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: