Monday 10/25/10 Commodity Ideas

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.