Monday 11/15/10 Commodity Ideas

Opening Note:

Yesterday
Concerns that China will take further action to curb inflation and European default worries continued to pressure the market throughout the U.S. session Friday. Commodities with the strongest Chinese demand saw the largest declines with Crude falling nearly $3, Silver down almost $1.50, and both Soybeans and Corn settling limit down. This sell off was not limited though to just markets related to Asian demand as contagion spread across all of the supportive markets. In many cases it was actually the best performers over the a last months and weeks that saw the largest decline as investors that drove the market could not get to the exit door quick enough.

The most interesting bit Friday was that for all of this market sell off the Euro was actually trading higher on the day. There has become almost a culture of acceptance and belief among the media, and often times in the market, that the correlation between Dollar and Commodity prices is in stone and can therefore be extrapolated down to a weekly, daily, or even hourly section of time. It is pretty clear though that if you hold the microscope up to the relationship that it is a lot more loose than others may have you believe. The relationship is real and holds up over time, but try to avoid the the trap of breaking it down too micro.

Today
Most of the supportive markets are at least slightly higher this morning. The Euro is lower however, helping to further confuse those looking to the Dollar/Commodities relationship for answers. The Treasury market prices are significantly weaker across the entire curve with Ten Year Note testing a key Bearish reversal level this morning. Most of the markets in free fall Friday have found stability overnight and into the morning with some even managing recovery rallies.

I have more details on the Radar, but barring horrible Economic data this morning I believe that there are a number of supportive markets that have capitulated to price levels that should find support. We have confirmation so far that the puking of positions has at least stalled for now, so I expect that there should be some recovery for the next couple days at least. Despite the Euro's weakness and the fundamental concern over Chinese demand, I still believe that the Physical Commodity, Equity, and Foreign Currency markets wish to proceed higher over the next several months based on Quantitative Easing and positioning for the inflation that may come down the road from the package.

Buys to Watch:

Sells to Watch:

Bonds- After a fake out rally Thursday evening the Bonds finally displayed strong confirmation Friday of its Bearish reversal. Below 129.05 the reversal now has a longer term (over the next couple weeks) objective of 123.00. This morning the Bonds are already significantly lower, but there are two different strategies that I am looking at for new entry or to add to the position. First, there is higher volume resistance from 127.27 - 128.05 as an area to sell against with stop placement just above. If this rally does not happen though then it is important to pay attention to the 10 Year Note. The 10 Year has violated its long term Bullish trend and is testing its own Bearish reversal level this morning. Below 125.015 the 10 Yr. projects a move to around 122.16. If the 10 Year does confirm a move below this level then the Bonds can be sold based upon this action. This morning there has been a lot of chop in the Treasuries, so be patient and wait for the opportunity rather than just jumping in.

Wheat- The sell off in the Grains Friday set off the Bearish triangle pattern in the Wheat market below $6.86. The December contract now has a target around $6.00 ($6.40 for March) with the pattern trendline at $6.89 1/2 today. Beans and Corn were weaker on Friday, but I again believe that this was more based on Chinese demand concerns and liquidation in the stronger markets. Wheat has generally been the laggard of the Grains and should be the consistent weakness still despite Chinese concerns.

For new short entry there is a low volume zone between $6.77 1/2 - $6.85 with higher volume resistance from $6.85 1/2 - $6.90 1/2 for stop placement above. If the December contract trades above $6.90 1/2 again then I no longer advise holding a short position in the market. While holding a short position it is also important to keep an eye on the support levels as areas to temporarily take profits or reduce position size. It looks like buying interest is viewing the Wheat market as possibly a sideways item with support near $6.65 and $6.43 1/2 on a range trade. It may be wise to trade in and out of the Wheat market around these levels rather than holding just for the longer move.

Put on the Radar:

Sticky Levels After the Capitulation Friday

S&P 500- Although the Nasdaq was unable to hold its own key support the S&P 500 has now established support at 1192 on three separate tests. Over the last 6 six sessions the stock market has consistently declined and now looks positioned for a recovery rally over the next 2 - 3 sessions. I believe the Nasdaq is generally the better buy among the Equities still off of this S&P 500 support.

Crude Oil- The December contract settled nearly $3 lower on Friday to bring the market back on a test of the original $84.50 Bullish breakout level on the range. Like the Equities, Crude has found support on multiple tests of the $84.50 level. The technicals still show negative momentum after Friday, but I believe this level can be looked at as a base for a 2-3 day recovery rally as well.

Gold- $1356 - $1360 is the base that Gold will look to build upon for short term recovery.

Sugar- From Wednesday's settlement Sugar declined 20% through Friday's close. This morning the market looks to be establishing at least a base to hold off further liquidation. On three separate tests near 25.50 cents/lb. the draw downs have stalled, so look at this level as well for a short term recovery base.

Euro- I still believe the next downside target for the Euro is between 1.32 and 1.33. For now 1.36 has established itself as a sticking point that could support gains at least temporarily. As the Euro is a weakness this morning this is my least favorite of the short term buys, but worth noting at least as an indicator for the others.

Notes: