Wednesday 11/10/10 Commodity Ideas

Opening Note:

Yesterday
Early stability in the markets held throughout the first half of the day, but an afternoon sell off followed among the supportive markets. The battle over the last 3 days has been a strengthening Dollar versus Commodity and Equity markets that still want to trend higher. The Dollar began a trending rally from 6:30 am that continued throughout the rest of the day and finally toppled the supportive markets around noon. Crude Oil broke $1.75 and the S&P 500 fell 13 points from noon until the close, but none of this compares to what happened in the Metals. The Metals settlement is established at 12:30 pm (CT) each day and is usually followed by dried up volume and volatility. From 12 pm until the 3 pm stock market close though Gold fell $42 from its highs and Silver an astounding $2.93, or exactly a 10% break top to bottom (in less than 3 hours!!!). The supportive markets have held up relatively well throughout the 3 day Dollar rally and I believe this afternoon break was clogged up momentum between the Dollar and Commodity market relationships that was overdue for a correction.

While the Grain Report yesterday morning was constructive for Soybeans, Corn and Wheat, it was only Soybeans that benefited. All three markets opened significantly higher than the previous day's and the 7:15 am close. My opinion going in was that we would see continued support in all 3 markets, but this was quickly dismantled on the open. Both Corn and Wheat plummeted within the first 5 minutes to establish a trend that would continue throughout the day to lower settlements for each market. Beans on the other hand made an impressive close 55 cents higher. Unwinding of Long Corn versus Short Bean and Short Wheat positions contributed to the movement, but the overall fundamental feeling is that the demand over the next several months will be stronger in Beans with much of the story already priced into both Wheat and Corn. More analysis to come in the Notes section.

Today
The supportive markets are relatively unchanged this morning with a "calm after the storm" vibe. The settlements in the Metals are deceiving today because they are taken from 12:30 pm rather than 2 or 3 like the rest of the markets. I guarantee you will hear on CNBC today that the "Metals plummet continues again today" (or something of that sort). In actuality though, the Metals might be the strongest Sector along with Energies since 3 pm yesterday and have managed gains rather than losses since that time.

I give better details below, but right now I believe the Euro (and therefore the Dollar) is the key market that will determine what happens over the next week. If the Euro confirms a move below 1.37 then there will likely be another 4 points on the correction with Commodity and Equity prices dragged along with it. However, if the Euro maintains at least a range above 1.37, as it has so far, then the Energies, Equities, and even the Metals look like they have corrected into areas that could support rallies over the short term.

For right now I am going to focus more on a 1 - 2 weeks out approach rather than over the next month or several. Each time that the market provides what appear to be clear and consistent signals we seem to run into either extended consolidation with 2 sided volatility, or a sharp reversal. My general opinion still is constructive markets over at least the next month, but for now I think this idea needs to be taken under a microscope to stay profitable, in the market, and most importantly sane.

Buys to Watch:

Crude Oil- Each time I suggest an entry level in Crude it seems to get run over within the next 24 hours. So, I am going to generalize and say that while the December contract hangs above $84.50 I view Crude as a buy and one of the best markets to hold a long position in. $87.50 has acted as resistance for the last four sessions to stall the market as it has consolidated. The technicals on the daily chart though all still remain in a positive mode and constructive. Yesterday's sharp break may be what the market needed to push out some of the longs and re-invigorate the rally. Intermediate target is still $90 psychological resistance with the longer term objective range from $94.95 - $96.55.

Sells to Watch:

Bonds (Wait until tomorrow for safety)- Yesterday the Bonds established a settlement below the 129.05 reversal breakout level. While the market is seeking a confirmation close today I recommend waiting until tomorrow or at least this evening before looking for entry. All technical indicators are in a negative mode, but there also is very little in the way of resistance for short entry against. Above 129.05, which was the high overnight, there really is not good volume resistance until 129.22 - 129.27. Hopefully today's trade produces some better entry parameters for later. This Bearish breakout also works well cyclically as the last 30 year auction was November 3rd with the next not until December 2nd. After the auctions the Bonds have typically declined for at least 2 weeks, so there is at least another 1 - 2 weeks of fundamental decline ahead. The reversal objective for the Bonds is 123.00 on the dot.

Put on the Radar:

Metals...What to Really Watch...Near a Top- If you are trading Gold, Silver, or any Metal for that matter you need to keep up with the Gold - Silver differential (Gold - Silver/2) and the Gold / Silver ratio (Gold/Silver). In yesterday's notes section I detailed my objectives for these weekly charts saying that these are the charts that will tell when the Metal trade tops, likely within the month and possibly within the week. The outrageous Silver rally in comparison to the smaller Gold rally early yesterday actually moved the Gold - Silver differential to my -$36 objective for the spread (way before I was expecting it to reach). At this point I luckily bought the Gold and Sold the Silver with strong support down to -$50 and what followed was a $100 rally in the spread over the next 3 hours on the $3 Silver break (literally equivalent to a $100 Gold move in 3 hours). I believe that while this was a fast reversal spike we will likely see a bottom form on the trade, which is why I am out and looking for re-entry later. This differential level clearly is "REAL" support on the weekly chart and will probably show when the Metal markets are topping rather than using the flexible technicals or market fundamentals. My guess is that this occurs within the next 2 weeks and that we will not see Silver hang above $30 for long if at all or Gold reach $1500 before there is a large correction. For now I am not suggesting the Metals as a short position, but I would hold off on new long entry for the time being as a reversal looks near based on the relationships.

Currencies (Euro & Yen)- Overnight the Euro tested the 1.37 level that has acted as a bottom on the trading range over the last month. Although the decline in the market has been sharp over the last 3 days I am looking for this level to hold for the time being. Below 1.37 a further correction between 1.32 - 1.33 is in order, which would likely mean further pressure on the supportive markets and a larger correction across the broad market. The Japanese Yen has broken out on a Bearish reversal from its own consolidation range over the same time frame this morning. Below 122.02 the market has a small reversal projection to roughly 119.62 (not a strong pattern). Looking at the Euro/Yen chart it looks like it has room to rally in the range, so it is still possible that the Yen produces this pullback while the Euro holds 1.37.

Notes:

Australian Dollar- With yesterday's set back and today's inability to recover the Aussie is off the Radar and the Buys sections. The Aussie nearly reached its pattern objective of 1.0204 - 1.0237, but proved difficult for entry and position maintenance. I think there are better markets and trades for now.

Grains- Beans up 55 cents, Corn down 8 cents, and Wheat down 14 cents paints the picture from yesterday pretty well. The Bean report was the most supportive and a bigger surprise than the others, but much of this move was relationship based and not on poor Corn or Wheat fundamentals. All of the Grains should be viewed as long term Bullish, but for the next couple months the Corn and Wheat look like the news is priced in the market without strong enough demand to be a Bullish catalyst for now. This means that I am removing my Buy suggestion on both Wheat and the July'11 - Dec'11 Corn Spread for the time being. The Soybean complex will have the best demand story in the coming months and should continue to gain in relation to Corn and Wheat. However, the charts technically have reached most of the objectives with further gains looking difficult and slow in the outright markets for now. The July'11 - Nov'11 Bean spread was a big winner yesterday up 21 cents and settling near 98 cents. This will be a spread to revisit in a couple months, but my 3rd leg objective for the spread is from $1.05 - $1.10. This makes current entry undesirable with heavy resistance at $1.00 and on a risk/reward basis for the trade.