Tuesday 10/19/10 Commodity Ideas

Opening Note:

Yesterday
The supportive markets started Sunday evening much weaker across the board, but shifted to a Bullish tone once the European markets opened. The anticipatory climb prior to the U.S. stock market open correctly predicted buying that continued throughout the morning in the risk markets. Although some of these markets looked to be gone past the point of return for the day when I went to bed Sunday evening there were actually some unbelievable price reversals to carry the macro market higher. Silver traded nearly 60 cents, the Euro 140 ticks, and Crude $1.19 lower on the day, but all managed to settle slightly to impressively higher (in Crude's case) by their closes.

I was floored by yesterday's reversal as Friday's close led me to believe that we were seeing technical and relationship topping action on the macro trade and weakness was to follow this week. The typical morning crawl into the open yesterday at least provided enough warning that it was not a clear sell day to save some money though. The media needs to make sense of what happens in the market each day with general explanations like "Lower Dollar...Higher Commodity Prices" or "After lagging for a while the market was bound to recover" when they have nothing much to say, but that does not mean that the price moves or relationships actually made much sense. Yesterday was a case of the laggards (S&P 500 and Crude Oil mostly) leading the QE trade higher, which is one of those "yes the prices are higher today, but this rally is actually bearish" signals that you have to stow away in the memory bank and wait for the opportunity later.

Today
As of 7 am the markets have taken a drastic turn lower on Earnings data and news out of China that they have raised their 1 yr. benchmark rate 25 basis points, sending the Dollar Index skyward. When I began doing my research around 5:30 am the markets were only slightly lower and quiet, but since 6 am there has been a flurry lower in the Foreign Currencies, Metals, Energies, and even the Grains. The Dollar Index is much higher, but other than some small outliers that is about all in the way of gainers. There is Housing Starts at 7:30 am, but that is all for Economic data (other than Earnings) for the next 48 hours until Jobless Claims.

A friend that is not a trader asked me yesterday afternoon what the markets are looking like right now and without even thinking the first thing out of my mouth was "Cloudy with a Chance of Meatballs". The unintentional joke may have just been a Freudian slip (I had spaghetti for lunch), but I honestly am seeing a lot of meatballs right now. Many of the market sectors are showing technical action consistent with topping patterns, yet each time we get a strong directional signal it seems to be violently reversed or at least pulled back into the range. With the QE "buy everything" idea still in the forefront of many traders minds we are still seeing strong dip buying and computer algorithms skewed to the Bullish side on even the most violent and sizable moves lower. I would not be surprised either if several months or years from now we discovered that there were trading programs that simply attempted to push the market directionally opposite from the previous day's trade to arbitrage from people liquidating positions.

The tight range in the S&P 500 over the last 5 sessions is similar to the other reversal points that we have seen in the Equities over the last 5 months. The parabolic rallies in Gold and Silver have been followed by volatile two sided trade that often precedes a top. Cotton traded limit up Thursday, limit up early Friday, but settled locked limit down for Friday's session. I would normally look at this as definite topping action, but the market still managed to post nearly limit up gains yesterday. Finally, Crude Oil posted a Bearish outside reversal day Friday, yet managed to in fact settle with a Bullish outside reversal day Monday. What all this says to me is that something is definitely wrong with the buy QE trade, but for right now you need to trade shorter term and take profits when you have them. I believe that we are underway on the market topping, but tread lightly until the markets become less cloudy.

Late Note: There is massive liquidation everywhere. I know that I will not be attempting a buy in any supportive market today for sure. I recommend going with today or waiting until the dust settles. Beware that there is a strong possibility for liquidation in the Grain markets on the open regardless of any fundamental or technical story for the individual markets. The Grains began to sink this morning along with the supportive markets and since the morning Grain close at 7:15 am there has been a swift continuation lower. Look for the Grains to "catch up" to the rest of the market with an initial liquidation sell off as they look like they may trade with a higher correlation to the outside markets on this violent day.


Buys to Watch:

Sells to Watch:

Bonds- Yesterday's trade entry recommendation in the low volume zone from 131.25 - 132.05 with stop placement above resistance from 132.06 - 132.18 worked well as the market held resistance and has moved lower into this morning. The market is now battling with some higher volume support left from Friday's trade between 131.00 - 131.20. This support should continue to stall the market over the short term, however with the technicals unanimously pointing towards a Bearish continuation I am not concerned with holding the position. There is now higher volume resistance left from yesterday's trade between 132.00 - 132.04, so I recommend moving up the stop loss on the trade to just above this level (sell against this level for new entry). The initial profit target is a test of 129.05, but I think it may be worth the effort to hold through this level as a move below 129.05 provides a reversal objective of 123.00. I have closely watched the relationship between the Bonds and the rest of the market and right now the relationship appears to be uncertain to very loosely defined (at best). It seems like the gut reaction to buy Bonds as risk aversion on violent breaks in the supportive markets is still there, but the Bonds seem to move lower in correlation to the stock market when it moves lower gradually. Keep an eye on this relationship to see if it establishes a better pattern.

Put on the Radar:

Crude Oil- On a very painful trade yesterday, Crude Oil took out the stop loss on my short trade above $83.50 for the December contract. The fundamental excuse for the rally was French worker strikes, but in my opinion I think it was more of just a good support job by the "super long" funds and opportunistic momentum traders pushing the rally more than any sort of real or lasting Bullish story. The fact remains that from August 27th to October 4th and October 4th to the present there are 2 separate bubbles of large long positions that have not experienced much in price gains that could be forced to liquidate if Crude prices fall below $81 and $74 subsequently. Stochastics for the daily chart continues to show negative momentum and MACD is also ticks away from producing a fresh sell signal. Below $80.98 Crude has a reversal pattern objective of $77.16. I recommend waiting for this breakout and then looking for new short entry rather than front running the move. If this liquidation does occur then my longer term objective for Crude remains at $62.50.

Notes:

Dollar Index- I am pretty much just stating the obvious now as the Dollar has exploded this morning (I swear it was around 77.50 when I first wrote this though), but despite yesterday's rally sell off the technicals for the Dollar Index still look very supportive. The momentum indicators are unanimously pointing towards Bullish continuation now. It is tough to jump on the rally this morning, but I believe the Dollar is undergoing bottoming action and will be looked at as a buy soon.