Wednesday 11/17/10 Commodity Ideas

Opening Note:

Yesterday
Like a dam bursting at the seams, the market was flooded with liquidation shortly after the stock market open yesterday morning. No Sector was really spared from the rush to the door, but the Metals, Grains, and Equities especially felt the heat. The Industrial Metals like Copper, Palladium, and Platinum (I'm only semi-grouping Silver here now) were the overall worst performers and should continue to be. The European default worries were the initial catalyst that got money rolling out of of Commodities, but the scare of Chinese policies to curb inflation really hit these over-subscribed markets that have depended on Asian demand and stockpiling. The Grain markets, especially Corn, Beans, and Bean Oil also tested and settled near limit down on similar fears that Chinese demand will wane in the coming months.

Most of the liquidation occurred in the market between 8:30 am - 12 pm, yet it was a late day Treasury and yield curve move that provided the biggest surprise in my opinion. The trend over the last couple months has been a steepening of the yield curve with the prices of the longer maturities falling in relation to the short end. Around 12 pm though the Bond market prices took off on a nearly 2 handle rally over the next two hours. Mind you, this was after the liquidation run across the market. My initial diagnosis is that this rally was a delayed and possibly faulty "run to safety" into the Treasury markets.

Today
There were some volatile moves and further liquidation overnight, but overall the market is slightly stronger this morning as of 6:45 am. The Soybean complex, Cotton, Crude Oil, and the Industrial Metals are the weaknesses again. In nearly every case though the markets are well off their overnight lows. The last three days were the largest group liquidation effort that we have seen across the market since May of this year, with yesterday particularly nasty. I expect that we could see a bit of a relief recovery for today. A number of markets have tested and held individual technical pivot points, which should aid in stopping the outflows or at worst slowing them over the next 12 hours.

The key word in the previous paragraph is a "bit" of a relief recovery for today though. I have little interest in trying to Buy and would rather wait for the opportunities to re-initiate shorts. The European debt situation and threats of Chinese policies to curb inflation are far from over and will likely still have a few jabs, if not uppercuts, to deliver to the market throughout the rest of the year. In today's letter I attempted to lay out some of the technical levels that will stall the liquidation effort temporarily. My belief though is that there more time and price decline needed before the market finds a base to assemble. The puking of the risk trade caught many large participants off guard this time again, and I have a feeling that after getting cut and bruised this year that many will say "enough" and hold off until January. Going forward for the next few weeks I advise taking a Bearish stance on the risk trade and using rallies as opportunities to short the market.

With a lack of patterns, mostly rough estimates for targets, and high volatility it is difficult for me to suggest individual Sales for the time being. However, I repeat my statement from yesterday "I believe Silver and the rest of the Industrial Metals, Cotton, Soybeans and Bean Oil, Nasdaq, Australian Dollar, and Crude Oil along with Heating Oil will be the biggest decliners over the next couple weeks" and I wish to add the Euro to this list as well.

Buys to Watch:

Sells to Watch:

Bonds- I lowered my stop loss on the trade suggestion yesterday morning to just above the resistance from 127.02 - 127.12. Yesterday afternoon's rally though ran straight through this resistance within 30 minutes as I painfully was forced to puke my outright position. This resistance was taken out, but after re-evaluation this morning I still feel strongly that Bonds are one of the best and most consistent sales among the market. I believe that this "run to safety" yesterday was not only delayed, but faulty in logic and an improper gut reaction that caused a sharp reversal in the yield curve.

First, the 10 Year Note has tested its individual resistance and breakout level several times now and has failed on each attempt. Below 125.015 the 10 Year has an objective of roughly 122.16. There is high volume resistance though from 125.06 - 125.13 that continues to stall out nearly four separate rally attempts so far. As long as this level holds then the Bonds should as well. The Bonds are now testing stronger resistance from 127.28 - 128.05 that has held up on multiple tests now as a top for the market as well. For now I recommend only initiating a smaller initial position against this resistance, but I highly suggest looking into the put options. There are December options that expire in 9 days with implied volatility that seems extremely cheap. Yesterday afternoon I purchased some 126 Puts, and while I am currently still out a little money on my initial purchase it would only take one or two days lower to make 3-4 times my risk on the trade. The target for the Bonds is 123.00 and I still see a strong possibility that they could reach this level by expiration next Friday.

Wheat (Take Some Profits Here, Hold Off a Day or Two for New Entry)- December Wheat has nearly reached my $6.00 target originally suggested only 6 days ago when the market was near $7.20. With substantial liquidation among the Grains over the last week and Wheat comparatively performing better than Beans and Corn over this time I think it is time to take some profits. As you will see below, I have both Corn and Beans reaching a technical support that should stall losses in the Grains for now. Above $6.37 for Wheat, which it is nearly at this morning, there is a definite lack of resistance as well. The $6.45 and $6.65 swing lows now become resistance, but yesterday's capitulation really only left higher volume resistance last at $6.70. Take some hopefully large profits for now and wait for a rebound rally prior to initiating a new short position.

Put on the Radar: (Some Technical Levels)

January Soybeans- Based on the base of the Summer rally from July 7th to the high November 12th the 38.2 % Fibonacci Retracement level is $11.80. Overnight the Soybeans found a base at $11.75 and recovered nearly 30 cents from this level into the morning. I expect this level to at least temporarily provide further support for price levels. However, I am not convinced that the Beans are finished liquidating. After such a sharp break I do not expect fund money to come sprinting back into the market to create a "real" base for Beans to build upon. The 50% level is $11.30 and I am looking for a decline to at least this level prior to looking at Beans as a Buy.

December Corn- From the base June 30th to the high November 9th the 38.2% Fibonacci Retracement level is $5.05 for the December contract. Corn found support at $5.09 overnight and has recovered like Beans. I expect less continued liquidation in Corn compared to Beans currently, so look for Corn to possibly find a base near $5.05.

January Crude Oil- Firstly, roll your Crude contract to January if you have not yet. Based on the low August 25th to the high November 11th the Fibonacci Retracement "Box" between the 50% and 61.8% levels is $81.11 - $79.23. Crude Oil has now violated the lowest Bull trend you can draw on the daily chart and repeatedly dismantled stronger support, so I would not look at Crude as a Buy until at least this level.

December Silver- Silver is now testing the Bull trend line from the low August 24th - October 26th that spans the entire 3 month rally. Yesterday this trend was $24.95 and supported a low near $24.98 and today's value is $25.07 to support a low of $25.015 so far. In addition, the 38.2% Fibonacci Retracement for the entire move falls at $24.92 1/2 to provide further temporary support. Silver was uncharacteristically strong yesterday though in relation to the Industrial Metals and versus what one would presume in its relation to Gold on a liquidation day. I think that the Bulls may be able to hold Silver above the trend for a day or two longer, but I strongly believe that it is due for a correction into the 50 - 61.8% Box between $22.20 - $23.56. This means that I believe Gold will also continue lower.

Swiss Franc- The Swiss Franc is testing a Bearish reversal breakout on its daily chart this morning. Below the real support at 1.0070 as well as the spike to 1.0031 the market has a conservative objective of .9770. If the Franc confirms this reversal then expect the Euro to follow along with a break of roughly 5 -7 points itself.



Notes: