Wednesday 9/15/10 Commodity Ideas

Opening Note:

Yesterday
While the markets appeared to be in normal order as of yesterday's morning analysis, there was an absurd amount of odd relationship moves that occurred throughout the day. The S&P 500 methodically tested the 1120.50 head and shoulders breakout level and 1122.50 summer swing high only to fail near the late afternoon settlement as I expected it would. The real odd stuff began around 8:30 am though as Gold busted out a strong rally above the $1260 resistance to rally to above $1275 by 7 am. This was followed by slow and steady gains in the Fixed Income Sector throughout the day amidst stock market strength as a contrary move to the recent relationship. It was also pretty clear that the risk trade and allocation programs were on yesterday as Crude Oil, Copper, Corn, Cotton and some of the supportive Foreign Currencies (Aussie, Canadian, Euro?) began strong uptrends just prior to the stock market open. Overall this was very odd action for the macro relationships with a lot of conflicting moves, but once the supportive markets like Crude, Copper, and Aussie started to sell off mid-day it was pretty clear to me that the S&P 500 did not have the support to settle above the 1120.50 head and shoulders breakout.

Today
Today the headline news is that the Japanese have intervened in the Currency market to devalue the Yen by buying U.S. Dollars without providing specific parameters or amounts. The Yen is over 3 full points lower as of this morning on the first "announced" intervention by Japan in 15 years (I say "announced" because if you look at the spiky action in the market around 115 over the last 2 years, the same level they began talking about intervention this time, it is fairly obvious that there was an invisible brick wall there). Because the Yen is viewed as a safe haven Currency the Fixed Income Sector began to sag on the news as well and has continued losses this morning. The supportive markets are slightly weaker this morning with Crude Oil being the clear loser, but Cotton remaining a strength.

Today should prove very interesting and critical to the market action over the next few weeks. With the S&P 500 failing on its rally breakout from the summer range yesterday it is possible that we see another test of this level this week, but I believe it is likely that the market may now be shifting away from the Bullish momentum of September as I write. The macro directional web I laid out on Monday is falling into line with my prediction that the S&P rally fails as the Australian Dollar, Crude, and Copper have put in possible tops on their rallies. The real question mark right now is what happens with the Yen and therefore the Fixed Income markets and is this a move that continues or creates a new relationship among the markets.


Buys to Watch: (Aussie is off the buys...please see the notes)

Sells to Watch:

Crude Oil- It only took 7 days of patience on the radar for Crude to finally provide a good opportunity for short entry...jeesh. Yesterday the market rallied early back to the $78 level at the same time the S&P 500 was making a strong breakout rally attempt providing very tight risk parameters on entry (if the S&P 500 goes, then Crude probably is not a good short). At 11 am the Crude market followed with a large price dive as the Equity markets fell off their highs. The nearby spreads for Crude Oil weakened at this same time with both Oct. - Nov. and Nov. - Dec. moving back below the -$1.00 warning level. This morning the market is a the clear weakness (other than the Yen) as Crude is now near a test of a moderate support level from $74.70 - $75.00.

Preliminary open interest reports for the market show an increase of 43,000 contracts yesterday, which can easily be revised 50,000 either way, but maintains the large open interest position since August 27th that is not holding a long from a better price than $71.53. The spreads have continued to move out this morning to suggest the over-supply issue is present in the market again. Technicals for the daily chart now have Stochastics likely providing a sell signal with today's price break and RSI maintaining a range that is consistent with a bear market move. For right now I am placing my stop just above the day's highs of $76.65, but I believe that this is the best trade out there right now and is one worth holding. Below $71.53 there should be a large amount of longs caught with losing positions that will provide a liquidation run lower towards the 2nd leg objective of $61.50 for the market. For new short entry I do not have great levels right now, but you can sell against today's highs and I believe all rallies are to be sold.

There are some very important things to note though. The API/EIA Enegy Stocks is today at 9:30 CT, which can have a significant impact on the market. Also, the October contract is nearing expiration and rolling the position to the October contract should be done by this evening as it will switch to the volume traded month tomorrow.

Copper- Other than the Monday rally on Chinese manufacturing data the Copper market has been a laggard among the macro picture since it reached its bottom head and shoulders objective of $3.50. Yesterday the market followed in line with the other Commodities on a morning rally, but ran into resistance just below $3.50 and has been a weakness market since. Copper has a similar, yet less substantial, setup to the Crude market with 8,000 (out of 142K) longs since Sept. 1st holding a long position from no better level than $3.37. Below $3.3930 the market has a smaller cup and handle pattern that projects a move to $3.2885, which is the objective for the trade. There is stronger resistance around $3.48 fro the market that has held overnight and without a great entry level I believe that entry should be constructed with a stop just above this level.

Put on the Radar:

Equity Indices- The S&P 500 failed yesterday on a test of the 1120.50 Bullish head and shoulder pattern breakout as a previous summer high at 1122.50 provided resistance to the exact tick for the market. The Nasdaq remains slightly stronger than the rest of the Indices and now actually has confirmation on its own head and shoulder pattern with an objective of 2135 above 1899. However, I strongly recommend refraining from long entry in the Nasdaq for the time being. The S&P 500 is the main directional indicator of the sector right now and without further progress it is unlikely that the Nasdaq will continue to rally on its own I recommend either fading this resistance level in the S&P 500 or staying out of the Equities for the time being. Above 1120.50 the S&P has an objective of 1245, so waiting for confirmation on the pattern still will provide ample time to catch a good move.

Canadian Dollar- The Canadian Dollar is the ugly sister to the Australian Dollar and with the Aussie basically meeting its 3rd leg rally objective I think it is time to start looking at shorting the Canadian. The Canadian is stuck in a summer range similar to the Equities and looks like it could be creating the right shoulder on a fairly large Bearish head and shoulders pattern with a breakout level around .9360 on the pattern. Stochastics is near a sell for the daily chart and RSI remains in a bear market range for the time being, so entry might be possible as early as today or tomorrow. Connecting a trendline from the Sept. 1st Low - Sept. 8th Open provides a value of .9679 today with a close below this level meaning short entry is now in play. I expect a preliminary objective of .9360 on this trade, but with the possibility of the pattern actually initiating a move to .86 on a longer term move.


Notes:

Australian Dollar- The Aussie Dollar reached .9356 yesterday, which for my purposes is close enough to the .9416 objective on the trade. I now recommend liquidating and taking profits on the trade as continuation higher is unlikely. Unless the S&P 500 is able to initiate its Bullish head and shoulders pattern it is likely that the Aussie has reached its high on the 3 leg advance and will weaken, making the Canadian in play as a short on this idea.

Gold- Not only did Gold make a new high close yesterday it made it on yearly and all-time highs as it ran through resistance like it was butter yesterday. The Silver lagged to the Gold yesterday, but I believe that going forward Silver is likely the better buy on this trade with a weekly objective of $21.48 right now. However, personally I am very skeptical of both markets technically, fundamentally, and macro relationship-wise. They are both acting right now under their own powers and they are ones that I do not understand at all. Some linked the Gold rally yesterday to Dollar weakness, but if you look at the 2 charts next to each other right now you can see that they literally have no correlation at all over the last several months. I suggest staying out of both Gold and Silver and say trade at your own risk.

Bonds- The Bonds are interesting right now as the devaluation of the Yen overnight has had an impact on the market. It is not the strongest correlation, but you can see that Bonds did sell off at 8:30 pm overnight on the Yen news and have trended lower into this morning with it. This puts the Bonds out of line with the macro picture this morning as the Commodity and Equity markets are weaker for the most part. Bonds also bounced off the topside trendline from the high Sept 1st - Sept. 8th at 131.20 on the dot last night prior to the Yen news. It will be interesting to see how the Yen and therefore Bonds react over the next 24 hours as I believe that the market was in the process of a Bullish reversal prior to the intervention.

Corn- The weekly objective is $5.50 for the market, but I have been sitting on the sidelines as Corn continues skyward. The market is very overdue for a pullback, but along with Cotton, there has not been a significant one since last weeks Crop Report. This morning Cotton actually has sold off since its open, so keep a close eye on Corn long positions as this could be a potential warning of similar action in the Grains.