Opening Note:
Yesterday
Friday's trade finally broke the string of 5 straight days of back and forth volatility. Although the supportive markets crept higher into the stock market open there was not much in store for the rest of the day as a quiet, tight range emerged across most of the markets. The Grain markets settled lower on the day as Soybeans pegged the higher volume $12.00 strike and Corn the $5.60 strike for November option expiration. It was also noteworthy that the Metals found support Friday and held off further liquidation after Thursday's poor price action.
Today
Nothing new was established from the G20 conference so any market weakness that preceded the meeting is being compensated for this morning. Every market on my board, other than the Dollar Index and Natural Gas, is higher this morning with many trading significantly stronger as of 7 am. The Metals and Foreign Currencies stand out as the strength sectors this morning and are uniformly much higher. Cotton is trading limit up again so far on 5 cent expanded limits. It is interesting that much of this advance was made during the first half of yesterday evening. Most of the market has actually fallen back a bit since the European open overnight, so expectations for continued buying on the open's this morning and the rest of the day should be tempered.
Today the Equity Indices, Copper, Palladium, Mexican Peso and the Australian Dollar are all on tests or rally breakouts above the 2 week consolidation range they have traded in. Some have only created spikes so far, but settlements above the range could foretell advances in the other supportive markets to follow. This also illuminates the stock market strength as a sector in comparison to the others.
Today seems like more of a go-with day early rather than one to fade the rallies. However, I still believe that we are seeing topping signs on the QE trade both technically and among the inter-commodity relationships. The Energies are again the weakness among the sectors and one of the better short positions still. I believe that the both Gold and Silver are in the process of setting up a fast liquidation move as well that should lead the markets at least slightly lower within the next couple weeks on an overdue pullback. Two sided volatility is absent from today's session, but I expect continued choppiness until the November 3rd fundamental pivot point. Focusing on shorter term trades by taking profits and looking to get back in later is still a smart strategy.
Buys to Watch:
Grains (Corn still the best)- On Friday Corn pegged $5.60 and Soybeans $12.00 for the November contract option expiration, leading the Grains lower. Although this made the Grains a noticeable weakness for the day they have rebounded well during today's session. In order of buying preference I still have longer term targets (meaning within the next month) of $6.40 for December Corn, 52.25 cents for December Bean Oil, and $12.86 for November Soybeans. This morning Bean Oil is the strength of the Grains by a mile, with the rally in the Oil Share (Bean Oil - Soy Meal) that I described last week now reaching its target.
With the relationship of Corn versus Soybeans still holding a daily chart trend in Corn's favor (Beans - Corn*2) I believe that Corn is the best buy among the Grains going forward. My suggestion last week of buying against support from $5.59 1/2 - $5.65 technically worked, but with Corn literally trading a low of $5.59 1/2 and settling at $5.60 I know that I did not hold a long position myself over the weekend. Corn settled at $5.70 3/4 this morning on the 7:15 am close though as it reestablished Bullish momentum overnight. There is now higher volume support left from $5.63 - $5.68 that is a good level to buy against this morning with stop placement below. If Corn is going to be good right now then I believe $5.63 should hold.
Sells to Watch: (Silver Moved to the Radar)
Put on the Radar:
Sell Silver- Silver is trading over 60 cents higher already today. I thought this was a possibility after Friday's trade failed to continue the liquidation weakness in the market. With a move above the $23.40 temporary breakout level Silver has now negated its Bearish reversal pattern and is not currently a sale. The market was setting up either a fast liquidation or a larger top, with the latter now looking more probable. Today prices are testing the recent downtrend for the daily chart at $23.805. This level does not need to hold though for Silver to possibly make a top. It would just be another indicator to watch if it held.
Both Gold and Silver have option expiration tomorrow and it looks like Gold could peg the higher volume $1350 strike price with Silver possibly pegging $24.00. The price action in the market over the next 30 hours could be odd and is possibly setting up the right shoulder rally for the reversal pattern that I believe is forming for Silver. I am keeping my eye on a lower volume zone from $24.00 - $24.20 with higher volume resistance from $24.20 - $24.50 as a potential area where the Silver market reverses. I still expect a rather sharp break in the near future down to roughly $21.50, so after option expiration tomorrow is the time to start looking at Silver for selling opportunities.
Buy Gold vs Sell Silver (Gold - Silver/2)- Like outright Silver I think it is a good idea to wait until after option expiration tomorrow afternoon prior to entering this differential trade. Although the spread violated the Bearish trend for the daily chart from the high August 24th to the high October 4th it has travelled back below this line at $159.3 today. The differential is likely creating a reversal base for the move that I expect to $210.
Crude Oil...Not as Good of a Short- I have had Crude Oil in the Sells section or radar for much of the last month, but I have to admit that my interest in the market as a sale is diminishing. The Crude market had a powder keg setup to trap two separate bubbles of large long positions into liquidation with a sharp move, but the nearby bubble has deflated. There was a good opportunity to set off running liquidation following the break on October 15th or October 19th, but in both cases the market found support. Over the choppy price break the last week open interest has continued to decline leaving only about 1/3rd of the long position above $82 that was there and "trapped" one week ago. This means that the ammo is not there right now for a real violent move that catches the longs off guard. There still is around 150,000 longs that have entered from $75 or above, but again there does not appear to be the Bearish momentum right now to really catch the longs from this level off guard. I still believe that Crude is a better sale than buy for the time being, but I am not as excited about the market right now and prefer looking for opportunities in Silver.
Notes:
December Cocoa a Buy?- My track record in the Softs for the newsletter is pretty brutal, so I am keeping this idea in the Notes section to bring attention to it but allow you to individually evaluate the opportunity. Today December Cocoa is trading above the recent $2904 swing high. A close above this level today would initiate a Bullish cup and handle pattern with an objective of $3083. Definitely wait until after the close today, but the technical setup for the pattern looks great. I only mention the trade because all signs point to go right now, so if it still looks good tomorrow morning it could be worth a small position.
Monday, October 25, 2010
Friday, October 22, 2010
Friday 10/22/10 Commodity Ideas
Opening Note:
Yesterday
Sticking with the theme of rangy volatility, Wednesday's strength was followed by weakness among the supportive markets. The markets were relatively flat coming into yesterday morning, but liquidation of the risk trade took over shortly after the markets began to open. The Metal Sector was the most notable weakness as both Gold and Silver led the decline among the complex. Each of these markets also individually initiated a Bearish reversal pattern that projects further liquidation among the Precious Metals. The Energies were not far behind either as Crude Oil traded within cents of $80 again before finding some moderate support. The Equities struggled at times with some intraday liquidation breaks, but still managed to settle a tad higher on the day. This further establishes my belief that the Equities are the strength Sector right now as the best supportive long position and hedge against short positions in other markets. Lastly, the Grain Sector had difficulty continuing the gains from Wednesday's session as a poor Corn export sales number and the outside market's weakness appeared to bleed over.
Today
As of 7 am I will call the macro trade slightly higher, but with some definite warning signs of weakness. The Equities, Energies, Foreign Currencies, and Grains are all a bit higher, but the Metals are again lagging. The risk markets are trying to establish the "crawl higher" along a 15 minute chart trendline that typically precedes buying on the market opens. However, as individual markets run into their higher volume resistance levels they are beginning to find tops that squash even the high frequency rallies. I will provide a late note once I get a better idea of the macro direction today, but what looked like early buying at first glance now looks like continued liquidation from yesterday.
The Metals have a tendency to lead the Sectors when there is a macro direction reversal. Therefore the Bearish reversal in the Metal Sector should be looked at as a serious warning sign that liquidation could continue and become more violent for the Quantitative Easing "buy everything" trade. The Dollar Index looks like it is bottoming, the Energy markets are seriously lagging, and the Equities can not seem to establish a lasting rally off of the nearly 2 week range consolidation. I believe that the QE trade is now over-subscribed as it is now losing out despite some valiant buying attempts over the last week.
The amount of risk and headache that is involved with carrying a position over night right now is unreasonably high. As the trade still remains choppy with two sided volatility on a day to day basis I recommend looking to take profits when you have them and focusing on catching the intraday or daily short term moves. As I believe that we will see liquidation among the supportive markets I believe that focusing on short positions in the Metals and Energies versus long positions in the stock market will be a profitable relationship until the November 3rd election results and Fed meeting.
Late Note: The letter is unfortunately being sent out late today, but many of the trade suggestions and longer term ideas are still in play. While the early morning "crawl higher" trendlines failed there was not an immediate sell off. There has been choppy range trade with the strong Nasdaq supporting many of the other markets. I see potential for liquidation this afternoon heading into the weekend and the G20 meeting with the Metals and Energies the best sale. Use caution on the Grains suggestion below because Corn looks like it is susceptible to outside market pressure if it emerges later today.
Buys to Watch:
Grains (but with caution)- My trade recommendation for entry on a long Corn position has held up well, but has not progressed as I believed that it would. Yesterday's suggestion was for long entry between $5.65 1/2 - $5.70 1/2 with stop placement below higher volume support from $5.59 1/2 - $5.65. The market is still sitting in this area for new position entry, but I am concerned with the outside markets right now and the effect that they may have on the Grains. Corn and the rest of the sector held up well yesterday despite the macro sell off, but the time may be coming that Dollar strength impacts even the Grain markets. My long term projection for Corn is $6.40, July '11 - Dec '11 Corn Spread is 91 cents, Bean Oil is 52.25, and Nov Beans is $12.86 in the order of sale preference. I still like the Bullish Corn trade for now, but I think that you need to focus on how the outside markets trade and if liquidation in Metals or Energy begins to spill over into Grains it is wise to abandon the trade early and re-evaluate.
Buy Gold vs. Sell Silver- In the sells section I will go into detail on the Precious Metals, but this spread is a great vehicle to capture the Bearish story with hedged risk. On moves in the Metals silver almost always leads the way. To chart the differential enter (Gold - Silver/2). Looking at the daily chart, my Bearish trendline is drawn from the high August 23rd to the high October 4th providing a value today of $163. Yesterday this trend was violated with a settlement above $167 and I believe it is now in play as a long position. There is higher volume support for the differential from $162 - $167 today, which is the area to purchase against and place a stop loss on the trade below. The long term objective on the move is $210 in favor of the Gold. Also, because of tick and contract size the execution ratio is the easy Long 1 Gold: Short 1 Silver.
Sells to Watch:
Silver (or less so Gold)- Like I explained above, Silver tends to lead the Metal moves so it is the better short in my opinion. Yesterday both Gold and Silver initiated Bearish head and shoulders reversal patterns that indicate further liquidation in the markets. For the Silver daily chart I have my neckline placed from the low October 12th to the low October 20th to provide a breakout value today of $23.405 and a projection of $21.50. For Gold my neckline is from the low October 7th to the low October 19th with a breakout value today of $1329.6 and a projection of $1268. Both markets are awaiting confirmation on the patterns today, but so far it appears likely that they will hold below the neckline. Silver entered a low volume zone from $23.30 - $23.49 with higher volume resistance from $23.50 - $23.58, which is a good setup for short entry if it is re-entered today. However, I believe that this is unlikely so looking to sell the rallies on intraday charts would then be advised.
Adding to the Bearish evidence for these Metals are some of the relationship charts as well. The violation of the Bearish trend from late August on the Gold/Silver ratio chart and the violation of the longer term Bullish for the Gold/Euro chart are both awaiting confirmation right now. But, they both display further proof that the long run of the precious Metals is ending at least temporarily.
Put on the Radar:
Crude Oil- Crude is not the laggard this morning with Metal weakness, but over the last two weeks it has under-performed the rest of the sectors. If the market manages to hold prices below $80.98 for an extended period of time I still have a reversal projection of $77.16 for the market for the short term. I continue to recommend selling the rallies in Crude while it continues to re-enter the consolidation range.
Euro- The Euro is still on my radar as potentially forming a reversal top similar looking to the Gold and Silver tops now. Like the Crude Oil I believe the Euro is a better sale than buy for now and advise selling the rallies going forward. Wait for larger short entry until the market establishes a confirmed reversal pattern.
Notes:
Yesterday
Sticking with the theme of rangy volatility, Wednesday's strength was followed by weakness among the supportive markets. The markets were relatively flat coming into yesterday morning, but liquidation of the risk trade took over shortly after the markets began to open. The Metal Sector was the most notable weakness as both Gold and Silver led the decline among the complex. Each of these markets also individually initiated a Bearish reversal pattern that projects further liquidation among the Precious Metals. The Energies were not far behind either as Crude Oil traded within cents of $80 again before finding some moderate support. The Equities struggled at times with some intraday liquidation breaks, but still managed to settle a tad higher on the day. This further establishes my belief that the Equities are the strength Sector right now as the best supportive long position and hedge against short positions in other markets. Lastly, the Grain Sector had difficulty continuing the gains from Wednesday's session as a poor Corn export sales number and the outside market's weakness appeared to bleed over.
Today
As of 7 am I will call the macro trade slightly higher, but with some definite warning signs of weakness. The Equities, Energies, Foreign Currencies, and Grains are all a bit higher, but the Metals are again lagging. The risk markets are trying to establish the "crawl higher" along a 15 minute chart trendline that typically precedes buying on the market opens. However, as individual markets run into their higher volume resistance levels they are beginning to find tops that squash even the high frequency rallies. I will provide a late note once I get a better idea of the macro direction today, but what looked like early buying at first glance now looks like continued liquidation from yesterday.
The Metals have a tendency to lead the Sectors when there is a macro direction reversal. Therefore the Bearish reversal in the Metal Sector should be looked at as a serious warning sign that liquidation could continue and become more violent for the Quantitative Easing "buy everything" trade. The Dollar Index looks like it is bottoming, the Energy markets are seriously lagging, and the Equities can not seem to establish a lasting rally off of the nearly 2 week range consolidation. I believe that the QE trade is now over-subscribed as it is now losing out despite some valiant buying attempts over the last week.
The amount of risk and headache that is involved with carrying a position over night right now is unreasonably high. As the trade still remains choppy with two sided volatility on a day to day basis I recommend looking to take profits when you have them and focusing on catching the intraday or daily short term moves. As I believe that we will see liquidation among the supportive markets I believe that focusing on short positions in the Metals and Energies versus long positions in the stock market will be a profitable relationship until the November 3rd election results and Fed meeting.
Late Note: The letter is unfortunately being sent out late today, but many of the trade suggestions and longer term ideas are still in play. While the early morning "crawl higher" trendlines failed there was not an immediate sell off. There has been choppy range trade with the strong Nasdaq supporting many of the other markets. I see potential for liquidation this afternoon heading into the weekend and the G20 meeting with the Metals and Energies the best sale. Use caution on the Grains suggestion below because Corn looks like it is susceptible to outside market pressure if it emerges later today.
Buys to Watch:
Grains (but with caution)- My trade recommendation for entry on a long Corn position has held up well, but has not progressed as I believed that it would. Yesterday's suggestion was for long entry between $5.65 1/2 - $5.70 1/2 with stop placement below higher volume support from $5.59 1/2 - $5.65. The market is still sitting in this area for new position entry, but I am concerned with the outside markets right now and the effect that they may have on the Grains. Corn and the rest of the sector held up well yesterday despite the macro sell off, but the time may be coming that Dollar strength impacts even the Grain markets. My long term projection for Corn is $6.40, July '11 - Dec '11 Corn Spread is 91 cents, Bean Oil is 52.25, and Nov Beans is $12.86 in the order of sale preference. I still like the Bullish Corn trade for now, but I think that you need to focus on how the outside markets trade and if liquidation in Metals or Energy begins to spill over into Grains it is wise to abandon the trade early and re-evaluate.
Buy Gold vs. Sell Silver- In the sells section I will go into detail on the Precious Metals, but this spread is a great vehicle to capture the Bearish story with hedged risk. On moves in the Metals silver almost always leads the way. To chart the differential enter (Gold - Silver/2). Looking at the daily chart, my Bearish trendline is drawn from the high August 23rd to the high October 4th providing a value today of $163. Yesterday this trend was violated with a settlement above $167 and I believe it is now in play as a long position. There is higher volume support for the differential from $162 - $167 today, which is the area to purchase against and place a stop loss on the trade below. The long term objective on the move is $210 in favor of the Gold. Also, because of tick and contract size the execution ratio is the easy Long 1 Gold: Short 1 Silver.
Sells to Watch:
Silver (or less so Gold)- Like I explained above, Silver tends to lead the Metal moves so it is the better short in my opinion. Yesterday both Gold and Silver initiated Bearish head and shoulders reversal patterns that indicate further liquidation in the markets. For the Silver daily chart I have my neckline placed from the low October 12th to the low October 20th to provide a breakout value today of $23.405 and a projection of $21.50. For Gold my neckline is from the low October 7th to the low October 19th with a breakout value today of $1329.6 and a projection of $1268. Both markets are awaiting confirmation on the patterns today, but so far it appears likely that they will hold below the neckline. Silver entered a low volume zone from $23.30 - $23.49 with higher volume resistance from $23.50 - $23.58, which is a good setup for short entry if it is re-entered today. However, I believe that this is unlikely so looking to sell the rallies on intraday charts would then be advised.
Adding to the Bearish evidence for these Metals are some of the relationship charts as well. The violation of the Bearish trend from late August on the Gold/Silver ratio chart and the violation of the longer term Bullish for the Gold/Euro chart are both awaiting confirmation right now. But, they both display further proof that the long run of the precious Metals is ending at least temporarily.
Put on the Radar:
Crude Oil- Crude is not the laggard this morning with Metal weakness, but over the last two weeks it has under-performed the rest of the sectors. If the market manages to hold prices below $80.98 for an extended period of time I still have a reversal projection of $77.16 for the market for the short term. I continue to recommend selling the rallies in Crude while it continues to re-enter the consolidation range.
Euro- The Euro is still on my radar as potentially forming a reversal top similar looking to the Gold and Silver tops now. Like the Crude Oil I believe the Euro is a better sale than buy for now and advise selling the rallies going forward. Wait for larger short entry until the market establishes a confirmed reversal pattern.
Notes:
Thursday, October 21, 2010
Thursday 10/21/10 Commodity Ideas
Opening Note:
Yesterday
I made the executive decision to sleep in a little extra yesterday morning to catch up on some sleep and get my mind off the markets for a few hours. This means that there was no newsletter on Wednesday to comment on Tuesday's trade, but the decision likely saved me a lot of money getting caught up in the day to day chop again.
Friday was a macro sell off, Monday was a hard reversal of buying, Tuesday was a larger reversal sell off on a move below Monday's lows. What happened yesterday? Of course it was a day of macro strength everywhere. Breaking down each market is almost unnecessary, but the Euro, Dow, and Australian Dollar stood out as the leaders. The Grain markets showed strength as well with Corn finding technical support midway into the gap left from the October 8th Report rally. In contrast though, the Metals notably lagged behind the rest of the sectors as both the Precious and Industrial groups did not find the same boost as other correlated markets.
The washing machine action over the last week was based on battling fundamental stories and over-bought versus over-sold dynamics. The Quantitative Easing trade has propelled the markets for at least the last month and a half, but the Chinese rate raise Tuesday threw the market another wrinkle that both the U.S. and China could come under continued pressure to support their currencies. This is enough news for me to wrestle with on its own, but taking into account that the QE trade is verging on over-bought and the current impact of this China rate decision on their Commodity demand is probably less than the gut reaction I think it is easy to get lost in the fundamentals.
With all of this longer term fundamental news over the last week you also have not only new entry/liquidation from longer term investment funds but the gut reaction to the news and fresh technicals from shorter term traders. This has created an environment where if you had either a Bullish or Bearish directional opinion over the medium term you likely lost money or, best case scenario, got chopped out of your position. The technicals, inter-commodity relationships, and leader/laggard trends have been left completely irrelevant over the week. Support and resistance in the markets has also made little to no impact on the market as fear and indecision easily has run over trends and higher volume pivot points. In summary, basically the fundamentals are flimsy, the technicals are garbage, and the day to day moves make little sense over the last week.
Today
The macro trade is slightly stronger, but there is a bit of divergence among the sectors. The Equities, Grains and Euro are the clear strength while the Energies, Metals, and most of the other Foreign Currencies are lagging behind. It is refreshing to see that the market is not completely reversed from yesterday at least. This morning there is Jobless Claims and Export Sales at 7:30 am, however this is all for the rest of the week with only Food reports tomorrow.
With the technicals and market relationships unreliable right now I only have the Grain markets under the buy section for the time being. I do however have a number of ideas on my radar to watch and wait until the correct opportunity presents itself. You will probably gather from the analysis that I am still leaning towards a weakening trend in the supportive markets. While the two sided volatility remains extreme I recommend focusing on shorter term less than 24 hours, taking profits when you catch a chunk, and looking to get back in later rather than holding a position.
Buys to Watch:
Grains (other than Wheat)- Led by a Corn rebound yesterday the Grain markets finally recovered their sector strength and look to be on course for another leg higher. My quick technical objective for Dec. Corn is $6.40, July '11 - Dec '11 Corn spread is 91 cents, Nov. Soybeans is $12.86, and Dec. Bean Oil is roughly 52.25 cents. To figure out which markets present the best opportunities you need to look at the relationships between them. The daily chart of Soybeans versus Corn (Nov. Bean - Dec. Corn*2 to chart) is still in an established downward trend on the daily chart that should continue to support Corn in the relationship. This means that despite the Soybean daily chart looking better over the last week technically I still prefer buying Corn. Next, the daily chart of the Bean Oil versus Soy Meal (Oil - Meal to chart) is potentially setting off a Bullish head and shoulders pattern today that should support the Bean Oil up to a differential of 1632. This defines the Bean Oil as the better buy on the possible Grain advance. In conclusion, the relationships establish that I like buying Corn (as well as the July - Dec spread), Bean Oil, and Soybeans in order of preference. I think that all of the above will show gains though, so if you feel more comfortable with Bean Oil or Soybeans I do not have a problem with either choice...just not Wheat right now.
For Corn there is a higher volume support level from $5.59 1/2 - $5.65 with the lower volume zone from yesterday's close between $5.65 1/2 - $5.70 1/2 a good area to look for long entry on a pullback. With Corn continuing to hold support around $4.71 overnight it is possible that the market could run higher without this pullback. Buy the dips, but if this pullback zone is entered then look to possibly execute with a larger initial size.
Cotton has traded all over the place lately, but when I apply a similar technical pattern as the Grain markets I receive a rough objective of 128 cents on this rally. The volatility in the market is off-putting though so I suggest just watching the trade as another indicator for the Grains.
Sells to Watch:
Put on the Radar:
Crude Oil- I have discussed the open interest situation enough, so look back on my blog at my letter from Monday or Tuesday for a description. Crude Oil and the rest of the Energies continue to clearly lag behind the Equities and most of the Foreign Currencies. Although we have seen some strong rallies in Crude this still means that it is one of the better sales of any market and a good sale as a hedge against a long stock market position. Like the rest of the supportive markets the daily chart technicals for Crude have acted unreliable, making it difficult to trade off of them for the time being. However, there is a higher volume resistance zone from $83.30 - $83.85 that continues to hold as a top on the recent range. Until we see a few hourly closes above this level I recommend strictly continuing to sell the rallies in the Crude Oil market and staying away from buying the dips. Like most other trades for now though I think it is wise to take your daily profits and look to get back in at another time until macro direction becomes more consistent.
Gold and Silver Forming Head and Shoulders Tops?- The Metals as a Sector have lagged behind the Equities, Energies, and Foreign Currencies over the last week of volatility. The daily charts for both Gold and Silver (and vaguely for the other metals) look like they may be forming Bearish head and shoulders reversal tops. I advise against front running any of these patterns for the time being, but if a right shoulder does form to initiate the patterns then these markets could present a quick profit on long liquidation. Keep an eye on the Palladium daily chart as an indicator for whether Gold and Silver are forming right shoulders. Palladium has the strongest 2 day rally among the Metals and if it rallies to new yearly highs then it is likely that the Precious Metals are not topping as well.
As Gold and Silver are extremely volatile in the outright markets I still recommend using the differential between the two markets as an execution vehicle (Gold - Silver/2 to chart). The differential is clearly in a downtrend still but is showing potential bottoming action. My down trend for the chart rests at $167 today. With the spread still trading around $150 though it looks like the trade is still not in play for another day or two.
Euro...Topping Like the Metals?- The Euro has been on possibly the most violent ride of any market over the last week, but still has managed to hold the resistance on its recent range. The market looks like it could be forming a similar reversal pattern to the Metals. Like Crude Oil there is some higher volume resistance on the recent range that is a good area to sell against while it holds. Higher volume resistance rests from 1.4020 - 1.4085. While this level holds I suggest still looking to sell the rallies in the Euro rather than buy the dips.
Equities Are the Strength- The stock market is greatly outperforming any other Sector among the supportive markets over the last several weeks. This is one of the only relationships that has held strong over this time frame. If you are looking to buy any group I believe stocks are the best right now and I think they should be avoided as a sale. Buying stocks as a spread against Metals, Energies, and even the Euro should continue to be a profitable trade over at least the next two weeks as well.
Notes:
Bonds- My trade suggestion from the Monday and Tuesday letters was stopped out on Tuesday afternoon with a rally above 132.05. The Bonds rallied on Tuesday on a risk aversion trade versus the supportive market sell off. I still believe that the Bonds are creating a topping pattern, but now is not the right time to enter or hold a short position in the market.
Yesterday
I made the executive decision to sleep in a little extra yesterday morning to catch up on some sleep and get my mind off the markets for a few hours. This means that there was no newsletter on Wednesday to comment on Tuesday's trade, but the decision likely saved me a lot of money getting caught up in the day to day chop again.
Friday was a macro sell off, Monday was a hard reversal of buying, Tuesday was a larger reversal sell off on a move below Monday's lows. What happened yesterday? Of course it was a day of macro strength everywhere. Breaking down each market is almost unnecessary, but the Euro, Dow, and Australian Dollar stood out as the leaders. The Grain markets showed strength as well with Corn finding technical support midway into the gap left from the October 8th Report rally. In contrast though, the Metals notably lagged behind the rest of the sectors as both the Precious and Industrial groups did not find the same boost as other correlated markets.
The washing machine action over the last week was based on battling fundamental stories and over-bought versus over-sold dynamics. The Quantitative Easing trade has propelled the markets for at least the last month and a half, but the Chinese rate raise Tuesday threw the market another wrinkle that both the U.S. and China could come under continued pressure to support their currencies. This is enough news for me to wrestle with on its own, but taking into account that the QE trade is verging on over-bought and the current impact of this China rate decision on their Commodity demand is probably less than the gut reaction I think it is easy to get lost in the fundamentals.
With all of this longer term fundamental news over the last week you also have not only new entry/liquidation from longer term investment funds but the gut reaction to the news and fresh technicals from shorter term traders. This has created an environment where if you had either a Bullish or Bearish directional opinion over the medium term you likely lost money or, best case scenario, got chopped out of your position. The technicals, inter-commodity relationships, and leader/laggard trends have been left completely irrelevant over the week. Support and resistance in the markets has also made little to no impact on the market as fear and indecision easily has run over trends and higher volume pivot points. In summary, basically the fundamentals are flimsy, the technicals are garbage, and the day to day moves make little sense over the last week.
Today
The macro trade is slightly stronger, but there is a bit of divergence among the sectors. The Equities, Grains and Euro are the clear strength while the Energies, Metals, and most of the other Foreign Currencies are lagging behind. It is refreshing to see that the market is not completely reversed from yesterday at least. This morning there is Jobless Claims and Export Sales at 7:30 am, however this is all for the rest of the week with only Food reports tomorrow.
With the technicals and market relationships unreliable right now I only have the Grain markets under the buy section for the time being. I do however have a number of ideas on my radar to watch and wait until the correct opportunity presents itself. You will probably gather from the analysis that I am still leaning towards a weakening trend in the supportive markets. While the two sided volatility remains extreme I recommend focusing on shorter term less than 24 hours, taking profits when you catch a chunk, and looking to get back in later rather than holding a position.
Buys to Watch:
Grains (other than Wheat)- Led by a Corn rebound yesterday the Grain markets finally recovered their sector strength and look to be on course for another leg higher. My quick technical objective for Dec. Corn is $6.40, July '11 - Dec '11 Corn spread is 91 cents, Nov. Soybeans is $12.86, and Dec. Bean Oil is roughly 52.25 cents. To figure out which markets present the best opportunities you need to look at the relationships between them. The daily chart of Soybeans versus Corn (Nov. Bean - Dec. Corn*2 to chart) is still in an established downward trend on the daily chart that should continue to support Corn in the relationship. This means that despite the Soybean daily chart looking better over the last week technically I still prefer buying Corn. Next, the daily chart of the Bean Oil versus Soy Meal (Oil - Meal to chart) is potentially setting off a Bullish head and shoulders pattern today that should support the Bean Oil up to a differential of 1632. This defines the Bean Oil as the better buy on the possible Grain advance. In conclusion, the relationships establish that I like buying Corn (as well as the July - Dec spread), Bean Oil, and Soybeans in order of preference. I think that all of the above will show gains though, so if you feel more comfortable with Bean Oil or Soybeans I do not have a problem with either choice...just not Wheat right now.
For Corn there is a higher volume support level from $5.59 1/2 - $5.65 with the lower volume zone from yesterday's close between $5.65 1/2 - $5.70 1/2 a good area to look for long entry on a pullback. With Corn continuing to hold support around $4.71 overnight it is possible that the market could run higher without this pullback. Buy the dips, but if this pullback zone is entered then look to possibly execute with a larger initial size.
Cotton has traded all over the place lately, but when I apply a similar technical pattern as the Grain markets I receive a rough objective of 128 cents on this rally. The volatility in the market is off-putting though so I suggest just watching the trade as another indicator for the Grains.
Sells to Watch:
Put on the Radar:
Crude Oil- I have discussed the open interest situation enough, so look back on my blog at my letter from Monday or Tuesday for a description. Crude Oil and the rest of the Energies continue to clearly lag behind the Equities and most of the Foreign Currencies. Although we have seen some strong rallies in Crude this still means that it is one of the better sales of any market and a good sale as a hedge against a long stock market position. Like the rest of the supportive markets the daily chart technicals for Crude have acted unreliable, making it difficult to trade off of them for the time being. However, there is a higher volume resistance zone from $83.30 - $83.85 that continues to hold as a top on the recent range. Until we see a few hourly closes above this level I recommend strictly continuing to sell the rallies in the Crude Oil market and staying away from buying the dips. Like most other trades for now though I think it is wise to take your daily profits and look to get back in at another time until macro direction becomes more consistent.
Gold and Silver Forming Head and Shoulders Tops?- The Metals as a Sector have lagged behind the Equities, Energies, and Foreign Currencies over the last week of volatility. The daily charts for both Gold and Silver (and vaguely for the other metals) look like they may be forming Bearish head and shoulders reversal tops. I advise against front running any of these patterns for the time being, but if a right shoulder does form to initiate the patterns then these markets could present a quick profit on long liquidation. Keep an eye on the Palladium daily chart as an indicator for whether Gold and Silver are forming right shoulders. Palladium has the strongest 2 day rally among the Metals and if it rallies to new yearly highs then it is likely that the Precious Metals are not topping as well.
As Gold and Silver are extremely volatile in the outright markets I still recommend using the differential between the two markets as an execution vehicle (Gold - Silver/2 to chart). The differential is clearly in a downtrend still but is showing potential bottoming action. My down trend for the chart rests at $167 today. With the spread still trading around $150 though it looks like the trade is still not in play for another day or two.
Euro...Topping Like the Metals?- The Euro has been on possibly the most violent ride of any market over the last week, but still has managed to hold the resistance on its recent range. The market looks like it could be forming a similar reversal pattern to the Metals. Like Crude Oil there is some higher volume resistance on the recent range that is a good area to sell against while it holds. Higher volume resistance rests from 1.4020 - 1.4085. While this level holds I suggest still looking to sell the rallies in the Euro rather than buy the dips.
Equities Are the Strength- The stock market is greatly outperforming any other Sector among the supportive markets over the last several weeks. This is one of the only relationships that has held strong over this time frame. If you are looking to buy any group I believe stocks are the best right now and I think they should be avoided as a sale. Buying stocks as a spread against Metals, Energies, and even the Euro should continue to be a profitable trade over at least the next two weeks as well.
Notes:
Bonds- My trade suggestion from the Monday and Tuesday letters was stopped out on Tuesday afternoon with a rally above 132.05. The Bonds rallied on Tuesday on a risk aversion trade versus the supportive market sell off. I still believe that the Bonds are creating a topping pattern, but now is not the right time to enter or hold a short position in the market.
Tuesday, October 19, 2010
Tuesday 10/19/10 Commodity Ideas
Opening Note:
Yesterday
The supportive markets started Sunday evening much weaker across the board, but shifted to a Bullish tone once the European markets opened. The anticipatory climb prior to the U.S. stock market open correctly predicted buying that continued throughout the morning in the risk markets. Although some of these markets looked to be gone past the point of return for the day when I went to bed Sunday evening there were actually some unbelievable price reversals to carry the macro market higher. Silver traded nearly 60 cents, the Euro 140 ticks, and Crude $1.19 lower on the day, but all managed to settle slightly to impressively higher (in Crude's case) by their closes.
I was floored by yesterday's reversal as Friday's close led me to believe that we were seeing technical and relationship topping action on the macro trade and weakness was to follow this week. The typical morning crawl into the open yesterday at least provided enough warning that it was not a clear sell day to save some money though. The media needs to make sense of what happens in the market each day with general explanations like "Lower Dollar...Higher Commodity Prices" or "After lagging for a while the market was bound to recover" when they have nothing much to say, but that does not mean that the price moves or relationships actually made much sense. Yesterday was a case of the laggards (S&P 500 and Crude Oil mostly) leading the QE trade higher, which is one of those "yes the prices are higher today, but this rally is actually bearish" signals that you have to stow away in the memory bank and wait for the opportunity later.
Today
As of 7 am the markets have taken a drastic turn lower on Earnings data and news out of China that they have raised their 1 yr. benchmark rate 25 basis points, sending the Dollar Index skyward. When I began doing my research around 5:30 am the markets were only slightly lower and quiet, but since 6 am there has been a flurry lower in the Foreign Currencies, Metals, Energies, and even the Grains. The Dollar Index is much higher, but other than some small outliers that is about all in the way of gainers. There is Housing Starts at 7:30 am, but that is all for Economic data (other than Earnings) for the next 48 hours until Jobless Claims.
A friend that is not a trader asked me yesterday afternoon what the markets are looking like right now and without even thinking the first thing out of my mouth was "Cloudy with a Chance of Meatballs". The unintentional joke may have just been a Freudian slip (I had spaghetti for lunch), but I honestly am seeing a lot of meatballs right now. Many of the market sectors are showing technical action consistent with topping patterns, yet each time we get a strong directional signal it seems to be violently reversed or at least pulled back into the range. With the QE "buy everything" idea still in the forefront of many traders minds we are still seeing strong dip buying and computer algorithms skewed to the Bullish side on even the most violent and sizable moves lower. I would not be surprised either if several months or years from now we discovered that there were trading programs that simply attempted to push the market directionally opposite from the previous day's trade to arbitrage from people liquidating positions.
The tight range in the S&P 500 over the last 5 sessions is similar to the other reversal points that we have seen in the Equities over the last 5 months. The parabolic rallies in Gold and Silver have been followed by volatile two sided trade that often precedes a top. Cotton traded limit up Thursday, limit up early Friday, but settled locked limit down for Friday's session. I would normally look at this as definite topping action, but the market still managed to post nearly limit up gains yesterday. Finally, Crude Oil posted a Bearish outside reversal day Friday, yet managed to in fact settle with a Bullish outside reversal day Monday. What all this says to me is that something is definitely wrong with the buy QE trade, but for right now you need to trade shorter term and take profits when you have them. I believe that we are underway on the market topping, but tread lightly until the markets become less cloudy.
Late Note: There is massive liquidation everywhere. I know that I will not be attempting a buy in any supportive market today for sure. I recommend going with today or waiting until the dust settles. Beware that there is a strong possibility for liquidation in the Grain markets on the open regardless of any fundamental or technical story for the individual markets. The Grains began to sink this morning along with the supportive markets and since the morning Grain close at 7:15 am there has been a swift continuation lower. Look for the Grains to "catch up" to the rest of the market with an initial liquidation sell off as they look like they may trade with a higher correlation to the outside markets on this violent day.
