Thursday 11/11/10 Commodity Ideas

Opening Note:

Yesterday
The market set a weaker tone early and through the first hour after the stock market open led by a rally in the Dollar. From 8:45 - 10 am the Euro faced a strong test of the critical 1.37 level near the bottom of its month long range. The Euro eventually proved true though as its recovery over the rest of the day encouraged rallies in the Equities, Energies, and for at least a while in the Metals. The day after the November Grain Report there was a continued slide in both Wheat and Corn prices.

Today
The Euro is again testing its critical 1.37 level this morning, giving back all of yesterday's recovery overnight. While my confidence was fairly high yesterday that the Euro would find support, I am less confident this morning even though the test has been slow. The Commodity and Equity markets have performed reasonably well despite a sharp Euro sell off over the last week. However, if the flood gates open below 1.37 then I expect the supportive markets to also be pulled along. The Metals are the clear strength as of 6:30 am, but as many of the individual markets are in a volatile parabolic phase this could just as easily change as hold true for the rest of the day. The Energies are definitely the strength sector other than the Metals as Crude Oil continues to crawl to new highs while correlated markets have failed.

Below 1.37 in the Euro I expect a continued correction to 1.32 - 1.33. It is highly possible that momentum on the break would stay at a similar fast pace. Because I am looking at this as a critical point for the entire market I think it is wise to dial it back for today until the Euro gives a clear definition on its direction over the next week. If the Euro does fail I suspect that the Metals might lead a liquidation sell off, but if it holds true then I still like Crude Oil the best and most consistent. I believe the path of least resistance will be to follow the Euro in the other supportive markets, so I recommend going with rather than fighting.

I want to send a special thank you and a Happy Veterans Day to all the Veterans and Active Servicemen. Bond markets are closed for the holiday, so expect slower trade in the treasury markets. No pertinent Economic Data until Monday, so look for the battle of the European Debt versus Quantitative Easing to take the focus of the market for the next two days.

Buys to Watch:

Crude Oil- A surprising Bullish draw in Crude supplies for the EIA number yesterday sparked a midday rally in Crude. The December contract finally rallied and settled above the pesky $87.50 resistance that had stalled the market for 3 1/2 days. The intermediate profit target is still the psychological $90 level, with the long term target still from $94.95 - $96.55. Now that Crude has rallied above its smaller consolidation I am moving up the stop loss on the Long position to just below $86.45, meaning a move below this level would prompt me to exit and re-evaluate. I would view the December contract holding above $87.70 as a good signal for faster continuation. If it does not though there is a lower volume zone from $87.10 - $87.64 to buy against the support below this level to the $86.45 stop level.

Sells to Watch:

Bonds (but with some concerns)- Yesterday's close (although rather weak) confirmed the breakout below 129.05 on the Bearish reversal pattern. I realize I made an error in yesterday's letter on the Bond market Auction schedule as the auction actually took place yesterday at noon. A sharp sell off immediately followed the auction, but quickly rebounded to settle back near the highs for the session near the breakout level (a bit concerning). Today there is higher volume resistance from 128.24 - 129.06 as an area to enter a short position against with a stop loss just above this range. I recommend beginning with minimal size for entry today as a feeler with the idea of adding to the position once it establishes better Bearish momentum on pullbacks. I think it is smart to keep a tight stop on current entry because above 129.06 the next resistance zone is from 129.22 - 129.27 and above that the next is 130.16 - 130.28. If the market decides to rally above 129.06 then there will be ample opportunity to get into the market at a better price, so no reason to throw the boat at the market for now. The reversal objective for the market is 123.00.

Put on the Radar:

Buy S&P 500 & Nasdaq- First I wanted to point out the daily chart for the Nasdaq/S&P 500 ratio. The Quantitative Easing trade really began early September and the Bullish trendline for the ratio from Sept 1st - Oct. 6th is being tested currently. The Euro's test of 1.37 will likely play an integral part in whether this trend holds or fails, but a weakening of the Nasdaq in relation to the S&P 500 is a Bearish signal for the stock market. If you are trading Equities I think it is smart to keep a close eye on the Euro for the next few days.

While the Euro is testing this morning the Equities have acutally descended near or into decent zones for long entry. In the S&P 500 there is a lower volume zone from 1198.50 - 1202 with support below to 1192.50 for stop placement below. The market briefly dipped into this zone and found immediate support yesterday. For the Nasdaq there is a low volume zone from 2153 - 2159.50 with higher volume support below to 2148 for stop placement below. I think it is critical that both markets hold the 1192.50 and 2148 support levels respectively to continue holding a long position in either Index. If either fails then I expect a larger correction in the stock market over the next several weeks. Although the Nasdaq is the weaker of the two markets over the last week I believe that it is the better buy at these levels, as if the ratio trend holds and stocks rally then the Nasdaq should be the better performer.

Sell Wheat- The December Wheat contract has now traded back into the triangle range that I originally was using as a Bullish pattern breakout. The trendline from the high October 11th - November 1st sits at $7.21 3/4 today and provided resistance for the high on the overnight session. With the Bearish reaction in both Corn and Wheat following the Tuesday report I expect further pressure in both markets with Wheat the weaker of the two. I believe you can look to fade rallies against this trend for the time being.

The bigger move on the horizon though is a Bearish breakout from this same triangle pattern after shaking the tree with a Bullish move prior to the report. The base trendline is drawn from the low October 4th - October 22nd providing a value of $6.86 1/2. A Bearish breakout would produce a target near $6.00 for the December contract. I think that the RSI for the daily chart may also give an early indication whether the Wheat market will initiate this Bearish move. By drawing a Bullish trendline on the RSI from the same low October 4th you can see that the trend almost has a confirmed violation well before the Wheat prices reflect this violation. If RSI provides confirmation then I think you can begin piecing into a short position in anticipation of the longer term move.

Notes: