Friday 11/26/10 Holiday Briefing

Intro:

The Holiday trade is always thin and over the last few days has definitely been choppy. The risk trade can not seem to decide whether it is concerned about Europe, Asia, Quantitative Easing, or any combination of the three on an hourly or daily basis. The Equity markets continue to trade in a volatile yet well defined range. The Physical Commodity markets are generally weakening, but with swings that really test your conviction. The one thing that I can say with conviction is that the Euro is weak and looks to be dragging the other supportive Currencies like the Aussie, Canadian, and other Europeans along for the ride.

I continue to stick by my stance that the supportive markets will weaken into the year end. In almost every market we have a well defined top already with a number of confirmed reversals and reversals on the horizon. Recall that on just Monday the Euro was trading near 1.38 on the high and has already traded 1.32 as of this morning. The relationship between the Euro and Commodity/Equity prices is more loose than the media may have you believe. Each time we have seen a runaway Euro though it is only 3-6 days until the rest of the market begins to correct and take this move into account. The Equity and Commodity markets have acted resilient throughout this 6 point Euro move this week, but look for a price break among the supportive markets next week to take this move in the Euro and the U.S. Dollar into account.

I figured that since I have not written since Tuesday I would point out a few trades that are now in play

Initiated Patterns and Trades:

Sell Australian Dollar- Originally initiated on Tuesday and negated on the reversal Wednesday, the Bearish head and shoulders pattern is in play again today. For the daily chart the neckline value for the pattern is .9741 today with a projection for the move of .9245 now. Chances are nearly 100% that the Aussie settles below this breakout today, so I believe that Sunday evening/Monday you can begin to look for pullbacks and opportunities to enter a short position. I believe that this move will likely progress now without another test of the neckline.

Sell Euro- The Euro is the most consistent weakness among the Currencies. For right now I have the Euro in the middle of a flag pattern that projects a move to 1.2953. The Euro has already made a big move, but I think that until it reaches this level you should continue to aim at selling the rallies. Oftentimes the Euro leads the larger market lower while the others lag, so it is possible that the Euro finds a bottom quicker than other markets like the Aussie Dollar.

Buy Dollar Index- As the inverse to the Euro the Dollar Index has now initiated its own Bullish head and shoulders pattern. The neckline today sits at 79.99, with the market well above this level. Because the Dollar Index has a spiky low on a reversal day I am leaving the projection for this pattern as a ranger from 83.40 - 83.90.

Sell Euro vs Buy Swiss Franc (Euro/Swiss Franc to chart)- As another option to play the declining Euro you can also add a Long Swiss Franc position. The cross between these two Currencies has initiated its own Bearish head and shoulders pattern today. Below 1.3320 the cross has a projection of 1.2872. I believe you can trade this position with a bit more size than you would just an outright Euro position. Remember that this pattern was set off today, so it is wise till wait until at least midday Monday for confirmation prior to adding size.


Trades and Patterns on the Horizon:

December Gold- We will switch to the February contract soon, but for now I will refer to December. The large Bearish head and shoulders pattern on the Gold daily chart is nearing a test of the neckline. For Monday the neckline value is $1336.5. The pattern projects a move of roughly $99, so if Monday is the day then the move is to $1226.

December Silver- Silver will be switched to the March contract soon, but for now it is still December. There are two separate patterns that I have on my radar for Silver. The closer yet less reliable pattern is the Bearish head and shoulders for the daily chart. For Monday the neck line is $25.98 with an objective of $20.93 if it is set off Monday. This neckline has an steep up-slope though making the projection less reliable in its own right. Below $24.98 Silver has an Bearish cup and handle objective of $22.07, which I believe is a lot more likely for the move. The 38.2% retracement level for the large Silver rally is $24.925, which supported the previous $24.98 low. The "Box" between the 50 and 61.8% retracement levels is $22.20 - $23.56. My game plan is to look at establishing an initial position once there is confirmation on the head and shoulders pattern, but not adding until there is confirmation below the $24.98 breakout.

Buy Gold vs Sell Silver (Gold-Silver/2)- This is the way to hedge some of the risk out of the Metal break. The spread is trading around $20 this morning with Silver much weaker. My guess is we will see the individual markets initiate their patterns with this spread around $50 (with Gold premium). Above $87.8 this spread has an objective of $200. Once the individual patterns for Gold and Silver are set in motion then you can look to enter this trade even prior to its own breakout.

March Coffee- There is a Bearish head and shoulders pattern forming on the daily chart for Coffee. A move below 200.50 cents produces a target of 175.75 cents/lb. Coffee is thin and volatile at times, so any position should be smaller than what you would trade in other markets.