Tuesday 12/7/10 Commodity Ideas

Opening Note:

Yesterday
Yesterday was very quiet with the majority of the market lulling in a sideways pattern. The largest winners for the day, Cocoa and Natural Gas, were actually two of the quietest markets over the last several months. Wheat was also strong in relation to both Corn and Soybean markets that struggled out of the morning open. The Euro was the overall weakness and helped stall the 3 days of strong gains across the market since the beginning of the month. I look at yesterday as a win actually for the supportive markets. Given an unchanged Euro I believe that most of these markets would have settled well higher.

Today
The news of the morning is that a deal is under way to extend the Bush tax cuts another 2 years and Jobless benefits another 13 months. Big news, but it looks like the extensions are mostly baked into the cake already. That is not to say that the market is not strong though. Every market on my board (literally every) other than the safety Treasuries and Dollar Index are higher on the day as of 7 am. The Metals are the strongest of the Sectors once again, with Copper and Silver the leaders. The Equity Sector is also notably higher, with the Nasdaq leading. The only Sector I would single out as a laggard right now is the Foreign Currencies. The Euro is higher, but not necessarily as much as I would expect in relation to the rest of the market.

November 17- 18th look like the days that you can single out as the beginning of this recent advance for many of the individual markets. That puts the current rally at 14 - 15 days. Taking into account the 20 day move idea and some of the 3rd leg and extended projections I have for individual markets, I am estimating that there is still another 7-10 days left on the move. While I unfortunately do not have short term entry or trade suggestions for the time being, I recommend focusing on the long side of the trade for the supportive markets over this period.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Euro, Hold Off On Selling- I am still looking for a potential 3rd leg lower for the Euro, or correction to sell for a larger move lower. However, there are too many Bullish signals for the time being. All of the momentum indicators for the daily chart remain in a positive mode and well below overbought territory. The bearish trend line since early November is also in danger of a second violation in the last 3 days with a close above 1.3334 today. Finally, with the risk trade on full blast for December, I believe that the Euro will continue to get some sympathy buying and short covering. From the November 4th high to the November 30th low the 50% retracement is 1.3622. There is also some resistance from 1.3575 - 1.3625, so wait until this level before re-evaluating a possible short position.

Short Bonds, An Indicator- The daily chart is a spiky jumble over the last few weeks with odd reactions to reports and swings in relation to the risk trade. This caused me to cover my short position a couple weeks ago and well before the market reached its objective. Today's weakness though has brought the Bonds to new lows on the move and towards the rough 122.00 objective for the March contract. I have no suggestion for short entry now and would only recommend a small position with most of the move concluded. This 122 level though is one of the individual indicators that I am using to gauge when the risk trade may begin to reverse.

Long Silver, An Indicator- Like the Bonds above, I do not recommend jumping into a long Silver (especially with the volatility and over 90 cents higher today). However, I am looking for Silver to rally further towards the $32.16 3rd leg projection. Most of the move has concluded, but this is another indicator level to begin looking for a macro reversal on the risk trade.

Buy Natural Gas- Last week I noted the weekly Bearish trend line for Natural Gas that extends throughout the 2010 year. Natural Gas failed to settle above this trend last week, but it does have a good opportunity to this week. This trend value is $4.452. The weekly chart is beginning to look overextended and may need another price break before becoming a long term buy. But, short term I have a small projection of $4.904 with a confirmed move above $4.515. Natural Gas can be extremely fickle with its continuation beyond range levels, although it can also have some extra fire power to continue well beyond objectives. Because of this volatility it is wise to wait until there is confirmation on the advance.

Notes:

Cocoa- It only took about 3 months of waiting through an extremely sideways pattern, but Cocoa finally rallied above this range in violent fashion yesterday. The March contract daily chart has an objective of $3217, which has nearly been met by within the last 24 hours. This daily chart pattern is the short term, but the weekly chart is the important thing to note on the move. Yesterday's rally jumped Cocoa straight above the Bearish trend that has lasted entirely throughout 2010. If this violation above roughly $2980 holds, then I expect Cocoa to continue towards the high of $3510 in a quick manner on this weekly chart. Look for temporary resistance to come in around the $3217 objective, but keep Cocoa on the radar as a longer term buy on a pullback from this level.

Grain Spreads- The Goldman Roll begins today for January Soybeans. This will put pressure on the Jan'11-Mch'11 spread. Around Day 4 of the roll though I think it is time to look at buying (bull spreading) the Jan and selling the March. Short term Chinese demand could easily come into the market and with clear support there will likely be limited risk for the position. I will review this trade in a few days. I also still recommend keeping an eye on the March'11 - May'11 Wheat spread. I am not necessarily set on this exact spread, so look for revised suggestions in the future. Russian and European demand for the higher quality U.S. Wheat will continue to be a story. Australian Wheat quality has suffered and demand for the Wheat at the Chicago & Kansas City Board of Trades and Minnesota Grain Exchange should make old crop Wheat a good bull spread position over the coming months.