Monday 11/22/10 Commodity Ideas

Opening Note:

Yesterday
The big news Friday was that China again raised its bank reserve rate. This was the same news that sent Commodity prices with the highest Asian demand reeling earlier in the week. The market reaction was different this time around though. The Metal markets that led the decliners on the last Chinese news recovered after declining into the morning with buying entering around 9:30 am. Both Crude Oil and the Equities also received a boost after trading weaker to eventually settle higher on the session. Trading against the Grain though were both Soybeans and Corn. After an hour long rally on the gap lower opening, both markets declined throughout the rest of the day as Beans settled over 40 cents and Corn 20 cents lower.

Towards the latter half of last week it was apparent that there was a difference in the relationships from Commodity to Commodity. This divergence in the market correlations was larger than we have seen for several weeks. The larger moves were spurred by fund and big investment liquidation that was not fluent across the entire market. This makes trying to pick the best position for the day or even week more difficult. Figuring out when big money will take profits or exit the market involves much more guessing. For now the Grain markets look to be under the most pressure from the Asian demand story and more so than the Metals, Energies, or Equities. Keep an eye on the open interest for the markets to get a better idea whether money is actually exiting. Keep in mind though that until December options expire even the Open Interest can be deceiving with positions coming off the table via expiration.

Today
The market started out firmer last evening, but has sank into this morning. The S&P 500 initially rallied above my 1202 resistance, Silver above my $27.68 resistance, and the Euro well above 1.37. Without much standing in the markets way the trade looked to be highly constructive to begin the week. Since 5 am the market has especially declined though with the S&P 500 trading 13 points, Silver 70 cents, and the Euro 170 ticks off their highs late last evening. The Grains are the strength so far this morning along with the Swiss Franc, and the long end of the yield curve. I suspect that the Grains will not remain the leader for long though as they fall back in line after being closed for part of the decline. When the market has a clear path higher and reverses into the morning it has a tendency to follow this reversal for the rest of the day. I will be looking for opportunities to short the supportive markets and go with this morning's trend throughout the day.

My market beliefs were tested over the last few days, but this morning's reversal reaffirms my opinion that we are generally heading lower over the next several weeks before end of the year positioning. A Bullish head and shoulders pattern looks to be forming in the Dollar Index that I believe will initiate within the next week and a half and act as a catalyst for this macro move. The resilience displayed over the last few days makes me believe that this correction will not be too dramatic though, just a healthy and needed break from the 3 month Bull market.

Buys to Watch:

Sells to Watch:(NO more Bonds, No more Wheat)

Put on the Radar:

Australian Dollar Bearish Head and Shoulders- On the daily chart draw the trend lines from the low Oct. 27th - low Nov. 16th to produce the neckline. The pattern has a 5 point projection if it is initiated. The neckline value is .9715 today, so it will still be several days until it is potentially violated.

Dollar Index Bullish Head and Shoulders- To form the neckline draw a trend line on the daily chart from the high Oct. 19th - high Nov. 16th. There is at least one other possible way to draw this neckline, but for right now I am looking at this as the more accurate trend. The magnitude of the pattern once initiated would be 3.5 - 4 points depending on whether the spike low from November 3rd is taken into account. Like the Aussie Dollar, the 79.78 breakout value for today means it is unlikely that the pattern is initiated for several days.

Buy Gold vs. Sell Silver (Gold-Silver/2 to chart)- On Friday my initial entry attempt was stopped out by the late afternoon (I was actually out a bit earlier once it was clearly not constructive for the day) with a move below -$10. I can not and will not recommend any outright position in the Silver market right now due to volatility and inconsistency. This makes this spread, although especially frustrating at times, the best vehicle to trade a correction in the Metals. While Silver remains premium to Gold in this differential and huge support on the weekly chart at -$50 there is less risk and great potential here. That is why I think you still pick your spots and continue to look for opportunities.

Although I was stopped out below -$10 I actually feel even better about the trade this morning after the price action overnight. On the daily chart the low close from November 9th of -$35.2 was tested overnight and the spread found support near -$30 before rallying into this morning. This makes a potential Bullish cup and handle (or double bottom) pattern still in play as long as there is no trade below the Nov. 9th low. Pull up a 120 or 240 minute chart for this differential pattern to get a closer look. For this chart there not only is clearly a possible base forming, but there are also unanimous and confirmed buy signals for Stochastics, RSI, and MACD. I expect that this base overnight above the November 9th low will begin the Bullish double bottom pattern with a move above $87.8 providing an objective of roughly $200 (premium Gold).

This is a potentially huge risk/reward at this time, so I continue to throw out feeler positions to see if I can get an early leg in. I personally am long again from early this morning, but will leave the recommendation for the trade on the Radar for now and "proceed at your own risk".

Notes:

Wheat- The $6.70 1/2 - $6.76 1/2 higher volume resistance in Wheat still has not been tested and continues to hold. This keeps Wheat strictly as a short position in my opinion for now, but not necessarily the best today. The moves right now are coming in the markets where there is liquidation and it is clear from the Wheat open interest that there is not that ammo to move the price currently. Both Corn and Soybeans have been better shorts over the last week with Wheat trading in an idle range. My objective of $6.00 for the December contract and $6.40 for the March contract still are in play, but I recommend exiting the Wheat market for greener pastures right now. It could very well be a crawl lower, so there are better trades.

Bonds- The Bond market along with the rest of the Treasuries seems to have at least a temporary base. Furthermore, I am getting signs this morning that there is some money coming into the long end of the yield curve on a safety basis from the risk in Equities, Commodities, and therefore Europe. The Bonds still continue to gain on the 10 Year as well. This is too many symptoms of illness for me, so I recommend exiting short positions in the Bonds currently. 123.00 is still a valid objective, but there may need to be a further rally and a longer consolidation that I do not wish to sit through.