Thursday 9/30/10 Commodity Ideas

Opening Note:

Yesterday
Most of the market sat in a rangy sideways pattern that accomplished very little, but the Energy markets and Grains were rocking. Crude Oil began to sag after its 8 am open as it has consistently shown weakness in relation to the Equity and other Commodity Sectors. This trend reversed hard though as a surprising 9:30 am EIA stocks number showed a decrease in stocks while the consensus expected a net increase. This number was significantly Bullish in relation to expectations as the market proceeded to close $2.26 above its low morning trade. I break down Crude more on the Radar, but it is noteworthy that the Crude rally was accomplished without any help from the other correlated Commodity Sectors and may mark a shift in the Energy markets.

I found myself caught completely off guard by the Grain market action yesterday as a putrid looking overnight sell off was followed by strong buying from the 9:30 morning open. Overnight both the Corn and Wheat markets violated critical nearby support levels that could have triggered further pressure on prices. However, the markets found fresh buying come in both early and late with Corn rallying from 14 cents lower to settle 5 cents higher and Wheat 21 cents lower to only 1 1/2 cents lower on settlement. Both markets recovered above their critical pivot points, but the Corn market has definitely stepped up the daily volatility and directional indecision over the last week and a half. The fundamental analysts almost unanimously agree that Corn prices will continue to rally based on USDA yield over-estimates and foreign demand. The speculative funds all seem to agree as well because the dips continue to be bought with strength and the long positions continue to hold steady without much profit taking and liquidation. Corn should lead the Grains for the rest of the year and the path of least resistance will be to follow the open interest and allocation.

Today
There is Q2 GDP revisions and Jobless Claims at 7:30 this morning that will effect the market as well as the Grain Stocks Report at 7:30 that will effect the Grains on their 9:30 open. Most of the macro market is slightly stronger today with Equities lagging a bit and the Energy Sector leading the gainers as of 7 am. It is the last day of the 3rd Quarter, there is some moderately important Economic data that will move the market, and we have seem some isolated violent volatility episodes across the market over the last week. Because of this I expect some erratic trade and do not have a good feel for today just yet. I think it may be wise to watch more today and get ready for re-positioning and allocation tomorrow.

It is important to also note that tomorrow is not only the first day of the month but the first day of the 4th Quarter. The stock market statistically performs much better on these first days of the month than any other over the last decade, so looking to take home a long position rather than a short is advised.

Late Note- Stock market rally of 5 points in S&P 500 on Jobless Claims that beat expectations slightly and slight upward revision to Q2 GDP. Standing alone neither report was very Bullish, but they beat the awful expectations to give the market a rally. Nothing new here and I again do not have a great feel for this morning, but I am leaning towards Bullish continuation. The S&P 500 will run into strong resistance near 1150, which should be a battle. The Corn USDA Corn stocks number today is 1.708 Billion Bushels with the average trade guess coming in at 1.407 and a range of expectations from 1.350 - 1.489. This is very Bearish for Corn today and I expect a disastrous open this morning. Beans fell right in line with expectations while Wheat was the slightest bit Bearish. Corn will likely lead all of the Grain Sector lower today.


Buys to Watch:

Buy Bean Oil vs. Sell Soy Meal (December Bean Oil - December Soy Meal to chart)- The Bullish cup and handle pattern for the differentials daily chart was confirmed by yesterday's close and is now in play. Above 1359 the differential has a projection of 1693. Higher volume support falls from 1360 - 1375 with some moderate support up to 1400 from this area as well. It may be prudent to wait for the initial move on the Grain open, but if the spread does not take a Bearish dive within the first 5 minutes I believe you should be safe. Beans could be dragged lower despite their stocks number falling in line with expectations by the Corn market that could have an awful open. If this is the case then you can also leg into the trade by Selling the Soy Meal first and waiting on the Bean Oil Long. Remember that the execution ratio is 5 Bean Oil : 3 Soy Meal.

Sells to Watch:

Dollar Index- The moderate resistance from 79.09 - 79.19 has now held on back to back daily tests as the Dollar Index has established new lows on the move this morning. While this level is a good short term fade I still have my eye on better entry on a rally above this resistance. From 79.30 - 79.45 there is the low volume zone for short entry with higher volume resistance from 79.50 - 79.65 for stop placement above. This setup looks great so for right now I am waiting for this level before entering a longer term position. The longer term objective for the Dollar Index is 75.00 or 1.4050 for the Euro, whichever hits first. I am Bullish the Euro to this level, but as I am at least slightly Bullish almost all the other Currencies the Dollar Index should continue to garner further losses in relation to the Euro gains.

Put on the Radar:

Buy Crude Oil- I took Crude Oil off my Bearish watch list several days ago when the short term Bearish trendline on the daily chart was violated. Since then Crude Oil has actually turned rather Bullish looking, especially after yesterday's strong rally. Today the market has rallied above the $78.86 nearby breakout level that provides a short term objective of $84.14 for the November contract. I do recommend waiting for a settlement today above this breakout prior to entering the trade.

The next important level for Crude is $83.91, with a rally above this level projecting a move to new yearly highs for the market. As the nearby spreads have continued to move in it appears that the fundamental supply story has turned less Bearish, with yesterday's stocks number being the catalyst the market needed to get the rally rolling. It is also a good idea to check out the Heating Oil chart as it is more Bullish in comparison to Crude and likely the better buy on this Energy trade both seasonally and technically.

While this market move is convincingly Bullish I still am keeping a very close eye on the open interest gains for the market in relation to the price gains. Although the Longs look like they are off the hook for right now there still is 100,000 holding positions from $73 - $78.86. If we see a large amount of new longs enter the market we could still have a situation where too many longs enter the market without a price rally, with an ensuing liquidation run. The Quantitative Easing story should continue to support Crude Oil though for the next several weeks so ride the rally and watch the OI for later.

Buy Nasdaq- The objective remains 2080 - 2135, but for right now there is not a good setup to re-enter a long Nasdaq position for right now. The market has ripped higher since the 7:30 am data this morning, but will encounter strong resistance when the S&P 500 comes up against the 1150 level. As the market has been choppy over this week and the end of the quarter today could cause erratic action I recommend holding off on longer term entry for today. I still encourage a strategy of buying the dips though and I will provide entry levels as they emerge. Remember that tomorrow is the first day of the 4th Quarter and month so taking home a long position from today's close is statistically profitable.

Notes: