Opening Note:
Yesterday
As soon as the Grain Stocks Report was released at 7:30 am I was pretty much locked into the Grain market as the surprising Corn number looked like it provided some excellent trading opportunities. I did manage to keep my peripheral vision on the rest of the markets though and I am glad that I had the Grain markets to distract me. The market was a jumble yesterday with sharp swings in the Equity, Fixed Income, and Precious Metals that seemed to do more with end of the quarter bookkeeping than rational trading. The S&P 500 ran into a wall again at 1150 causing a 20 point plunge around 9 am, the Bonds broke nearly 2 full handles from 8-9 am, and Gold fell $20 from 8 - 10:30 am. This looked like a complete screw job that did not make much sense to me other than some profit taking prior to the end of the 3rd Quarter that pushed the relationships way out of line temporarily. I do have to say that Crude Oil remained the absolute strength of the macro market throughout the day and looks like the best buy right now.
The Grain markets were the most interesting "real" story yesterday as the Corn stocks number came out much higher than even the wildest expectations. The discussion will rage whether the USDA is a reliable source anymore, but as I was taught on my first day trading "The USDA is god, and what they say is what it is". The Stocks number was Very Bearish for the Corn market and led an open sell off that choppily pulled the Wheat and Soybean markets lower for the first half hour. However, once the Corn market reached the low volume "pivot point" of $4.80 the market found some temporary support. Four separate pushes ensued to attempt to take the market limit down below $4.75, but the support from $4.77 - $4.78 1/2 held. The Corn then became a good short term buy and managed to rally 15 cents from this base, as rather than liquidate, the funds decided to hold strong on their positions and protect the Grain market quarterly close. From all of this the Bean Oil emerged as the champion of the Grain Sector and Wheat the weakness for the time being. I do not have time to elaborate on Grains more today, but I am not holding any positions in the market other than the Bean Oil vs. Meal as I expect further two sided volatility over the next week.
Today **Construction Spending and ISM Manufacturing at 9 am will move the market
The macro market is strong with every Equity, Energy, Metal, and Foreign Currency market unanimously higher at 7 am. The Grains and Softs are moderately lower as the market figures out what to do with yesterday's Stocks report. And, the Fixed Income markets are moderately weaker as the risk trade looks to be the center of attention today. As I notified yesterday, the first day of the month (and especially quarter) is statistically the strongest day for the stock market and therefore the correlated Commodity markets. So far the market is not disappointing as the higher markets are doing the anticipatory crawl higher that usually signals buying will be coming on the market opens. If the S&P 500 is going to rally above 1150 today looks like the day that it can do it. I expect strong buying to continue throughout the day with the pullbacks minimal.
I feel more confident than ever that my objectives for the Equity markets will be reached as the macro relationship web is shifting more Bullish. Firstly, I have to admit that I was incorrect in my Bearish speculation on the Copper market as the Industrial Metal has climbed to new yearly highs this morning. This looks like a confirmed 3 leg advance now with the 2nd leg currently under way. The market should continue on the longer term Bullish move above $4.00, and we will get on the 3rd leg once it emerges. As Copper is a good indicator for stock market direction this is a Strong Bullish Signal. In addition, the U.S. Dollar continues to be Very Weak, as it continues to depreciate in relation to every other Currency. The European PIIGS story takes the backseat right now as the Quantitative Easing story overrides all else in the Currency markets. Finally, the Energy markets now look clearly Bullish despite lagging the rest of the Sectors for most of the Summer. I go into further detail in the Buys section, but if Crude can continue to carry momentum we could easily see $95 within the next month and a half. As Crude was a troubling macro Sector for a while this Bullish shift is the clincher that reaffirms my Bullish macro stance.
The two stories that I am interested in watching right now is what happens to the long end of the yield curve and is the Dollar on just a 2 leg or a 3 leg advance lower? The Ten Year and Bond prices have hung in there as the stock market has rallied and the risk trade has reemerged. However, will longer term interest rates continue to hold this low if we see Equities, Energies, Metals, and other Physical Commodities continue to new yearly highs? Part of the Quantitative Easing package will likely include the purchase of more long date Treasuries, but it is possible that this has now been front run and the Bonds will turn into a sale. Let's keep an eye on this. Even more interesting to me is whether we see further capitulation in the Dollar Index below 75 and a rally in the Euro convincingly above 1.40. These are roughly my 2nd leg objectives for these markets, but will there be a 3rd? Most of the fundamental currency analysts believe the European debt story is looming around the corner still and they make a convincing argument. In contrast, the weaker Dollar "QE" story may over power the Euro news and cause a 3rd leg move that wipes out these long term traders still holding a short Euro position as it climbs back to 1.50. Either way it looks like there will be opportunity and it should be interesting.
