Monday 12/6/10 Commodity Ideas

Opening Note:

While I Was Gone
I was in the office for a while Wednesday, although I did not write, so this summary is observations I have of the markets from Wednesday through Friday. While I was away I purposefully only took a brief look at where the Dow closed Friday to get a truly fresh look. I like vacations because when I come back I usually have a less opinionated view and sometimes a better understanding of the markets. Unfortunately it looks like I should have stayed a little while longer. I hopefully have some helpful observations, but I am finding that the market seems just as difficult to predict day to day as when I left.

-The Euro is WEAK in comparison to the Equity and Physical Commodity markets over the last month. While this originally appeared to be an early signal to me that the Equities and Commodities may struggle in the coming month, I now believe that it could just be a sign of these same markets "real"strength in the face of adversity.

-Wednesday was the 1st of December. The fact that this was the biggest winning day for the Dow in 3 months should not be surprising. What was the previous larger winner...September 1st. Beginning of the month allocation and follow through.

-The correlation between the U.S. Dollar and the Equity and Commodity markets is still low in my opinion. I believe that on one of the biggest 3 day moves in months that there was a bandwagon/pile-on effect to push the Dollar lower. I do not believe that a weaker Dollar was "the cause" of this rise in prices across the market. The only way that you could make this case is if you tie the cause to the rise in prices strictly to optimism on the European Debt situation and not to any other fundamental factor like QE2, China, Korea...etc. I highly recommend avoiding trading the causal relationship between the Dollar/Euro and Equity or Commodity prices throughout the rest of the year. This means do not sell the Dollar because the S&P is up and vice versa.

-Follow through is absolutely terrible right now. If there is established support or resistance you can almost guarantee that the market will not only violate this level, but that it will subsequently fail. Possibly multiple times before a direction is decided. There are still some markets with a clearly defined trend, but the most part I would call the Equity and Commodity markets an up-sloping volatility range. I have never called a market or a group of markets this, nor do I believe it is an actual definition. How to trade this pattern on a short term or day to day basis...stay out of the way and wait until you find something that really makes sense.

Today
The market is very mixed this morning. The Foreign Currencies are unanimously weak as the Dollar is strong. The Treasuries are all definitely stronger this morning as well. It gets more complicated from there though. The Precious Metals, Wheat, and Natural Gas are moderate strengths, while the Industrial Metals and Equities are moderate weaknesses.

After such strength the second half of last week I would not be surprised to see some pullback today and tomorrow. I am looking at this early month rally to likely remain the trend over the next two weeks though. The market seems that it would rather push prices higher for now and with more momentum than the declines in price. Because I believe the market is currently extra-treacherous I am waiting until I find trades that I really like prior to suggesting them. There will therefore only be some Radar and Notes.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Soybeans Weekly Chart- Last week the Soybeans made an initial close above the high from June 8th, 2009 of $12.91 1/4. If the Soybeans make a second consecutive weekly close above this level Friday then a new price target of $16.53 - $16.97 would be in place for Beans. Remember that this is a weekly chart, so this is a longer term projection that could take anywhere from several months to even a year to reach. My guess is that with the Fundamental Chinese demand and tight U.S. supplies that we will see at least $18 by the end of 2011 and likely prices above $20 at some point.

Sell Euro- Other than possibly the Treasuries, the Euro is the only market that I would consider a short position in for the time being. There is resistance in some other markets still, but the Euro has the best Bearish trend and I am not looking to fade anything right now. On Friday, and again overnight, the Euro bounced off the daily chart trend from the high Nov. 4th - Nov. 22nd with a value of 1.3375 today. It is possible that the Euro has put in another interim top now and is in the process of forming a 3rd leg lower. However, I recommend holding off on entry in the Euro for now. All of the momentum indicators remain in a Bullish mode currently. Furthermore, there is a fresh Bullish trend line formed by the lows on the daily chart since Wednesday at 1.3239 today that is providing support. If the Euro breaks this trend then I think you can begin looking at short entry with a 3rd leg objective of 1.2621. If the short term Bull trend upholds then look for a correction near resistance from 1.3575- 1.3625 before initiating a short position.

March'11-May'11 Wheat Spread- The Wheat spreads have had a strong Bullish move since Wednesday of last week. I need to do a bit more research before I suggest a specific one, but I believe this March-May chart shows the violation of the clear Bearish trend since early August the best. Tight supplies in Europe should cause further short term demand for U.S. Wheat, making the Wheat spreads potentially explosive throughout 2011. More to come soon.

Notes:

Bonds...Does Unemployment Even Matter?
The Unemployment Number Friday was weak. I would expect that this would carry over into the market, but the Bullish enthusiasm from Wednesday and Friday continued to subdue losses in Equities and Commodities. This did not surprise me a whole lot, but the Bond market's reaction definitely did. Initially following the number from 7:30 - 7:45 am the Bonds rallied 1 1/2 handles, as I would expect following a poor number. Within an hour though the Bonds were back where they started and proceeded to trade lower on the day.

Either this is a sign that the Bonds are flat out weak or that Unemployment is at a place in the market where it just does not matter much. Bonds are possibly on the way lower after a "bubble" pile-in of money. The global fundamental stories are dominating the headlines and money flow now too, rendering U.S. Economic data as back page stories. I speculate that both are probably true.