning buying entered the market in Equities and Physical Commodities as carryover from the FOMC announcement Tuesday afternoon. The Dollar Index got absolutely pummelled over the 18 hour period after the announcement as Quantitative Easing appears to be on the horizon, which fueled this inflow of new money into the market mostly off the weaker Dollar stronger Commodity notion. This early morning buying however failed to sustain throughout the day as these supportive markets began to fall after the morning allocation. It appeared that we may have a downtrend day in the markets as the Dollar began to rally, the Nasdaq led Equities lower, and Crude Oil broke over $2 off its highs, but moderate support in the S&P 500 held steady on numerous tests to provide at least a plug on liquidation and a temporary base for a mild rally for the rest of the afternoon.

Today
This morning the macro market is moderately weaker, but the real story today will be a battle in the stock market at a high volume pivot point that could decide where the market heads into October. The S&P 500 has high volume support between 1117 - 1121 leftover from the 3 day battle at this breakout level on the Bullish head and shoulders pattern that is already being tested this morning. If this level holds then I can say the 1218 - 1245 objective for the market is on with a whole lot more certainty. In contrast though, a close below this support signals a move back into the range and directional uncertainty. If you ask any two analysts right now their opinion on Equities you are bound to get dissenting predictions as some steadfastly claim we are still stuck in the range while others (including yours truly...at least for right now) believe that we are breaking out on an extended rally to new highs for the year.

Both Corn and Cotton (and therefore the entire Food and things that grow trade) is also encountering a pivot point this morning that will either produce another Bullish rally leg or fuel a liquidation melt lower over the next several weeks. Corn and Cotton as the leaders on the trade have finally encountered a rough patch over the last several trading sessions that has caused prices to move significantly lower on consecutive days for the first time in months. As the story has morphed from a demand to a supply driven market the daily charts have moved parabolic without much more than short intraday pullbacks. Bullish Supply markets usually do not allow for pullbacks on long entry or allow the shorts a breath of fresh air, so I believe it is crucial that the market's hold if they are going to be viewed as Buys going forward. There is a low volume zone in December Corn from $4.96 1/2 - $4.98 1/2 with higher volume support from $4.94 - $4.96 that I have had my eye on for several sessions and is the pivot point I am watching for direction. A close below $4.94 would tell me it is time to liquidate the longs and re-evaluate the trade to decide if this is a Bullish story that will re-emerge or is over.

With several markets and stories at pivot points I think that the next two days may be ones to place minor bets on, but to pick your spots and be flexible on your directional opinion. Not that I own a houseboat, but I definitely would not be putting it on the stock market continuing its rally. Because these are pivot points there should be plenty of opportunity to get on the longer term trade objectives if they prove their strength. Even with my own directional convictions I am also finding lately that catching a chunk of the move and getting back in the next day is delivering better profits and better sleep. As the shorter term trades continue to work better than the longer term trends I suggest keeping your ammo available and confidence up for the time being.

Buys to Watch:

Bonds- My entry suggestion at 132.09 with higher volume support down to 132.04 not only provided the low tick for the market intraday yesterday, but also was only one tick off the overnight low as the market continues onwards and upwards this morning. The shorter term objective for the Bullish cup and handle pattern remains at 133.29 with the market only half a handle off this target as of 7:35 am. I believe it is likely that this is the beginning of a fresh rally leg for the market that will produce new highs on the Bull trend. As the market is near the short term objective I only recommend long entry on an intraday pullback to a lower volume zone between 132.21 - 132.24 with higher volume support to 132.15 for stop placement below (also recommended as the stop loss on the trade unless you wish to put a trailing stop with new highs this morning). Once the trade reaches the objective I recommend taking profits for the time being and re-evaluating to see if this fresh rally is one to continue on. **Late Note: We are pretty much at the target. Put on a trailing stop. No longer suggest looking for long entry for the time being.

