Friday 11/5/10 Commodity Ideas

Opening Note:

Yesterday
Nearly every supportive market settled with impressive gains as buying carried over from Wednesday's Fed announcement. Most of the market was already much firmer by the time the U.S. stock market opened though, providing less opportunity for entry on pullbacks and a slow intraday trade. Slow was not the word to describe the Metal Sector however. Money poured into all of the individual markets with Gold settling nearly $50 higher and Silver settling a whopping $1.60 higher (or over a 6% gain). The Equity Indices all posted impressive closes as well with the Dow gaining 210 points. The interesting note about the stock market was that on a day of strength it was actually the Dow that led and the Nasdaq that lagged in contrast to the leader/laggard relationship since September. Other leaders of note were the British Pound, Crude Oil, Cotton, and Wheat.

Today
As of 7 am the macro market is slightly weaker, led by a rally in the Dollar Index overnight. The Euro is actually the weakest Currency on my board this morning and actually the laggard market overall. The Energies and Metals are the leaders thus far as they have managed to hold onto slim gains thus far. Unemployment is set to be released at 7:30 am, so I will provide a late note because the market dynamics will likely shift. I hate writing during Unemployment because the letter often displays bipolar characteristics between the 1st and 2nd half depending on what happens. Poor time-planning...better luck next month.

After rereading yesterday's letter I realize that I practically wrote a book (non-fiction of course). Necessary because there was an important pivot point on Wednesday, but I thought I would give my hands and your eyes a break this morning. I stand strong in my opinion that the QE sell the Dollar and buy EVERYTHING else trade will continue for at least another month. Please refer to yesterday's letter, also posted on my blog, for the schpeel.

Late Note 8am: The Unemployment Report was actually one of the more Bullish we have had in a long time with positive revisions to October, payrolls that beat expectations this month, and a steady 9.6% Unemployment. You would not guess this was the case though from the market reaction thus far. The stock market and Crude Oil got the best initial rally off of the number, but the rally was small and both markets have given back the gains over the last half hour. The real shocker to me was an immediate 75 tick break in the Euro as the U.S. Dollar rallied. I personally stepped into a small Euro position (luckily near the bottom) and have some $89 Dec Crude Oil calls still, but I am not too encouraged on this market reaction and may have a quick ejection button. You can look at a positive jobs report as a Bullish scenario for the Dollar under the pretenses that a better economy means less stimulus. However, this is a contrary move to the market relationship trends over the last couple months.

My guess is that the markets are a bit hungover from yesterday's rally with some indigestion from all the news this week. My Buys and Radar recommendations below still stand as written, but I caution that something feels off in the market today. I think that the critical support will hold, but it could be a saggy day.


Buys to Watch:

Euro- I have not found any pertinent news regarding strictly the Euro this morning, so it is a bit concerning that it is THE laggard market this morning. I still really like the technical setup on the daily chart though and believe that the Euro is still in good standing for rally continuation. The intermediate target based on the continuation triangle pattern is 1.4456, but the Euro is likely on a 3rd leg higher rally that projects to roughly 1.51. The entry setup I suggested yesterday was initiated overnight, but a fast capitulation break this morning took out the stop loss level (my 20 minute brown line commute this morning cost just a little bit more than the standard $2.25 fare). There still is a good new entry level for the Euro though in the low volume zone between 1.4042 - 1.4080 with higher volume support from 1.4000 - 1.4040 for stop placement below. If the Euro trades below 1.40 for more than an hour then I think it would be time to reexamine the market.

Australian Dollar- The Aussie is one of the stronger Currencies this morning and may be a better purchase than the Euro at least for today. The only problem is I do not have a great entry setup based on trade volume for right now, so I think focusing on a 15 minute chart to spot bottoming action is the best strategy at least for today. The shorter term projection for the Aussie is from 1.0204 - 1.0237 based on the cup and handle pattern, but I believe that this is just an initial portion of a much larger move. Based on the individual chart technicals I already have the Aussie completing the 3rd leg on its summer rally. However, although the Aussie and Euro do not necessarily travel in tandem but I believe that if the Euro is on a 3rd leg higher to 1.51 then the Aussie will be on the same time schedule. If the market trades below .9980 for more than an hour it would similarly be time to re-evaluate.

Crude Oil- One of the leader markets this morning, Crude Oil remains my favorite Buy for the time being. Yesterday's higher settlement confirmed the longer term pattern objective range from $94.95 - $96.55. Remember though that $90 will at least provide some temporary resistance as a good place to take profits and re-evaluate the trade. Like the Aussie I do not have a good entry setup based on trade volume. However, if Crude holds a price above $86.10 on a rally continuation then this would be a great sign of strength. A move back to the $84.45 breakout level at this time would be troublesome to the Bullish case, so I would not hold a long position to this point.

Sells to Watch:

Put on the Radar:

Buy Wheat- Just to recap, the triangle pattern I have the Wheat market in is drawn from the high Oct 11th - Nov. 1st and the low Oct 5th - Oct 22nd. This provides an upper value on the triangle of $7.24 3/4 for today. Overnight the market traded to $7.23 on a test of this level, but subsequently reversed to trade lower on the session into this morning. Wheat was the leader of the Grain Sector yesterday (along with Bean Oil) and over the last couple days there has actually been Buying enter on the close while Corn has been sold in a relationship trade. This means that some of the huge interest in the Corn market is shifting to the Wheat market for the Funds and Investment firms. With the Crop Production and Supply/Demand report on November 9th I think that it is now unlikely that Wheat garners the momentum to initiate the Bullish pattern prior to the report. The objective for the pattern would be near the $8.20 level. While I do not recommend carrying a substantial outright position into the number it is possible that this is the catalyst that jump starts the rally. Vol premium has increased leading up to the report and will likely be crushed following the number, but for a lower risk position into the report I still am considering the $8 - $8.40 call spread.

Buy July'11 - Dec'11 Corn Spread- Today is day 4 of the Dec'10 - Dec'11 Deutsche Bank roll for Corn. There will still be Bearish pressure on the July - Dec spread because of this, but I am fairly confident that the spread has found at least a short term base around the 50 cent level already. For the daily chart keep an eye on Stochastics as the indicator is attempting to form a Buy signal crossover for about the 5th consecutive day. If Stochastics settles with a Bullish cross then I believe you can confidently look to at least establish an initial position. The fundamental analysts can break down the numbers better than I can, but the USDA trends and the production estimates do not appear to be too threatening for holding a position in the July - Dec spread through the report (please do your own research into this though). My 3rd leg objective for the spread is $1.10 and along with the Wheat call spread this is the only other position I will consider carrying into the Nov 9th Grain report.

Notes: