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.