Commodity Ideas Wednesday 11/3/10

It has been a week since my last letter with a lot of shifting market action to take into account over this time. Because I have more to cover and can not go into as much detail as usual I decided to change the letter's format today. The aim is to look at today's FOMC announcement as a pivot point that should confirm and establish a macro direction over at least the next few weeks. I hope that the format is easy to follow, but email me if you have any questions or wish to discuss the markets.

My intention is to proceed from today with the daily morning letter as usual. However, as I am still writing the letter free of charge as an individual I have to prioritize my time to focus on my own trading, sleep, and health first for the time being. This means that there will be sporadic days that I can not write the letter without notice. If this is a problem for you let me know, but otherwise I plan on continuing to write to the best of my abilities.

Opening Note:

What I Have Seen Over the Last Week
When I last wrote I was moderately leaning towards the opinion that there was topping action in the macro market with an ensuing break on the horizon for the supportive markets. While this opinion seemed to be profitable every other day for a 2 week period (like an eerie clockwork), the supportive markets have moved higher over the last week in general. Over the last several days the momentum has taken a surely Bullish tone with the Euro, Metals, Energies, and Equities all proceeding with consecutively higher sessions. There was a several week period where the markets appeared in a range, a point 4 days ago when they looked on the verge of a Bearish breakout, but now most of the technicals and relationships are decidedly Bullish among the supportive markets.

What Will Make an Impact
Yesterday was Election Day, today is the FOMC announcement, and Friday is the monthly Unemployment Report. With all of this critical data released over such a short time frame there is a lot to digest and take into account. The election results are basically in with the Republicans taking control of Congress yet the Democrats retaining majority control of the Senate, despite relinquishing a few seats. There is no real shocker here and the markets had very little reaction to the news. Friday's Unemployment Report is important as far as data goes, but over the last two months the markets have given only the concessionary short term reaction before continuing on with the real business. I expect little change in the reaction this month and venture that the number will remain rather steady (I have little interest in the number until we have moved a 1/2% in either direction). With both of these numbers seemingly "ho-hum" I, as well as the rest of the market, is pretty much focused solely on the Fed announcement today and the market reaction.

The guesses range from $500 Billion to $1 Trillion for the Quantitative Easing announcement today, but pretty much the entire market is banking on The Fed announcing this package today. There are a lot of different variables among this equation, but the consensus opinion for now is that a $500 Billion plan would be enough to at least hold the markets steady in reaction if not rally them. I am not in the business of breaking down the $500 billion and deciding its effectiveness, so I am more concerned with how the market reacts to the news more than what the actual news is. There are those that believe the announcement will continue the "Bearish Dollar, Bullish Everything Trade" and there are those that believe the "QE and Elections are Baked in the Cake". Instead of Buys and Sells today I laid out the markets that I am interested in Buying if the FOMC reaction is Bullish or Selling if the FOMC reaction is Bearish.

"Baked in the Cake" Seems Oversold to Me
I wrote my night time "Bullish Momentum Is Shifting" rant back on October 6th when I first felt that the QE trade was slowing. If you recall this was a warning of shifting momentum rather than an announcement to sell everything. Up until just last Friday this still looked fairly accurate as most of the highlighted markets travelled sideways. Over the last week though the macro relationships and technicals have shifted more towards a Bullish continuation scenario. The Euro, Australian Dollar, and Crude Oil have or are on the verge of establishing strong Bullish continuation breakouts that should lead the supportive markets higher overall. This "Baked in the Cake" or "Sell the Fact" idea has also garnered a lot of support over the last month making it much less of a minority opinion.

The Funds and Investment Money are already extremely long the "Buy Everything, Sell the Dollar" trade, so if there was a sell the fact reaction coming up I would expect that these positions would be lightened in advance to today's announcement. Not only are they not lightening up, but they are adding to their positions over this week and pushing the Bullish momentum. It is not often that you catch the entire market this off guard, so a "sell the fact" move could look more like a flash crash. The Fed knows what the market is expecting and has provided some veiled warnings to not expect too much (meaning $1 Trillion), but they are pretty much stuck in a scenario where they need to come up with this QE package today. I believe they will not disappoint and that these fresh technicals and Bullish momentum will continue to squeeze the "sell the fact" shorts over the next several weeks. This means that my finger will be on the Buy trigger rather than the Sell as the announcement occurs.

I am going into the FOMC this afternoon with no positions. I believe the trade today will be mostly preparation chop, so all recommendations below are strictly after and in reaction to the announcement.

Buys if FOMC Bullish:
I expect that we will see all of the supportive markets rally on a Bullish announcement. This means you probably can not go wrong as long as you stay out of the Softs or Nat. Gas. I have highlighted the markets with clear patterns though that I believe will perform the best.