Buys to Watch:
Sells to Watch:
Bonds- Yesterday's trade entry recommendation in the low volume zone from 131.25 - 132.05 with stop placement above resistance from 132.06 - 132.18 worked well as the market held resistance and has moved lower into this morning. The market is now battling with some higher volume support left from Friday's trade between 131.00 - 131.20. This support should continue to stall the market over the short term, however with the technicals unanimously pointing towards a Bearish continuation I am not concerned with holding the position. There is now higher volume resistance left from yesterday's trade between 132.00 - 132.04, so I recommend moving up the stop loss on the trade to just above this level (sell against this level for new entry). The initial profit target is a test of 129.05, but I think it may be worth the effort to hold through this level as a move below 129.05 provides a reversal objective of 123.00. I have closely watched the relationship between the Bonds and the rest of the market and right now the relationship appears to be uncertain to very loosely defined (at best). It seems like the gut reaction to buy Bonds as risk aversion on violent breaks in the supportive markets is still there, but the Bonds seem to move lower in correlation to the stock market when it moves lower gradually. Keep an eye on this relationship to see if it establishes a better pattern.
Put on the Radar:
Crude Oil- On a very painful trade yesterday, Crude Oil took out the stop loss on my short trade above $83.50 for the December contract. The fundamental excuse for the rally was French worker strikes, but in my opinion I think it was more of just a good support job by the "super long" funds and opportunistic momentum traders pushing the rally more than any sort of real or lasting Bullish story. The fact remains that from August 27th to October 4th and October 4th to the present there are 2 separate bubbles of large long positions that have not experienced much in price gains that could be forced to liquidate if Crude prices fall below $81 and $74 subsequently. Stochastics for the daily chart continues to show negative momentum and MACD is also ticks away from producing a fresh sell signal. Below $80.98 Crude has a reversal pattern objective of $77.16. I recommend waiting for this breakout and then looking for new short entry rather than front running the move. If this liquidation does occur then my longer term objective for Crude remains at $62.50.
Notes:
Dollar Index- I am pretty much just stating the obvious now as the Dollar has exploded this morning (I swear it was around 77.50 when I first wrote this though), but despite yesterday's rally sell off the technicals for the Dollar Index still look very supportive. The momentum indicators are unanimously pointing towards Bullish continuation now. It is tough to jump on the rally this morning, but I believe the Dollar is undergoing bottoming action and will be looked at as a buy soon.
Yesterday
The supportive markets started Sunday evening much weaker across the board, but shifted to a Bullish tone once the European markets opened. The anticipatory climb prior to the U.S. stock market open correctly predicted buying that continued throughout the morning in the risk markets. Although some of these markets looked to be gone past the point of return for the day when I went to bed Sunday evening there were actually some unbelievable price reversals to carry the macro market higher. Silver traded nearly 60 cents, the Euro 140 ticks, and Crude $1.19 lower on the day, but all managed to settle slightly to impressively higher (in Crude's case) by their closes.
I was floored by yesterday's reversal as Friday's close led me to believe that we were seeing technical and relationship topping action on the macro trade and weakness was to follow this week. The typical morning crawl into the open yesterday at least provided enough warning that it was not a clear sell day to save some money though. The media needs to make sense of what happens in the market each day with general explanations like "Lower Dollar...Higher Commodity Prices" or "After lagging for a while the market was bound to recover" when they have nothing much to say, but that does not mean that the price moves or relationships actually made much sense. Yesterday was a case of the laggards (S&P 500 and Crude Oil mostly) leading the QE trade higher, which is one of those "yes the prices are higher today, but this rally is actually bearish" signals that you have to stow away in the memory bank and wait for the opportunity later.
Today
As of 7 am the markets have taken a drastic turn lower on Earnings data and news out of China that they have raised their 1 yr. benchmark rate 25 basis points, sending the Dollar Index skyward. When I began doing my research around 5:30 am the markets were only slightly lower and quiet, but since 6 am there has been a flurry lower in the Foreign Currencies, Metals, Energies, and even the Grains. The Dollar Index is much higher, but other than some small outliers that is about all in the way of gainers. There is Housing Starts at 7:30 am, but that is all for Economic data (other than Earnings) for the next 48 hours until Jobless Claims.
A friend that is not a trader asked me yesterday afternoon what the markets are looking like right now and without even thinking the first thing out of my mouth was "Cloudy with a Chance of Meatballs". The unintentional joke may have just been a Freudian slip (I had spaghetti for lunch), but I honestly am seeing a lot of meatballs right now. Many of the market sectors are showing technical action consistent with topping patterns, yet each time we get a strong directional signal it seems to be violently reversed or at least pulled back into the range. With the QE "buy everything" idea still in the forefront of many traders minds we are still seeing strong dip buying and computer algorithms skewed to the Bullish side on even the most violent and sizable moves lower. I would not be surprised either if several months or years from now we discovered that there were trading programs that simply attempted to push the market directionally opposite from the previous day's trade to arbitrage from people liquidating positions.
The tight range in the S&P 500 over the last 5 sessions is similar to the other reversal points that we have seen in the Equities over the last 5 months. The parabolic rallies in Gold and Silver have been followed by volatile two sided trade that often precedes a top. Cotton traded limit up Thursday, limit up early Friday, but settled locked limit down for Friday's session. I would normally look at this as definite topping action, but the market still managed to post nearly limit up gains yesterday. Finally, Crude Oil posted a Bearish outside reversal day Friday, yet managed to in fact settle with a Bullish outside reversal day Monday. What all this says to me is that something is definitely wrong with the buy QE trade, but for right now you need to trade shorter term and take profits when you have them. I believe that we are underway on the market topping, but tread lightly until the markets become less cloudy.
Late Note: There is massive liquidation everywhere. I know that I will not be attempting a buy in any supportive market today for sure. I recommend going with today or waiting until the dust settles. Beware that there is a strong possibility for liquidation in the Grain markets on the open regardless of any fundamental or technical story for the individual markets. The Grains began to sink this morning along with the supportive markets and since the morning Grain close at 7:15 am there has been a swift continuation lower. Look for the Grains to "catch up" to the rest of the market with an initial liquidation sell off as they look like they may trade with a higher correlation to the outside markets on this violent day.
Buys to Watch:
Sells to Watch:
Bonds- Yesterday's trade entry recommendation in the low volume zone from 131.25 - 132.05 with stop placement above resistance from 132.06 - 132.18 worked well as the market held resistance and has moved lower into this morning. The market is now battling with some higher volume support left from Friday's trade between 131.00 - 131.20. This support should continue to stall the market over the short term, however with the technicals unanimously pointing towards a Bearish continuation I am not concerned with holding the position. There is now higher volume resistance left from yesterday's trade between 132.00 - 132.04, so I recommend moving up the stop loss on the trade to just above this level (sell against this level for new entry). The initial profit target is a test of 129.05, but I think it may be worth the effort to hold through this level as a move below 129.05 provides a reversal objective of 123.00. I have closely watched the relationship between the Bonds and the rest of the market and right now the relationship appears to be uncertain to very loosely defined (at best). It seems like the gut reaction to buy Bonds as risk aversion on violent breaks in the supportive markets is still there, but the Bonds seem to move lower in correlation to the stock market when it moves lower gradually. Keep an eye on this relationship to see if it establishes a better pattern.
Put on the Radar:
Crude Oil- On a very painful trade yesterday, Crude Oil took out the stop loss on my short trade above $83.50 for the December contract. The fundamental excuse for the rally was French worker strikes, but in my opinion I think it was more of just a good support job by the "super long" funds and opportunistic momentum traders pushing the rally more than any sort of real or lasting Bullish story. The fact remains that from August 27th to October 4th and October 4th to the present there are 2 separate bubbles of large long positions that have not experienced much in price gains that could be forced to liquidate if Crude prices fall below $81 and $74 subsequently. Stochastics for the daily chart continues to show negative momentum and MACD is also ticks away from producing a fresh sell signal. Below $80.98 Crude has a reversal pattern objective of $77.16. I recommend waiting for this breakout and then looking for new short entry rather than front running the move. If this liquidation does occur then my longer term objective for Crude remains at $62.50.
Notes:
Dollar Index- I am pretty much just stating the obvious now as the Dollar has exploded this morning (I swear it was around 77.50 when I first wrote this though), but despite yesterday's rally sell off the technicals for the Dollar Index still look very supportive. The momentum indicators are unanimously pointing towards Bullish continuation now. It is tough to jump on the rally this morning, but I believe the Dollar is undergoing bottoming action and will be looked at as a buy soon.
Monday, October 18, 2010
Monday 10/18/10 Commodity Ideas
Opening Note:
Yesterday
The 7:30 am batch of Economic data started the morning off ugly for the stock market and other supportive markets. An afternoon rally into the close though was able to rally the S&P 500 back near unchanged for the day. The outstanding Google earnings report from Thursday afternoon kept the Nasdaq index strong in comparison to the rest of the Equities. Crude Oil and the Euro stuck out as weaknesses among the other markets. Despite the stock sell off in the morning the Bond market fell well over a handle on the 7:30 numbers, negating a Bullish trend on the daily chart from early June. Finally, the Grain markets were calm with a slight sell off into the close, but the Cotton market settled limit down after Thursday's limit up close.
Today
The supportive markets are moderately weaker, but are well off their lows from the overnight session as of 6:50 am. The Metals, Canadian Dollar, and Pound are the weakest sectors, while the Nasdaq and Crude Oil are the strengths this morning despite weakness overnight. The long end of the yield curve, Yen, and Dollar are all slightly higher.
With the macro picture flip-flopping between signals of continuation and warning signs that the run higher is ending I think it is important as ever to pay attention to the leaders/laggards of the market when trading. Although it is not necessarily the case so far this morning the Nasdaq is the clear leader over the last week with Bonds and Crude Oil the most consistent weaknesses according to their market relationships.
The early part of last week looked as if the risk trade was continuing almost everywhere, but Friday and this morning are showing a similar lag and warning symptoms that had me concerned two weeks ago. Concern about the banks and financial stocks has come to the forefront lately as a new fundamental story slowing the rally. The macro direction seems too unstable right now to bet one way or the other over the longer term, so I advise still focusing on the intraday trades and ones that are expected to last less than a week.
Buys to Watch:
Sells to Watch:
Crude Oil (Sell rallies now for aggressive traders, Sell below breakout for conservative traders)- With first notice day approaching Friday it is time to roll the November contract to December today, so I will now be referring to the December contract. I have had the open interest for Crude on my radar for over a month now and it looks like the more recent market action in October is now setting up a a possible liquidation trap. Since October 4th open interest for Crude has risen from 1.367 - 1.503 million open contracts, with none of these new purchases at a better price than $80.98 and nearly all at least above $82. Below $80.98 the December contract has a small reversal pattern that projects to $77.16. Although this money invested in Crude is likely longer term we have seen in the past that once the position becomes a big enough loser even the long term trades will reconsider and liquidate. This reversal though is possibly just an initial move on a larger liquidation. On August 27th open interest sat at 1.242 million contracts with no entry price better than $74.51. This is a 21% increase in open long positions versus a price increase during this time of only 8.75% through Friday's close. This increase in long positions versus increase in price is proposterous and one of the largest I have seen in any market. It may come as a surprise, but with this climb in OI the market is now back within a few thousand of all time highs from July 2007. This is a blaring signal that the trade is incredibly over-crowded and ripe to catch the longs off guard.
If prices fall below $75 I believe we will see the beginning of a fast and furious liquidation run, but for right now I think that you can look at this smaller reversal as an initial move. For the more aggressive traders I believe you can look to sell rallies now. There is a low volume zone from $82.20 - $82.62 with higher volume resistance from $82.70 - $83.50 for stop placement above. You can look at this larger area for entry on an initial short position. For more conservative traders it may be wise to wait for a confirmed move below $80.98 prior to entry on the trade. Short term you can look at $77.16 as the target, but if the large liquidation run does set off then $62.50 is the longer term objective. As a hedge on the trade you can also look at purchasing the strength of the Nasdaq or also looking at the December puts with 29 days till expiration.
Bonds- On Friday Bonds negated their longer term trendline from the low June 3rd - open July 28th. Today this trend value sits at 132.13, with a settlement below this level today confirming the Bearish shift. All of the momentum indicators have confirmed sell signals as well, so I feel comfortable looking for short entry today. There is a great low volume zone for short entry from 131.25 - 132.05 with higher volume resistance from 132.06 - 132.18 and the 132.13 trend value today for stop placement above. If Bonds continue below 129.05 the market would initiate a larger Bearish reversal pattern projecting a move to 123.00. Shorter term I suggest a profit target around a test of this breakout level of 129.05. However, I definitely have my eye on 123 as the longer term objective for the market and trade.
Put on the Radar:
Buy Nasdaq Dips- The Nasdaq has now reached its Bullish head and shoulders objective range from 2080 - 2135. The S&P 500 though has yet to reach its own target on the same pattern from 1208 - 1245 as it is lagging due to the financial stocks. Apple and Google have been on a tear over the last several weeks to lead the Nasdaq higher. I expect this trend of Nasdaq strength to continue for at least another week or two, making it the best buy among the supportive markets still. This morning the market has recovered from weakness overnight to new highs making it potentially difficult to look for entry today, but keep this idea in your mind going forward as a good intraday trade. As the strength right now among all of the supportive markets Crude Oil is also a good buy as a hedge or spread against short positions in other markets.
Notes:
Yesterday
The 7:30 am batch of Economic data started the morning off ugly for the stock market and other supportive markets. An afternoon rally into the close though was able to rally the S&P 500 back near unchanged for the day. The outstanding Google earnings report from Thursday afternoon kept the Nasdaq index strong in comparison to the rest of the Equities. Crude Oil and the Euro stuck out as weaknesses among the other markets. Despite the stock sell off in the morning the Bond market fell well over a handle on the 7:30 numbers, negating a Bullish trend on the daily chart from early June. Finally, the Grain markets were calm with a slight sell off into the close, but the Cotton market settled limit down after Thursday's limit up close.
Today
The supportive markets are moderately weaker, but are well off their lows from the overnight session as of 6:50 am. The Metals, Canadian Dollar, and Pound are the weakest sectors, while the Nasdaq and Crude Oil are the strengths this morning despite weakness overnight. The long end of the yield curve, Yen, and Dollar are all slightly higher.
With the macro picture flip-flopping between signals of continuation and warning signs that the run higher is ending I think it is important as ever to pay attention to the leaders/laggards of the market when trading. Although it is not necessarily the case so far this morning the Nasdaq is the clear leader over the last week with Bonds and Crude Oil the most consistent weaknesses according to their market relationships.
The early part of last week looked as if the risk trade was continuing almost everywhere, but Friday and this morning are showing a similar lag and warning symptoms that had me concerned two weeks ago. Concern about the banks and financial stocks has come to the forefront lately as a new fundamental story slowing the rally. The macro direction seems too unstable right now to bet one way or the other over the longer term, so I advise still focusing on the intraday trades and ones that are expected to last less than a week.
Buys to Watch:
Sells to Watch:
Crude Oil (Sell rallies now for aggressive traders, Sell below breakout for conservative traders)- With first notice day approaching Friday it is time to roll the November contract to December today, so I will now be referring to the December contract. I have had the open interest for Crude on my radar for over a month now and it looks like the more recent market action in October is now setting up a a possible liquidation trap. Since October 4th open interest for Crude has risen from 1.367 - 1.503 million open contracts, with none of these new purchases at a better price than $80.98 and nearly all at least above $82. Below $80.98 the December contract has a small reversal pattern that projects to $77.16. Although this money invested in Crude is likely longer term we have seen in the past that once the position becomes a big enough loser even the long term trades will reconsider and liquidate. This reversal though is possibly just an initial move on a larger liquidation. On August 27th open interest sat at 1.242 million contracts with no entry price better than $74.51. This is a 21% increase in open long positions versus a price increase during this time of only 8.75% through Friday's close. This increase in long positions versus increase in price is proposterous and one of the largest I have seen in any market. It may come as a surprise, but with this climb in OI the market is now back within a few thousand of all time highs from July 2007. This is a blaring signal that the trade is incredibly over-crowded and ripe to catch the longs off guard.
If prices fall below $75 I believe we will see the beginning of a fast and furious liquidation run, but for right now I think that you can look at this smaller reversal as an initial move. For the more aggressive traders I believe you can look to sell rallies now. There is a low volume zone from $82.20 - $82.62 with higher volume resistance from $82.70 - $83.50 for stop placement above. You can look at this larger area for entry on an initial short position. For more conservative traders it may be wise to wait for a confirmed move below $80.98 prior to entry on the trade. Short term you can look at $77.16 as the target, but if the large liquidation run does set off then $62.50 is the longer term objective. As a hedge on the trade you can also look at purchasing the strength of the Nasdaq or also looking at the December puts with 29 days till expiration.
Bonds- On Friday Bonds negated their longer term trendline from the low June 3rd - open July 28th. Today this trend value sits at 132.13, with a settlement below this level today confirming the Bearish shift. All of the momentum indicators have confirmed sell signals as well, so I feel comfortable looking for short entry today. There is a great low volume zone for short entry from 131.25 - 132.05 with higher volume resistance from 132.06 - 132.18 and the 132.13 trend value today for stop placement above. If Bonds continue below 129.05 the market would initiate a larger Bearish reversal pattern projecting a move to 123.00. Shorter term I suggest a profit target around a test of this breakout level of 129.05. However, I definitely have my eye on 123 as the longer term objective for the market and trade.
Put on the Radar:
Buy Nasdaq Dips- The Nasdaq has now reached its Bullish head and shoulders objective range from 2080 - 2135. The S&P 500 though has yet to reach its own target on the same pattern from 1208 - 1245 as it is lagging due to the financial stocks. Apple and Google have been on a tear over the last several weeks to lead the Nasdaq higher. I expect this trend of Nasdaq strength to continue for at least another week or two, making it the best buy among the supportive markets still. This morning the market has recovered from weakness overnight to new highs making it potentially difficult to look for entry today, but keep this idea in your mind going forward as a good intraday trade. As the strength right now among all of the supportive markets Crude Oil is also a good buy as a hedge or spread against short positions in other markets.
Notes:
Thursday, October 14, 2010
Thursday 10/14/10 Commodity Ideas
There will be no morning newsletter tomorrow, but I will be back Monday. There are about 5 minor to moderate Economic data releases tomorrow at 7:30 am. I suspect that none will have a significant impact on the market though with traders waiting on Bernacke's speech to shed more light on QE later in the day.
Opening Note:
Yesterday
The morning started out firmer heading into the open with nearly every supportive market higher on the day and the risk aversion trade weaker. Buying entered on most of the market's opens as the Metals, Energies, Equities and Foreign Currencies all got a lift. As usually happens during the crawls higher, the markets kept a tight trading range throughout the afternoon before settling slightly off the highs for the day. The Grain markets were another story though as profit taking entered on the 9:30 am open. Although they came into the morning slightly higher the Grains mostly traded on a straight downtrend during the session. Finally, the Fixed Income markets got a lift on a positive 10 year note auction at noon. The long end of the yield curve began the day as the laggard, but managed to rally over a full handle from the session lows into the close.
