Thursday 10/21/10 Commodity Ideas

Opening Note:

Yesterday
I made the executive decision to sleep in a little extra yesterday morning to catch up on some sleep and get my mind off the markets for a few hours. This means that there was no newsletter on Wednesday to comment on Tuesday's trade, but the decision likely saved me a lot of money getting caught up in the day to day chop again.

Friday was a macro sell off, Monday was a hard reversal of buying, Tuesday was a larger reversal sell off on a move below Monday's lows. What happened yesterday? Of course it was a day of macro strength everywhere. Breaking down each market is almost unnecessary, but the Euro, Dow, and Australian Dollar stood out as the leaders. The Grain markets showed strength as well with Corn finding technical support midway into the gap left from the October 8th Report rally. In contrast though, the Metals notably lagged behind the rest of the sectors as both the Precious and Industrial groups did not find the same boost as other correlated markets.

The washing machine action over the last week was based on battling fundamental stories and over-bought versus over-sold dynamics. The Quantitative Easing trade has propelled the markets for at least the last month and a half, but the Chinese rate raise Tuesday threw the market another wrinkle that both the U.S. and China could come under continued pressure to support their currencies. This is enough news for me to wrestle with on its own, but taking into account that the QE trade is verging on over-bought and the current impact of this China rate decision on their Commodity demand is probably less than the gut reaction I think it is easy to get lost in the fundamentals.

With all of this longer term fundamental news over the last week you also have not only new entry/liquidation from longer term investment funds but the gut reaction to the news and fresh technicals from shorter term traders. This has created an environment where if you had either a Bullish or Bearish directional opinion over the medium term you likely lost money or, best case scenario, got chopped out of your position. The technicals, inter-commodity relationships, and leader/laggard trends have been left completely irrelevant over the week. Support and resistance in the markets has also made little to no impact on the market as fear and indecision easily has run over trends and higher volume pivot points. In summary, basically the fundamentals are flimsy, the technicals are garbage, and the day to day moves make little sense over the last week.

Today
The macro trade is slightly stronger, but there is a bit of divergence among the sectors. The Equities, Grains and Euro are the clear strength while the Energies, Metals, and most of the other Foreign Currencies are lagging behind. It is refreshing to see that the market is not completely reversed from yesterday at least. This morning there is Jobless Claims and Export Sales at 7:30 am, however this is all for the rest of the week with only Food reports tomorrow.

With the technicals and market relationships unreliable right now I only have the Grain markets under the buy section for the time being. I do however have a number of ideas on my radar to watch and wait until the correct opportunity presents itself. You will probably gather from the analysis that I am still leaning towards a weakening trend in the supportive markets. While the two sided volatility remains extreme I recommend focusing on shorter term less than 24 hours, taking profits when you catch a chunk, and looking to get back in later rather than holding a position.


Buys to Watch:

Grains (other than Wheat)- Led by a Corn rebound yesterday the Grain markets finally recovered their sector strength and look to be on course for another leg higher. My quick technical objective for Dec. Corn is $6.40, July '11 - Dec '11 Corn spread is 91 cents, Nov. Soybeans is $12.86, and Dec. Bean Oil is roughly 52.25 cents. To figure out which markets present the best opportunities you need to look at the relationships between them. The daily chart of Soybeans versus Corn (Nov. Bean - Dec. Corn*2 to chart) is still in an established downward trend on the daily chart that should continue to support Corn in the relationship. This means that despite the Soybean daily chart looking better over the last week technically I still prefer buying Corn. Next, the daily chart of the Bean Oil versus Soy Meal (Oil - Meal to chart) is potentially setting off a Bullish head and shoulders pattern today that should support the Bean Oil up to a differential of 1632. This defines the Bean Oil as the better buy on the possible Grain advance. In conclusion, the relationships establish that I like buying Corn (as well as the July - Dec spread), Bean Oil, and Soybeans in order of preference. I think that all of the above will show gains though, so if you feel more comfortable with Bean Oil or Soybeans I do not have a problem with either choice...just not Wheat right now.

For Corn there is a higher volume support level from $5.59 1/2 - $5.65 with the lower volume zone from yesterday's close between $5.65 1/2 - $5.70 1/2 a good area to look for long entry on a pullback. With Corn continuing to hold support around $4.71 overnight it is possible that the market could run higher without this pullback. Buy the dips, but if this pullback zone is entered then look to possibly execute with a larger initial size.

Cotton has traded all over the place lately, but when I apply a similar technical pattern as the Grain markets I receive a rough objective of 128 cents on this rally. The volatility in the market is off-putting though so I suggest just watching the trade as another indicator for the Grains.

Sells to Watch:

Put on the Radar:

Crude Oil- I have discussed the open interest situation enough, so look back on my blog at my letter from Monday or Tuesday for a description. Crude Oil and the rest of the Energies continue to clearly lag behind the Equities and most of the Foreign Currencies. Although we have seen some strong rallies in Crude this still means that it is one of the better sales of any market and a good sale as a hedge against a long stock market position. Like the rest of the supportive markets the daily chart technicals for Crude have acted unreliable, making it difficult to trade off of them for the time being. However, there is a higher volume resistance zone from $83.30 - $83.85 that continues to hold as a top on the recent range. Until we see a few hourly closes above this level I recommend strictly continuing to sell the rallies in the Crude Oil market and staying away from buying the dips. Like most other trades for now though I think it is wise to take your daily profits and look to get back in at another time until macro direction becomes more consistent.

Gold and Silver Forming Head and Shoulders Tops?- The Metals as a Sector have lagged behind the Equities, Energies, and Foreign Currencies over the last week of volatility. The daily charts for both Gold and Silver (and vaguely for the other metals) look like they may be forming Bearish head and shoulders reversal tops. I advise against front running any of these patterns for the time being, but if a right shoulder does form to initiate the patterns then these markets could present a quick profit on long liquidation. Keep an eye on the Palladium daily chart as an indicator for whether Gold and Silver are forming right shoulders. Palladium has the strongest 2 day rally among the Metals and if it rallies to new yearly highs then it is likely that the Precious Metals are not topping as well.

As Gold and Silver are extremely volatile in the outright markets I still recommend using the differential between the two markets as an execution vehicle (Gold - Silver/2 to chart). The differential is clearly in a downtrend still but is showing potential bottoming action. My down trend for the chart rests at $167 today. With the spread still trading around $150 though it looks like the trade is still not in play for another day or two.

Euro...Topping Like the Metals?- The Euro has been on possibly the most violent ride of any market over the last week, but still has managed to hold the resistance on its recent range. The market looks like it could be forming a similar reversal pattern to the Metals. Like Crude Oil there is some higher volume resistance on the recent range that is a good area to sell against while it holds. Higher volume resistance rests from 1.4020 - 1.4085. While this level holds I suggest still looking to sell the rallies in the Euro rather than buy the dips.

Equities Are the Strength- The stock market is greatly outperforming any other Sector among the supportive markets over the last several weeks. This is one of the only relationships that has held strong over this time frame. If you are looking to buy any group I believe stocks are the best right now and I think they should be avoided as a sale. Buying stocks as a spread against Metals, Energies, and even the Euro should continue to be a profitable trade over at least the next two weeks as well.

Notes:

Bonds- My trade suggestion from the Monday and Tuesday letters was stopped out on Tuesday afternoon with a rally above 132.05. The Bonds rallied on Tuesday on a risk aversion trade versus the supportive market sell off. I still believe that the Bonds are creating a topping pattern, but now is not the right time to enter or hold a short position in the market.