Nasdaq (with S&P 500 indicator)- Jobless Claims were just released and sent the Equity markets lower with the S&P 500 testing the low end of the higher volume support from 1117 - 1121. A close below this 1117 level would signal that the Equity markets are no longer a buy, but while they hold I believe you can buy against this support. The Nasdaq has held up much better than I expected over the last 24 hours as well as in comparison to the S&P 500, so I still recommend executing long positions in this market. While I predicted yesterday that we would see a pullback in the Nasdaq to volume support from 1950 - 1956 we have only pulled back to the moderate support level of 1962.50 during this S&P test, which is a Bullish signal in my opinion. Between 1964.50 - 1969 for the Nasdaq there is a low volume zone for long entry with moderate support at 1962.50 that correlates to the strong support level in the S&P 500. I recommend using the S&P 500 as the stop loss on the trade with a move below 1117. As indicated in the opening note I also recommend using an initial position for this trade instead of taking out a home equity loan.

December Corn- The low volume zone for long entry is between $4.96 1/2 - $4.98 1/2 with the higher volume support from $4.94 - $4.96. As described above, this is a critical level for the market with a failure to hold support likely meaning liquidation of long positions and a melt lower in prices. As Corn has been the leader among this Food and Grain trade over the last month it would also signal that the correlated markets are due for a pullback as well. Cotton has been highly correlated to the Corn and this morning the Cotton sold off on its open, but has regained some strength since that could indicate that Corn will hold this support as well. The longer term weekly chart objective for Corn remains at $5.50 so this pullback could be the beginning of another rally leg for the market towards this target.

Sells to Watch:

Dollar Index- The Dollar Index has found support into this morning after the post-FOMC free fall that provides an opportunity for short entry. Overnight some poor European Economic data was released that pressured the Euro and drove the Dollar higher, but the Euro seems to have found a base to support its own rally. The Dollar Index is currently sitting in a lower volume zone for short entry from 80.19 - 80.32 with moderate resistance from 80.33 - 80.44 for stop placement above. As this is only moderate resistance though I still have my eye on a lower volume zone from 80.46 - 80.55 with stronger resistance from 80.57 - 80.72 for entry at a later date if this moderate resistance fails today. The long term 2nd leg lower objective for the Dollar Index is 75.00 with this individual trade looking to capture a 2 - 3 day break in the market. As this is only a moderate trade entry level I also suggest using only a moderate position size for entry.

Put on the Radar:

Buy Bean Oil vs. Sell Soy Meal (December contract) (Bean Oil - Meal to chart)- This is strictly backed by technicals right now, but the daily chart of the spread is setting up a strong looking Bullish cup and handle pattern that supports further gains in Bean Oil in relation to Meal. Above 1359 the pattern provides an objective of 1693 for the spread. We are sitting 100 ticks away from this breakout level, so just keep it on the radar for now.

Crude Oil- Crude Oil repeatedly proves that it is the laggard of the entire macro market on a daily basis, but that does not mean that it has been easy to hold a short position or provide great execution setups. As Equities have rallied the open interest continues to flow into Crude on the correlated trade as the Funds have taken a strong interest in it. However, Crude continues to inch lower with a move below $73 for the November contract meaning that 100,000 longs that have entered since August 27th will be locked into losing trades. These entities continue to protect their trade and look like they are using purposeful buying tactics, which has caused many of the strong rallies off of the base making it difficult to hold a short. However, I think that these are clear signs that they are beginning to worry about their sizable position that is losing Bullish hope.

The spreads are slightly firmer this morning, but still remain ticks away from another move out to the very bearish zone as short term supply outweighs demand. I still have a 2nd leg lower objective for the market of roughly $62.50 for the November contract, but if we want to get really sinister there is a downward sloping head and shoulders pattern on the daily chart with a move below around $70 projecting to around $58. I would not be surprised by this move either with the amount of new longs that could potentially liquidate and provide a fast sell off below $70.

If you are a passive trader I believe that you should look to put on a short in Crude with a mental stop on consecutive closes above the Sept. 14th - Sept. 21st trendline at $75.37 today. You can also use a Long Nasdaq position as a hedge with the execution ratio being roughly 4 Nasdaq: 1 Crude Oil as a full hedge with contract size and volatility taken into consideration. All other shorter term traders I still recommend looking to sell rallies, but do not have a great setup for short entry at the time and suggest holding off until we get one.

Notes: