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.