Monday 12/27/10 Commodity Ideas (Mid-Day Edition)

Opening Note:

Over the Christmas holiday China finally raised interest rates 1/4 percent to back up months of speculation on the issue. This was an intentionally sneaky move as hints have been leaked for weeks to brace the market and minimal damage was done over the slow weekend. Most of the market is lower still at noon today, but I am very impressed with the price action following the news. The Energies, Equities, Metals, and Foreign Currencies are only slightly lower overall. Meanwhile, the Grain Sector is strong thanks to the Soybean market amid Argentinian weather concerns.

For months, if not years, I have read analysts that predicted this Chinese "bubble" burst as the next catalyst to for another Bearish global market wash lower. The rationale made sense to me on a certain level along with the some of the evidence provided. I have to say that I am completely underwhelmed by the market reaction thus far though. The first stone has dropped and the market could not be less concerned.

I am adamantly Bullish on Physical Commodities for the coming 2011 year, especially Soybeans and Grains in general. I was actually hoping for maybe a 50 cent break in Beans once China did begin to raise rates to piece into some July call options. The Soybean market has instead rallied off of the news with Beans trading 25 cents higher mid-day. Until the market reacts differently to Chinese inflation curbing I believe that you must trade the Commodity and Equity markets with a Bullish bias once 2011 begins. To begin the year I believe that the Energy (minus Natural Gas) and Grain Sectors will be the leaders.

For this week the market will be slow with the possibility for some rogue moves. Most trade ideas are on the radar for now. I will write again later this week if I have new observations or trade ideas, but this may be the letter for the week.

Buys to Watch:

March'11 - May'11 Soybean Spread (May-July Too)- Last Monday I called for the March - May Soybean spread to find a bottom between (-8) - (-9). On Tuesday the spread widened to -8 1/4 cents, but this was the low tick as the market has since reversed. Bullish fundamentals based on Argentinian weather, increased export sales, and supply concerns for the coming year have caused the outright Bean market to rally and this spread to come in recently. There is also sentiment that the USDA will tighten supplies on the upcoming Jan. 12th crop report. I still believe that his March - May as well as the May - July spread is a great vehicle to play the Bullish Soybean story for the 2011 year. I do not believe that March - May will widen past -8 again in the near term and will come in to at least -2 within the next month. The May - July should not widen past -3 1/4 as well and will likely at least test the November 12th high of 3 cents inverted. Continue piecing into Bull spreads each time they widen.

Sells to Watch:

Put on the Radar:

Weekly Soybean Chart- Last week the front month January Soybean contract made a second consecutive close above the $12.91 1/4 high from 2009. The weekly chart now has an objective of $17.03, which will likely be reached by July of 2011. The technicals combined with the fundamentals of the Soybean market combine to make a very strong Bullish case over the spring and summer of the coming year. I believe that Beans will at least reach $18 if not more before all is said and done in 2011. Now that there is technical confirmation I recommend building a Bullish options position on breaks in the market. I personally like the $16 - $18 July call spread trading roughly 30 cents as of today. I believe there is a strong possibility to triple or quadruple this initial risk.

Possible Gold Bearish Head and Shoulders- The daily Gold chart has now ditched its Bullish trend line and is trading in more of a sideways range over the last couple months. From the low on Nov. 26 - Dec. 16 there is a neckline for a Bearish head and shoulders pattern at $1356.7 today. Clearly it will not be initiated today, but the pattern projects a move of $75.9 from the breakout level.

Buy Crude Oil- I now have a 2nd leg target of $97.71 for February Crude Oil based on the daily chart. I believe that Crude will be the one of the strongest performers to begin the new year as new allocation flows into the lagging sector. A breakout below the 4 month range in the Gold/Crude Oil chart technically supports this theory as well. There is some moderate volume support from $90.18 - $90.44 that the market found a base near this morning prior to reversing. Any pullback based on China looks like a good opportunity to buy this market, so if there is another test of this support I believe it is worth an initial position.

Buy Yield Curve Flattening (Buy Bonds vs. Sell 5 Years)- To chart this spread enter (Bonds*3 - 5 Years *7). The daily chart is nearing a Bullish cup and handle breakout above -457.03 that projects a move to -451.15. The execution ratio for the trade is Long 3 Bonds vs. Short 7 Five Year Notes. Because this is nearly 1:2 you can also use this execution ratio for smaller positions if you convert the chart to (Bonds - 5 Year Notes *2). It is prudent to wait for 2 consecutive closes above the breakout for confirmation prior to entry so just keep this trade on the radar for now.

Notes:

Euro Has Not Made New Lows- For all the talk of a weak Euro or a 3rd leg lower the market still has not made a new low below the November 30th 1.2963 trade. Momentum now looks to possibly turn Bullish for the Euro with Stochastics and RSI both nearing buy signals on the daily chart. I am not looking at the Euro as a buy just yet, but I am definitely avoiding a short bias for now on this possible reversal. If the Euro trades above 1.35 within the next couple weeks then expect a move back to 1.40.