Tuesday 9/7/10 Commodity Ideas

Opening Note:

Yesterday
The Unemployment number did beat expectations slightly, but as I described in my late note Friday, it looks like the short squeeze was on no matter what the number. Equities did not gain much past the initial post-Unemployment rally, but did manage to close on their highs for the week. Meanwhile, the Grain Sector was very strong as Informa numbers estimated a decline in yields for the Friday Crop Production Report. Corn and Wheat led the Grains higher with a 17 and 24 cent higher settlement respectively. Silver and Gold both rebounded strongly despite a $14 early morning Gold break as dip buying continues to hold the markets firm. Finally, the Fixed Income Sector sold off on the gut reaction to the Unemployment number, but climbed part way back over Friday's session.

Today
The market's are weaker as of 7 am with Crude Oil, Silver, the Pound, and Wheat leading the laggards this morning. Cotton is the strength among the market, with what could be a final capitulation rally overnight, and the Fixed Income markets and other risk aversion markets of the Yen and Dollar strong.

The week is light on Economic numbers with the Crop Production and Supply/Demand Reports for the Grains on Friday the only thing I am looking forward to. However, the new Obama $50B stimulus plan should provide plenty of banter for the markets...it really does not do much for me in my trading decision making though for right now. We hopefully will see some more human traders returning to the market this week, but with Equities stuck in a well defined range it's debatable if we will see a new committed move for the time being.

There are a few stories that I am interested in watching this week though with opportunities possibly on the horizon in these markets. Is Crude Oil going to continue to trade it's fundamental over-supply story and continue as a laggard? Do the industrial Metals of Copper, Palladium, and Silver, maintain their recent strength to paint a positive wrinkle for Equities? Do Bonds maintain their Bullish trend since April? Can the demand market in the Grains maintain the positive momentum after the sizable move thus far? And, does the Euro begin to show signs that this 2nd leg lower is truly underway?

Buys to Watch:

Australian Dollar- The Bullish head and shoulders objective of .9298 for the Aussie Dollar is now confirmed so it is time to look for entry into the market. This morning the market has pulled back into a nice lower volume zone from .9104 - .9126 with higher volume support down to .9068 for stop placement below. I am a little concerned however with the Equity and Currency markets right now. Below 1095 in the S&P 500 there really is not good support until around 1085 and the Euro is looking very weak this morning, which could both lead the Aussie lower through correlation. Because of this, despite the good trade execution setup, I recommend just purchasing an initial position for today and looking to add tomorrow possibly if the Aussie proves itself in the face of possible adversity.

Sells to Watch:

Put on the Radar:

Crude Oil- Crude Oil is a weakness among the market once again this morning as the nearby spreads have moved back out on the ample supply story for Crude. Crude has a tendency to follow the Equity markets rather than its own fundamentals, but it appears that with the Equities stuck in a dead zone and the spreads moving that Crude is trading fundamentally once again which would point towards a further price break. The market failed to close above the $75.58 recent high that would point to a short term rally in the market, so this area now acts as resistance for possible short entry against. With allocation entering Crude over the last week there also is a good possibility that a number of longs will get stuck holding losing positions. Since August 27th there have been about 100,000 new longs (about 7.5% of the market) that have entered at a price no better than $71.53 and up to $75.58. A move below $71.53 in Crude projects a small cup and handle pattern with a projection of $67.62 that could fuel some of this new long liquidation.

The 2nd leg objective of $61.50 still stands with the shorter term pattern above likely being a move with good momentum if it is set off. There is a good amount of resistance in Crude from $74 - $75.50, but for right now I do not have a level that I am comfortable looking for short entry on. I honestly would prefer if Crude rallied above the $75.58 level towards $80 as this would be a better looking setup. So, for right now I recommend staying flat to look for a better entry setup, but jumping on the short trade if the market moves below $71.53.

Notes:

Long Term Silver Trade (Liquidate)- There are now enough warning signals on the long term Silver trade that I recommend liquidating the long term put strategy I suggested last Wednesday. On Friday Silver settled at $19.95 above the previous yearly high, which shows strength and continuation on its current rally. Despite trading nearly 40 cents lower this morning the market also saw a huge recovery rally on its open as it rallied nearly 30 cents in 20 minutes on the heels of Gold. The Gold/Silver ratio that I discussed on Friday also settled below 63.00, displaying that the Silver strength in relation to Gold is likely a continuing trend.

Despite multiple (if not almost daily) sell signals in one form or the other for the Gold market the strong, purposeful dip buying continues to lead the market higher. I really do not understand exactly what is going on in the Gold market right now because it has no correlation to any other market that I can tell over the last month and a half and looks like it is just moving on its own with algorithms spiking the trade and some entity buying every dip in the market. Coupled with the strength of the Copper and Palladium Industrial Metals the Silver is being supported on both ends fundamentally and now technically. Holding a short position could continue to get more painful going forward this month, so liquidating and re-evaluating looks like the right play now.

Corn- With the strong rally Friday Corn has now reached the $4.70 rally (only $4.69 really) for my purposes, with the July '11 - Dec '11 spread also trading 34 cents into the 32 - 37 cent objective range. This morning the market has sold off 10 cents from the overnight highs as the rally was bound to give back some of the gains last week. The chart for Corn still looks rather strong, but with the reports coming out on Friday and the market reaching its 3rd leg objective now I recommend looking to at least take some profits on long positions.

Because Corn has been the strength among the Grains I am also hesitant to encourage long entry into Soybeans or Wheat for the time being. Above $10.34 (which has been negated this morning) the November Beans have an objective of $10.67 and the Wheat market does look technically promising as it could be setting up another leg higher. But I suggest holding off on entry until at least after the Friday Crop and Supply/Demand reports.