Euro- I have the Euro establishing a Bullish breakout yesterday on a continuation triangle pattern. To form the triangle draw trend lines from the High Oct. 15th - High Oct. 25 and the Low Oct. 20th - Low Oct. 27th. Yesterday the market settled above the 1.3988 upper range value and is looking for confirmation this afternoon. Today's trend value is 1.3974 with a close above this level providing an objective of 1.4456. The Euro is the highest correlated Currency on an inverse to the Dollar Index. If there is a Bullish reaction you can bet that the Dollar gets pummelled and the Euro skyrockets. With a clear continuation pattern already in motion this makes the Euro one of the easier buys.

Australian Dollar- Yesterday the Australian Dollar settled above the Bullish cup and handle breakout of .9916 that provides a target range of 1.0204 - 1.0237. The Aussie is sitting just above this breakout level today and will likely remain there for the rest of the day. The settlement is what matters though, so if the reaction is Bullish into the close the Aussie is my second favorite Currency buy to the Euro.

Crude Oil- Crude was on my Bearish watch list and sell list for most of the last 2 months, but I became disenchanted with the market once it posted a 2nd Bearish breakout failure and the open interest receded. Over the last several sessions though Crude has become a leader among the macro market. December Crude Oil could initiate a Bullish pattern above $84.45 that would provide a target range of $94.95 - $96.55 with two consecutive closes above this level. This morning the market is already trading above $84.45 as the overall macro strength again. Wait until after the announcement, but if it appears Crude will hold and rally above $84.45 then I think it is safe to jump on an initial long position. Throughout the recent range for the daily chart RSI has maintained a Bullish range while MACD would likely produce a buy signal with a higher close today. Expect Crude's next move to be to $90 as a temporary stalling point on the larger move.

Nasdaq- The Nasdaq reached and has advanced through my long term weekly chart objective range from 2080 - 2135. However, I now have an extended objective for the market near 2240 if it can maintain its current Bullish trend without a significant pullback. The Nasdaq has continually outperformed the rest of the Equity Indices and there is no reason to expect this trend to disappear. My weekly chart objective for the S&P 500 still is from 1208 - 1245, so this is another level to use as an indicator on Nasdaq purchases.

Sells if FOMC Bearish:
Like the Buys, I believe that if the FOMC reaction is Bearish there will be a sell off among all of the supportive markets. I have isolated markets with the best technical setups and patterns that are potentially Bearish and still have tops on their ranges. The Euro will likely be a good sale, but I think that the Metals will be the better position in the event of a sell off.

Copper- While some of the Currencies, Energies, and Equities have rallied above their ranges Copper has sat relatively idle. As long as Copper maintains a price below the $3.90 recent high then the market could be setting up a Bearish head and shoulders pattern on the daily chart. A breakout below the neckline near $3.69 produces a target near $3.48. Because Copper is also a thin market it tends to have more volatile moves making it a good trade to jump on for directional continuation.

Gold & Silver- Silver continues to gain in relation to Gold nearly everyday on a relentless trend. This relationship move is a Bullish indicator for the economy as well as the supportive markets. But, when the supportive markets do break Silver usually lags to the Gold. Both markets maintain highs (other than a couple Silver spikes) on the recent range from a couple weeks ago. Either Bearish double top or head and shoulders patterns could be formed on a poor FOMC reaction. While these look like the better markets as sales on this poor reaction I would like to note that they are only sales if the announcement is Bearish. Both Gold and Silver's technicals and momentum point towards continuation higher for the time being with all else in the outside markets neutral. The fact that they have maintained their range and have pattern potential is what makes them the better sale.

Dow or S&P 500- The Nasdaq tends to be the strength and the weakness among the Equities directionally. If there is a Bearish reaction though either the Dow or S&P 500 is the safer sale if you wish to execute in the Equities. I believe that the Metals and probably even the Currencies are a better sale, but I imagine that severe damage would be done to the stock market.

Radar & Notes:

Bonds- Bonds are my wild card market here. The Bonds have shown little to no consistency in their relationship to Equities or the other outside markets lately. In times of gut reaction the Bonds can be a run to safety from falling supportive markets. Other times though, like if the Fed announces a large QE package, Bonds will also be bought along with the Equities to front run the Fed's later purchase. I believe that Bonds are forming an intermediate top after a 3 leg Bullish advance throughout the summer. A break below 129.05 in the market projects a move to 123.00, but recently the market found support on a test of this level. Now the down trend over the last several weeks has been negated, both RSI and MACD for the daily chart are producing buy signals, and Bonds look like a potential buy over the short term. There is still another round of 30 year auctions in a couple weeks and the Bonds have moved cyclically with 2 weeks up followed by 2 weeks down around the auctions. This is the middle of the 2 week up portion of the cycle now. I think the Bonds will remain in a range between 129 - 135 for the time being, but there are a number of different scenarios that could produce a Bond rally this afternoon. Keep them on your radar to go with the Bullish momentum.