Today
Almost all of the supportive markets are again at least moderately higher. The European Currencies, Precious Metals, and Cotton are the strengths this morning. It is worth noting that Cotton has already traded limit up (4 cents higher) for the session and Silver traded over $1 higher overnight on a 10 minute 50 cent rally at 1:45 am that tested $25. The Fixed Income sector is slightly weaker with the belly of the curve weaker than the wings. The Dollar Index is absolutely getting pummeled as well, further supporting prices in anything Dollar denominated.
Following Tuesday morning's recovery in the supportive markets we have seen continued buying on an uptrend. It is clear that the Quantitative Easing trade is still on and will likely continue along the same crawl until more details on the timing and size of the package are released. Circle November 3rd on your calendar as it is not only the morning after Election Day, but also the next FOMC announcement. From now until then I think that you can expect the same low volatility, directional crawl in the markets.
This morning there are Jobless Claims, PPI, and U.S. Trade Balance releases at 7:30 am, so I will provide a late update if I see any indication for today's trade on the market reaction.
Under the assumption that the markets melt higher for the rest of October I recommend continuing to employ a "buy the dips" strategy among the supportive markets. For now the European Currencies, Metals, and Equities are the most consistent and best performers. There still are isolated bouts of volatility though, so taking profits if you catch an hour of momentum or a strong up day is a good idea. Sure you can make $5 - $10 a day buying Gold, but if you are using loose parameters and get caught on the wrong end of the fast $25 sell off then you are losing 2-5 days of work. Most of the markets have already reached my furthest objectives and without at least a decent pullback it is difficult for me to recommend entering a trade without a profit target or defined risk/reward. A couple longer term objectives that I still have that have yet to be reached are 1208 - 1245 for the S&P 500 and 75.00 for the Dollar Index. I think that you can look at these levels as an area to take profits on the QE trade once they are reached. This means if the Aussie Dollar is working for you as a buy then keep looking to buy the dips until the Dollar reaches 75.
Buys to Watch:
Sells to Watch:
Put on the Radar:
Bonds (30 Year Auction at noon today)- Bonds have now negated the 2 week Bull trend for the daily chart and have unanimously Bearish momentum indicators. This would usually cause me to initiate a short position, but with the longer term Bull trend still intact and Treasury fundamentals swinging the market I think it is safer to stay out of the way for now. After clearly negating its Bullish trend since mid-September on Tuesday the Bonds sold off to 132.16 yesterday morning, but found support from the 10 year note auction at noon to rally over a full handle higher. This means that the longer term trendline from the low June 3rd to the open July 28th is resting intact at 132.04 today. Until this trend is negated I suggest holding off on looking for short entry.
The Treasury auction schedule effects the Fixed Income markets and the yield curve moves right now as well. Over the last couple months we have seen the "belly" of the curve advance (like over the last two weeks) in preparation for the auctions and decline after in a monthly cycle. With another round of auctions still to come in November for the long end of the curve it is possible that a market reversal holds off until after this time. This morning we are seeing the Bond prices as a strength in relation to the shorter end of the curve as the 30 year auction at noon today nears. Keep an eye on how the Bonds trade this afternoon post-auction.
Buy the Nasdaq dips- The Nasdaq should continue to be the strength on Equity rallies. The large Bullish head and shoulders pattern from the summer range still has an objective range from 2080 - 2135 that the market is nearing. The S&P 500 also still has its own objective range from 1208 - 1245 on the similar pattern. Because the markets only seem to produce minor pullbacks on the crawl higher the previous days mid-day consolidation range is a good support level to purchase against. So far this morning 1175 in the S&P 500 is providing this support, but look for 2051 as a support level in the Nasdaq.
Notes:
Euro- I retracted my sell the rallies suggestion yesterday morning and just in time to avoid the strong rally last night. With the Equity markets moving higher and the QE trade still strong it is likely that the Euro continues higher despite any European Economic concerns for the time being. Traders in the Euro are also aware that there is plenty of money already short the Euro and are using stops and short covering to add to the rally (such as the 7 pm 75 tick rally last evening that took out 1.40 and later 1.4050). I have a 2nd leg objective for the Dollar Index of 75.00, so I believe that the Euro should be looked at as strictly a buy until this level is reached.
Crude Oil- Crude Oil took out stops above $83.91 and $84.00 again last night as it rallied with the Euro and Equity markets. However, the Energies are definitely not a strength this morning and may turn into a weakness. The initial report on open interest from yesterday is again predicting a large increase in long positions meaning that an absurd 250,000 long positions have been entered within the last month and a half. Two consecutive closes above $83.91 projects a move to roughly $95, but if the market can not initiate this rally then this huge position is ripe for liquidation. I suggest a neutral stance on Crude for now...meaning stay flat.
Opening Note:
Yesterday
The morning started out firmer heading into the open with nearly every supportive market higher on the day and the risk aversion trade weaker. Buying entered on most of the market's opens as the Metals, Energies, Equities and Foreign Currencies all got a lift. As usually happens during the crawls higher, the markets kept a tight trading range throughout the afternoon before settling slightly off the highs for the day. The Grain markets were another story though as profit taking entered on the 9:30 am open. Although they came into the morning slightly higher the Grains mostly traded on a straight downtrend during the session. Finally, the Fixed Income markets got a lift on a positive 10 year note auction at noon. The long end of the yield curve began the day as the laggard, but managed to rally over a full handle from the session lows into the close.
Today
Almost all of the supportive markets are again at least moderately higher. The European Currencies, Precious Metals, and Cotton are the strengths this morning. It is worth noting that Cotton has already traded limit up (4 cents higher) for the session and Silver traded over $1 higher overnight on a 10 minute 50 cent rally at 1:45 am that tested $25. The Fixed Income sector is slightly weaker with the belly of the curve weaker than the wings. The Dollar Index is absolutely getting pummeled as well, further supporting prices in anything Dollar denominated.
Following Tuesday morning's recovery in the supportive markets we have seen continued buying on an uptrend. It is clear that the Quantitative Easing trade is still on and will likely continue along the same crawl until more details on the timing and size of the package are released. Circle November 3rd on your calendar as it is not only the morning after Election Day, but also the next FOMC announcement. From now until then I think that you can expect the same low volatility, directional crawl in the markets.
This morning there are Jobless Claims, PPI, and U.S. Trade Balance releases at 7:30 am, so I will provide a late update if I see any indication for today's trade on the market reaction.
Under the assumption that the markets melt higher for the rest of October I recommend continuing to employ a "buy the dips" strategy among the supportive markets. For now the European Currencies, Metals, and Equities are the most consistent and best performers. There still are isolated bouts of volatility though, so taking profits if you catch an hour of momentum or a strong up day is a good idea. Sure you can make $5 - $10 a day buying Gold, but if you are using loose parameters and get caught on the wrong end of the fast $25 sell off then you are losing 2-5 days of work. Most of the markets have already reached my furthest objectives and without at least a decent pullback it is difficult for me to recommend entering a trade without a profit target or defined risk/reward. A couple longer term objectives that I still have that have yet to be reached are 1208 - 1245 for the S&P 500 and 75.00 for the Dollar Index. I think that you can look at these levels as an area to take profits on the QE trade once they are reached. This means if the Aussie Dollar is working for you as a buy then keep looking to buy the dips until the Dollar reaches 75.
Buys to Watch:
Sells to Watch:
Put on the Radar:
Bonds (30 Year Auction at noon today)- Bonds have now negated the 2 week Bull trend for the daily chart and have unanimously Bearish momentum indicators. This would usually cause me to initiate a short position, but with the longer term Bull trend still intact and Treasury fundamentals swinging the market I think it is safer to stay out of the way for now. After clearly negating its Bullish trend since mid-September on Tuesday the Bonds sold off to 132.16 yesterday morning, but found support from the 10 year note auction at noon to rally over a full handle higher. This means that the longer term trendline from the low June 3rd to the open July 28th is resting intact at 132.04 today. Until this trend is negated I suggest holding off on looking for short entry.
The Treasury auction schedule effects the Fixed Income markets and the yield curve moves right now as well. Over the last couple months we have seen the "belly" of the curve advance (like over the last two weeks) in preparation for the auctions and decline after in a monthly cycle. With another round of auctions still to come in November for the long end of the curve it is possible that a market reversal holds off until after this time. This morning we are seeing the Bond prices as a strength in relation to the shorter end of the curve as the 30 year auction at noon today nears. Keep an eye on how the Bonds trade this afternoon post-auction.
Buy the Nasdaq dips- The Nasdaq should continue to be the strength on Equity rallies. The large Bullish head and shoulders pattern from the summer range still has an objective range from 2080 - 2135 that the market is nearing. The S&P 500 also still has its own objective range from 1208 - 1245 on the similar pattern. Because the markets only seem to produce minor pullbacks on the crawl higher the previous days mid-day consolidation range is a good support level to purchase against. So far this morning 1175 in the S&P 500 is providing this support, but look for 2051 as a support level in the Nasdaq.
Notes:
Euro- I retracted my sell the rallies suggestion yesterday morning and just in time to avoid the strong rally last night. With the Equity markets moving higher and the QE trade still strong it is likely that the Euro continues higher despite any European Economic concerns for the time being. Traders in the Euro are also aware that there is plenty of money already short the Euro and are using stops and short covering to add to the rally (such as the 7 pm 75 tick rally last evening that took out 1.40 and later 1.4050). I have a 2nd leg objective for the Dollar Index of 75.00, so I believe that the Euro should be looked at as strictly a buy until this level is reached.
Crude Oil- Crude Oil took out stops above $83.91 and $84.00 again last night as it rallied with the Euro and Equity markets. However, the Energies are definitely not a strength this morning and may turn into a weakness. The initial report on open interest from yesterday is again predicting a large increase in long positions meaning that an absurd 250,000 long positions have been entered within the last month and a half. Two consecutive closes above $83.91 projects a move to roughly $95, but if the market can not initiate this rally then this huge position is ripe for liquidation. I suggest a neutral stance on Crude for now...meaning stay flat.
Wednesday, October 13, 2010
Wednesday 10/13/10 Commodity Ideas
Opening Note:
Yesterday
After getting off to a poor start for the overnight session the market gained strength on a recovery path into the early morning. The stock market had an initial sell off on its open, but found a quick base to form a slingshot rally. After stagnation for several hours an afternoon rally also followed. This finally produced a settlement above 2030 in the Nasdaq to establish a rally breakout above its 2 week consolidation range. The other supportive markets that started the early morning off weaker followed a similar path as the Euro, Crude Oil, and Copper all managed to settle higher on the day. The Grain markets recovered strength after Monday's profit taking correction as Corn led the sector higher again.
It was shocking for me to see the Euro, Crude, and Copper all settle higher on the day after such weakness overnight and into the early morning. Much of the World was off on Monday so yesterday's trade was more true to the actual story right now and that looks like the Quantitative Easing story continuing. The stock market looks to be the leader higher going forward along with the Metals among the correlated markets. If these two sectors continue higher then I see little to no chance that the Energies, Foreign Currencies, and even "the things that grow" do not follow along.
Today
Pretty much everything is higher as of 7 am with the Dollar Index, Japanese Yen, and the Long end of the yield curve the only markets that are lower so far. The Nasdaq, Silver, and Canadian Dollar stick out as the strengths and leaders. As you will see below, I continue to keep the Bonds on my radar as a sale. It will be interesting to watch the relationship between the Bonds and the Equity markets today because it could give better insight into both individual trades. The correlation between the Equity and Bond markets free floated over the last month and a half, but with the Equity rally looking like it will extend further the risk aversion trade may be selling off. If we see a couple more days of Bonds and Yen moving opposite the stock market than this relationship will become a good indicator for future market performance.
What I thought was a reversal in the macro market now looks like it may only be a consolidation range prior to continuation higher. Many of the warning flags that I was seeing last week are beginning to correct. The Nasdaq has regained the leadership role among the Equity sector and has established a close above its consolidation range. The Metal markets survived some violent intraday sell offs, but still maintain their trend higher. And, both Crude Oil and the Euro refuse to fall much in price as buying enters with strength on each dip. All of this leads me to believe that the resistance that we have seen for the macro market is failing and the trade will resume its climb higher.
Sometimes my critical thinking and skepticism can be troublesome as I over think the trade and predict outcomes beyond the scope of the current market. While I strongly believe that the "Buy Good News and Buy Bad News" trade is already extended beyond a reasonable level and that the market is over-optimistic about how supportive a Republican Congress and QE will be for the economy I do not think that this is a profitable way to trade for the next month. With elections on the horizon in November, an earnings season underway that continues to beat expectations (however weak or doctored they may be), and big money and algorithms still buying the dips I see little in the way of a new catalyst for the next month that will derail the Quantitative Easing trade. Once the stock market reaches its objective targets and we get confirmation on election results and what the QE package will really be then it may be time to reexamine these thoughts, but put them away for now.
One of the things that I have learned as a trader is that there is not glory in losing money even if you were eventually right. The only job performance you are gauged on is what your account statement says each day. For the next few weeks if you buy the dips and focus on shorter term trades (1 - 12 hours) I think that the account will be higher come November.
Buys to Watch:
Sells to Watch:
Put on the Radar:
Nasdaq and S&P 500...buy the dips again- The Nasdaq established a critical close above 2030 and its recent consolidation range yesterday while reclaiming the leadership role among the Equities. I believe that the original Bullish head and shoulders pattern objectives I laid out a month ago are now back in play as target levels on a continuation on the Equity rally. The markets are now closer the bottom of this target range, but for the Nasdaq it is from 2080 - 2135 and the S&P 500 it is from 1208 - 1245. I believe the Nasdaq will continue to be the leader and will be the better buy on the dips. The intraday trade for the Equities has reminded me a lot of the action we saw on the recovery throughout 2009, so I am thinking that this will be more of a crawl higher rather than an explosion. In this case you can usually look to buy each day on a pullback towards the previous days mid-day consolidation level. I still wish to wait for confirmation on the macro trade from Crude Oil and the Euro prior to moving the stock market to the Buys. However, I believe buying the intraday dips is already in play and encourage only looking to buy the stock market rather than sell it.
Bonds Bearish Reversal Under Way- Yesterday the Bonds violated their 2 week Bullish trend on the daily chart while confirming sell signals in both Stochastics and MACD momentum indicators. While this would normally be enough for me to begin looking for short entry I am still waiting for confirmation that the longer term Bullish trend is failing. The Bullish trendline from the low June 3rd to the open July 28th (sitting at 132.00 today) already has 4 points of interaction that have supported the market over the last 4 months. I believe that the Bond market will likely violate this trend within the next week, but in the hopes of not getting chopped up I think it is best to wait for this time. A move below this trendline would mean it is time to sell the market with a potential Double top pattern forming with a breakout below 129.05 projecting a move to roughly 123.00. Keep the relationship between Bond prices and the Equity market on your radar as well. It looks like inflows into the stock market may mean outflows for Bonds right now. If this relationship clearly establishes itself then this will be another indicator tool to process the Bond market.
Notes:
Crude Oil- Each time that Crude has looked in trouble over the last week the market has come to its rescue with volatile dip buying. The open interest versus price advance is still something that I came keeping close watch of on a daily basis, but it looks unlikely that we are going to see a significant decline in Crude right now. This does not mean that I believe Crude Oil is a buy for right now, but I think that it is time to stop looking to sell the rallies. The resistance level around $83.91 continues to hold and until it fails Crude should remain a neutral market. With Equities, Metals, and many of the Foreign Currencies looking like they will continue their advance the Energy markets will probably follow along or at least have enough support to prevent the liquidation trap from being set until November. Above $83.91 Crude would have an objective of roughly $95, so if the Energies gain strength as a sector Crude could actually become a good buy at some point.
Euro- Like Crude Oil, the resistance from 1.3950 - 1.4050 in the Euro is still holding strong, but I would rather avoid taking the whole loss when I believe there is a good chance that the resistance will fail. The velocity that the dips are being bought with in the Euro market though has me wanting to sit on the sidelines rather than try to sell the rallies. Over the last 24 hours the Euro was able to rally nearly 240 ticks off its lows at one point on the heels of the Equity rally. While this resistance continues to hold I do not view the Euro as a good long position so I recommend staying flat for now. If the Euro is able to settle above 1.4050 I believe that the Dollar Index will continue lower to 75.00 with a correlated value in the Euro looking roughly like 1.45.
Soybeans- My current objective for the Soybean market is $11.95, which was nearly reached this morning. I believe that Corn can easily continue higher, but I think that Beans will struggle around the $12.00 psychological level. The spread between Beans and Corn (Beans - Corn*2 to chart) has now fallen below the pre-September report lows and now looks like it could continue through even and into Corn's favor. I still advise looking to buy Corn dips, sell Wheat rallies, and to keep an eye on Beans around $12 as an area to take profits on longs.
Curious Economic Data Response- The FOMC minutes were released yesterday afternoon around 1 pm. They basically did not tell us much that we did not know already, but they did take a stronger stance that QE was even more likely. There was some dissension about the timing of initiation and the amount of time to prepare the intricacies of the plan, but it definitely sounded even more sure that it was coming. While the stock market has been bought following almost every number good or bad over the last month and a half I would expect that of any piece of news this would be one that was bought. However, it was followed by a weak rally attempt that fell back to pre-announcement levels within 20 minutes. While the market did retrace and hold this rally later in the afternoon I find it curious that the rally on this news failed. Continue to focus on buying the dips, but file this bit of information away for November 3rd when we will know election results and will hear from the Fed next.
Yesterday
After getting off to a poor start for the overnight session the market gained strength on a recovery path into the early morning. The stock market had an initial sell off on its open, but found a quick base to form a slingshot rally. After stagnation for several hours an afternoon rally also followed. This finally produced a settlement above 2030 in the Nasdaq to establish a rally breakout above its 2 week consolidation range. The other supportive markets that started the early morning off weaker followed a similar path as the Euro, Crude Oil, and Copper all managed to settle higher on the day. The Grain markets recovered strength after Monday's profit taking correction as Corn led the sector higher again.
It was shocking for me to see the Euro, Crude, and Copper all settle higher on the day after such weakness overnight and into the early morning. Much of the World was off on Monday so yesterday's trade was more true to the actual story right now and that looks like the Quantitative Easing story continuing. The stock market looks to be the leader higher going forward along with the Metals among the correlated markets. If these two sectors continue higher then I see little to no chance that the Energies, Foreign Currencies, and even "the things that grow" do not follow along.
Today
Pretty much everything is higher as of 7 am with the Dollar Index, Japanese Yen, and the Long end of the yield curve the only markets that are lower so far. The Nasdaq, Silver, and Canadian Dollar stick out as the strengths and leaders. As you will see below, I continue to keep the Bonds on my radar as a sale. It will be interesting to watch the relationship between the Bonds and the Equity markets today because it could give better insight into both individual trades. The correlation between the Equity and Bond markets free floated over the last month and a half, but with the Equity rally looking like it will extend further the risk aversion trade may be selling off. If we see a couple more days of Bonds and Yen moving opposite the stock market than this relationship will become a good indicator for future market performance.
What I thought was a reversal in the macro market now looks like it may only be a consolidation range prior to continuation higher. Many of the warning flags that I was seeing last week are beginning to correct. The Nasdaq has regained the leadership role among the Equity sector and has established a close above its consolidation range. The Metal markets survived some violent intraday sell offs, but still maintain their trend higher. And, both Crude Oil and the Euro refuse to fall much in price as buying enters with strength on each dip. All of this leads me to believe that the resistance that we have seen for the macro market is failing and the trade will resume its climb higher.
Sometimes my critical thinking and skepticism can be troublesome as I over think the trade and predict outcomes beyond the scope of the current market. While I strongly believe that the "Buy Good News and Buy Bad News" trade is already extended beyond a reasonable level and that the market is over-optimistic about how supportive a Republican Congress and QE will be for the economy I do not think that this is a profitable way to trade for the next month. With elections on the horizon in November, an earnings season underway that continues to beat expectations (however weak or doctored they may be), and big money and algorithms still buying the dips I see little in the way of a new catalyst for the next month that will derail the Quantitative Easing trade. Once the stock market reaches its objective targets and we get confirmation on election results and what the QE package will really be then it may be time to reexamine these thoughts, but put them away for now.
One of the things that I have learned as a trader is that there is not glory in losing money even if you were eventually right. The only job performance you are gauged on is what your account statement says each day. For the next few weeks if you buy the dips and focus on shorter term trades (1 - 12 hours) I think that the account will be higher come November.
Buys to Watch:
Sells to Watch:
Put on the Radar:
Nasdaq and S&P 500...buy the dips again- The Nasdaq established a critical close above 2030 and its recent consolidation range yesterday while reclaiming the leadership role among the Equities. I believe that the original Bullish head and shoulders pattern objectives I laid out a month ago are now back in play as target levels on a continuation on the Equity rally. The markets are now closer the bottom of this target range, but for the Nasdaq it is from 2080 - 2135 and the S&P 500 it is from 1208 - 1245. I believe the Nasdaq will continue to be the leader and will be the better buy on the dips. The intraday trade for the Equities has reminded me a lot of the action we saw on the recovery throughout 2009, so I am thinking that this will be more of a crawl higher rather than an explosion. In this case you can usually look to buy each day on a pullback towards the previous days mid-day consolidation level. I still wish to wait for confirmation on the macro trade from Crude Oil and the Euro prior to moving the stock market to the Buys. However, I believe buying the intraday dips is already in play and encourage only looking to buy the stock market rather than sell it.
Bonds Bearish Reversal Under Way- Yesterday the Bonds violated their 2 week Bullish trend on the daily chart while confirming sell signals in both Stochastics and MACD momentum indicators. While this would normally be enough for me to begin looking for short entry I am still waiting for confirmation that the longer term Bullish trend is failing. The Bullish trendline from the low June 3rd to the open July 28th (sitting at 132.00 today) already has 4 points of interaction that have supported the market over the last 4 months. I believe that the Bond market will likely violate this trend within the next week, but in the hopes of not getting chopped up I think it is best to wait for this time. A move below this trendline would mean it is time to sell the market with a potential Double top pattern forming with a breakout below 129.05 projecting a move to roughly 123.00. Keep the relationship between Bond prices and the Equity market on your radar as well. It looks like inflows into the stock market may mean outflows for Bonds right now. If this relationship clearly establishes itself then this will be another indicator tool to process the Bond market.
Notes:
Crude Oil- Each time that Crude has looked in trouble over the last week the market has come to its rescue with volatile dip buying. The open interest versus price advance is still something that I came keeping close watch of on a daily basis, but it looks unlikely that we are going to see a significant decline in Crude right now. This does not mean that I believe Crude Oil is a buy for right now, but I think that it is time to stop looking to sell the rallies. The resistance level around $83.91 continues to hold and until it fails Crude should remain a neutral market. With Equities, Metals, and many of the Foreign Currencies looking like they will continue their advance the Energy markets will probably follow along or at least have enough support to prevent the liquidation trap from being set until November. Above $83.91 Crude would have an objective of roughly $95, so if the Energies gain strength as a sector Crude could actually become a good buy at some point.
Euro- Like Crude Oil, the resistance from 1.3950 - 1.4050 in the Euro is still holding strong, but I would rather avoid taking the whole loss when I believe there is a good chance that the resistance will fail. The velocity that the dips are being bought with in the Euro market though has me wanting to sit on the sidelines rather than try to sell the rallies. Over the last 24 hours the Euro was able to rally nearly 240 ticks off its lows at one point on the heels of the Equity rally. While this resistance continues to hold I do not view the Euro as a good long position so I recommend staying flat for now. If the Euro is able to settle above 1.4050 I believe that the Dollar Index will continue lower to 75.00 with a correlated value in the Euro looking roughly like 1.45.
Soybeans- My current objective for the Soybean market is $11.95, which was nearly reached this morning. I believe that Corn can easily continue higher, but I think that Beans will struggle around the $12.00 psychological level. The spread between Beans and Corn (Beans - Corn*2 to chart) has now fallen below the pre-September report lows and now looks like it could continue through even and into Corn's favor. I still advise looking to buy Corn dips, sell Wheat rallies, and to keep an eye on Beans around $12 as an area to take profits on longs.
Curious Economic Data Response- The FOMC minutes were released yesterday afternoon around 1 pm. They basically did not tell us much that we did not know already, but they did take a stronger stance that QE was even more likely. There was some dissension about the timing of initiation and the amount of time to prepare the intricacies of the plan, but it definitely sounded even more sure that it was coming. While the stock market has been bought following almost every number good or bad over the last month and a half I would expect that of any piece of news this would be one that was bought. However, it was followed by a weak rally attempt that fell back to pre-announcement levels within 20 minutes. While the market did retrace and hold this rally later in the afternoon I find it curious that the rally on this news failed. Continue to focus on buying the dips, but file this bit of information away for November 3rd when we will know election results and will hear from the Fed next.
Tuesday, October 12, 2010
Tuesday 10/12/10 Commodity Ideas
Opening Note:
Yesterday
Other than the Grains yesterday the market was pretty much lifeless. Corn started Sunday evening locked limit up 45 cents higher, but came off in the morning as profit taking took hold of the Grains. Wheat settled clearly lower on the day, but both Beans and Corn actually also settled at or below their own synthetic highs from Friday. Crude Oil and the Euro managed to settle moderately lower for the day as the notable laggards of the broad market. The day can be easily summed up though by noting that the S&P 500 only had a range of 4.75 points until 2:30 pm, including the overnight trade. Volume was low, the moves small, and the trade less meaningful.
Today
The supportive markets began last evening with a Bearish trend that continued until nearly 4 am, but have rebounded impressively since. The Energies, Metals, Euro, and Equities were well lower when I woke up this morning, but Crude Oil has now managed to even produce new highs for the session in spite of trading nearly $1.30 lower overnight (mostly done from 6:20 - 6:45am...there's no way that was predatory programs purposefully running stops and inducing short covering...no way). The Dollar Index is slightly higher along with the Treasury markets as the risk aversion trade appears to be inverted to the stock market action for today.
Although the supportive markets are still sitting lower this morning I feel undecided on my expectations for today. I am clearly now pushing the idea that the Quantitative Easing trade is ending, but this morning's rally leaves me suspicious. The early morning creep higher has become an indicating staple that has preceded buying of the supportive markets. Anytime that I begin to see those 15 minute chart uptrends I definitely become more hesitant about entering or holding short positions. I will include a late note though if I get clearer signals though.
Going forward I am using both the Euro and Crude Oil as my indicator markets for macro direction. With both still holding critical resistance I believe that the supportive markets should be viewed as a sale on rallies, with these two markets likely the best short positions of any. For right now I am going with the flow on the trade, but possible longer term objectives of 1.10 and $62.50 for the Euro and Crude would mean a broad sell off heading towards the end of the year. While it looks like the macro direction is in the process of reversing I still recommend holding off on larger long term positions for the time being. Focus on capturing the shorter term day to day moves because the topping or consolidation process can often mean that the next day looks different than the previous one (or the next hour different than the last).
Late Note: Traders are definitely looking to buy the supportive markets this morning despite the overnight sell off. Pay attention to some of the higher volume resistance levels below as possible opportunities to fade the rally, but if they do not hold then I would not fight it. Picking a top or reversal can be a frustrating trade because the rest of the market clearly does not realize the direction shift yet, so tread lightly. It is this type of trade though that produces the liquidation traps and trading opportunities as the market sells off larger during low volume times and fights higher on large allocation during the higher volume times. Be patient.
Buys to Watch:
Sells to Watch:
Put on the Radar:
Sell Crude Oil- Now that Crude Oil is beginning to head lower I am making sure to keep a close eye on open interest. Crude settled lower yesterday on very low Columbus Day volume, so it is unlikely that open interest dropped much for the market. The possible longer term objective of $62.50 will come into play if this long position accumulation over the last month chooses to liquidate once prices fall to an unacceptable level. Below $80.30 the November contract has a short term reversal objective of $77.10, which is a short term move that should be easier to quantify and capture. For today there is higher volume resistance from $82.20 - $82.60, which I am looking at to keep the market at bay as a sign of strength. Look to sell the rallies unless the markets makes consecutive closes above the $83.91 pivot point.
Sell Euro- The Bullish trendline on the daily chart from the low Sept. 10th - low Sept. 21st rests at 1.3941 today and is in serious danger of being violated today. Both Stochastics and RSI have also produced sell signals within the last two days for this daily chart. The possible longer term objective for the Euro is roughly 1.10, but if the market holds below 1.3825 then there is a shorter term reversal objective of 1.3650. As the market is on a morning recovery after last night's sell off it will likely re-encounter some higher volume resistance from 1.3866 - 1.3892 that I am hoping will hold as a sign of strength and level to fade. Continue to sell the rallies unless the market produces a settlement above 1.4050.
Buy Gold vs Sell Silver (Gold - Silver/2 to chart)- Both Gold and Silver are extremely volatile at times in the outright markets lately. Although I believe that the Metals are topping, this volatility makes me hesitant to suggest any trades in the individual outright markets. If these Metals are indeed topping though then Silver should correct more than Gold, putting this spread in play. On this differential I have a Bearish trendline from the August 30th high - September 21st high with a value of $201.8 today. RSI for this daily chart is near producing a buy signal along with some of the other momentum indicators. The ratio chart for Gold/Silver has actually produced a buy signal already for the daily RSI and is one that should be on your radar if you are looking at this trade as well. I think that you need to wait for the Bearish trendline to make a confirmed violation prior to longer term entry, so keep this fundamental trade on your radar until the technicals set up properly.
Bonds...Bearish Reversal?- I am considering the Treasury markets closed yesterday due to the low volume, so today's action will be important for the Bonds going forward. While the shorter term Treasuries have well defined trends higher the Bonds are fading with sell signals piling up. So far today the Bullish trendline from the low Sept. 17th - low Sept. 31st at 134.28 has produced the high for the Bond market. If there are two settlements below this trend then I think it is time to look for short entry in Bonds. Momentum indicators for the daily chart have already produced sell signals, so it is looking more likely that the market is creating a Bearish reversal pattern.
Notes:
Nasdaq- The Equity sector has been the strength among the macro market since I started noticing topping action among the markets last Wednesday. This means that I recommend looking at almost every other sector as a sale prior to the stock market currently. The Nasdaq is also a strength this morning on a lower board, which is often a signal that buying will be coming today. However, unless the Nasdaq is able to produce settlements above 2030 then the market looks like it could be topping. The Dow and S&P 500 have gained on the Nasdaq over the last several weeks and have established fresh highs during this time while the Nasdaq has not. If the Nasdaq is not able to form a breakout rally soon then look at this as another indication of a macro directional shift lower.
Yesterday
Other than the Grains yesterday the market was pretty much lifeless. Corn started Sunday evening locked limit up 45 cents higher, but came off in the morning as profit taking took hold of the Grains. Wheat settled clearly lower on the day, but both Beans and Corn actually also settled at or below their own synthetic highs from Friday. Crude Oil and the Euro managed to settle moderately lower for the day as the notable laggards of the broad market. The day can be easily summed up though by noting that the S&P 500 only had a range of 4.75 points until 2:30 pm, including the overnight trade. Volume was low, the moves small, and the trade less meaningful.
Today
The supportive markets began last evening with a Bearish trend that continued until nearly 4 am, but have rebounded impressively since. The Energies, Metals, Euro, and Equities were well lower when I woke up this morning, but Crude Oil has now managed to even produce new highs for the session in spite of trading nearly $1.30 lower overnight (mostly done from 6:20 - 6:45am...there's no way that was predatory programs purposefully running stops and inducing short covering...no way). The Dollar Index is slightly higher along with the Treasury markets as the risk aversion trade appears to be inverted to the stock market action for today.
Although the supportive markets are still sitting lower this morning I feel undecided on my expectations for today. I am clearly now pushing the idea that the Quantitative Easing trade is ending, but this morning's rally leaves me suspicious. The early morning creep higher has become an indicating staple that has preceded buying of the supportive markets. Anytime that I begin to see those 15 minute chart uptrends I definitely become more hesitant about entering or holding short positions. I will include a late note though if I get clearer signals though.
Going forward I am using both the Euro and Crude Oil as my indicator markets for macro direction. With both still holding critical resistance I believe that the supportive markets should be viewed as a sale on rallies, with these two markets likely the best short positions of any. For right now I am going with the flow on the trade, but possible longer term objectives of 1.10 and $62.50 for the Euro and Crude would mean a broad sell off heading towards the end of the year. While it looks like the macro direction is in the process of reversing I still recommend holding off on larger long term positions for the time being. Focus on capturing the shorter term day to day moves because the topping or consolidation process can often mean that the next day looks different than the previous one (or the next hour different than the last).
Late Note: Traders are definitely looking to buy the supportive markets this morning despite the overnight sell off. Pay attention to some of the higher volume resistance levels below as possible opportunities to fade the rally, but if they do not hold then I would not fight it. Picking a top or reversal can be a frustrating trade because the rest of the market clearly does not realize the direction shift yet, so tread lightly. It is this type of trade though that produces the liquidation traps and trading opportunities as the market sells off larger during low volume times and fights higher on large allocation during the higher volume times. Be patient.
Buys to Watch:
Sells to Watch:
Put on the Radar:
Sell Crude Oil- Now that Crude Oil is beginning to head lower I am making sure to keep a close eye on open interest. Crude settled lower yesterday on very low Columbus Day volume, so it is unlikely that open interest dropped much for the market. The possible longer term objective of $62.50 will come into play if this long position accumulation over the last month chooses to liquidate once prices fall to an unacceptable level. Below $80.30 the November contract has a short term reversal objective of $77.10, which is a short term move that should be easier to quantify and capture. For today there is higher volume resistance from $82.20 - $82.60, which I am looking at to keep the market at bay as a sign of strength. Look to sell the rallies unless the markets makes consecutive closes above the $83.91 pivot point.
Sell Euro- The Bullish trendline on the daily chart from the low Sept. 10th - low Sept. 21st rests at 1.3941 today and is in serious danger of being violated today. Both Stochastics and RSI have also produced sell signals within the last two days for this daily chart. The possible longer term objective for the Euro is roughly 1.10, but if the market holds below 1.3825 then there is a shorter term reversal objective of 1.3650. As the market is on a morning recovery after last night's sell off it will likely re-encounter some higher volume resistance from 1.3866 - 1.3892 that I am hoping will hold as a sign of strength and level to fade. Continue to sell the rallies unless the market produces a settlement above 1.4050.
Buy Gold vs Sell Silver (Gold - Silver/2 to chart)- Both Gold and Silver are extremely volatile at times in the outright markets lately. Although I believe that the Metals are topping, this volatility makes me hesitant to suggest any trades in the individual outright markets. If these Metals are indeed topping though then Silver should correct more than Gold, putting this spread in play. On this differential I have a Bearish trendline from the August 30th high - September 21st high with a value of $201.8 today. RSI for this daily chart is near producing a buy signal along with some of the other momentum indicators. The ratio chart for Gold/Silver has actually produced a buy signal already for the daily RSI and is one that should be on your radar if you are looking at this trade as well. I think that you need to wait for the Bearish trendline to make a confirmed violation prior to longer term entry, so keep this fundamental trade on your radar until the technicals set up properly.
Bonds...Bearish Reversal?- I am considering the Treasury markets closed yesterday due to the low volume, so today's action will be important for the Bonds going forward. While the shorter term Treasuries have well defined trends higher the Bonds are fading with sell signals piling up. So far today the Bullish trendline from the low Sept. 17th - low Sept. 31st at 134.28 has produced the high for the Bond market. If there are two settlements below this trend then I think it is time to look for short entry in Bonds. Momentum indicators for the daily chart have already produced sell signals, so it is looking more likely that the market is creating a Bearish reversal pattern.
Notes:
Nasdaq- The Equity sector has been the strength among the macro market since I started noticing topping action among the markets last Wednesday. This means that I recommend looking at almost every other sector as a sale prior to the stock market currently. The Nasdaq is also a strength this morning on a lower board, which is often a signal that buying will be coming today. However, unless the Nasdaq is able to produce settlements above 2030 then the market looks like it could be topping. The Dow and S&P 500 have gained on the Nasdaq over the last several weeks and have established fresh highs during this time while the Nasdaq has not. If the Nasdaq is not able to form a breakout rally soon then look at this as another indication of a macro directional shift lower.
Monday, October 11, 2010
Monday 10/11/10 Commodity Ideas
Opening Note:
Yesterday
Thursday's macro sell off was followed by mostly weaker markets heading into Unemployment Friday morning. The number came out near expectations, but with a moderately Bearish Non-Farm Payroll section. While this led an initial sell off in the Equity markets two sided volatility ensued with the Bulls eventually winning out. The Crude Oil market as an example fell quickly after the number, ran towards a test of the overnight highs, took a sharp break within 4 ticks of the overnight low, and then finally established a lasting rally to new highs all within an hour. If this sounds confusing I can tell you that with most of these swings $1 or more it was hard to tell which way was up by the time the market decided. The Quantitative Easing trade re-emerged despite the non-Bullish number once again as traders scooped up risk assets under the assumption that bad news will mean a larger QE package. Nearly every market other than the Dollar Index managed to settle higher on the day.
The USDA Crop Production and Supply/Demand Reports left no question for market direction as the number came out mildly Bullish both Beans and Wheat, but extremely and surprisingly Bullish for Corn. Corn, Beans, and Meal opened limit up on the day with Wheat and Bean Oil eventually settling locked limit up as well. The Corn numbers imply that there could be supply concerns for several years with the dramatic drop in expected carryover.
Today
The macro market opened strong yesterday evening with all of the supportive markets carrying over Friday's strength. However, overnight the strength has definitely dissipated, with some of the Foreign Currencies and Energies dancing around prices below Friday's close this morning. Corn opened limit up again last night to lead the Grains, but is trading a few cents off its 45 cent extended limit heading into the 7:15am close. The Grains will likely be the most volatile and interesting trade today, but the rest of the markets look like they could be more of a stagnant trade with many hanging right around Friday's settlement with small overnight ranges.
While Thursday's sell off in the risk assets backed up my hypothesis that the Quantitative Easing trade is ending, Friday's reversal showed a re-emergence of the trade unexpectedly to me. Friday's rally was clearly in line with the "buy good news and buy bad news" idea, but the key resistance levels that I am looking at as pivot points among the supportive markets held strong. Both Crude Oil and the Euro posted positive gains into last evening, but are beginning to fade this morning on what still could be topping action on the QE trade. With the macro direction still uncertain at this point I recommend holding off on entering medium to large longer term positions. However, I believe that selling the rallies in the supportive markets is the best approach over the short term.
Today is Columbus Day, Canadian Thanksgiving Day, and Japan's Health-Sports Day (I choose not to look up what this holiday actually is because I enjoy the mental image the name congers), so the markets should be slower. The Fixed Income markets will be the lightest trade as the pits are closed for Columbus Day.
The markets that I believe will be the weakest going forward and the best sales in order of preference are: Crude Oil, Euro, Silver, Copper, Canadian Dollar, Nasdaq. For more details on some of the technical levels please refer back to Wednesday evenings Bullish Momentum is shifting letter and Thursday evenings letter.
Buys to Watch:
Sells to Watch:
Put on the Radar:
Sell Crude Oil- Crude was in the sells column on Thursday evening with the advice of selling the initial rally after Unemployment. Although there was a small rally ten minutes after the number it was only profitable as a sale for a short period of time. The market carried to new highs as fresh allocation entered the market throughout the day. After a strong opening last evening though the market has sold off and continually posted new lows for the day after strong resistance kept the market at bay. Until Crude posts consecutive closes above $83.91 I think the market is a sale on rallies, especially when it nears this level. Open Interest for Crude since August 27th has now risen 209,000 out of 1.451 million total with entry on these new longs between $73 - $84.43. If the market does reverse off of these recent highs then I have a longer term 2nd leg objective of $62.50, which should be aided by the potential liquidation of this recent open interest position.
Sell Euro- The Euro turned out to actually be a weakness among the Currency sector on Friday as it only settled slightly above Thursday's close while the other correlated markets rallied substantially in some cases. I now have my eye on the Bullish trendline for the market extending from the low Sept. 10th - low Sept. 21st that has a value of 1.3882 today with at least 4 points of price interaction already. Daily Stochastics for the market now has produced a crossover sell signal and RSI also looks like it may be topping in overbought territory. As long as the Euro continues to hold resistance from 1.3950 - 1.4050 I believe that it is a sale on rallies. If the market settles above 1.4050 then I recommend removing short positions as it will likely travel near 1.45 on a move that would correlate to the Dollar Index near 75.00.
Bonds Turning Into Sale?- The Fixed Income markets are basically closed today, so the market action should be looked at as less reliable until tomorrow. The Bond market though has now moved below the Bullish trendline from the low Sept. 17th - low Sept. 31st at 134.18 today. The yield curve has steepened over the last 2 weeks as Bond prices have lagged in comparison to the shorter term Treasuries. This has now produced a sell signal for daily Stochastics with other momentum indicators also nearing potential sales. I want to wait until at least tomorrow morning before executing a sale in the market, but if higher volume trade tomorrow shows a similar decline in Bonds then the market may be producing a double top pattern.
Bond prices have benefited from the Quantitative Easing story so a decline int he market can also be looked at as an indicator that the QE trade is slowing. It is believed that The Fed will use Bond purchases as part of the Easing package, so declining a shift to declining prices could be used as a signal that the Equity and Commodity markets may slow as well. The Bond market is used as a risk aversion market though that moves opposite the stock market and risk trade This is a relationship to keep an eye on before deciding whether falling Bond prices has a correlation to the Equity and Commodity markets right now.
Notes:
Gold & Silver Still May Be Topping- They sold off hard Thursday and recovered strong Friday, but this action could be forming a volatility top after parabolic rallies. As I explained in my last two letters I believe that Silver would have the larger fall of the two markets should the Metals top. Therefore, Buying Gold while Selling Silver is a good spread to take advantage of this idea. Keep the chart of (Gold - Silver/2) and (Gold/Silver) on your radar fundamentally as a possible buy if the charts show technical reversal signals. For right now I recommend staying out of both markets until direction becomes clearer.
Grains- The Corn numbers Friday sealed that Corn will be the directional leader for the Grain sector for the rest of the year. Although the market can not continue forever I advise focusing on buying the dips rather than selling the rallies going forward in Corn. Wheat remains the weakness of the Grains, making it the best sale on rallies. If you extend the 3 leg rally projection for Soybeans then the market has a target near $11.95 for right now. While Corn could easily continue higher above $6.00 I think that Beans will struggle once they reach the $12.00 psychological resistance.
Yesterday
Thursday's macro sell off was followed by mostly weaker markets heading into Unemployment Friday morning. The number came out near expectations, but with a moderately Bearish Non-Farm Payroll section. While this led an initial sell off in the Equity markets two sided volatility ensued with the Bulls eventually winning out. The Crude Oil market as an example fell quickly after the number, ran towards a test of the overnight highs, took a sharp break within 4 ticks of the overnight low, and then finally established a lasting rally to new highs all within an hour. If this sounds confusing I can tell you that with most of these swings $1 or more it was hard to tell which way was up by the time the market decided. The Quantitative Easing trade re-emerged despite the non-Bullish number once again as traders scooped up risk assets under the assumption that bad news will mean a larger QE package. Nearly every market other than the Dollar Index managed to settle higher on the day.
The USDA Crop Production and Supply/Demand Reports left no question for market direction as the number came out mildly Bullish both Beans and Wheat, but extremely and surprisingly Bullish for Corn. Corn, Beans, and Meal opened limit up on the day with Wheat and Bean Oil eventually settling locked limit up as well. The Corn numbers imply that there could be supply concerns for several years with the dramatic drop in expected carryover.
Today
The macro market opened strong yesterday evening with all of the supportive markets carrying over Friday's strength. However, overnight the strength has definitely dissipated, with some of the Foreign Currencies and Energies dancing around prices below Friday's close this morning. Corn opened limit up again last night to lead the Grains, but is trading a few cents off its 45 cent extended limit heading into the 7:15am close. The Grains will likely be the most volatile and interesting trade today, but the rest of the markets look like they could be more of a stagnant trade with many hanging right around Friday's settlement with small overnight ranges.
While Thursday's sell off in the risk assets backed up my hypothesis that the Quantitative Easing trade is ending, Friday's reversal showed a re-emergence of the trade unexpectedly to me. Friday's rally was clearly in line with the "buy good news and buy bad news" idea, but the key resistance levels that I am looking at as pivot points among the supportive markets held strong. Both Crude Oil and the Euro posted positive gains into last evening, but are beginning to fade this morning on what still could be topping action on the QE trade. With the macro direction still uncertain at this point I recommend holding off on entering medium to large longer term positions. However, I believe that selling the rallies in the supportive markets is the best approach over the short term.
Today is Columbus Day, Canadian Thanksgiving Day, and Japan's Health-Sports Day (I choose not to look up what this holiday actually is because I enjoy the mental image the name congers), so the markets should be slower. The Fixed Income markets will be the lightest trade as the pits are closed for Columbus Day.
The markets that I believe will be the weakest going forward and the best sales in order of preference are: Crude Oil, Euro, Silver, Copper, Canadian Dollar, Nasdaq. For more details on some of the technical levels please refer back to Wednesday evenings Bullish Momentum is shifting letter and Thursday evenings letter.
Buys to Watch:
Sells to Watch:
Put on the Radar:
Sell Crude Oil- Crude was in the sells column on Thursday evening with the advice of selling the initial rally after Unemployment. Although there was a small rally ten minutes after the number it was only profitable as a sale for a short period of time. The market carried to new highs as fresh allocation entered the market throughout the day. After a strong opening last evening though the market has sold off and continually posted new lows for the day after strong resistance kept the market at bay. Until Crude posts consecutive closes above $83.91 I think the market is a sale on rallies, especially when it nears this level. Open Interest for Crude since August 27th has now risen 209,000 out of 1.451 million total with entry on these new longs between $73 - $84.43. If the market does reverse off of these recent highs then I have a longer term 2nd leg objective of $62.50, which should be aided by the potential liquidation of this recent open interest position.
Sell Euro- The Euro turned out to actually be a weakness among the Currency sector on Friday as it only settled slightly above Thursday's close while the other correlated markets rallied substantially in some cases. I now have my eye on the Bullish trendline for the market extending from the low Sept. 10th - low Sept. 21st that has a value of 1.3882 today with at least 4 points of price interaction already. Daily Stochastics for the market now has produced a crossover sell signal and RSI also looks like it may be topping in overbought territory. As long as the Euro continues to hold resistance from 1.3950 - 1.4050 I believe that it is a sale on rallies. If the market settles above 1.4050 then I recommend removing short positions as it will likely travel near 1.45 on a move that would correlate to the Dollar Index near 75.00.
Bonds Turning Into Sale?- The Fixed Income markets are basically closed today, so the market action should be looked at as less reliable until tomorrow. The Bond market though has now moved below the Bullish trendline from the low Sept. 17th - low Sept. 31st at 134.18 today. The yield curve has steepened over the last 2 weeks as Bond prices have lagged in comparison to the shorter term Treasuries. This has now produced a sell signal for daily Stochastics with other momentum indicators also nearing potential sales. I want to wait until at least tomorrow morning before executing a sale in the market, but if higher volume trade tomorrow shows a similar decline in Bonds then the market may be producing a double top pattern.
Bond prices have benefited from the Quantitative Easing story so a decline int he market can also be looked at as an indicator that the QE trade is slowing. It is believed that The Fed will use Bond purchases as part of the Easing package, so declining a shift to declining prices could be used as a signal that the Equity and Commodity markets may slow as well. The Bond market is used as a risk aversion market though that moves opposite the stock market and risk trade This is a relationship to keep an eye on before deciding whether falling Bond prices has a correlation to the Equity and Commodity markets right now.
Notes:
Gold & Silver Still May Be Topping- They sold off hard Thursday and recovered strong Friday, but this action could be forming a volatility top after parabolic rallies. As I explained in my last two letters I believe that Silver would have the larger fall of the two markets should the Metals top. Therefore, Buying Gold while Selling Silver is a good spread to take advantage of this idea. Keep the chart of (Gold - Silver/2) and (Gold/Silver) on your radar fundamentally as a possible buy if the charts show technical reversal signals. For right now I recommend staying out of both markets until direction becomes clearer.
Grains- The Corn numbers Friday sealed that Corn will be the directional leader for the Grain sector for the rest of the year. Although the market can not continue forever I advise focusing on buying the dips rather than selling the rallies going forward in Corn. Wheat remains the weakness of the Grains, making it the best sale on rallies. If you extend the 3 leg rally projection for Soybeans then the market has a target near $11.95 for right now. While Corn could easily continue higher above $6.00 I think that Beans will struggle once they reach the $12.00 psychological resistance.
Wednesday, October 6, 2010
Evening Update (The Bullish Momentum is Shifting)
The Bullish Momentum Is Shifting
(Long, so take your time reading...but I took the time to lay out the details because I believe they are important)
As I have a limited amount of time each morning to formulate and express my thoughts on the market I like to write supplemental updates when I have commentary that extends beyond the scope of the morning newsletter. As you may have gathered from this morning's letter, I have become concerned with the macro trend higher as red warning flags seem to continually pop up. After dissecting the market action over the last month, week, and today as a punctuation mark, I believe that the Bullish trend is shifting and may soon turn Bearish.
Over the last several weeks, and especially since The FOMC meeting last month, I have promoted a Bullish trading stance for the supportive markets. Buying the Nasdaq, buying Crude Oil, buying the Australian Dollar and selling the Dollar Index are trades that continually made the Buy or Sell recommendation lists over this time while the Quantitative Easing story has dominated market direction. However, the macro relationships are beginning to shift; painting a Bearish picture for the market going forward. I wanted to take some time to break down the red flags that I am seeing in greater depth and provide some new suggestions to keep on your radar.
The Euro is Near Key Technical Levels
My objective for the Euro over the last several weeks has been 1.4050 on its 2nd leg higher. Looking at the weekly chart closer though I think that the market may have difficulty reaching this level. From the high in late November of '09 to the low in early June of this year the .618 Fibonacci Retracement level sits roughly at 1.3925. As the market encountered this level today it ran into a wall that stalled gains. There are a number of analysts that have similar objectives to my own, ranging from 1.39 - 1.4050. I believe that as the Euro reaches this critical technical and psychological barrier that there will be significant selling pressure that will temper further gains and lead a decline in prices. I recommend taking profits and liquidating Long Euro positions for the time being until the market gives fresh signals that a move higher is imminent. The same goes for Short Dollar Index positions as the inverse of the Euro.
The fundamental story that drove the Euro lower over the first half of the year is all but forgotten now with the weaker Dollar stealing the headlines lately. I am still hearing accounts though that the original bailout packages for the PIIGS were insufficient and have only delayed the European debt issue. Technically many large declines are followed by a 2 leg advance and if the Euro stalls out now then this would be action consistent with another large leg lower. I can still draw a visual path of a Euro move back to .95, which is still my long term objective for the market. I believe that the next direction for the Euro will be lower and possibly much lower throughout the 4th Quarter with a potential target of 1.10 on the next leg lower.
Crude Oil Has Reached Its Pattern Objective
The $84.14 Bullish cup and handle objective was reached today for all intensive purposes as the market climbed to a high of $84.09. While I have had my eye on the possible initiation of a larger Bullish pattern I now am highly skeptical of this pattern's advance. Two consecutive closes for the November contract above the $83.91 high trade from August 4th would project a move to roughly $95. The case for Bullish continuation is troubling because the market has now recovered back into the proverbial "box" from Crude's steep decline in early May. Measuring from the high of $93.14 May 3rd to the low of $70.96 from May 25th you receive a .500 value of $82.05 and a .618 value of $84.66 on the Fibonacci Retracement. Between these values is the same zone that Crude failed in early August. Unless the market is able to initiate the large Bullish pattern above $83.91 then it is likely that Crude will also encounter substantial selling pressure. I recommend taking profits and liquidating Long Crude positions (including longer term), if you have not already, until fresh Bullish signals emerge.
In addition, I began making note in early September of the substantial divergence between the advance in open interest for Crude versus the outright market price. This divergence is nearly identical to the action that we saw in the Crude market from late March into early May that preceded the massive sell off throughout May. When too many longs pile into a market without the price advancing you have the setup for a liquidation trap if too many of these positions become net losses. My prediction is that (just like in May) much of this open interest in the Crude market is "dumb money", in that it is longer term investments that are resistant to small price fluctuations. When the price of Crude drops the open interest will likely remain at a stagnant level and setting up a fast liquidation run if the price falls below $75. My original 2nd leg lower objective for the market was $62.50 based on the August 4th highs, so this would again be the next target for the Crude Oil market if it fails to advance further
Industrial Metals Have Reached Their Bullish 2nd leg, 3rd leg, or Pattern Objectives
Copper, Palladium, and Platinum have now all reached their individual market targets on the recent Bullish advance. All remain in deeply overbought territory without a Bullish objective prior to a pullback in prices. My belief is that the optimism for Gold and Silver has spilled over into the rest of the Metal complex creating such strong rallies. Each of these markets is now ripe for a pullback in price, meaning the next direction is likely lower.
Equities Slow Above Resistance...Index Relationships Predicting a Bearish Move
Depending on where you choose to define the original bottom on the the S&P 500 break from late April, to either late May or early July of this year, you can produce a value range for the .618 Fibonacci retracement value from 1128 - 1151. It is clear from the pressure at this 1150 level over the last 2 weeks that there are many that are paying attention to this higher value on the range. During the S&P 500 rallies over the summer we have seen the market reach several key technical levels, but this time appears to be different than the others. In most cases when the Equities have stalled out and later advanced through technical resistance we have seen momentum re-emerge with strong follow through. Since the market has reached the 1120 upper end of the summer range though the gains have been labored at best. Although the market is sitting above 1150 for the time being I do not take much solace from the price action over the last several weeks.
Even more concerning is the relationships between the Equity Indices over the last week. Throughout nearly all of the recovery over the last 18 months the Nasdaq has been the leader on the rallies. Because of this I have taken to looking at the relationships between the Indices in the same manner as the spreads on an individual market are used to predict future Bullish or Bearish outright price action. While the Equity markets have generally moved higher over the last 5 sessions, the Nasdaq has now clearly become the laggard of the sector (check out the Nasdaq/S&P 500 ratio to see). This leader/laggard shift was clearly on display today as the S&P 500 settled unchanged from Tuesday's close while the Nasdaq settled over 14 points lower. This has been a fairly accurate predictor of future direction for the Sector and must be looked at as a Bearish indicator. Would you hold a Long July Soybean outright position as the market advanced slightly, but the July - November spread collapsed significantly for 5 straight days during this time frame? This is a Bearish signal for outright Bean positions and I know I definitely would not!
