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: