Friday 11/12/10 Commodity Ideas

Opening Note:

Yesterday
The market began the morning weaker on continued European Debt worries and the continuation of the precipitous fall in the Euro. The Euro eventually succumbed to the pressure after a second battle with the key 1.37 level to settle at 1.3659. While the Euro ground lower throughout the day, many Commodity markets and especially the Equities performed above expectations comparatively. Following an early sell off across the board on the stock market open, the Equities actually formed a Bullish intraday trend with the worst of the other markets only trending slightly lower.

The Grain markets and inter-crop spreads were especially interesting yesterday following Informa's planting expectations for 2011. The numbers showed Corn garnering more acres from Beans than expected. This produced a sharp rally in the July'11 - Dec'11 Corn spread while the front month Dec'10 contract was lower on the day and a break in the July'11 - Nov'11 Bean spread while the front month Jan'11 contract was moderately higher on the day. This relationship between the spreads and outrights was tricky and counter-intuitive, yet explainable as the 2011 crop was the story in the spreads.

Today

Asian Sell Off
Tempered disaster struck last night at 7 pm (we'll call it a tropical storm compared to the flash crash's Category 5) when the Asian market opened. In unison it looks like the continent decided that the Irish contagion risk was too high and dumped a significant amount of Commodity positions. Markets that have stronger fundamental ties to Asian demand like the Metals, Crude Oil, Soybeans, and Bean Oil saw the sharpest declines. It just so happens though that most of these markets were also the comparative strengths and best performers amongst the broad market over the last several weeks or months. (Leader? Laggard? Who knows, but I understand why some of these hedge fund managers that have been successful for decades are deciding they have enough money to retire this year.) The break in the market until the European open was rather relentless as well. Since short term statistical trading programs have flooded the market there is usually a fade that comes into to chop out the bandwagon money riding the short term wave. This was not the case last night though as these programs were run over as the selling came fast at first and then appeared to almost wait for bids to enter to take them out.

Euro Higher?
The most curious thing this morning is that the only markets higher on my board as of 7 am are the Treasuries, Swiss Franc, Yen, and THE EURO. Since 1:30 am the Euro has actually formed a Bullish 15 minute chart trend to carry the market back above 1.37 at least temporarily. Meanwhile most of the troubled markets from last evening have stabilized, but not rebounded much. This tells me that while the driver for the move was based on European risk it was more of a long term fundamental puke-job rather than a move based on the news of the hour or day. This makes the market right now, as Bernacke put it, "Unusually Uncertain". If the Euro continues to strengthen along this trend then we could actually see markets exceptionally lower that are nothing but buys for the rest of the day.

Less Probability of Market Capitulation
The Euro has again become a significant driver in the market meaning that the outlook and game plan has changed. In both January and May of this year it was the buildup of a falling Euro that eventually led to the fast market sell offs. If the Euro continues its descent then there is the definite possibility of this occurring for the 3rd time this year. The supportive Physical Commodity, Equity, and Currency markets continue to hold up relatively well compared to the Euro. For right now though I am taking the stance that the market fundamentals and sentiment are different this time around. In January and May the U.S. economy was running on the fumes of government stimulus while a new package has been established and has yet to even begin. Furthermore, The Fed has pretty much decided that their game plan is to no only infuse inflation into the Economy, but to hopefully enact the "Wealth Effect" by targeting a higher stock market as well. We have yet to see how tight The Fed policy will be for the market, but I would rather pick my spots to buy rather than fight the Fed. While there is the possibility that there could be another sharp break prior to Fed intervention, I am not trading on this philosophy for now and would rather be on the sidelines than exposed to the risk of Government intervention.


Buys to Watch: (No Buys, Just a Helpful Tip)

Keep Up Charts of Commodities in Euros- I get asked all the time how I keep track of the diverse markets. The answer is organization by sorting the markets into Sectors, eliminating the ones without a story, and establishing the leader and laggard of each Sector daily to minimize the focus. Since the beginning of the year I have had an entire sector (or row on my quote board) devoted strictly to individual Commodity markets versus the Euro. This means I have each Grain, Equity Index, Crude Oil, Metal, and Currency divided by the Euro to establish the ratio. Right now the Quantitative Easing trade is generally holding up the physical Commodities (other than last evening), making it appear that with the Euro out of the equation they would prefer to rally. While this relationship may shift and the Commodities may begin to sag on their own, this means that a long position may still be profitable. While the Euro is a story I think you need to at least take a look at the Commodity vs. Euro chart prior to execution to establish whether the Euro risk is something that should be hedged or reduced. I have found some great individual relationship trades strictly based on these charts that I would not have normally found as well. If you are shorting a market I see no reason to take the Euro into account, but prior to Longs see if a short Euro would add to the trade.

Sells to Watch:

Bonds- I am giving the Bonds another shot in the Sells despite the overnight spike rally. I believe this rally was based on "run to safety" buying in response to the Asian sell off, but a move that was clearly wrong so far. This rally continued up to my next resistance level from 129.22 - 129.27 prior to reversing and actually trading lower again this morning. With the market back below the 129.05 breakout I believe that you can enter a minimal short position again based off the resistance from 128.24 - 129.06. If this resistance is violated again then it is time to hold off and wait for a test of the Bearish daily chart trend from the high Oct. 12th - Nov. 5th to be re-tested. The longer term objective remains 123.00 on the reversal pattern.

Put on the Radar:

Sell Wheat- Overnight the Wheat market fell along with all of the other Grains. The Beans and Corn were both weaker though with the Wheat the strength though. Unless proved otherwise I am concluding that this move was a liquidation of positions based on Asian demand, so it would make absolute sense that Wheat was not the weakness as Corn and Beans have more interest and demand story for now. This means I am still looking at Wheat as the best short, and likely most consistent, among the Grains. After touching the top of the triangle overnight Wednesday evening the market has fallen back to the Oct 4th - Oct 22nd base trend at $6.88 today. Below this level the market has a rough projection of $6.00 for the Dec contract ($6.40 for March). The apex is nearing for the triangle, so I think that it is important that this breakout is established by Monday at the latest. Otherwise, I expect more of a sideways decline rather than liquidation with momentum.

S&P 500 & Nasdaq- In relation to some of the other markets the Equities actually held up rather well last evening. The spike lows for each market held critical support with 1192.50 for the S&P 500 and 2142 for the Nasdaq. I think that you can continue to look at the stock market as a buy above these levels, with a move below likely producing a correction that could last several weeks.


Notes:

Canadian Dollar vs Australian Dollar (Canadian/Aussie to chart)- The Bearish trendline for the chart since early June has been violated over the last 3 days. Since the flash crash and market plummet in May the supportive markets established at least a base in early June with many of the physical Commodity markets actually rallying with strength since this date (Metals, Grains). It is no coincidence that this Currency relationship has followed the same move and the violation of this trend is a warning signal for the Commodity rally. The Aussie tends to have more volatility than the Canuck and moves directionally more during times of weakness or strength. I think it is wise to hold off for now, but long Canadian vs. Short Aussie could be a good longer term Currency trade on the horizon.

Crude Oil- There was some large liquidation in the Crude Oil market last night that took out my $86.45 stop loss level for the long position. During times when people "just want to get out" the volume based support and resistance levels are rendered basically useless, as is the case over the last 14 hours. I think Crude is way to unpredictable right now to hold a position in either direction. The trend continues to look constructive, but Bullish momentum has flagged and outright price has not rallied as much as I would expect in relation to the gains in open interest. The longer term target for Crude near $95 is still in play, but the indecision, volatility, and subdued momentum make Crude an undesirable long for right now.