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.