Monday 10/4/10 Commodity Ideas

Opening Note:

Yesterday
The morning began Friday with the typical crawl higher in the Equity and Supportive Commodity markets that has become a staple for the first day of the month. Once the stock market opened though the fresh buying was missing. Without new 4th quarter allocation the weaker than expected ISM Manufacturing Index number caused a sell off in Equities at 9 am that the market struggled to recover from all day. While most of the market sectors saw little in the way of new purchases, the Energy Sector was a clear winner as open interest impressively continued to rise. It seems as though the speculative money is operating on a carousel, jumping from sector to sector in bandwagon fashion from month to month with Energy now looking primed for the next run higher in prices. In contrast though, the "Things That Grow" trade suffered a major price set back as Corn settled limit down Friday. Thursday's Bearish Stocks number fueled a delayed price break in Corn that further led the decline in the Grains and Softs that we have seen over the last week.

Today
The macro market is moderately weaker with nearly every supportive Commodity market trading lower as of 7 am and the Fixed Income Sector and Dollar trading higher. The Grains and Softs have melted lower overnight, continuing Friday's Bearish price action. The stock market continues to trade in a tight consolidation range bound by critical support and resistance levels on either side. And, overall it feels like we again will not see much in the way of broad market buying this morning.

The lack of new allocation thus far to start the 4th Quarter is surprising and concerns me with my Bullish stance over the next several weeks. While it appeared that the market was on cruise control higher after the Fed's admission that they would use Quantitative Easing if necessary, the weak Economic data is producing at least a temporary top for the market. I am looking at this stall in the market as an intermediate consolidation break after a month of solid gains prior to the development of a new leg higher in the market. However, for right now it I think it is wise to dial back the long positions slightly until the market produces new signals that it will continue higher.

Buys to Watch:

Crude Oil- Crude Oil is the best buy of any market currently as fund allocation continues to drive the market higher. The market saw sharp advances again Friday in relation to any of the other correlated market sectors. The shorter term Bullish cup and handle projection is $84.14 with the market now completing about half of this move. Early this morning it appeared that there may be an opportunity for a moderate pullback, but since 4 am the market has recovered to make new highs for the trading session. The next acceptable setup for new entry is the lower volume zone from $80.04 - $80.28 with higher volume support from $79.76 - $80.00 for stop placement below. However, the pullbacks have only been modest and avoided the good entry setups. Looking at a 15 minute intraday chart for bottoming price action remains the only way to get a leg in for right now until on of these pullback zones is reached. Longer term a move above $83.91 would provide an objective range of $94.24 - $96.33 that is feasible if the market can maintain its current momentum, so look at the options market as another source for longer term entry.

Bean Oil vs. Soy Meal (December Bean Oil - December Soy Meal to chart)- The differential now has a confirmed objective of 1693 with a second consecutive close Friday above 1359. Early on the Bean Oil took the brunt of the Grain sell off bringing this spread to the brink of triggering the stop loss for the trade. There was a 30 second period around noon, as Bean Oil ran stops to new lows, that the differential sat below the 1374 higher volume support, but buying re-emerged quickly in the Oil while the Meal continued lower to settle the differential at 1484. I now recommend moving up the stop loss on the trade to just below higher volume support at 1404. For new entry there is some moderate support from 1436 - 1446 to purchase against with a stop loss also set below the 1404 level, but while this is only a moderate setup I recommend doing a partial amount of your regular position at this entry level. The suggested execution ratio is 5 Bean Oil : 3 Soy Meal to make tick size equal.

Sells to Watch:

Dollar Index- It looks pretty clear now that the Euro will reach its 1.4050 objective prior to the Dollar Index reaching its own 75.00, so the Euro will be the indicator for profit taking on the 2nd leg lower of this Dollar move. The Dollar is trading higher into the lower volume zone from 78.63 - 78.71 with moderate resistance to 78.89 that was suggested on Friday, but not reached until this morning. The resistance here is not too strong though with a higher volume level from 79.02 - 79.06 being the recommended stop loss on the longer term trade.


Put on the Radar:

Sell December Coffee- This morning the market broke below key support at 178.25 cents that projects a move to 165.60. Coffee has benefited from its own fundamentals along with the support from the other Soft and Grain markets over the last several months. But, as the "things that grow" trade has suffered over the last week it looks like Coffee is ready for a larger pullback over the short term. As the market move swiftly below the breakout level on this mornings open there is not great higher volume resistance to sell against, so I only recommend selling a rally for right now with a stop above the breakout level if you choose to enter today. Coffee is one of the thinner markets that I follow and with a number of predatory and psychological trading programs in the market it can be difficult to hold a position in the outright market. It is easier for me to trade Coffee if I have an options position instead that I can watch more loosely, so if you decide to sell the outrights use a minimal initial position.

Notes:

Nasdaq- Overnight the market dipped below the 1983 moderate support level suggested on Friday and with the lack of new allocation on Friday I recommend staying out of the Nasdaq for the time being. The market looks like it needs more time in this consolidation zone before it becomes a good long position again. Over the last several sessions the Nasdaq has begun to lag behind the S&P 500 and the Dow, which is another signal that the Equities lack strength right now. The S&P 500 remains caught between higher volume support levels at 1131 and 1122 and higher volume resistance at 1150 for now and until the market establishes a direction out of this range there are better trades to enter.

December Corn- On Friday the market settled 30 cents lower and down the limit for the day as a delayed reaction to Thursday's Bearish stocks number. The speculative funds look like they marked Thursday's close for their quarterly profit books, so Friday's sell off was likely more accurate price action after the Report. Treating the market as a sale is probably the best position over the next several days, but longer term the market fundamentals still look Bullish for prices. The 50% Fibonacci Retracement level for the entire Corn move is $4.36 with some higher volume support from mid-August also falling just below this level. I am waiting for the market to reach this 50% retracement prior to looking at Corn as a buy again. Keep in mind that open interest only fell slightly on Friday, so the large speculative long position continues to stand strong despite the Bearish move over the last week. On September 13th the market opened at $4.77 1/4 with 1.316 million open contracts with the price this morning at $4.55 with open interest sitting at 1.448 million contracts. This means that there are a lot of people that have entered new longs over the last few weeks that are holding a losing position that may wish to liquidate if prices continue to fall. This means there could be some good short term liquidation runs lower to jump on this week leading up to Friday's Crop Production and Supply/Demand Reports.