Bullish Reaction to Both Bullish and Bearish Economic Data Can Only Last So Long
The market has taken the assumption over the last month that both Bullish and Bearish economic data is Bullish for Equity and Commodity prices that day. The thinking is that while Bullish data is clearly a sign of strength, if the data is bad it will force The Fed into Quantitative Easing that will positively effect these markets. While it has been easy to ride this thinking's success there comes a time when one end of this reasoning has to fail. The swings over the summer have been fueled by over-optimism and over-pessimism permeating the market. Once one side becomes dominate we tend to see a sharp swing the other way to correct the alignment. Since late August when Bernacke first suggested The Fed would be open to QE this Bullish thinking has ruled the trade. However, the market is again giving warning signs over the last 2 weeks that burning the Bullish wick at both ends is waning. The immediate snap higher regardless of the number is proving less effective and sometimes creates a sell off after the initial reaction (Last Thursday, Monday, Today). I believe the market has now become over-optimistic and a correction in this thinking is near on the horizon.
Conclusion & What To Do Going Forward
I had more that I wanted to cover on why Quantitative Easing is not necessarily Bullish for Equities and Commodities and what I see as a possible reaction to the Unemployment Report Friday, but these will have to wait till tomorrow (a guy needs a little sleep at some point). Bottom line, there are so many red flags among these supportive markets right now that I did not even have time to describe some of the other moderate signals that I have listed on my notepad. I think that the main take away I have after preparing the analysis and extrapolating it into words is that one market can trick you into a Bullish or Bearish opinion, but by looking at the total package you get a much clearer picture. While it is possible that one of these markets or sectors could remain Bullish while the others turn Bearish (or the other way around), they share a tight correlation that you can derive the macro direction from. Right now the preponderance of evidence says that a shift is occurring from Bullish to Bearish price action going forward for the supportive markets.
While many of these markets I discussed still have well defined Bull trends I am only preaching a word of skepticism and knowledge for the time being. Just because a market has reached its objective does not mean that it will immediately reverse. I have a feeling that we still may see new runs at stops above the recent highs to induce short covering rallies. The key is patience for the technical setup prior to jumping into larger Bearish positions. I highly recommend laying off new long entry on the supportive markets for now and taking profits/liquidating positions in the markets of concern.
(Long, so take your time reading...but I took the time to lay out the details because I believe they are important)
As I have a limited amount of time each morning to formulate and express my thoughts on the market I like to write supplemental updates when I have commentary that extends beyond the scope of the morning newsletter. As you may have gathered from this morning's letter, I have become concerned with the macro trend higher as red warning flags seem to continually pop up. After dissecting the market action over the last month, week, and today as a punctuation mark, I believe that the Bullish trend is shifting and may soon turn Bearish.
Over the last several weeks, and especially since The FOMC meeting last month, I have promoted a Bullish trading stance for the supportive markets. Buying the Nasdaq, buying Crude Oil, buying the Australian Dollar and selling the Dollar Index are trades that continually made the Buy or Sell recommendation lists over this time while the Quantitative Easing story has dominated market direction. However, the macro relationships are beginning to shift; painting a Bearish picture for the market going forward. I wanted to take some time to break down the red flags that I am seeing in greater depth and provide some new suggestions to keep on your radar.
The Euro is Near Key Technical Levels
My objective for the Euro over the last several weeks has been 1.4050 on its 2nd leg higher. Looking at the weekly chart closer though I think that the market may have difficulty reaching this level. From the high in late November of '09 to the low in early June of this year the .618 Fibonacci Retracement level sits roughly at 1.3925. As the market encountered this level today it ran into a wall that stalled gains. There are a number of analysts that have similar objectives to my own, ranging from 1.39 - 1.4050. I believe that as the Euro reaches this critical technical and psychological barrier that there will be significant selling pressure that will temper further gains and lead a decline in prices. I recommend taking profits and liquidating Long Euro positions for the time being until the market gives fresh signals that a move higher is imminent. The same goes for Short Dollar Index positions as the inverse of the Euro.
The fundamental story that drove the Euro lower over the first half of the year is all but forgotten now with the weaker Dollar stealing the headlines lately. I am still hearing accounts though that the original bailout packages for the PIIGS were insufficient and have only delayed the European debt issue. Technically many large declines are followed by a 2 leg advance and if the Euro stalls out now then this would be action consistent with another large leg lower. I can still draw a visual path of a Euro move back to .95, which is still my long term objective for the market. I believe that the next direction for the Euro will be lower and possibly much lower throughout the 4th Quarter with a potential target of 1.10 on the next leg lower.
Crude Oil Has Reached Its Pattern Objective
The $84.14 Bullish cup and handle objective was reached today for all intensive purposes as the market climbed to a high of $84.09. While I have had my eye on the possible initiation of a larger Bullish pattern I now am highly skeptical of this pattern's advance. Two consecutive closes for the November contract above the $83.91 high trade from August 4th would project a move to roughly $95. The case for Bullish continuation is troubling because the market has now recovered back into the proverbial "box" from Crude's steep decline in early May. Measuring from the high of $93.14 May 3rd to the low of $70.96 from May 25th you receive a .500 value of $82.05 and a .618 value of $84.66 on the Fibonacci Retracement. Between these values is the same zone that Crude failed in early August. Unless the market is able to initiate the large Bullish pattern above $83.91 then it is likely that Crude will also encounter substantial selling pressure. I recommend taking profits and liquidating Long Crude positions (including longer term), if you have not already, until fresh Bullish signals emerge.
In addition, I began making note in early September of the substantial divergence between the advance in open interest for Crude versus the outright market price. This divergence is nearly identical to the action that we saw in the Crude market from late March into early May that preceded the massive sell off throughout May. When too many longs pile into a market without the price advancing you have the setup for a liquidation trap if too many of these positions become net losses. My prediction is that (just like in May) much of this open interest in the Crude market is "dumb money", in that it is longer term investments that are resistant to small price fluctuations. When the price of Crude drops the open interest will likely remain at a stagnant level and setting up a fast liquidation run if the price falls below $75. My original 2nd leg lower objective for the market was $62.50 based on the August 4th highs, so this would again be the next target for the Crude Oil market if it fails to advance further
Industrial Metals Have Reached Their Bullish 2nd leg, 3rd leg, or Pattern Objectives
Copper, Palladium, and Platinum have now all reached their individual market targets on the recent Bullish advance. All remain in deeply overbought territory without a Bullish objective prior to a pullback in prices. My belief is that the optimism for Gold and Silver has spilled over into the rest of the Metal complex creating such strong rallies. Each of these markets is now ripe for a pullback in price, meaning the next direction is likely lower.
Equities Slow Above Resistance...Index Relationships Predicting a Bearish Move
Depending on where you choose to define the original bottom on the the S&P 500 break from late April, to either late May or early July of this year, you can produce a value range for the .618 Fibonacci retracement value from 1128 - 1151. It is clear from the pressure at this 1150 level over the last 2 weeks that there are many that are paying attention to this higher value on the range. During the S&P 500 rallies over the summer we have seen the market reach several key technical levels, but this time appears to be different than the others. In most cases when the Equities have stalled out and later advanced through technical resistance we have seen momentum re-emerge with strong follow through. Since the market has reached the 1120 upper end of the summer range though the gains have been labored at best. Although the market is sitting above 1150 for the time being I do not take much solace from the price action over the last several weeks.
Even more concerning is the relationships between the Equity Indices over the last week. Throughout nearly all of the recovery over the last 18 months the Nasdaq has been the leader on the rallies. Because of this I have taken to looking at the relationships between the Indices in the same manner as the spreads on an individual market are used to predict future Bullish or Bearish outright price action. While the Equity markets have generally moved higher over the last 5 sessions, the Nasdaq has now clearly become the laggard of the sector (check out the Nasdaq/S&P 500 ratio to see). This leader/laggard shift was clearly on display today as the S&P 500 settled unchanged from Tuesday's close while the Nasdaq settled over 14 points lower. This has been a fairly accurate predictor of future direction for the Sector and must be looked at as a Bearish indicator. Would you hold a Long July Soybean outright position as the market advanced slightly, but the July - November spread collapsed significantly for 5 straight days during this time frame? This is a Bearish signal for outright Bean positions and I know I definitely would not!
Bullish Reaction to Both Bullish and Bearish Economic Data Can Only Last So Long
The market has taken the assumption over the last month that both Bullish and Bearish economic data is Bullish for Equity and Commodity prices that day. The thinking is that while Bullish data is clearly a sign of strength, if the data is bad it will force The Fed into Quantitative Easing that will positively effect these markets. While it has been easy to ride this thinking's success there comes a time when one end of this reasoning has to fail. The swings over the summer have been fueled by over-optimism and over-pessimism permeating the market. Once one side becomes dominate we tend to see a sharp swing the other way to correct the alignment. Since late August when Bernacke first suggested The Fed would be open to QE this Bullish thinking has ruled the trade. However, the market is again giving warning signs over the last 2 weeks that burning the Bullish wick at both ends is waning. The immediate snap higher regardless of the number is proving less effective and sometimes creates a sell off after the initial reaction (Last Thursday, Monday, Today). I believe the market has now become over-optimistic and a correction in this thinking is near on the horizon.
Conclusion & What To Do Going Forward
I had more that I wanted to cover on why Quantitative Easing is not necessarily Bullish for Equities and Commodities and what I see as a possible reaction to the Unemployment Report Friday, but these will have to wait till tomorrow (a guy needs a little sleep at some point). Bottom line, there are so many red flags among these supportive markets right now that I did not even have time to describe some of the other moderate signals that I have listed on my notepad. I think that the main take away I have after preparing the analysis and extrapolating it into words is that one market can trick you into a Bullish or Bearish opinion, but by looking at the total package you get a much clearer picture. While it is possible that one of these markets or sectors could remain Bullish while the others turn Bearish (or the other way around), they share a tight correlation that you can derive the macro direction from. Right now the preponderance of evidence says that a shift is occurring from Bullish to Bearish price action going forward for the supportive markets.
While many of these markets I discussed still have well defined Bull trends I am only preaching a word of skepticism and knowledge for the time being. Just because a market has reached its objective does not mean that it will immediately reverse. I have a feeling that we still may see new runs at stops above the recent highs to induce short covering rallies. The key is patience for the technical setup prior to jumping into larger Bearish positions. I highly recommend laying off new long entry on the supportive markets for now and taking profits/liquidating positions in the markets of concern.
Wednesday 10/6/10 Commodity Ideas
Opening Note:
Yesterday
First I want to apologize for my confusion yesterday morning. I knew that it was Tuesday, wrote that it was Tuesday, but for some reason my mind jumped ahead to Wednesday. This means that there was not an EIA Energy Stocks number as it is this morning. As I was expecting Wednesday's data it was a little surprise to me when the ISM Non-Manufacturing Index was released at 9 am. The number was Bullish on its own, meaning not just in comparison to brutal expectations, and accelerated the early gains in the market.
The S&P 500 established a close above the short term 1150 resistance level as it led the supportive markets higher. Both Gold and Silver vaulted to new yearly highs as it looks like Asia REALLY wants to convert more of its Currency holdings into Gold and they want to do it NOW. The Corn market had another day of strong gains after Friday's sell off to lead the Grain Sector into positive territory yesterday. Lastly, the Dollar Index continued to get pummeled as it has nearly everyday for the last month.
Today
The markets are a mixed basket with my quote board flashing Green to Red in many of the markets. Gold, Silver, and the rest of the Metals are the only sector that is decidedly firmer as of 7 am with no markets sticking out particularly as a weakness yet. This could all change soon though with the ADP Employment Report released at 7:15 am. I will provide a late note if necessary.
While yesterday was clearly a Buy day with the S&P 500 taking out critical resistance I am a little disappointed with the followup action this morning and overnight. I expected that once the stock market established a rally above the recent consolidation zone that the market would be off to the races, yet this is not the case over the last 18 hours. I think it is important to gauge your expectations versus actual trade and my warning flags are flapping in the wind right now. The lack of fresh allocation to begin the quarter, no follow through on yesterday's strength, and expectations that the market will lull as we head into Friday's Unemployment Report leave me feeling uncertain about entering medium to long term positions right now. As a couple trades failed yesterday there are less ideas in play today. I suggest taking a shorter term mindset right now, meaning that if you get a day of good gains the market can not hurt you if you take the profits and look at it again tomorrow.
Late Note: The ADP Employment number was Bearish and sent the stock market from its session highs back to the session lows. The Nasdaq (which I will discuss more later) is the laggard of the Equity Sector this morning and is an indicator that Buying is less likely this morning (and if there is Buying it may be one to fade). There are a lot of mixed messages that the macro relationships are sending right now and I believe taking some positions off the table is a good idea for today.
Buys to Watch:
Crude Oil- With a rally to $83.33 overnight the market has nearly reached the $84.14 objective for the shorter term move. This morning the market has sold off a bit on its own with weakness even before the poor ADP Employment number. If you have a decent profit in Crude I think it is a good idea to take profits on at least half of your position this morning. There is some moderate support at $82.30 that has produced the low for today's session thus far. If the market moves below this level though there is not good support until the higher volume trade between $81.46 - $81.62. A pullback to this level is the only area that I would look to enter new long positions against for today. If you are trading the longer term move and looking to hold for the possible $95 target then I suggest using a stop below $81.46 as this looks like only a correction for right now. The EIA Energy Stocks number is this morning at 9:30 am...for sure this time.
Sells to Watch:
Dollar Index- The Dollar Index fell to a new low on the move yesterday as money continued to move out of the Dollar and into riskier assets. The objective of 1.4050 in Euro for this move is now nearing, so taking some risk and profits off the table may be a good idea at this point. I do still believe that it is likely that the market's reach their objectives and yesterday's suggestion for entry on a pullback rally still looks good. There is a lower volume zone from 78.35 - 78.53 for short entry on the trade with a stop above higher volume resistance at 78.66. I recommend using a stop above 78.66 today for those holding a longer term position.
Put on the Radar:
Nasdaq- The Nasdaq has a target range of 2080 - 2135 still on the Bullish head and shoulders pattern. Yesterday's stock market rally was impressive, but despite the S&P 500 rallying above its consolidation range I have issues with buying the Nasdaq (and stock market) for right now. The Dow and S&P 500 have performed better than the Nasdaq over the last week and until this trend shows a definitive shift I think the Equities should be avoided. Check out the Nasdaq/S&P 500 ratio daily chart to see that even with yesterday's rally the short term trend still favors the S&P 500. The Nasdaq has some moderate support at 2015 and 2010 for right now, but if the market falls below 2007 then it looks like it could easily give back most of yesterday's gains. Keep the Nasdaq on the Radar for today and if there is improvement in the troubling indicators then it will be moved to the Buy Section.
Bonds- Since the FOMC report two weeks ago that re-established the Quantitative Easing story the long end of the yield curve has lagged behind the shorter end as the curve has steepened. Although the QE story supports Bond prices it looks like momentum on the rally is slowing. Both MACD and Stochastics are nearing sell signals for the daily chart as the market has moved mostly sideways over the last 7 sessions. I am keeping my eye on the trendline from the low on September 17th - the low September 30th that falls at 133.18 today. The market has produced several bounces off of this trend including the lows on the session overnight, but a move below would signal to me that it is time to start looking at Bonds as a sale. The recent rally has failed to take out the highs from late August and could produce a Bearish Double Top or Cup and Handle Pattern if momentum turns negative. I believe there is no reason to enter the market until this trend fails, so just keep it on your computer screen for now.
Cotton & Sugar- Both are potentially forming Bearish Head and Shoulders patterns that would confirm a reversal in the markets.
Notes:
Bean Oil vs. Soy Meal- This trade has been a nuisance over the last several days and with the stop loss of 1404 triggered on the trade yesterday morning I am relieved to say good riddance. The Grains have seen both Bullish and Bearish volatility over the last week with the leaders and laggards exchanging daily. Despite the great technical setup for the trade it was unable to progress much as uncertainty gained strength in the Grain Sector. Meal has a tendency to lead (more than 50% of the time...but not always) the Soybean Complex on Bullish moves and the reversal in Soybean's momentum the last two days swung this differential below an acceptable level to stay with the trade. I would not be surprised if the spread continues on to reach the 1693 objective, but with Friday's Crop Progress and Supply/Demand Reports it would be risky to carry the trade through the rest of the week anyways.
Coffee- I had the Coffee on the Radar Monday and the trade worked like a charm, as I was able to take a good profit out of the market on my initial position. However, as I feared, as soon as I moved the trade to the Sells section yesterday the market blew up in my face. The pattern, technicals, correlated relationships, and trade entry setup were outstanding, but this is clearly not enough sometimes in the outrights for the thin Softs markets. Coffee calmly traded into the low volume zone for short entry and after kissing off the initial resistance at 175.30 exactly it looked like an easy short position to hold. At 12:23 pm (7 minutes before the pit close) this all changed though. In a 5 minute time frame the market rallied nearly 3 1/2 cents without a pullback straight through all of the higher volume resistance from the prior day. After doing a little inquiring about the move I was told that with options expiring in 3 days that there are people that go hunting for the stops in a predatory short term fashion. The move was clearly not allocation and obviously malicious in intent, but this is something that you deal with as a cost of business in the Softs. I hope I provided ample warning yesterday, but from here forward all outright trade suggestions in the Softs will remain on the Radar for their entirety as the markets are too unpredictable on short term moves.
Yesterday
First I want to apologize for my confusion yesterday morning. I knew that it was Tuesday, wrote that it was Tuesday, but for some reason my mind jumped ahead to Wednesday. This means that there was not an EIA Energy Stocks number as it is this morning. As I was expecting Wednesday's data it was a little surprise to me when the ISM Non-Manufacturing Index was released at 9 am. The number was Bullish on its own, meaning not just in comparison to brutal expectations, and accelerated the early gains in the market.
The S&P 500 established a close above the short term 1150 resistance level as it led the supportive markets higher. Both Gold and Silver vaulted to new yearly highs as it looks like Asia REALLY wants to convert more of its Currency holdings into Gold and they want to do it NOW. The Corn market had another day of strong gains after Friday's sell off to lead the Grain Sector into positive territory yesterday. Lastly, the Dollar Index continued to get pummeled as it has nearly everyday for the last month.
Today
The markets are a mixed basket with my quote board flashing Green to Red in many of the markets. Gold, Silver, and the rest of the Metals are the only sector that is decidedly firmer as of 7 am with no markets sticking out particularly as a weakness yet. This could all change soon though with the ADP Employment Report released at 7:15 am. I will provide a late note if necessary.
