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.