Thursday 11/4/10 Commodity Ideas

Opening Note:

Yesterday
The Fed announcement yesterday was highlighted by the news that a Quantitative Easing package of $600 Billion progressing with $75 Billion monthly will be enacted. This fell in between the $500 Billion - $1 Trillion range of expectations and above the $500 Billion level that was necessary to hold and continue gains in the supportive markets. For the half hour directly after the announcement the high frequency programs took over to run the market on a volatile ride both higher and lower. Once the volatility settled though the markets fell into agreement as a macro move higher was decidedly in order. The Dollar fell while nearly every supportive market climbed higher into the stock market close. The Bonds, my wild card market yesterday, nose dived without return directly following the announcement. While $600 Billion appears to be enough to keep the Commodity and Equity rally going it looks like the Bond market was positioned for a larger monthly or overall package.

Today
Everything on my board (I mean even Nat. Gas) is higher on the day except for the Dollar Index. Because the Metals settlement is taken at 12:30 pm (prior to the announcement) they appear to be the strength this morning, but since the the announcement the sectors are pretty much stronger in unison. The Bank of England just announced at 7 am (CT) that they will keep rates unchanged, which has actually vaulted the Pound into the leader roll among the Currencies this morning for at least right now.

There still is a lot of sentiment out there that QE and the Elections are baked in the cake already. I was on this side of the argument as recently as a week ago. I think there comes a point in human psychology where skepticism naturally takes over and says it is time to fade or get out of the market. After some serious summer rallies in the Commodity Sectors and 2 straight months of QE rally without much pullback I can understand this urge. What I am seeing though is some very fresh and very strong buy signals across nearly every sector (other than the Fixed Income). Some signals are only shorter term or intermediary projections, but there are many that project 3rd legs and large moves. Whether or not you believe QE will be effective, that the market is ahead of itself, or that the people buying are flat out morons I think it is wise to repress these thoughts for at least another month. Right now there are prime opportunities to get in towards the base level of what I believe will be a 3rd leg and at least another month of continuation higher on the "Sell the Dollar, Buy Everything" trade.

I do not think that you can really stray too wrong by stepping into long positions in almost any of the supportive markets for right now. I do have a few though that I believe are strengths and will continue to outperform at least the other comparable markets. If I were to venture a guess right now I believe that the Energies will show the largest gains over the next month as they catch up to the pack. However, the thinness of the Metals will definitely continue to boost their status, the Nasdaq continues to lead, the Euro looks outstanding, and the Grains still look like they have the powder for another explosion higher. Bottom line, I think you ride the rally and buy the small dips until the market gives a clear sell signal.

Note: Unemployment Report tomorrow at 7:30 am. Personally I have an interest rating of about 3 on a 10 point scale for this number. I believe that, like myself, the rest of the market will glance at the number and return to the QE story unless it is an extreme outlier. Outlier prospects are about 1 on a 10 point scale.

Buys to Watch:

Euro- Despite the volatility yesterday the Euro held above the 1.3974 triangle breakout to confirm the pattern objective of 1.4456. While this is a shorter term target I believe that the Euro is now on a 3rd leg higher on the move. The 3rd leg longer term objective is 1.51. I know that there are still plenty of fundamentalists shorting the market based on the European economy, but for right now the QE trade overrides all and should only use these shorts to squeeze the rally higher. All of the momentum indicators for the market are positive for the daily chart with MACD possibly producing a fresh buy signal today as well. I suspect that this initial rally will provide little in the way of pullbacks so take them when you get them, even if you have to trade smaller based on the risk. From 1.4146 - 1.4186 there is a low volume zone with higher volume support form 1.4094 - 1.4140 for stop placement below. This looks like a great setup if the maket can hold off the rally at least temporarily.

Australian Dollar- Although the Aussie Dollar traded below the breakout level intraday it confirmed the Bullish cup and handle pattern with a settlement above .9916. This confirms the pattern objective range from 1.0204 - 1.0237 for at least the short term move. Like the Euro, all momentum indicators are trending higher for the Aussie with MACD likely producing a fresh buy signal today as well. If the market provides a pullback today there is a low volume zone from 1.0018 - 1.0030 for entry with higher volume support below from .9982 - 1.0014 for stop placement below.

Crude Oil- The energy sector has been subdued over the last 2 months compared to the rest of the Commodity sectors. However, with a fresh, strong rally breakout above the long consolidation range I think that this is all about to change. Likely finding confirmation on the pattern today, Crude Oil settled above the $84.45 breakout level yesterday, producing a longer term objective range from $94.95 - $96.55. Like most of the supportive markets, all momentum indicators are positive for Crude with MACD producing a fresh buy signal as of this morning. If there is a moderate pullback today then the I like looking for long entry in the lower volume zone from $85.14 - $85.60. However, the support below this level consistently extends all the way to $84.10 making risk management difficult on entry today. Expect Crude to find intermediate resistance near the $90 level as the market tends to bracket itself around the $5 psychological levels. I believe that Crude will have the most explosive gains among the supportive markets over the next couple weeks and think that it is a trade that you definitely want to be on.

Sells to Watch:

Dollar Index- The explanation is spoken for by my viewpoint. I prefer to take a long Euro position rather than sell the Dollar Index because I believe the Euro will outperform some of the other Currencies. Just wanted to put this here to reiterate that I do not think you can go wrong looking to sell the Dollar over the next month.

Put on the Radar:

BUY Grains- The Grains are much firmer overnight on QE buying. This may give the market's the momentum they need to at least begin another strong rally leg here, even in advance of the November 9th report. My longer term objective for December Corn is $6.40, January Soybeans is $12.98, and December Oil is 52.25 cents (which I believe is a minimum). Wheat is definitely catching my eye now though as a flagrant triangle pattern is forming. For the daily chart draw trend lines from the high Oct. 11th - Nov. 1st and the low Oct. 4th - Oct. 22nd to produce the formation. A move out of this triangle would produce a 96 cent projection above the daily breakout level, meaning somewhere around $8.20. The breakout level for today is $7.25 3/4, which is unlikely to be reached. My guess is that the market will head towards the upper end of this formation over the next several days and eventually rally above on the morning after the report. Might be a good idea to look at the $8.00 - $8.40 call spread.

Buy July'11 - Dec'11 Corn Spread- It is now the beginning of day 3 of the Deutsche Bank roll for the Dec - Dec spread in Corn. Yesterday the market found support for a 3rd time around 27 - 30 cents before rallying midday and causing a fast puke of the roll bear spreaders. Day 3 or 4 is usually the lowest that you get for the roll and with the bear spread capitulation yesterday I think that it already has a bottom on the move. The pre-roll bear spreading has caused a downward trend in the spread that has coiled momentum as outright Corn has trended higher over the last several weeks. This has formed a possible Bullish wedge pattern that is near initiation. The July'11 - Dec'11 component of Dec - Dec is the inter-crop portion that shows the best gains and is the spread to focus on. I believe that the market is about to embark on a 3rd leg higher with an objective of $1.10 on the move. With the Grain report on November 9th it is possible that gains will be subdued for the rest of the roll up to the report. Along with Wheat though this is my main target going forward among the Grains.

Buy Nasdaq- It goes without saying that the stock market is a buy on the QE rally. For right now if you have limited resources though I like the markets listed in the Buys section more so than the Equities. The Nasdaq is the clear strength among the Indices and is the one that I recommend buying going forward. My new objective for the Nasdaq is 2240, but again may be more of a minimum objective on the longer term. The S&P 500 has entered my weekly chart objective range from 1208 - 1245 this morning, so reassessing a Nasdaq long position if the S&P reaches 1245 is probably a smart idea. It looks improbable this morning, but between 2167.50 - 2172 there is a low volume zone in the Nasdaq that I like for long entry on a small pullback.

Notes:

Metals- The Metal markets were under the Sell column yesterday if the FOMC reaction was Bearish. I wanted to make sure that I cleared up that with the Bullish reaction the Metals are a clear buy now and not a sale. I believe that the Metals could see some of the best gains as a sector over the next month. However, with some of the most over-extended charts, vague market objectives, and extreme intraday and overnight volatility I intend to focus on other markets for now. Palladium is clearly off to the races and I believe that we could see Silver continue to $30 over the next month. I just can not stomach the movement in the markets for right now and would only recommend using the metal markets as a spread or hedge against another sector or market position.

Euro/Yen- When is the last time you heard someone mention the Euro/Yen chart? This was the risk on/risk off darling during the Euro debacle during the first half of the year, but it has fallen off the radar for many people since. This is because it has really kept a tight range throughout the last six months despite the explosion in Commodity and Equity prices and the Dollar plummet. My opinion of the Euro/Yen is that it is the risk on/risk off gauge for the market that eliminates a lot of the stimulus and market noise to focus on the bare state of the market. This means that if you take out QE, government intervention, all of the crap, that the real risk appetite and economic condition has only crawled higher rather than the impressive stock market gains. If this cross spread is able to rally a bit higher it looks like it could produce a sizable rally leg over the next several months, which is another positive sign for the supportive markets. Quantitative Easing...Base level gains for the market...sounds like a real Bullish recipe for now.