Tuesday 9/14/10 Commodity Ideas

Opening Note:

Yesterday
The S&P 500 made a convincing test of the 1120.50 Bullish head and shoulders breakout, but failed to close above this level as strong resistance held the market off. Most of the correlated Commodity markets also fell into a similar pattern with the Australian Dollar, Crude Oil, and Copper also establishing higher closes, but falling off a bit to settle off of early highs. Bonds made a nice recovery despite early morning weakness to close higher on the day in the face of stronger Equities and these correlated Commodities. Copper was a leader yesterday as Bullish Chinese manufacturing data supported the market. The Grain Sector was quiet as Corn made a new high close, yet only a few cents above Friday's settlement. And Gold closed below the base of its Bullish month and a half rally channel for a second consecutive day.

Today
The market is moderately weaker with Equities, Energies, Grains, and most Foreign Currencies trading lower at 6:50 am. Gold is strong this morning despite yesterday's 2nd consecutive close below the market's trendline, leaving me a bit perplexed on the market fundamentals. Cotton is the strongest market this morning with the great Bullish trend maintaining even better than Corn for the time being. Copper is a laggard this morning as it reverses the gains from yesterday's Chinese data. Everything appears pretty much in line on the macro level though other than Gold with the risk aversion trade stronger this morning.

In the Notes section yesterday I laid out the Macro indicator markets that I am using currently that are pointing towards a failure on the Equity breakout attempt above the summer range. Today I am seeing nothing that has changed my opinion with Copper weakness this morning looking like topping action for the market and actually strengthening my opinion that a larger macro rally is not in the works for now. I recall conversations when I began trading several years ago, and my fundamental acumen was about 1/4 what it is now, when I would lay out this relationship web as evidence for my macro directional opinion and I would get a lot of confusion and "what is this kid talking about" responses. I have found though that this is a reliable tool that takes out fundamental data confusion and adds more accuracy to the decision making process than just applying technicals to the S&P 500 chart. While I am eagerly willing to buy Nasdaq if the S&P 500 chart does initiate the Bullish head and shoulders pattern this is just a different indicator that is saying "hold off and don't get too Bullish".

That being said, I also do not want to get too Bearish right now either as each day for the market continues to look different than the next. While there are a lot of notes and possible suggestions on the Radar finding a predictable, fluid trade for entry right now is difficult. I still recommend sitting on the sidelines for most longer term trades and looking more for just intraday moves because that is what the market is giving right now.

Buys to Watch:

Australian Dollar- This remains my only longer term trade idea with the .9416 target clearly defined and a fluid rally continuing higher. With the outside markets slightly weaker this morning I think that it is more likely today that the market provides a pullback for new long entry opportunity. The low volume zone/gap left from over the weekend between .9170 - .9186 is a good level for long entry with a stop from either at .9138 or .9148 depending on opinion, safety, and risk appetite below the higher volume support range. For the longer term trade I also still recommend using a stop level of .9138 or .9148. The technicals for the Aussie daily chart are becoming slightly overextended and into overbought territory, but it looks like another 1 - 2 day pullback would still not set off liquidation signals, making this trade still in play.

Sells to Watch:

Put on the Radar:

Crude Oil- We are now on about Day 7 since I first pointed out the sizable increase in open interest versus price action and the market is now ready to begin looking for initial short entry. Although there actually was a 1 day decrease in the open interest there still remains over 100,000 longs that entered at a price no better than $71.53. The key to this trade's success is that these dip buying strategies become locked into losing trades on these large positions like for example in late April/early May of this year, which can easily happen with 2 - 3 days of sharp breaks. The best part is that these guys are dip buyers, which means they add to their positions on this price break adding to the later liquidation.

Yesterday October Crude Oil made a high of $78.05 just below the $78.25 short term target for the market before breaking in price mid-day back to $77. The Crude spreads have sat relatively flat over the last 24 hours, but they still are sitting at an uncomfortable level for Bulls as another dip below $1.00 for Oct. - Nov. could mean trouble. The daily chart is also becoming extended on this smaller rally now with indicators coming closer to sell signals on the 2nd leg lower target of $61.50 for the Crude market. Although the market is slightly weaker this morning I still think there is a possibility that there is another rally above $78, which provides a good initiation level for Bearish positions that I recommend executing in the options market for the time being. I recommend using the November options contract because I expect the full trade to last roughly 20 days and definitely will not cover the 2 days left on the October contract.

S&P 500- Up to 1120.50 the market has strong resistance that has been repeatedly tested, but I believe will eventually hold on this rally attempt for the market. However, if there are two consecutive closes above this level the market has an objective of 1245 on the Bullish cup and handle pattern. The Nasdaq also has an even stronger cup and handle pattern with an objective of 2135 above 1899 and would be the preferable market for a long position as the technology sector has continually outperformed on the recovery.


Notes:

Gold- This morning Gold is trading back above $1260 on a $13 rally above the base trendline that the market negated yesterday. This move is out of line with the rest of the market as it appears that Gold is further confirming that it is completely uncorrelated and its own entity for right now. As there are so many different fundamental stories for Gold right now it is difficult to pin the rally on a specific idea. It is being bought as a Currency reserve, store of value, and the Asian market seems to have a voracious appetite for it right now. Furthermore, there are also people just buying it based on the long term technicals and the belief that it is in a long term bull market. Technical indicators for the market have lagged considerably and have proved unreliable on a day to day basis for the market, so for right now I suggest staying out of the market. It really appears to be whoever is coming in to buy Gold on a longer term basis that day that is moving the market, making predictability difficult.

Bonds- With the failure on the move lower yesterday and higher settlement it is possible that Bonds have reversed their short term Bearish trend and are setting up another rally leg. Keep an eye on the topside trendline on the 2 week break that is sitting at 132.00 today as Stochastics may be nearing a buy signal as well.