Late Note: There was not buying on the Metal or Energy open. The markets did not pullback much, but it is possible that some of the allocation is waiting until after the 9 am Economic data. If fresh buying does not come in by after these numbers it is possible that we get a sell off later in the day.
Buys to Watch:
Crude Oil- I give my props when props are do, and I have to give a standing ovation to the funds that have pushed the Crude market higher. They were on the verge of being completely caught with a settlement below $73 only a week ago, but have turned their large losing position back into a winner that has me jumping on board. They picked the perfect opportunity to push the trade after the Bullish stocks number Wednesday to completely take out the Gartman crowd that was shorting the market that day. Now the market has the possibility to see new yearly highs if it can maintain its momentum.
The Bullish pattern above $78.86 now has a projection of $84.14 on the short term move. For entry I have a better setup with a pullback to the low volume zone from $79.44 - $79.74 with higher volume support down to $78.92 for stop placement below (my overnight order at $79.48 was 22 ticks away from a fill). However, the market is on a tear and the pullbacks look to be minimal. If the market breaks there is another low volume zone from $80.04 - $80.28 with moderate support from $79.76 - $80.00. It may be the case that you have to just pick the right time to jump into a long position though. Buy the dips.
If Crude Oil is able to rally and settle above $83.91 then the market would have an objective range of $94.24 - $96.33 on the larger Bullish cup and handle pattern. Some evidence to support this move is found on the Heating Oil daily chart. As the profit margins for Heating Oil production have increased recently the Heating Oil has outperformed Crude and settled above its own August 4th high (same date as the $83.91 Crude high). If you are full on the Crude rally train then it would be wise to look at the options market. There are 14 day Nov and 46 day Dec options that you could look to get an early leg in on the longer term move with with minimal risk.
Buy Bean Oil vs Sell Soy Meal (December Bean Oil - December Soy Meal to chart)- Above 1359 we now have a confirmed target of 1693. The differential found a base against the moderate support at 1400 on yesterday's open and proceeded to plug higher into this morning. Yesterday's Grain trade reconfirmed that Bean Oil is the strength of the Sector and the strong Crude Oil rally supports this case as well. When Crude is trading roughly above $70 the Bean Oil market has a slight correlation to the market as an alternative energy source. Add to this that the crush margins for Soy Meal have suffered lately and you have a good fundamental story for the trade.
If you entered yesterday then I recommend using 1374 as the longer term stop loss on the trade for today. For new entry there is a good low volume zone from 1410 - 1422 with the higher volume support down to 1374 for the trade. However, I think it is less likely that we see this level today. So, from 1452 - 1458 there is a lower volume zone that the market has reached this morning with moderate support from 1424 - 1432 that has supported the market well thus far. This first setup should be used for just an initial position though as it is less reliable.
Nasdaq- There still is not a great setup for new entry in the market, but with 4th Quarter allocation beginning today and the macro relationships looking stronger than ever I am moving the Nasdaq to the Buys. Right now the S&P 500 is causing trouble for the Nasdaq as the 1150 resistance continues to put an end to stock market rallies. I believe though that today could be the day that the Equities are able to bust out of this resistance and continue higher. Everyday I continue to hear Bears in the media claim that we are still in the "Summer Range" and that 1150 is a level to fade. This may work for a couple days, but since the S&P 500 rallied above 1120 I believe that the market is clearly out of the range (I mean Memorial Day was May 31st...clearly the "Summer Range" crew is mistaking April and early May as "Summer"). It is actually comforting to know that Bullish is not the consensus right now. If these fund managers are shorting the market at 1150 then they will probably be jumping back on the rally above this level providing another catalyst.
The target range for the Nasdaq remains 2080 - 2135 with the S&P 500 target 1208 - 1245. The Nasdaq is still the strength of the Equity sector and is the best buy, just use the S&P as an indicator. For new entry 2000 is a moderate support level that looks like it may support the market for today. If the market does fall below this level though then there is a lower volume zone from 1993 - 1994.50 with higher volume support down to 1983 for stop placement below. If the market falls below 1983 again then something is wrong and it is time to reanalyze the trade.
Sells to Watch:
Dollar Index- The low volume zone from 79.30 - 79.45 with higher volume resistance from 79.50 - 79.65 did not get filled yesterday although the market came close. As is the case with most strong moves, the market is only providing marginal pullbacks and entry levels, so you have to adapt and initiate smaller positions to get in. It looks like the high for today's session of 79.02 will provide ample resistance for the Dollar Index with 79.06 looking like a pivot point if it is encountered again. There is an intraday lower volume zone from 78.63 - 78.71 with moderate resistance up to 78.89 for stop placement above. As this is a moderate level I recommend using a lighter position for entry. The longer term objective for the Dollar Index remains 75.00 or 1.4050 in the Euro, whichever hits first.
Put on the Radar: I am out of time today. If you want to talk Grains shoot me an email.
Notes:
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