While yesterday was clearly a Buy day with the S&P 500 taking out critical resistance I am a little disappointed with the followup action this morning and overnight. I expected that once the stock market established a rally above the recent consolidation zone that the market would be off to the races, yet this is not the case over the last 18 hours. I think it is important to gauge your expectations versus actual trade and my warning flags are flapping in the wind right now. The lack of fresh allocation to begin the quarter, no follow through on yesterday's strength, and expectations that the market will lull as we head into Friday's Unemployment Report leave me feeling uncertain about entering medium to long term positions right now. As a couple trades failed yesterday there are less ideas in play today. I suggest taking a shorter term mindset right now, meaning that if you get a day of good gains the market can not hurt you if you take the profits and look at it again tomorrow.
Late Note: The ADP Employment number was Bearish and sent the stock market from its session highs back to the session lows. The Nasdaq (which I will discuss more later) is the laggard of the Equity Sector this morning and is an indicator that Buying is less likely this morning (and if there is Buying it may be one to fade). There are a lot of mixed messages that the macro relationships are sending right now and I believe taking some positions off the table is a good idea for today.
Buys to Watch:
Crude Oil- With a rally to $83.33 overnight the market has nearly reached the $84.14 objective for the shorter term move. This morning the market has sold off a bit on its own with weakness even before the poor ADP Employment number. If you have a decent profit in Crude I think it is a good idea to take profits on at least half of your position this morning. There is some moderate support at $82.30 that has produced the low for today's session thus far. If the market moves below this level though there is not good support until the higher volume trade between $81.46 - $81.62. A pullback to this level is the only area that I would look to enter new long positions against for today. If you are trading the longer term move and looking to hold for the possible $95 target then I suggest using a stop below $81.46 as this looks like only a correction for right now. The EIA Energy Stocks number is this morning at 9:30 am...for sure this time.
Sells to Watch:
Dollar Index- The Dollar Index fell to a new low on the move yesterday as money continued to move out of the Dollar and into riskier assets. The objective of 1.4050 in Euro for this move is now nearing, so taking some risk and profits off the table may be a good idea at this point. I do still believe that it is likely that the market's reach their objectives and yesterday's suggestion for entry on a pullback rally still looks good. There is a lower volume zone from 78.35 - 78.53 for short entry on the trade with a stop above higher volume resistance at 78.66. I recommend using a stop above 78.66 today for those holding a longer term position.
Put on the Radar:
Nasdaq- The Nasdaq has a target range of 2080 - 2135 still on the Bullish head and shoulders pattern. Yesterday's stock market rally was impressive, but despite the S&P 500 rallying above its consolidation range I have issues with buying the Nasdaq (and stock market) for right now. The Dow and S&P 500 have performed better than the Nasdaq over the last week and until this trend shows a definitive shift I think the Equities should be avoided. Check out the Nasdaq/S&P 500 ratio daily chart to see that even with yesterday's rally the short term trend still favors the S&P 500. The Nasdaq has some moderate support at 2015 and 2010 for right now, but if the market falls below 2007 then it looks like it could easily give back most of yesterday's gains. Keep the Nasdaq on the Radar for today and if there is improvement in the troubling indicators then it will be moved to the Buy Section.
Bonds- Since the FOMC report two weeks ago that re-established the Quantitative Easing story the long end of the yield curve has lagged behind the shorter end as the curve has steepened. Although the QE story supports Bond prices it looks like momentum on the rally is slowing. Both MACD and Stochastics are nearing sell signals for the daily chart as the market has moved mostly sideways over the last 7 sessions. I am keeping my eye on the trendline from the low on September 17th - the low September 30th that falls at 133.18 today. The market has produced several bounces off of this trend including the lows on the session overnight, but a move below would signal to me that it is time to start looking at Bonds as a sale. The recent rally has failed to take out the highs from late August and could produce a Bearish Double Top or Cup and Handle Pattern if momentum turns negative. I believe there is no reason to enter the market until this trend fails, so just keep it on your computer screen for now.
Cotton & Sugar- Both are potentially forming Bearish Head and Shoulders patterns that would confirm a reversal in the markets.
Notes:
Bean Oil vs. Soy Meal- This trade has been a nuisance over the last several days and with the stop loss of 1404 triggered on the trade yesterday morning I am relieved to say good riddance. The Grains have seen both Bullish and Bearish volatility over the last week with the leaders and laggards exchanging daily. Despite the great technical setup for the trade it was unable to progress much as uncertainty gained strength in the Grain Sector. Meal has a tendency to lead (more than 50% of the time...but not always) the Soybean Complex on Bullish moves and the reversal in Soybean's momentum the last two days swung this differential below an acceptable level to stay with the trade. I would not be surprised if the spread continues on to reach the 1693 objective, but with Friday's Crop Progress and Supply/Demand Reports it would be risky to carry the trade through the rest of the week anyways.
Coffee- I had the Coffee on the Radar Monday and the trade worked like a charm, as I was able to take a good profit out of the market on my initial position. However, as I feared, as soon as I moved the trade to the Sells section yesterday the market blew up in my face. The pattern, technicals, correlated relationships, and trade entry setup were outstanding, but this is clearly not enough sometimes in the outrights for the thin Softs markets. Coffee calmly traded into the low volume zone for short entry and after kissing off the initial resistance at 175.30 exactly it looked like an easy short position to hold. At 12:23 pm (7 minutes before the pit close) this all changed though. In a 5 minute time frame the market rallied nearly 3 1/2 cents without a pullback straight through all of the higher volume resistance from the prior day. After doing a little inquiring about the move I was told that with options expiring in 3 days that there are people that go hunting for the stops in a predatory short term fashion. The move was clearly not allocation and obviously malicious in intent, but this is something that you deal with as a cost of business in the Softs. I hope I provided ample warning yesterday, but from here forward all outright trade suggestions in the Softs will remain on the Radar for their entirety as the markets are too unpredictable on short term moves.
Tuesday, October 5, 2010
Tuesday 10/5/10 Commodity Ideas
Opening Note:
Yesterday
The lack of fresh allocation to start the 4th Quarter was apparent again yesterday as the macro market traded weaker with the previously strong Nasdaq the laggard on my board. This is a concerning shift from strength to weakness as the Nasdaq was not only the leader of the Equity Sector, but the leader among almost every individual market over the last month. Most of the other markets with a higher correlation to the Equity markets declined as well yesterday with the Euro and Australian Dollar flipping from strengths the previous day to weaknesses yesterday.
The most surprising move for me was the rebound in the Grain markets as buying entered right on the 9:30 am open. With a very Bearish Stocks number Thursday and an increase in yields predicted by Informa Friday, the Corn market came under pressure towards the end of last week and settled limit down on Friday. Noteworthy during this price break though was the record speculative long position in Corn held strong without much if any liquidation. The money was there to buy again throughout most of the trading day as Corn rallied from 10 cents lower early in the session to settle over 5 cents higher and lead the Grains. The conviction of the Bulls and there willingness to continue to add must be looked at as a sign of strength for the market, but I can not help but remain a little skeptical that there are still over 80,000 contracts holding a losing position anywhere from 5 - 50 cents. We shall see what develops, but for right now I think the market is strictly a day trade with two sided volatility lurking still.
Today
Almost every supportive market is trading moderately higher this morning. The outlier is the Australian Dollar, which fell overnight as the RBA kept rates steady contrary to trade expectations that they would rise 1/4%. The Japanese Government made another small Currency Intervention to devalue the Yen, but as of 7 am it is already trading higher again (I think the market is calling the Japanese bluff on there hard line Currency talk). The Fixed Income Sector is trading slightly higher, but is mostly meddling along on a slow uptrend over the last couple weeks that appears uncorrelated to the other sectors as it travels its own fundamental path. Finally, the Dollar Index is significantly weaker as the Euro has made a strong rebound overnight after yesterday's weakness to establish new highs on its recent move.
After such an exciting last week with notable news and commentary I am slightly relieved, but with a side of boredom as the markets are plodding along without much in the way of new shifts. While the S&P 500 remains range bound in the 1120 - 1150 consolidation range the advances in the macro market will be dulled, despite the macro trend remaining higher. I can imagine that we would see Crude Oil on an absolute rip higher if the stock market was continuing gains. However, the trades and ideas are much the same today. While the Equity markets sit directionally uncertain in the consolidation zone I suggest continuing to execute with smaller size on the long side of the Bullish macro trade.
Buys to Watch:
Crude Oil- The confirmed shorter term objective for November Crude Oil is still $84.14, with 2 consecutive closes above $83.91 producing the longer term target range of $94.24 - $96.33. Take a peek at the daily chart for the nearby Crude spreads and notice that they have recovered from their Bearish slide a couple weeks ago to levels that are now supportive of further gains in the outright markets. If you also trade the other Energy products then I suggest also checking out the Heating Oil chart as it looks stronger than the Crude Oil despite being a little weaker thus far today. There is higher volume support for the market from $80.90 - $81.30 that produced the bottom of today's range and should now hold if the market will continue higher. I recommend using a stop loss on the larger trade just below this level if you are holding a long below $81. For new entry you can purchase on a pullback against this support, however there is a higher volume zone from $81.46 - $81.62 that you can also execute against with this level likely holding today and becoming the next area for longer term stop placement tomorrow. Note: The market is lagging slightly this morning but this is likely because the EIA stocks number set to be released at 9:30 am. I only recommend holding a position through the number if you already have a decent profit in it as you can always jump in with less risk after.
Bean Oil vs. Soy Meal (December Bean Oil - December Soy Meal to chart)- The move in this differential has underwhelmed me a bit since the confirmation on the Bullish cup and handle pattern, but I still like the technicals as well as fundamentals for the trade. The objective on the spread remains at 1693 with the stop loss still sitting just below the 1404 level. Overnight the market tested this 1404 support, but it held and now actually provides a low risk entry parameter this morning with the differential at 1434 currently. Note that Stochastics for the daily chart produced a Bearish crossover in overbought territory yesterday. Still, both RSI and MACD are sitting at acceptable levels, making this crossover less concerning. The execution ratio for the trade is Long 5 Bean Oil : Short 3 Soy Meal.
Sells to Watch:
Dollar Index- The objective for the trade is 1.4050 for the Euro (this is the right target, but I find it a little amusing myself that the objective is based on another market). I do like being long the Euro up to this objective, but as the other foreign Currencies remain strong you literally get more bang for you buck in the Dollar Index. The lower volume zone suggested over the last 2 days from 78.63 - 78.71 with moderate resistance up to 78.89 was entered multiple times although the market did tick to 78.90 overnight (I hope nobody got caught on this minutiae). The longer term stop level on the trade of 79.06 was obviously not triggered though. Today the market is already much lower making new entry difficult. If there is an intraday pullback though then the low volume zone from 78.35 - 78.53 is a good area to get short with a stop loss just above the higher volume resistance from 78.55 - 78.70. For the longer term stop loss on the trade I feel more comfortable leaving it at just above 78.90 for right now, but it will be moved to 78.70 if the market holds its weakness into the close.
December Coffee- I have had awful luck with trade suggestions in the Soft's markets in the newsletter. I finally have one though that can make its way off the radar and into the execution section because the pattern and entry setup are very good. Yesterday Coffee initiated a Bearish reversal pattern below key support at 178.25 cents that now provides a target of 165.70 for the market. From 173.40 - 175.20 there is a low volume zone for short entry with a stop loss above higher volume resistance from 175.30 - 176.70. The Coffee market is slightly correlated to the Grains and Things That Grow Trade, so if Corn or Cotton starts ripping higher then be careful with the short in Coffee. As a note of caution I must warn that Coffee is thin, it is full of small and large disappearing orders, and anytime you get a fast market you get airbag orders (The ones where it hits an iceberg and explodes the other direction to chop out the late-comers to the move. I call them Airbag Orders because it looks a lot like the Youtube pranks where somebody sits on an airbag). It can be difficult to hold an outright position, so I suggest also looking at the options market.
Put on the Radar:
Nasdaq- The Nasdaq is the strength among the Equities again this morning, which is a good sign for continuation higher today among the Supportive markets. Right now I am looking at the Nasdaq consolidation over the last week as a potential flag pattern that is forming, but with spiky tops. I plan on staying out of the Equities for today, but if the S&P 500 is able to rally above 1150 then the Nasdaq will be moved back into the Buy section.
Notes:
Yesterday
The lack of fresh allocation to start the 4th Quarter was apparent again yesterday as the macro market traded weaker with the previously strong Nasdaq the laggard on my board. This is a concerning shift from strength to weakness as the Nasdaq was not only the leader of the Equity Sector, but the leader among almost every individual market over the last month. Most of the other markets with a higher correlation to the Equity markets declined as well yesterday with the Euro and Australian Dollar flipping from strengths the previous day to weaknesses yesterday.
The most surprising move for me was the rebound in the Grain markets as buying entered right on the 9:30 am open. With a very Bearish Stocks number Thursday and an increase in yields predicted by Informa Friday, the Corn market came under pressure towards the end of last week and settled limit down on Friday. Noteworthy during this price break though was the record speculative long position in Corn held strong without much if any liquidation. The money was there to buy again throughout most of the trading day as Corn rallied from 10 cents lower early in the session to settle over 5 cents higher and lead the Grains. The conviction of the Bulls and there willingness to continue to add must be looked at as a sign of strength for the market, but I can not help but remain a little skeptical that there are still over 80,000 contracts holding a losing position anywhere from 5 - 50 cents. We shall see what develops, but for right now I think the market is strictly a day trade with two sided volatility lurking still.
Today
Almost every supportive market is trading moderately higher this morning. The outlier is the Australian Dollar, which fell overnight as the RBA kept rates steady contrary to trade expectations that they would rise 1/4%. The Japanese Government made another small Currency Intervention to devalue the Yen, but as of 7 am it is already trading higher again (I think the market is calling the Japanese bluff on there hard line Currency talk). The Fixed Income Sector is trading slightly higher, but is mostly meddling along on a slow uptrend over the last couple weeks that appears uncorrelated to the other sectors as it travels its own fundamental path. Finally, the Dollar Index is significantly weaker as the Euro has made a strong rebound overnight after yesterday's weakness to establish new highs on its recent move.
After such an exciting last week with notable news and commentary I am slightly relieved, but with a side of boredom as the markets are plodding along without much in the way of new shifts. While the S&P 500 remains range bound in the 1120 - 1150 consolidation range the advances in the macro market will be dulled, despite the macro trend remaining higher. I can imagine that we would see Crude Oil on an absolute rip higher if the stock market was continuing gains. However, the trades and ideas are much the same today. While the Equity markets sit directionally uncertain in the consolidation zone I suggest continuing to execute with smaller size on the long side of the Bullish macro trade.
Buys to Watch:
Crude Oil- The confirmed shorter term objective for November Crude Oil is still $84.14, with 2 consecutive closes above $83.91 producing the longer term target range of $94.24 - $96.33. Take a peek at the daily chart for the nearby Crude spreads and notice that they have recovered from their Bearish slide a couple weeks ago to levels that are now supportive of further gains in the outright markets. If you also trade the other Energy products then I suggest also checking out the Heating Oil chart as it looks stronger than the Crude Oil despite being a little weaker thus far today. There is higher volume support for the market from $80.90 - $81.30 that produced the bottom of today's range and should now hold if the market will continue higher. I recommend using a stop loss on the larger trade just below this level if you are holding a long below $81. For new entry you can purchase on a pullback against this support, however there is a higher volume zone from $81.46 - $81.62 that you can also execute against with this level likely holding today and becoming the next area for longer term stop placement tomorrow. Note: The market is lagging slightly this morning but this is likely because the EIA stocks number set to be released at 9:30 am. I only recommend holding a position through the number if you already have a decent profit in it as you can always jump in with less risk after.
Bean Oil vs. Soy Meal (December Bean Oil - December Soy Meal to chart)- The move in this differential has underwhelmed me a bit since the confirmation on the Bullish cup and handle pattern, but I still like the technicals as well as fundamentals for the trade. The objective on the spread remains at 1693 with the stop loss still sitting just below the 1404 level. Overnight the market tested this 1404 support, but it held and now actually provides a low risk entry parameter this morning with the differential at 1434 currently. Note that Stochastics for the daily chart produced a Bearish crossover in overbought territory yesterday. Still, both RSI and MACD are sitting at acceptable levels, making this crossover less concerning. The execution ratio for the trade is Long 5 Bean Oil : Short 3 Soy Meal.
Sells to Watch:
Dollar Index- The objective for the trade is 1.4050 for the Euro (this is the right target, but I find it a little amusing myself that the objective is based on another market). I do like being long the Euro up to this objective, but as the other foreign Currencies remain strong you literally get more bang for you buck in the Dollar Index. The lower volume zone suggested over the last 2 days from 78.63 - 78.71 with moderate resistance up to 78.89 was entered multiple times although the market did tick to 78.90 overnight (I hope nobody got caught on this minutiae). The longer term stop level on the trade of 79.06 was obviously not triggered though. Today the market is already much lower making new entry difficult. If there is an intraday pullback though then the low volume zone from 78.35 - 78.53 is a good area to get short with a stop loss just above the higher volume resistance from 78.55 - 78.70. For the longer term stop loss on the trade I feel more comfortable leaving it at just above 78.90 for right now, but it will be moved to 78.70 if the market holds its weakness into the close.
December Coffee- I have had awful luck with trade suggestions in the Soft's markets in the newsletter. I finally have one though that can make its way off the radar and into the execution section because the pattern and entry setup are very good. Yesterday Coffee initiated a Bearish reversal pattern below key support at 178.25 cents that now provides a target of 165.70 for the market. From 173.40 - 175.20 there is a low volume zone for short entry with a stop loss above higher volume resistance from 175.30 - 176.70. The Coffee market is slightly correlated to the Grains and Things That Grow Trade, so if Corn or Cotton starts ripping higher then be careful with the short in Coffee. As a note of caution I must warn that Coffee is thin, it is full of small and large disappearing orders, and anytime you get a fast market you get airbag orders (The ones where it hits an iceberg and explodes the other direction to chop out the late-comers to the move. I call them Airbag Orders because it looks a lot like the Youtube pranks where somebody sits on an airbag). It can be difficult to hold an outright position, so I suggest also looking at the options market.
Put on the Radar:
Nasdaq- The Nasdaq is the strength among the Equities again this morning, which is a good sign for continuation higher today among the Supportive markets. Right now I am looking at the Nasdaq consolidation over the last week as a potential flag pattern that is forming, but with spiky tops. I plan on staying out of the Equities for today, but if the S&P 500 is able to rally above 1150 then the Nasdaq will be moved back into the Buy section.
Notes:
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