Wednesday 10/13/10 Commodity Ideas

Opening Note:

Yesterday
After getting off to a poor start for the overnight session the market gained strength on a recovery path into the early morning. The stock market had an initial sell off on its open, but found a quick base to form a slingshot rally. After stagnation for several hours an afternoon rally also followed. This finally produced a settlement above 2030 in the Nasdaq to establish a rally breakout above its 2 week consolidation range. The other supportive markets that started the early morning off weaker followed a similar path as the Euro, Crude Oil, and Copper all managed to settle higher on the day. The Grain markets recovered strength after Monday's profit taking correction as Corn led the sector higher again.

It was shocking for me to see the Euro, Crude, and Copper all settle higher on the day after such weakness overnight and into the early morning. Much of the World was off on Monday so yesterday's trade was more true to the actual story right now and that looks like the Quantitative Easing story continuing. The stock market looks to be the leader higher going forward along with the Metals among the correlated markets. If these two sectors continue higher then I see little to no chance that the Energies, Foreign Currencies, and even "the things that grow" do not follow along.

Today
Pretty much everything is higher as of 7 am with the Dollar Index, Japanese Yen, and the Long end of the yield curve the only markets that are lower so far. The Nasdaq, Silver, and Canadian Dollar stick out as the strengths and leaders. As you will see below, I continue to keep the Bonds on my radar as a sale. It will be interesting to watch the relationship between the Bonds and the Equity markets today because it could give better insight into both individual trades. The correlation between the Equity and Bond markets free floated over the last month and a half, but with the Equity rally looking like it will extend further the risk aversion trade may be selling off. If we see a couple more days of Bonds and Yen moving opposite the stock market than this relationship will become a good indicator for future market performance.

What I thought was a reversal in the macro market now looks like it may only be a consolidation range prior to continuation higher. Many of the warning flags that I was seeing last week are beginning to correct. The Nasdaq has regained the leadership role among the Equity sector and has established a close above its consolidation range. The Metal markets survived some violent intraday sell offs, but still maintain their trend higher. And, both Crude Oil and the Euro refuse to fall much in price as buying enters with strength on each dip. All of this leads me to believe that the resistance that we have seen for the macro market is failing and the trade will resume its climb higher.

Sometimes my critical thinking and skepticism can be troublesome as I over think the trade and predict outcomes beyond the scope of the current market. While I strongly believe that the "Buy Good News and Buy Bad News" trade is already extended beyond a reasonable level and that the market is over-optimistic about how supportive a Republican Congress and QE will be for the economy I do not think that this is a profitable way to trade for the next month. With elections on the horizon in November, an earnings season underway that continues to beat expectations (however weak or doctored they may be), and big money and algorithms still buying the dips I see little in the way of a new catalyst for the next month that will derail the Quantitative Easing trade. Once the stock market reaches its objective targets and we get confirmation on election results and what the QE package will really be then it may be time to reexamine these thoughts, but put them away for now.

One of the things that I have learned as a trader is that there is not glory in losing money even if you were eventually right. The only job performance you are gauged on is what your account statement says each day. For the next few weeks if you buy the dips and focus on shorter term trades (1 - 12 hours) I think that the account will be higher come November.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Nasdaq and S&P 500...buy the dips again- The Nasdaq established a critical close above 2030 and its recent consolidation range yesterday while reclaiming the leadership role among the Equities. I believe that the original Bullish head and shoulders pattern objectives I laid out a month ago are now back in play as target levels on a continuation on the Equity rally. The markets are now closer the bottom of this target range, but for the Nasdaq it is from 2080 - 2135 and the S&P 500 it is from 1208 - 1245. I believe the Nasdaq will continue to be the leader and will be the better buy on the dips. The intraday trade for the Equities has reminded me a lot of the action we saw on the recovery throughout 2009, so I am thinking that this will be more of a crawl higher rather than an explosion. In this case you can usually look to buy each day on a pullback towards the previous days mid-day consolidation level. I still wish to wait for confirmation on the macro trade from Crude Oil and the Euro prior to moving the stock market to the Buys. However, I believe buying the intraday dips is already in play and encourage only looking to buy the stock market rather than sell it.

Bonds Bearish Reversal Under Way- Yesterday the Bonds violated their 2 week Bullish trend on the daily chart while confirming sell signals in both Stochastics and MACD momentum indicators. While this would normally be enough for me to begin looking for short entry I am still waiting for confirmation that the longer term Bullish trend is failing. The Bullish trendline from the low June 3rd to the open July 28th (sitting at 132.00 today) already has 4 points of interaction that have supported the market over the last 4 months. I believe that the Bond market will likely violate this trend within the next week, but in the hopes of not getting chopped up I think it is best to wait for this time. A move below this trendline would mean it is time to sell the market with a potential Double top pattern forming with a breakout below 129.05 projecting a move to roughly 123.00. Keep the relationship between Bond prices and the Equity market on your radar as well. It looks like inflows into the stock market may mean outflows for Bonds right now. If this relationship clearly establishes itself then this will be another indicator tool to process the Bond market.

Notes:

Crude Oil- Each time that Crude has looked in trouble over the last week the market has come to its rescue with volatile dip buying. The open interest versus price advance is still something that I came keeping close watch of on a daily basis, but it looks unlikely that we are going to see a significant decline in Crude right now. This does not mean that I believe Crude Oil is a buy for right now, but I think that it is time to stop looking to sell the rallies. The resistance level around $83.91 continues to hold and until it fails Crude should remain a neutral market. With Equities, Metals, and many of the Foreign Currencies looking like they will continue their advance the Energy markets will probably follow along or at least have enough support to prevent the liquidation trap from being set until November. Above $83.91 Crude would have an objective of roughly $95, so if the Energies gain strength as a sector Crude could actually become a good buy at some point.

Euro- Like Crude Oil, the resistance from 1.3950 - 1.4050 in the Euro is still holding strong, but I would rather avoid taking the whole loss when I believe there is a good chance that the resistance will fail. The velocity that the dips are being bought with in the Euro market though has me wanting to sit on the sidelines rather than try to sell the rallies. Over the last 24 hours the Euro was able to rally nearly 240 ticks off its lows at one point on the heels of the Equity rally. While this resistance continues to hold I do not view the Euro as a good long position so I recommend staying flat for now. If the Euro is able to settle above 1.4050 I believe that the Dollar Index will continue lower to 75.00 with a correlated value in the Euro looking roughly like 1.45.

Soybeans- My current objective for the Soybean market is $11.95, which was nearly reached this morning. I believe that Corn can easily continue higher, but I think that Beans will struggle around the $12.00 psychological level. The spread between Beans and Corn (Beans - Corn*2 to chart) has now fallen below the pre-September report lows and now looks like it could continue through even and into Corn's favor. I still advise looking to buy Corn dips, sell Wheat rallies, and to keep an eye on Beans around $12 as an area to take profits on longs.

Curious Economic Data Response- The FOMC minutes were released yesterday afternoon around 1 pm. They basically did not tell us much that we did not know already, but they did take a stronger stance that QE was even more likely. There was some dissension about the timing of initiation and the amount of time to prepare the intricacies of the plan, but it definitely sounded even more sure that it was coming. While the stock market has been bought following almost every number good or bad over the last month and a half I would expect that of any piece of news this would be one that was bought. However, it was followed by a weak rally attempt that fell back to pre-announcement levels within 20 minutes. While the market did retrace and hold this rally later in the afternoon I find it curious that the rally on this news failed. Continue to focus on buying the dips, but file this bit of information away for November 3rd when we will know election results and will hear from the Fed next.