Tuesday 11/23/10 Commodity Ideas

Opening Note:

Yesterday
Chop, Chop Chop. For the majority of the market the last week has been a glorified consolidation trade. One with constructive data and news, but also one with stories of risk and fear. Early yesterday morning the market made a sharp reversal lower as news of FBI raids on Insider Trading rings leaked and the European and Chinese stories still garnered headlines. My thought in yesterday's letter was that we were now finally past the point of return and ready for another leg lower for most markets. Some like the Euro and the Industrial Metals (Silver excluded) fell in line with my expectations, but there was divergence among the Sectors as well as in the traditional leader/laggard relationships for macro moves. The Equity markets recovered throughout the day to pare early losses led by a strong a volatile Nasdaq. Both Gold and Silver defied the rest of the Metal Sector (Silver especially yet again) to settle higher despite the awful action among the Industrials. The Grains meanwhile were a jumbled sideways trade that failed to establish anything noteworthy or constructive. Overall, the macro picture was a jumble and the markets were mostly a hunting ground for high frequency chop.

Today
Concern is rampant this morning as conflict is rising between North and South Korea. Accounts of missile launches are being reported, so keep an eye on the news for developments. This has added pressure to the markets in addition to the European and Chinese stories. All of the supportive markets other than the Swiss Franc and Gold (which has options expiration today) are lower as of 6:50 am this morning. Both of these likely higher this morning on "safety" or "best option out there" buying. The Euro, Industrial Metals, and Equities are the weakest sectors thus far, while the Treasury markets and Dollar Index have both conversely found strength.

The Fundamental news this morning appears to be the catalyst that the market needed to snap out of its consolidation range and choppy trade. The Equity markets have at least temporarily set off Bearish flag patterns this morning. There are also numerous Bearish patterns looming nearby across nearly every sector. Barring a second (or fourth) consecutive midday recovery I expect that will now see the supportive markets resume a decline that will continue for several more weeks and into mid-late December. There will be bouts of volatility, but in summation I am looking at this as a natural and healthy correction that is overdue. I do not believe this is a disastrous break or one that will be comparable even to the one from May of this year. I expect fundamental and technically healthy Bull markets to resume shortly after the turn of this year once the overbought Bullish sentiment corrects a bit.

Because most trades are on the radar for now I figured I would take some time today to disucss some of the Sectors and individual markets.

Buys to Watch:

Sells to Watch:

S&P 500 & Nasdaq (Wait until S&P comfortably below 1186)- First, take a look at the S&P 500 daily chart. Clearly there is consolidation over the last week with a base trend from the low Nov. 16th - low Nov. 18th with a value of 1186 today. Over the last several days the market has found quick dip buying against this trend on rallies back to the magnetic 1197 - 1202 resistance. This morning though the S&P 500 has at least temporarily moved below this trend. Stochastics for the daily chart attempted a Bullish crossover the last few sessions, but now appears to have failed on a Bearish bounce with all other indicators remaining negative as well. Below the 1186 trend today I have the S&P initiating a smaller flag pattern that projects a move to 1152. Non-coincidentally the 38.2% retracement level from August 31st - November 9th is 1151.25...hmm. I believe this is a 2nd leg lower with a 3rd to subsequently follow on a final move into the 50 - 61.8% retracement box between 1106 - 1128.50.

The S&P 500 has clearer cut trends for right now, so trading the Nasdaq may prove to be more difficult. The Nasdaq does have the same flag pattern forming as the S&P though with the same 3 leg move lower expected. I have two separate trend lines for the Nasdaq over the last 5 day period with the higher at 2133.25 today and the lower at 2118.50. I believe that if the S&P 500 holds its 1186 level and the Nasdaq moves below 2133.25 that you can look to assume a short position prior to violating 2118.50. The Nasdaq has been a clear winner in relation to the S&P 500 over the last week, but I believe that the Nasdaq will be the bigger percentage loser on the potential flag pattern. The first objective for the Nasdaq is 2040 in correlation to the S&P 1152 level.

Late Note for Stocks: Q'3 GDP revision was announced at 7:30 and the Equities received a slight rally off of the lows. The S&P 500 is battling with the 1186 level but holding lower for now. Look for this to be a testing point throughout the day. If this level is abandoned with a move lower after the open then I think you can look to begin piecing into a short position this morning. There is Existing Home Sales at 9 am this morning and a smorgasbord of Economic data tomorrow that will effect the market.

Put on the Radar:

Grains- December Corn is currently testing the lowest trend line that you can draw on the daily chart that encompasses the entire rally from July. From the low June 30th - low Oct. 4th the trend has a value today of $5.14 1/2. Yesterday this trend provided support for the market as it settled just above this level. Personally I am less concerned with this trend and its only two contact points and focused on the trend from the low June 30th to the low July 28th with multiple contacts and a value of $5.23 1/2. Yesterday the market settled below this level and is seeking violation confirmation with a second consecutive lower close this afternoon. I have previously noted that $5.05 is the 38.2% retracement for the entire rally, but with the failure of this trend I believe that this level will not hold for long. I am looking for a pullback for December Corn near the $4.50 level (around $4.64 for March) in between the 50 - 61.8% retracement levels prior to looking at Corn as a buy. Until this price, and especially if this trend fails today, I am looking to establishes short positions in Corn for the next few weeks.

December Wheat- The Wheat market does not want to break much over the last week, but the flagging action looks like it is nearly finished. What should follow is a commitment to the move lower towards the $6.00 triangle pattern objective. I am becoming intrigued though with the possibility that Wheat actually has a larger top with a projection of around $5.30 for December before the market becomes a constructive long position again. Add 40 cents to any objective for the March contract.

Soybeans- On the weekly chart for Soybeans the market has failed over the last two weeks on Bullish breakout attempts above the June 8th highs from last summer. Above $12.91 1/4 the long term objective for the weekly chart has a range of $16.56 - $17.08 that should take several months to complete once initiated. However, while this breakout has failed on numerous attempts I believe the market will now head into a Bearish consolidation move. $11.80 is the 38.2% retracement level, but like Corn I do not expect this level to hold. Look for a pullback between $10.83 - $11.32.

Metals (December Option expiration this morning)- Gold- I think it is fairly obvious, so on the daily chart draw your own trend lines for the Bearish head and shoulders top that may be forming. If this pattern initiates then it projects a $100 magnitude move, which would likely fall around the $1250 price level.

Silver- You can draw a possible Bearish head and shoulders pattern or a cup and handle pattern for the Silver daily chart. The Bearish head and shoulders pattern projects a $5.00 magnitude mover. Either way I believe that you are looking at a pullback between the $21 - $23.50 price level.

Buy Gold vs Sell Silver (Gold - Silver/2 to chart)- Overnight the differential found support again at -$28 and still above the left shoulder low close of -$35.2. The spread rallied this morning back above $0, but has pulled back once again as Silver has found support after its open. Today is December options expiration for the Metals, so expect erratic trade into the close. After this expiration though and once the volume picks back up after Thanksgiving I expect this spread to heat back up and become an outstanding trade. Above $87.8 the spread would have an objective of $200. Notice that the Gold head and shoulders has a $100 projection and the Silver a $5.00 projection. This would equate to a $150 move...I wonder if they set off around $50 in the spread? If these tops set into motion then this spread is for sure a great vehicle to hedge volatility and risk.

Palladium- A very thin contract and I only recommend using it as an indicator rather than a trade. Palladium shows the greatest symmetry to the Silver market right now and Palladium has begun to fall apart. Trading near $675/oz. and well off the Nov 9th high of $743.50 the market would have an objective of $535 on a move below $625. If Palladium goes then so goes Silver. Watch it as an indicator.


Currencies- Australian Dollar- Bearish head and shoulders pattern on the daily chart is near the .9721 breakout level today. I do not think the prospects are strong that it initiates this morning, but once it does it projects a 5 point move. Look for around .9250 as the target.

Euro- Following the 3 1/2 day rally (that I am looking at as a flag) the Euro is going after the low of 1.3444 of the move this morning. Using this as a flag pattern provides an objective just below 1.30 as the 2nd leg lower. Remember that the Dollar Index also has a Bullish head and shoulders pattern near initiation that would come near an 84.00 target. I believe that this means that a 3rd leg lower on this Bearish move would be in the mix for the Euro.

Notes: