Monday 12/13/10 Commodity Ideas

Opening Note:

Yesterday
For the third straight day the Equity markets sold off for the first 30 minutes of trading, but managed to find support and rally throughout the rest of the day. Closing higher for the fourth straight day the S&P 500 established a new daily and weekly high close for the recovery. The Grain report Friday fell spot on with expectations across the board. It appears that the market was skewed for the possibility of a Bullish report though as the initial open was lower than the 7:15 am pre-report close. The recent strength in Wheat saw the most profit taking settling 13 cents lower, Beans 8 1/2 cents lower, and Corn unchanged. These are pretty uneventful moves in comparison to other report days, so I think the main takeaway is the Grains did not find their Bullish catalyst Friday. Crude Oil and both Gold and Silver were the weaknesses for the day. The latter two however pared losses after finding support around 9:30 am when the stock market did.

Today
The macro market is moderately stronger this morning with nearly every supportive market higher as of 6:50 am. The rumor mill was abuzz last week with rumors that China may initiate a tougher stance to curb inflation after moving the announcement forward a few days. Over the weekend though China refrained from raising interest rates and suggested that they will maintain a strong growth policy despite high inflation. Any weakness felt in advance of this announcement has corrected this morning as the Metal and Energy Sectors are unanimously the leaders. The one exception to the strength is the British Pound, which is a significant outlier trading 80 ticks lower on the session.

As you will garner from the Radar and Notes sections, I believe that the potential money will be made this week trading the supportive markets from the long side. Profit taking and short positioning in advance of the Chinese announcement has proved invalid, so look for short covering and fresh allocation as the week begins. The Metal, Energy, and Grain Sectors most dependent on Chinese demand should receive the biggest boost as current fears have been alleviated. Many of the potential trades on my radar are smaller intermediate swings, so I believe that if initiated we should see anywhere from 5-7 days of strength among the risk markets.

**Make sure you have rolled all Equity, Treasury, and Currency markets to the March contract. I will be using the March contract for reference today and forward.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Australian Dollar Bullish Formation- The Australian Dollar has the strongest correlation to the Chinese economy among the Currencies and therefore the most volatile reaction to the country's economic news. The decision over the weekend to hold interest rates steady should inspire a bid in the Aussie. There is a Bullish head and shoulders pattern that has formed on the daily chart for the Aussie near initiation now. There are two possible necklines for the pattern. The first from the high Nov. 22 - Dec. 7 has a value of .9860 today and the second from the high Nov. 22 - Dec. 3 has a value of .9825 after eliminating the spike from the Dec. 7th high. The pattern projects a rally between .401 - .418 once initiated. Wait for the breakout and confirmation for today.

Euro and Swiss Franc Look Constructive- The Euro has been the dog of the Currencies over the last month. With today's rally though and momentum unanimously remaining in a positive mode on the daily chart, the Euro may be positioned for another leg higher on a rally correction. Above 1.3428 the Euro would have an objective of 1.3799 as it cleans out some of the market shorts. The Swiss Franc continues to outperform the Euro and is closer to its own previous swing high. A move above 1.0293 would project a move to 1.0490 back near the yearly highs. A rally in either Currency would obviously boost both the Commodity and Equity markets as well.

Euro/Yen Bullish Head and shoulders (Euro/Yen to chart)- I would call the head and shoulders pattern crude because the shoulders are relatively small. Regardless, the neckline from the high Nov. 25 - Dec. 8 has a breakout value of 111.39 today with a projection of 114.49 if initiated today. As of 7:30 am the cross is trading right at this neckline breakout. The Euro/Yen is a good indicator for the risk trade, so a rally would also be supportive of the Equity and Commodity markets as well. If this pattern is initiated in conjunction with the Swiss Franc pattern above then I suggest looking at possibly a Long 1 Euro, Long 1 Swiss, Short 1 Yen combo trade that skews profits toward a Currency rally.

Silver Finds Another Trend- The draw downs in Silver are very volatile, but so are the upswings. On Friday Silver encountered and found support on another Bullish trend line from the low Nov. 17 - Nov. 29. I still have a 3rd leg objective for Silver of $32.17 that has yet to be reached. Deciding on entry parameters for Silver is difficult right now as the higher volume support/resistance levels are continuously run through. I will just leave the 3rd leg objective out there to do with it as you please or simply use it as an indicator.

Notes:

Copper- Copper established a new daily and weekly high close for the year on Friday. Copper tends to track similar to the Equity markets and sometimes ahead of them. Copper is in open water and continues to make new highs, which is a positive signal for the Equity market's continuation. Look for the S&P 500 to at least test 1250 this week and probably continue higher.

Bonds- The Bond market made new lows this morning on the recent move. The weakness this morning is likely accentuated by the strength of the risk trade though. I still believe that Bonds are oversold right now and will form a base and subsequent rally correction over the short term. For now I believe there are better positions than continuing to hold a short in the Bonds. The weekly chart leads me to believe that there will be another leg lower on the move, but there should be an interim recovery to relieve the oversold market status.