Friday 11/19/10 Commodity Ideas

Opening Note:

Yesterday
The market delivered a much needed rally after a week of liquidation yesterday. Excitement over the GM IPO and some European ease while Ireland met with the EU and IMF both fundamentally drove buying. On the stock market open there was a burst of buying for the first hour of trading with the Nasdaq leading the way. For the rest of the day though the Equity markets oddly fell into an extremely tight holding pattern in relation to the range for the day. Commodities across the board also got a boost yesterday as the Euro rallied, Silver went parabolic, Cotton settled limit up, and Crude finally got relief from its relentless fall. Overall it was a strong day across the entire market, but a pretty crappy trade for anybody trying to do anything after 9:30 am.

Today
Yesterday's price action among the supportive markets was good, but the reason that the holding pattern took over for the rest of the day is because the markets settled up against higher volume resistance and pivot points. These levels prevented further gains yesterday and their effect is apparent this morning. The market is only moderately weaker as of 7 am, but I suspect that this could worsen as the markets open. This morning the Euro is higher and the Dollar lower, yet this is not providing much in the way of support elsewhere. The Euro was trading on its lows for the session near 1.36 around 10 pm last evening while much of the market was holding up well. The 126 tick rally from the lows I presume would further support the other markets, but everything else has consistently sagged since the highs around 3 am.

I predicted yesterday morning that the current rally would last between 2 - 36 hours and I am pretty certain now that overnight we reached the highs in most markets before another round of liquidation and price decline. This morning China again raised the bank reserve rate in an effort to dampen inflation in the country. While China has mostly been talk, they are actually taking some real steps that should further pressure the Commodities with the strongest ties to Asian demand such as Crude Oil, Metals, and the Soybean Complex (regardless of the fact that I think their price manipulation will not work for more than the short term and is complete bullshit) I recommend looking to strictly sell rallies for the next few days at least in the supportive markets.

Buys to Watch:

Sells to Watch:

Wheat- Yesterday the Wheat market failed to rally within 15 cents of my $6.70 - $6.76 1/2 resistance level during the day session. This is good evidence for my Bearish stance, but did not allow for re-entry into the market for the time being. I think it is unlikely now that Wheat will reach this resistance level now before a further decline, so it may be necessary to get a bit more creative or just use a 15 minute chart to establish a top to sell. $6.43 - $6.45 is a pivot point for the December contract that now below should provide resistance again. I also am still using the trend line from the open Nov. 9th - open Nov. 12th with a value of $6.48 3/4 today. This line should be used as a basis for the daily settlement. The target is $6.00 still, but if Wheat holds below $6.43 then I can easily see a decline to just below $5.50 (or $5.90 for the March contract).

Bonds or 10 Year Notes (with some skepticism)- Overnight the resistance in the Bond market (now slightly extended) from 126.27 - 127.05 provided the highs for the market. While I still like the Bonds as a short position and believe the 123.00 target will soon be met I am beginning to lean towards the 10 Year Note as a better short. The daily trend is still in favor of a stronger 10 year in relation to Bonds, but there is a solid base that has formed that could produce a reversal in this relationship throughout the next week (Bonds*3 - Ten Year*5...check it out for yourself). The 10 Year Note projection is 122.16, which I believe will be met within the next week if you prefer this market as a short.

Because I am expecting further liquidation in the supportive markets during the next week I think it is important to keep a close eye on the Treasury price action versus that of the Physical Commodities and Equities. On Tuesday I believe that there was some buying that entered the Bond market as the supportive markets liquidated. I think that piling into Bonds as a "run to safety" right now is completely faulty. However, if you begin to see this type of relationship forming then give up on the Treasuries and go short some Bean Oil (or something).

Put on the Radar:

Sell Silver- After last evening's price action I am increasingly confident that Silver has now put in the highs prior to another sharp liquidation break in the market. The reason Silver has outperformed related products throughout the week is strictly based on short term traders picking the 3 month daily trend line, putting up a strong buying stance, and pushing the market higher with the help of high frequency. This has pushed Silver completely out of whack in relation to Gold, the rest of the Metals, and the entire broad market. Strong resistance from $27.24 - $27.68 finally stalled out gains in the market after yesterday's nearly $1.50 rally. Now I expect Silver to go battle this trend line near $25.10 today (not today, but next week) and eventually pullback on a correction into "The Box" between $22.20 - $23.56. I think that you can now begin to look at piecing into a position by selling rallies as a lower close today will prompt me to move Silver to the Sells Monday. Note of caution: Silver and Gold December options expire Tuesday. This is a very large contract for both Metals, so the options will effect the price action significantly Monday and Tuesday. I would not be surprised to see Silver settle near the higher volume $25.00 strike Tuesday.

Buy Gold vs. Sell Silver (Gold - Silver/2 to chart)- I have had this relationship on the radar many times over the last few weeks and I think it is finally very much in play. The weekly chart is firstly most important. The double top pattern in favor of Silver recently reached its objective of -$36. This is a HUGE move...I MEAN EXTRAORDINARY...that has occurred between the Metals over the last month and is due for a very significant correction. There is a whole lot of "Real" support on the weekly chart down to -$50 that should be the final stop loss on the trade, although I believe we will not see -$35 again.

As I believe Silver has now topped, I consequently believe that this relationship has bottomed overnight. I expect a large Bullish cup and handle pattern to form on the daily chart with the $76 close on November 15th the breakout level. If overnight was the base then the pattern would project a move to roughly $160 in favor of Gold over Silver. This morning I purchased an initial positon at $6 and so far it is profitable as a Bullish trend has formed for the spread since 3 am. My intention is to keep at least half of this position for the duration of the move with a stop loss below the overnight low of -$10. The trade is on the radar because it is still rather risky, but I think you can begin to buy the dips with small size and I would not be surprised to see the spread settle near $40 by today's 12:30 pm close. The execution ratio is Buy 1 Gold vs. Sell 1 Silver to make the ticks and contract size equal...easy peasy.

S&P 500 & Nasdaq- Yesterday the Nasdaq ticked above my 2136 - 2142 resistance level, but the S&P 500 held my 1197 - 1202 resistance levels. Both markets have sagged lower throughout the evening, so I am looking at these as highs. The next stop for the S&P 500 appears to be 1150. I think you can look to sell the rallies, with the Nasdaq the weaker of the two markets on the move.


Notes:

Possible Bullish Head and Shoulders Pattern Forming- Dollar Index daily chart.

Possible Bearish Head and Shoulders Pattern Forming- Australian Dollar daily chart, March Coffee daily chart