Tuesday 10/5/10 Commodity Ideas

Opening Note:

Yesterday
The lack of fresh allocation to start the 4th Quarter was apparent again yesterday as the macro market traded weaker with the previously strong Nasdaq the laggard on my board. This is a concerning shift from strength to weakness as the Nasdaq was not only the leader of the Equity Sector, but the leader among almost every individual market over the last month. Most of the other markets with a higher correlation to the Equity markets declined as well yesterday with the Euro and Australian Dollar flipping from strengths the previous day to weaknesses yesterday.

The most surprising move for me was the rebound in the Grain markets as buying entered right on the 9:30 am open. With a very Bearish Stocks number Thursday and an increase in yields predicted by Informa Friday, the Corn market came under pressure towards the end of last week and settled limit down on Friday. Noteworthy during this price break though was the record speculative long position in Corn held strong without much if any liquidation. The money was there to buy again throughout most of the trading day as Corn rallied from 10 cents lower early in the session to settle over 5 cents higher and lead the Grains. The conviction of the Bulls and there willingness to continue to add must be looked at as a sign of strength for the market, but I can not help but remain a little skeptical that there are still over 80,000 contracts holding a losing position anywhere from 5 - 50 cents. We shall see what develops, but for right now I think the market is strictly a day trade with two sided volatility lurking still.

Today
Almost every supportive market is trading moderately higher this morning. The outlier is the Australian Dollar, which fell overnight as the RBA kept rates steady contrary to trade expectations that they would rise 1/4%. The Japanese Government made another small Currency Intervention to devalue the Yen, but as of 7 am it is already trading higher again (I think the market is calling the Japanese bluff on there hard line Currency talk). The Fixed Income Sector is trading slightly higher, but is mostly meddling along on a slow uptrend over the last couple weeks that appears uncorrelated to the other sectors as it travels its own fundamental path. Finally, the Dollar Index is significantly weaker as the Euro has made a strong rebound overnight after yesterday's weakness to establish new highs on its recent move.

After such an exciting last week with notable news and commentary I am slightly relieved, but with a side of boredom as the markets are plodding along without much in the way of new shifts. While the S&P 500 remains range bound in the 1120 - 1150 consolidation range the advances in the macro market will be dulled, despite the macro trend remaining higher. I can imagine that we would see Crude Oil on an absolute rip higher if the stock market was continuing gains. However, the trades and ideas are much the same today. While the Equity markets sit directionally uncertain in the consolidation zone I suggest continuing to execute with smaller size on the long side of the Bullish macro trade.

Buys to Watch:

Crude Oil- The confirmed shorter term objective for November Crude Oil is still $84.14, with 2 consecutive closes above $83.91 producing the longer term target range of $94.24 - $96.33. Take a peek at the daily chart for the nearby Crude spreads and notice that they have recovered from their Bearish slide a couple weeks ago to levels that are now supportive of further gains in the outright markets. If you also trade the other Energy products then I suggest also checking out the Heating Oil chart as it looks stronger than the Crude Oil despite being a little weaker thus far today. There is higher volume support for the market from $80.90 - $81.30 that produced the bottom of today's range and should now hold if the market will continue higher. I recommend using a stop loss on the larger trade just below this level if you are holding a long below $81. For new entry you can purchase on a pullback against this support, however there is a higher volume zone from $81.46 - $81.62 that you can also execute against with this level likely holding today and becoming the next area for longer term stop placement tomorrow. Note: The market is lagging slightly this morning but this is likely because the EIA stocks number set to be released at 9:30 am. I only recommend holding a position through the number if you already have a decent profit in it as you can always jump in with less risk after.

Bean Oil vs. Soy Meal (December Bean Oil - December Soy Meal to chart)- The move in this differential has underwhelmed me a bit since the confirmation on the Bullish cup and handle pattern, but I still like the technicals as well as fundamentals for the trade. The objective on the spread remains at 1693 with the stop loss still sitting just below the 1404 level. Overnight the market tested this 1404 support, but it held and now actually provides a low risk entry parameter this morning with the differential at 1434 currently. Note that Stochastics for the daily chart produced a Bearish crossover in overbought territory yesterday. Still, both RSI and MACD are sitting at acceptable levels, making this crossover less concerning. The execution ratio for the trade is Long 5 Bean Oil : Short 3 Soy Meal.

Sells to Watch:

Dollar Index- The objective for the trade is 1.4050 for the Euro (this is the right target, but I find it a little amusing myself that the objective is based on another market). I do like being long the Euro up to this objective, but as the other foreign Currencies remain strong you literally get more bang for you buck in the Dollar Index. The lower volume zone suggested over the last 2 days from 78.63 - 78.71 with moderate resistance up to 78.89 was entered multiple times although the market did tick to 78.90 overnight (I hope nobody got caught on this minutiae). The longer term stop level on the trade of 79.06 was obviously not triggered though. Today the market is already much lower making new entry difficult. If there is an intraday pullback though then the low volume zone from 78.35 - 78.53 is a good area to get short with a stop loss just above the higher volume resistance from 78.55 - 78.70. For the longer term stop loss on the trade I feel more comfortable leaving it at just above 78.90 for right now, but it will be moved to 78.70 if the market holds its weakness into the close.

December Coffee- I have had awful luck with trade suggestions in the Soft's markets in the newsletter. I finally have one though that can make its way off the radar and into the execution section because the pattern and entry setup are very good. Yesterday Coffee initiated a Bearish reversal pattern below key support at 178.25 cents that now provides a target of 165.70 for the market. From 173.40 - 175.20 there is a low volume zone for short entry with a stop loss above higher volume resistance from 175.30 - 176.70. The Coffee market is slightly correlated to the Grains and Things That Grow Trade, so if Corn or Cotton starts ripping higher then be careful with the short in Coffee. As a note of caution I must warn that Coffee is thin, it is full of small and large disappearing orders, and anytime you get a fast market you get airbag orders (The ones where it hits an iceberg and explodes the other direction to chop out the late-comers to the move. I call them Airbag Orders because it looks a lot like the Youtube pranks where somebody sits on an airbag). It can be difficult to hold an outright position, so I suggest also looking at the options market.

Put on the Radar:

Nasdaq- The Nasdaq is the strength among the Equities again this morning, which is a good sign for continuation higher today among the Supportive markets. Right now I am looking at the Nasdaq consolidation over the last week as a potential flag pattern that is forming, but with spiky tops. I plan on staying out of the Equities for today, but if the S&P 500 is able to rally above 1150 then the Nasdaq will be moved back into the Buy section.


Notes: