Monday, January 10, 2011

Monday 1/10/11 Commodity Ideas

Opening Note:

Yesterday
The Unemployment rate dropped to 9.4% Friday, which is Bullish at first blush. However, the jobs created was still disappointing. The early reaction to the Report was mixed across the market with a lot of spiky back and forth trade. After some early allocation though Commodities moved lower for the day, Equities modestly lower, and Treasuries higher. The Energies, Grains, and Metals were unanimously weaker as the Commodity Sector is looking very heavy. The Treasury markets actually provided the first clue that the day would turn sour as they held constructive moves despite trading out of line with the rest of the market.

Today
As of 7 am the market is mixed, but definitely weaker than last evening's open. The Foreign Currencies are mostly lower, as the Dollar is higher, and producing pressure on the rest of the market. The Energies and Metals are higher to unchanged, but are well off their overnight highs. The Equities are actually the weakest Sector this morning in a twist from their leadership role last week. Finally, the Treasury markets are beginning to creep higher. This could be a similar signal of market weakness today as it was Friday.

I believe it is pretty clear now that the risk in the market is to the downside. After a strong 4 months for the market it looks like there will finally be at least a moderate pullback across the board. I advise using caution on long positions in Commodities and Equities for the next couple weeks. There is rebalancing for Funds across the Commodity Sector this week as well, which will make the market more choppy.

Buys to Watch:

Buy Gold vs. Sell Silver- On Friday my entry suggestion to buy against support from -$83 to -$92 on the (Gold - Silver/2) differential worked great. The differential traded down to -$88 mid-morning, but rallied throughout the rest of the session to settle near -$65. This morning there has been early buying on the Metal open to push the spread in Silver's favor again, but this looks like just a pullback on the longer term move I am looking for in Gold's favor. The suggested execution ratio is Long 1 Gold : Short 1 Silver. I still recommend a stop loss on the trade just below the higher volume support down to -$92. This means you can also enter new positions on pullbacks towards this higher volume support. The target for the longer term trade is $60 to $70 with Gold premium, so a $130+ move from today's level. If you have questions on how to chart or trade this spread you can always send me an email.

Sells to Watch:

Euro- This morning the Euro has actually turned into one of the stronger Currencies, but I still believe that it is the best sale among the Sector with the weakest chart. My initial target range for the Euro is still 1.2669 - 1.2744. There is not an outstanding setup for short entry this morning, but I recommend using a stop loss on the trade above higher volume resistance to 1.2992. You can therefore use a pullback towards this level for new entry. Possible longer term objective for the Euro still 1.2144.

Put on the Radar:

Buy Treasuries- The 5 Year Note is already broken out on a rally above its recent consolidation range and both the 10 Year and Bonds look to follow. Above 117.302 the 5 Year has an objective of 119.032. I still am holding off on entry though until either the 10 Year or Bonds follow suit and trade above their own consolidation. Above 120.26 the 10 Year has a target of 122.24 and above 122.07 the Bonds have a target of 125.04. All of these are conservative projections and should be viewed as minimums as well. Stay away for today, but if the 10 Year settles above 120.26 then I think it is time for an initial position in the 5 Year.

Notes:

Grains
Wednesday is the January report for the Grain market. While I am Bullish on the Grain Sector overall for this Spring and Summer I am not getting a good vibe as we head into the report this week. It is difficult to find anyone that is not constructive on the Grains this year. It appears that this enthusiasm may already be slightly over-allocated in the market as many fundamental analysts believe the USDA will have to lower stocks and raise demand for both Corn and Beans. The spreads for Beans, Corn, and Wheat have all Bearishly widened over the last week though as the outright prices have dipped as well. Furthermore, there is rebalancing this week, which will put pressure on all of the major Grain markets. I believe the Grains will see a further pullback this week, so for now I am not looking to buy and do not have interest in carrying a position into this report. Please refer to Friday's letter for my target ranges on the pullback. I strongly advise only looking to buy the Grains though over the long term and discourage carrying a short position into the report.

Friday, January 7, 2011

Friday 1/7/10 Commodity Ideas (Pre-Unemployment)

Opening Note:

Because I am crunched for time to get this letter out prior to Unemployment I am going to forgo the recap today and instead lay out my game plan for Unemployment today. You will notice few entry parameters as well because who knows what could happen with volatility after the number.

Unemployment Game Plan
The ADP Employment number Wednesday was the best number we have seen in a long time and has increased Bullish expectations for Unemployment this morning. Because of this I believe there is now slightly more risk to the downside because a Bearish number versus expectations would likely produce a larger magnitude move than a Bullish one. I have absolutely no opinion or estimate on the number though and have never tried to crunch data. Instead I always like to have a trading plan for both a Bullish and Bearish number. I always like to have backup markets, so there are more than a few suggestions listed in order of preference. I do not necessarily jump into all the markets and sometimes none if I do not like the reaction. If something is not working I am quick to cut it and ride the winners instead.

Bullish: Buy Nasdaq, Sell Bonds, Sell Euro, Sell Gold, Buy Canadian Dollar I will foremost be looking to buy the Nasdaq as the overall market strength, especially over the last few days. My next move is to sell Bonds. The Treasury market is in a tight consolidation and a Bullish number should break the Bonds out of this range (more below). Third I sell the Euro. There has been a shift over the last several days that has seen the Dollar rally on positive economic news. This is contrary to the relationship over the last year so I have a little less confidence in how tight this correlation is now. Still, because the Euro chart looks awful this is my go to currency move. Fourth I am selling Gold. Gold has Bearish confirmation now and there should be an exodus on the run to safety trade. This is also a potential hedge to the other market positions. Lastly, the Canadian Dollar is the best looking Currency chart and with a high correlation to the stock market I am buying it.

Bearish: Buy Gold vs. Sell Silver, Sell Australian Dollar, Wait and then Sell Euro, Sell Crude Oil The Metals are on the verge of collapse and now have Bearish confirmation of the move. Because I have difficulty selling outright Silver I am doing it with a long Gold hedge. Next, the Aussie Dollar is the Canadian's drunk uncle right now, so I am selling this laggard. Third, because I believe the Dollar has a positive correlation to the Equity markets I am holding off on directly selling the Euro. The chart is absolutely awful though and I can not see the market recovering above 1.31 on the number. It should regain its laggard status before long, so I sell the rally. Finally, Crude Oil is a strength this morning as the spreads have come back in. However, there is a potential trap of vulnerable longs on the horizon, so I lastly look to sell Crude.

Buys to Watch:

Buy Gold vs. Sell Silver- Gold now has confirmation on the Bearish head and shoulders pattern and is trading below the $1361.6 swing low. Both breakout patterns project a move to just ticks from $1299. Yesterday Silver also finally established a close below its never ending Bull trend on the daily chart. This morning it is the absolute weakness on my board, so barring a miraculous recovery it should provide confirmation as well. Buying Gold versus Selling Silver is now in play. I recommend a Long 1 Gold:Short 1 Silver ratio for execution. There is a nice higher volume support level from -$83 to -$92 that is good for long entry against on a pullback. The differential is currently trading premium to Silver near -$68 and my target for the trade is $60 - $70 premium the Gold. To chart this enter (Gold - Silver/2) on CQG. If you are having difficulty charting then your system uses different decimals. An example of how you calculate is: 1360.0 (Gold) - 2850.0 (Silver)/2 = -$65. The ticks have the same value as the Gold contract.

Sells to Watch:

Euro- Yesterday the Euro did break below the 1.3096 base trend as well as the 1.3050 previous swing low. It is also the laggard of the Currencies again this morning and is testing the 1.2963 low tick before open water below. My initial target for this Euro move is 1.2669 - 1.2744. Long term target possibly is 1.2144 on the move. Entry parameters to come Monday after Unemployment is settled.

Put on the Radar:

Bond Consolidation Nearing the Bearish Breakout- The Treasuries have traded a tight consolidation range lately, but the Bonds (also 10 years) are close to the bottom of this range. A Bullish number this morning could be the catalyst for a Bearish Bond breakout today. Below 119.10 I have a projection of 112.27 for the Bond market. Conversely, if the Bonds reject the move lower then the Bullish breakout level is 122.10 with a projection near 128.00.

Crude Oil Bearish Fundamentals and Open Interest- The Crude Oil spreads have widened considerably over the last week and the Feb - Mch spread has moved below the -$1 level. Anything below -$1 has a direct negative effect on the outright price so I am more concerned about a Bearish move on the horizon. Open interest in Crude has also set up another potential open interest trap for the Bulls. As of yesterday's number, since Dec. 17th 130,000 new longs have entered at a price no better than $87.50. A move below this level would put all these positions under water and likely cause a liquidation run back towards the $82. Keep an eye on the spreads and the $87.50 level.

Notes:

Grains Technically Bearish
I was a bit surprised by Wednesday's rally, but yesterday's sell off confirmed to me that the short term move in the Grains is likely lower. Today is the start of fund rebalancing, which will not help the cause either. There will be selling coming in all of the Grain markets. As I said yesterday, I am only interested in taking longer term Bullish positions in the Grains. These are the levels that I am looking for the markets to form a base for fresh long entry. Corn $5.63 - $5.90, Wheat $7.00 - $7.42, Beans $12.90 - $13.17. I advise caution if you are long over the next week. I think it is better to play it safe and have some ammo for the dip if it happens.

Natural Gas- My long entry parameters for Natural Gas worked well yesterday through the Inventory Report with support holding. The market proceeded to test the $4.635 breakout level, but after an hour fell completely apart. My support was taken out as the market broke over 24 cents top to bottom from 10:30 am - Noon. There will be extensive buying on the rebalance this week, but I expect high volatility. Unless Natural Gas confirms a Bullish breakout then I recommend leaving it alone for the time being.

Thursday, January 6, 2011

Thursday 1/6/10 Commodity Ideas

Opening Note:

Yesterday
My thinking yesterday morning that a weak Commodity sector would spill over into the strength of the Equity market proved to be the opposite of what actually happened. Yesterday morning's ADP Employment Report jump started the Equity market off of its lows at 7:15 am to lead a Bullish charge for the broad market. Whether it was actually the ADP report or fresh allocation as the main source for the rally is debatable. However, I think that without that report the day would have looked much different. Friday's Unemployment Report now has a bit more intrigue as the number will likely have more effect than I previously thought.

The Grain markets were independently strong as opportunistic Bulls took advantage of Tuesday's break to buy the entire Grain board despite some Bearish technical signals. Crude Oil made a $2.50 rally off of session lows as it followed the Equity markets after its 9:30 storage numbers. The Treasury markets were extraordinarily weak on the Equity rally, but still remain range bound over the last couple weeks. Finally, my main takeaway from yesterday is that the Euro and Metals (other than Copper) appear extremely soft in relation to the rest of the market. The Euro settled over 150 ticks lower and is now testing a critical support level. Meanwhile, both Gold and Silver may have settled near unchanged, but in relation to Tuesday's 12:30 pm close they are still severely lagged most other markets.

Today
As of 7 am the market is mixed, but the leader/laggard relationships throughout this week are still guiding the sectors. The Equity Sector is the strength again so far today while the Metals and Euro are the weaknesses. Crude Oil also looks a little worrisome with yesterday's rally possibly just a disguise.

Over the last couple months it seems like whenever I finally come to a macro direction conclusion that by the next day I look like an imbecile. This has proven to me that for right now it is incorrect to umbrella the broad market and assume that it is in sync. So instead for now it is necessary to focus just on the individual sector's and market's trajectory rather than the economy when trading.

The Equity market is strictly a buy for me right now because if I was looking to sell something I could come up with at least 10 better markets. The ferocity that Tuesday's sell off in the Grains was bought yesterday leads me to believe that the Grains should be looked at as strictly a buy into the summer. There may be times that you should not buy or hold a long, but I definitely do not want to get caught the wrong way in the short term when I am Bullish overall on the sector. The Metals and the Euro are the markets that are in trouble right now and, with some more confirmation, look like the best upcoming sales.


Buys to Watch:

Natural Gas- Natural Gas has not rallied above its breakout level yet, but I am impressed with the technical action in the market and there is a good pre-emptive entry setup for today. With confirmation above $4.635 the February contract would have an objective of $5.285. Although the market was rather weak yesterday it managed to form a base in the gap left over last weekend between $4.454 - $4.491 and has acted supportive since. For the daily chart the RSI indicator has a Bullish trend from the Dec. 16th - Dec. 27th that was encountered yesterday as well. This trend has held though and as long as it does then the market continues to look constructive. There is a low volume zone for long entry left from both yesterday and overnight from $4.511 - $4.535 with higher volume support from $4.462 - $4.510 for stop placement below. This morning Nat. Gas has traded into this low volume zone and has found support thus far. I recommend using just an initial position for entry today though as this is still a pre-emptive breakout trade.

Sells to Watch:

Put on the Radar:

Buy Gold vs. Sell Silver- To discuss this trade in greater depth I need to break down each market individually. Gold yesterday settled in violation of the neckline on a Bearish head and shoulders pattern from the low Nov. 16 - Dec. 16. Today this neckline has a value of $1381.0 with the target projection of $1298.9 for the pattern if confirmed. Furthermore, if Gold were to travel below $1361.6 then it would have a similar objective of $1298.8 on a Bearish cup and handle. To make a third coincidence, the 50% retracement from the low July 28 - Dec. 7 high is exactly $1297.7. If Gold settles below $1381 today then set $1299 as the next target, but beware that the sideways action over the last couple months provides a number of support levels. Silver spiked nearly 50 cents below the $29.05 Bull trend line from Aug 24 - Oct 22 yesterday, but still managed to rally back above this level for settlement. This trend has a value of $29.17 today, yet again it has found support this morning after spiking below this level on its open. RSI for the Silver daily chart settled yesterday at the lowest value since Aug. 23rd, which you will recall is the day prior to the beginning of the large rally. A move below 35 in RSI would mark a definite Bearish shift and is within shouting distance now. The 50% retracement level is $24.55 and the 38.2% retracment level is $26.13 as possible targets pending a Bearish move.

Gold and Silver are the Top 2 on my Bearish watch list, but because it is so difficult to trade and manage risk in either outright I am recommending this spread vehicle. Based on the differential (Gold - Silver/2) a move to both 50% retracement levels projects a move to $70 in favor of Gold. On my own calculation based on pattern objectives I also arrived at a similar value of $60 in favor of Gold. This makes my objective range for the trade $60 - $70 premium Gold. Until silver gives Bearish confirmation I will not move this trade to the Buy list. However, the last couple mornings between 5 - 7 am I have entered a small position based on the intraday chart for the session with a tighter stop loss (and actually taken a net profit out of it). If this move is going to breakout then it will happen around the 7:20 am Metal open and could leave those not already in in the dust. Stay out of the way today though...the support is busted.

Euro Testing Critical Support- The Euro is testing the base on its triangle range from the low Nov. 30 - Dec. 23 at 1.3096 this morning. The recent swing low also sits at 1.3050 to provide further support. So far the market has held up despite a spike below the trend base, making it less likely that the breakout occurs today. A move below 1.3050 would provide an initial objective range of 1.2669 - 1.2744. When you take into account the extended break from the high Nov. 4th though you can also produce an extended 2nd leg lower for the Euro that projects to 1.2144. I believe that if the move is confirmed then you look to take profits in the initial range and then re-evaluate.

Notes:

Wednesday, January 5, 2011

Wednesday 1/5/10 Commodity Ideas

Opening Note:

Yesterday & Monday
On Monday the Equity markets led the rally to begin the new year with clearly the most new allocation. The Energy markets also looked relatively strong as well. There were some warning signs on Monday though as the Metals, Foreign Currencies, and Grains all struggled from their morning opens to post losses for the day in contrast to the strong stock market. Yesterday these warning signals proved relevant as the broad market fell under pressure as the morning began. Gold and Silver dropped $44 and $1.62 respectively, Corn led the Grains lower once again, and Crude Oil traded over $3 lower before a weak closing rally. The stock market still managed to settle near unchanged for the day, but gave back early gains and momentum from Monday's session.

Today
The broad market looks weak once again as every supportive Commodity I track is lower as of 6:50 am this morning. Wheat, Crude Oil, and Silver stand out as the laggards so far taking into account where Silver opened the evening session. There was very little rally bounce yesterday and just continued sinking overnight. I expect that we will see another large losing day for the Commodity markets that spills over into the Equities more today.

Expect Declines the Next Couple Weeks
Just like last year it appears that the market was over-allocated and over-optimistic heading into the new year. It just so happens that this year the market is also on the heels of a large broad rally since late August, when Quantitative Easing prospects first hit the market. The market action over the last 2 1/2 days has caused serious technical damage to some of the strongest markets over this time frame, as I will detail below. It has really been several months since the macro correlation has been this high and uniform directionally. For the next week or two I intend on being very cautious, but with a Bearish bias in regards to the physical Commodity markets. I believe the Equity Sector will remain the leader in the market, but it may be so as it declines itself.

I am still Bullish on Commodities and Equities throughout the year, especially the Grains. I think the dip this January will provide some great buying opportunities among the market. I just recommend being cautious on entering longs for a little while.

Late Note: This morning's ADP Employment number was rather Bullish and has provided a boost for the market off of its lows. This definitely sets a positive tone for the Friday report. Keep in mind though that the market has not traded along fundamental lines for a while and may not much past a gut reaction. Positive economic growth could actually be viewed as a negative signal for Commodity prices as much of the rally is tied to the notion that stimulus will continue to be infused into the market.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Buy Gold vs. Sell Silver- For due diligence on this trade you need to look at a number of charts. First, notice that the Gold/Silver daily chart now has a confirmed negation of the overwhelming trend since August. Next, look at the differential (Gold - Silver/2) to see that the trend on this daily chart from Oct. 22 - Nov. 16 was also violated yesterday and is awaiting confirmation today. Finally, the long term Bullish trend for the Silver daily chart from the low Aug. 24 - Oct. 22 sits at $29.05 today as the market is testing this level currently. Right now I have 2 out of the 3 indicators that I would like to see before taking a larger position on this trade, with the Silver daily chart trend violation the last piece. I already have a small "feeler" position in this spread, but it is based off the intraday Bull trend this session and not something I am attached to if today is not the day.

The execution ratio I recommend for this trade is 1 Gold:1 Silver, which means a position that would be in line with the above differential chart. The parameters of risk/reward and time length for the trade are difficult to define for the time being, but I am basing my expectations around the Silver chart. If the Silver trend is violated then the 38.2% correction value is $26.13 and 50% is $24.55, which will be the range that I will be looking to take profits on the spread position is initiated. Be cautious for now because Silver may find support on this trend at least temporarily. More definitive terms to come once the trade is moved to the Buys.

Grains Looking Short Term Bearish- Several days ago both Corn and Soybeans turned technically Bearish as daily chart RSI violated its Bull trend and Stochastics produced sell signals in both cases. Corn has taken the harder hit and may continue to. The chart for Beans/Corn is nearing a Bullish breakout that has already been initiated on the chart for Beans - Corn/2 projecting to $2.50 in Beans favor. Yesterday Wheat also settled at a technically Bearish level on the daily chart. After failing on a rally above the December 7th high, the March contract settled below several Bull trend lines. RSI also violated its own trend with Stochastics and MACD also contributing sell signals. My expectation is that Wheat will travel into the gap left from $7.00 - $7.42 and Corn will look to establish a base between $5.64 - $5.90 for the March contract.

Remember that the next Grain report is January 12th and a number of fundamental analysts are calling for increases in demand and stock reductions for both Corn and Beans. I do not wish to be short heading into the report. This pullback should actually provide a good buying opportunity for the Grains going forward. Recall that Soybeans still have a weekly chart objective of $17 and I recommend looking at purchasing the July $16-$18 call spread once there is a base.

Natural Gas Possible Bullish Breakout- The Natural Gas market has large allocation inflows at the start of this year, boosting the market over the last week and a half. The February contract now is testing the $4.635 swing high that would produce an objective of $5.285. Natural Gas can be volatile and loves false breakouts, so I recommend waiting for two consecutive closes for confirmation prior to entry. It is possible that the allocation trade is losing steam, so just keep it on the radar.

Notes:

Why I am concerned for the Stock Market right now
Until yesterday I was on the Bullish side of the outright Equity markets. The failure on yesterday's 8:30 am open though and loss of momentum concerned me. The Copper and Australian Dollar daily charts now have me even more cautious. These two markets arguably have the highest correlation to the U.S. Equity markets over the last several months, and especially over the last month. Both Copper and the Aussie negated their Bullish trends over the last month and are unlikely to recover prior to today's close. This technically points to a continued correction in both markets and indicates Equities will move lower as well. I believe that Equities could easily maintain their strength relative to the broad Commodity markets going forward though.