Tuesday 11/30/10 Commodity Ideas

I took a little extra liberty over Thanksgiving with some time off from writing...I know...I know. I wanted to give an early warning that I will be out of town on vacation both Thursday and Friday of this week as well and there will be no newsletter either day. I will be around for the rest of the time until Christmas though, so you got that to look forward to at least...

Opening Note:

Yesterday
Euro weakness led the decliners yesterday again, putting pressure on the rest of the supportive markets early. The stock market and the rest of the Currencies were the most effected. From 8:45 - 9:00 am the Nasdaq actually fell over 23 points to test the lows on its up-sloping daily chart range over the last week and a half. This early break ended up forming the low of the session though. After trading in a tight sideways range for most of the day the stock market was able to advance into the afternoon close and settle nearly unchanged. Weakness was not uniform across the market as the Metals, Grains, Energies, and Softs opted to ignore the advancing Dollar. January Crude Oil actually was able to settle nearly $2 higher for the session as the Energies were the strongest sector.

Today
Same story with the weak Euro dragging most of the other foreign Currencies and the Equity markets lower. Crude Oil and the rest of the Energies however are not a strength this morning. Identifying a clear strength is a bit difficult actually. The "safety" markets like Treasuries, Japanese Yen, and U.S. Dollar are all strong (possibly more than I would expect in relation), but Gold and Cotton would have to be the strongest of the supportive markets (mostly by default).

There is no question that the Euro has terrible price action over the last 7 sessions, but it is still uncertain what its (as well as the Dollar's) impact will be on the rest of the market. The Physical Commodity and Equity markets have acted very resilient in the face of the Euro's sharp decline and much more so than I expected. The question is if this is a sign of real strength among the other markets, or more of just a lag between the relationship. The Euro is now near my 2nd leg (flag pattern) objective of 1.2953, so it is possible that the Euro finds some support shortly with previous consolidation from 1.26 - 1.29 slowing the decline. Just Monday of last week though the Euro was trading near 1.38. Quite a significant move over that time frame. We have seen several occasions over the last year where the rest of the markets quickly snap back into line with the relationship to the Euro and this looks like a similar setup. Even if the Euro does find support in the short term we could still see a correction in the rest of the market over the next couple weeks.

Regardless of your opinion on the individual markets or sectors I think that it is a good idea to take into account this possible relationship (correlation) realignment. My belief is that without the introduction of a new unexpected Bullish catalyst that the supportive markets will begin to sink. The Equity markets have maintained a range, the Energies rallied, and the Metals slid higher, but I prefer to error on the short side of these trades for the first half of December (before end of the year profit taking and realignment take over the markets). I am very constructive on many of the Physical Commodity markets for 2011 fundamentally and becoming more so each day. However, that is a discussion to have at a later date. For now I opt to play the short side or sit on the sidelines.

Buys to Watch:

Sells to Watch:

Australian Dollar- The Aussie Dollar now has a confirmed Bearish head and shoulders breakout on the daily chart. The move below .9741 from Friday now provides an objective of .9245. I am confident in this trade and believe it will be the most consistent short over the next week, but I unfortunately do not have entry parameters today that I am confident suggesting. If the Aussie does hold below .9632 though I believe that it is a great sign of weakness. As a side note it is a good idea to also keep an eye on the Euro and its relationship to the Aussie. The Euro is nearing my 1.2953 objective and its free fall may subside at least temporarily. If the Aussie does not look like it can go without the Euro going at the same time then it would be time to re-evaluate the trade.

Put on the Radar:

Buy Dollar Index (With Euro Commentary)- The Dollar Index now has a confirmed Bullish head and shoulders pattern in motion with an objective range from 83.40 - 83.90. The only reason that the Dollar is not on the Buys section for right now is I believe that the rally may be temporarily over-extended and the Euro may stall in its decline. The 2nd leg objective for the Euro is 1.2953, which would temper the Dollar Index gains obviously. I believe that the Euro will shortly produce a 3rd leg lower towards 1.24 or so, which will eventually support this Dollar move. However, at this time I suggest holding off on aggressive entry into a long Dollar position. Both RSI and Stochastics are showing overbought levels and are near producing sell signals. I think it is wise to wait for a pullback towards the pattern neckline on a 2-3 day correction prior to looking for entry now.

Sell Crude Oil- Over the last 4 days Crude Oil has been the best performer over the broad market. While open interest does not seem to reflect this in the outright markets I have heard accounts and noticed that the open interest for some of the December '11 out of the money calls ($100..$110...$120) is rising substantially. Some big players have clearly been positioning for next year, but I also suspect that part of Crude's recent strength is derived from the simple reversal from the market weakness over the previous several weeks. Measuring from the high Nov. 11 to the low Nov 23 the 61.8% Fibonacci retracement sits at $85.73, which is also near the level that the market topped yesterday and overnight. I believe that Crude is likely in the process of reversing the short term Bull trend over the last week. Keep in mind that a move below $80 would project a move to around $72 on the head and shoulders pattern for the January contract. When I woke up this morning around 4:30 am I did one of those "throw the dart" trades and shorted Crude to see if it sticks. Right now it is sticking. For new entry I would recommend risking only to new highs above $85.90, as I am doing myself.

Natural Gas Potential Buy (Weekly Chart)- I have no interest in trading Natural Gas today, tomorrow, or for the rest of this week for that matter. I did want to bring attention to the weekly chart though and the possible reversal of Nat. Gas from a weakness to a strength market as we head into next year. Natural Gas has been abused because of fundamental reasons over the last year, but what has really hurt it is its use a short position hedge against a long Crude position. I suspect that some time early January or February this may no longer be the case though. Natural Gas has built an extensive base and if it is able to rally above this year's early highs then I see it easily rallying above $8.50 by the end of 2011. The trend line for the weekly chart from the high January 18th - June 14th sits at $4.463 this week. The market has failed on a test of this trend over the last week, but with support building below current prices I believe it will not be long before this trend is violated. Get your finger on the Nat. Gas buy trigger for early 2011.

Bonds (Buy Short Term, Great Sale Long Term)- To begin, switch your contract to March if you have not already. The Bonds have found support over the last couple weeks as the supportive markets have declined and as the market prepares for the December 9th 30 Year Auction. This has initiated a Bullish cup and handle pattern on the daily chart this morning with a move above 127.19 producing an objective of 130.10. This trade will be moved to the Buy section if it is confirmed. However, I strongly feel that the Bonds have put in at least an interim top on the weekly chart with the major trend over the next year or two shifting Bearish. Around December 9th we should see the cyclical shift back to price declines, so if the Bonds reach the 130.10 objective near this time I am ready to switch to the short side. Next stop for the Bonds is 122 after this corrective rally.

Notes:

Sell March Coffee- Yesterday the Coffee messed around its breakout as it is again this morning. Below the neckline from the low Nov. 3rd - Nov. 17th at 200.80 cents/lb. the market has a projection of 176.05. I absolutely recommend waiting for confirmation on this pattern prior to entering a position. I would rather miss the move than get chopped because Coffee is thin.