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: