Monday 11/8/10 Commodity Ideas

Opening Note:

Yesterday
A nonchalant reaction to the positive Unemployment report Friday morning set the pace for what proceeded to be an odd yet interesting day for the markets. The Euro's reaction to the Unemployment number was clearly Bearish as the market established itself as the overall laggard early on. As the Euro makes up the largest portion of the Dollar Index this Euro move in turn encouraged a steep Dollar rally. While the consistent trend over the last couple months has been "Dollar down, Commodities up" on a daily basis, the relationship was at least temporarily stretched as the supportive markets did not experience much of a price break. The Metals rallied to settle much higher on the day, Crude Oil and the S&P 500 managed late rallies to settle in the black, and the Aussie and Canadian Dollars were the positive leaders among the Currencies. I believe that a positive Employment report and inflation prospects on the long term horizon was enough to overcome the Higher Dollar for the other markets Friday.

Today
Around 6 pm last evening the Euro took another sharp dive and has not recovered much as of 7 am this morning. This has caused most of the other supportive markets to also trade lower on the day. These other markets are definitely finding a stronger bid though and are not experiencing a decline in prices consistent with the magnitude of the Dollar rally this morning. Cotton is already trading limit up once again with Silver and Palladium the other early leaders.

The market has become so accustomed to the Dollar and Commodity relationship lately that on days the relationship does not fall in line you get a lot of "how can this be?" reactions. First off, taking into account what has happened overnight, it appears that the market is much more concerned about the default possibilities among the PIIGS countries. If this fundamental idea takes over the Euro trade then the Dollar Index will move higher despite Quantitative Easing actions as the Euro dominates the Index movement. Just because the Euro may get pummeled and the Dollar may rally though does not mean that we will necessarily see falling Commodity or Equity prices over the next few months. We are actually receiving some legitimately Bullish pieces of Economic Data that imply growth (even if it is minimal). More importantly, the investment community seems to determined to load up the accounts with risk assets based on the Fed's determination to continue the market's ascension and infuse inflation into the system. The Euro and the fundamental European debt story will have to be monitored closely, but for right now I am not taking weaker Euro and higher Dollar to consequentially mean weaker Equity or Commodity markets.

The Euro has fallen nearly 3 full points since Thursday's settlement, but I am standing strong in my belief that we will see weaker Dollar and stronger supportive markets over the next month. The Euro is testing key technical support this morning so there should be a clearer picture by tomorrow. If this support holds then I still see the technical ability for the Euro to recover on a rally at least to the intermediate objective of 1.445. This Euro weakness may actually provide good opportunities to get in on some of these other supportive markets as well at a discount today.

Note: Extremely light week for Economic Data, but Crop Production and Supply/Demand Reports for the Grain markets tomorrow at 7:30 am. Extreme volatility could follow so make sure you position accordingly.

Buys to Watch: (Euro and Australian Dollar moved to radar)

Crude Oil- The longer term objective for the December contract remains $94.95 - $96.55 with an eye on intermediate profit taking against resistance at $90. Price has wavered for Crude over the last 2 sessions, but consistent support has been found around $86.14. Two tests of this level have already held and are likely forming a temporary base for Crude to continue to new highs. However, if this level fails on a subsequent test over the next 24 hours then looking for long entry in the low volume zone between $85.14 - $85.60 with stop placement below higher volume support from $84.50 - $85.00 is a good entry setup. There is further higher volume support for Crude Oil from $84.50 down to $84, but with the market breakout at $84.45 I think a pullback below this level would be a signal to get out and re-evaluate.

Sells to Watch:

Put on the Radar:

Buy Euro- This morning the Euro is testing the upper trendline from the continuation triangle pattern that it initiated Tuesday of last week. The trend from the high October 15th - October 25th has a value of 1.3932 today. A settlement this afternoon below this level would negate the triangle pattern objective of 1.4456 as well as the 3rd leg objective of 1.51 for now. The Euro appears to at least have a temporary base forming since 5 am this morning with higher volume support from 1.3906 - 1.3868 holding off a further break in the market. Because the Euro is the key to the U.S. Dollar movement I think attention needs to be closely paid to these technical levels. If the Euro projects further losses then it is time to take a closer look at the rest of the supportive markets (like Crude) to see if their individual stories could continue to rally in spite of the Euro. The higher volume support previously mentioned could also be a good level to fade to test a small initial position on this large pullback, but I would recommend executing a long position in the technically stronger Pound or Franc markets based on Euro levels.

Buy Australian Dollar- As the Euro goes so goes the Australian Dollar for now. The Aussie is the 2nd weakest Currency this morning and without a good setup for new entry I recommend staying out of the market until we get more certainty. Short term objective range is still 1.0204 - 1.0237 on the Bullish cup and handle pattern.

Buy Wheat- On Friday the December Wheat contract settled above my Bullish triangle pattern breakout level. Drawn from the high Oct. 11th - Nov. 1st the trend had a value of $7.24 3/4 Friday and a value of $7.24 today. This pattern projects a move almost exactly to $8.20. With the Grain reports tomorrow morning though I believe that entering a long term position at this time is extra risky. I think it is wise to wait until after the report to look for entry if it is still applicable, or to look at the $8/$8.40 call spread as a less risky position to carry into the report.

Buy July'11-Dec'11 Corn Spread- Today is the last day of the Deutsche Bank Dec '10 - Dec'11 roll that has put pressure on the July - Dec spread over the last several weeks. I believe that the spread now has an established base around the 50 cent level, which will produce a 3rd leg rally objective of $1.10 for the next move in the spread. With the Grain reports tomorrow it is risky to hold a position, but this spread along with the Wheat call spread are the two positions with less risk that I would consider. It is unlikely that Corn receives an outlying Bullish surprise tomorrow, but it is conversely unlikely that the number will be very Bearish.

I want to still say that I like the spread a lot, but there are a couple points that have me concerned and are worth noting as the reasons it is still on the radar. Corn export demand continues to fall below expectations as China has focused on Beans for the time being. The spread takes advantage of short term demand and supply issues between the 2010 and 2011 crop, so unless exports pick up in the near term then it is unlikely that the spread has the juice to rally to $1.10. It also seems like July - Dec to at least $1.00 is a consensus rather than even just a majority. You can easily point out that the Nov'10 - Nov'11 Soybeans exploded higher after their own Deutsche Bank roll, but this was supported by the hugely Bullish October Corn number and overflow into the Bean market. I am not expecting as much volatility from tomorrow's report and could actually see a situation where the Corn market "sells the fact" on a Bullish report.

Notes: