Thursday 11/18/10 Commodity Ideas

Opening Note:

Yesterday
Beginning the morning only slightly stronger the market managed to make some noise, but basically settled back where it began the morning. The Equity futures all ended the afternoon just a smidge higher on the day as early gains were wiped out in the afternoon. The Euro also found the strength to reverse a tad higher to support Commodity and Equity prices. The outlier for the day was clearly Crude Oil and its Energy products. The 9:30 am EIA Inventories showed a surprisingly Bullish draw in supplies that produced a temporary rally. From 9:45 am through the close though January Crude fell over $2.25 to test the October low at $80.58. The Treasury markets were pressed up against strong resistance for several hours midday as The Fed purchased $8 Billion worth of 10 Year Notes. The resistance held though as Treasury prices declined into the close. Finally, the Grains made an impressive rebound to trade higher for at least part of the day after a terrible overnight session. This was likely overdue after two days nearly limit down out of the previous three.

Today
The risk trade is much higher this morning led by a strong Euro. Irish officials are meeting with the EU and IMF today in hopes to hash out a new bailout, providing some relief for the Euro. This morning is also the much anticipated GM IPO, which is also injecting some enthusiasm into the Equity markets. The laggard markets over the last week are the leaders this morning in many cases. For one because they probably need a bounce, and two because these were the best performers before the whole "sky is falling" liquidation began. The Metals are off to the races again, with Silver up over $1.00 already. Crude Oil has managed to hold support from its October lows and at least violate the nasty 60 minute chart downtrend that dominated for the last week. The Grains are also finding support and price stability again after volatile swings again overnight. The Dollar Index, Japanese Yen, Natural Gas, and the Treasuries are the only markets lower this morning so far. I expect that this rally in the risk trade will continue at least through the early part of the day and possibly into the end of the week.

While the media will likely boast today's recovery, I stress not to make too much of the rally and hold off the enthusiasm. Substantial damage was done over the last week to the majority of markets to end the Bull trends that have progressed over the last two and half months. Most of the relationships that have held true through the QE rally are now violated and reversing. Some individual markets still manage to cling to their old trends. I believe that the broad market is now past the point of continuation though and in need of several weeks of deeper correction and consolidation before creating healthy Bull markets again. Do not jump in too big at first because this bounce could last for anywhere from another 2 - 36 hours. But, pick your spots and look at the rally as an opportunity to re-establish short positions in the risk trade.

Buys to Watch:

Sells to Watch:

Bonds- The Treasuries found early support yesterday from The Fed purchase of Ten Year Notes, but once the buying was finished the markets reversed as I expected. The Bonds tested and held the higher volume resistance from 127.28 - 128.05 and the 10 Years similarly held below 125.06 - 125.13. Since yesterday's midday highs the Bonds have fallen two full handles and the 10 Years a full handle with the longer maturities re-establishing weakness in relation to the short end of the curve. Resistance for Bonds now lies from 126.27 - 127.02 as an area to enter short positions against and a stop loss on positions from yesterday. Take note though that there is stronger support from 125.16 - 126.00 from the lows earlier this week that the Bulls will try to hold, as they have this morning. The objective for Bonds remains 123.00 and the 10 Year 122.16, likely within the next week and a half. I still recommend looking at put options that are relatively cheap. From midday yesterday to this morning my 126 Puts suggestion is already worth 2.5 - 3 times the purchase price.

December Wheat- Yesterday morning I recommended taking some profits on short Wheat positions and waiting a day or two to re-establish them. So far my timing is lucky as the Wheat has rallied for the last 36 hours. The rally is now nearing some better resistance levels to re-establish the short positions on the draw lower towards the $6.00 objective for the December contract. The $6.45 swing low provided the highs yesterday, so I expect the $6.65 previous lows to also provide some resistance. I suspect that there will likely be at least a spike rally above this rally. There is some higher volume resistance from $6.70 - $6.76 1/2 that is a good level to enter short positions against with a stop loss just above this price level. After the strong rebound in Wheat I expect that the market will not put up much of a fight against this resistance. Keep an eye on the trend line from the open Nov. 9th - open Nov 12th at roughly $6.60 today. If the market continues to hold closes below this steep trend then this would be a great Bearish signal.

Put on the Radar:

Sell December Soybean Oil vs December Soybean Meal (Dec Oil - Dec Meal to chart)- Drawing a trend line from the September 3rd close to the October 12th close provides a value of 1687 today with the differential currently sitting below this level. Yesterday the spread made an initial settlement below this trend line and is looking for confirmation today. Not only would a violation of this trend be a Bearish signal for the Soybean complex and the Grains overall, but it could also be a good position trade for a week or two. I expect Grains to make new highs at some point today, which should test this trend again. There is moderate resistance from 1696 - 1706 that has produced the highs so far for the spread and is an area to watch. If the trend violation occurs then I will probably move the Oil ratio to the Sells column. The execution ratio is Sell 5 Bean Oil vs. Buy 3 Soy Meal, making the ticks $30 for this base ratio.

Nasdaq and S&P 500 Resistance- I believe that the stock market will rally on the open this morning and possibly throughout the entire day. GM has the market excited. The next stronger resistance levels are 2136 - 2142 for the Nasdaq and 1197 - 1202 for the S&P 500. I would hold off on entering shorts right away, but these should be the levels to enter a short position fade on this rally some time today or tomorrow.

Silver (and it's relationship to Gold)- Yesterday Silver found support on its 3 month Bullish trend line from the low August 24th - low October 22nd. Silver has exploded on a recovery higher today on fresh buying off of this trend. The trend value today is $25.07 today, which is inconsequential for now. I have a strong suspicion though that this trend is bound to fail within the next two weeks. During Tuesday's liquidation across the market Silver held up extraordinarily well strictly based off of buying on this trend. This has put Silver out of line with the rest of the Metals, the broad market, and especially versus Gold. On liquidation days the Gold - Silver differential (Gold - Silver/2) rallies in favor of Gold. However, on Tuesday the differential actually fell based purely on Silver trend buying. This means that both Silver and this relationship is over-inflated and due for a sharp correction in my opinion. There is some moderate resistance from $26.64 - $26.96 that has topped the market so far today, but I advise holding off on entering a short for the time being. I expect a correction in December Silver into the "Box" between $22.20 - $23.56 within the next few weeks. For now watch and wait. If this trend is violated there should be a fast liquidation down to this level.

Notes:

Dollar Index- Will the daily chart form a Bullish head and shoulders pattern? The right shoulder could be forming. A corrective rally to around 83 would follow.

March Coffee- Bearish Head and shoulders top forming?