Friday 2/12/10 Commodity Ideas

*There will be no newletter Monday due to President's Day and some markets closed

Opening Note:
Boy do they not make this an easy game to play. Coming into yesterday the commodity and equity markets were showing signs of moderate strength after bouncing off their bottom side trendline. The currency market however, was painting a different picture as the Euro, Dollar Index, and Euro/Yen Cross all broke out of consolidation formations giving a bearish commodity and equity signal. Despite the currencies displaying market weakness, commodities and equities set up a base on a 15 minute intraday chart and rallied above an upside breakout point fueling a massive long entry and short covering rally that had little regard for resistance and in some cases continued more than 3 times the small intraday projection (see Copper and Nasdaq). Furthermore, contrary to what one might expect, there was little to no break off of this large rally into the close, which signals to me that there was minimal profit taking on the long side. Fast forward to today, the currencies I listed above have not only maintained their breakouts, but gained bearish market momentum causing commodities and equities to already give back a significant portion of yesterday's rally. I was trying to rationalize yesterday how the market could take the weakness of the Euro and turn it into bullish sentiment, but failed to find a way that you can sensibly do this. Whether it is a story of the EU devaluing the Euro by printing money to save Greece, an isolated lending problem that will only affect Greece (I doubt it), or that it is only Europe in trouble and the U.S. is fine I can not rationally buy into the idea. We do not live in an isolationist country and as the global economy goes so does the U.S. (we kind of messed up Europe on the subprime blowout). Either the currencies or the commodity market has to give at some point, and I lean towards believing the currencies as I see money being thrown at the other markets and psychological tactics to fuel rallies and to scare shorts. I still do not recommend picking tops to sell, but rather waiting for a breakout below consolidation to sell as the manic bull money can move it when it wants and has plenty of spots to buy off of, but I do not encourage buying on more than a day trade level as I think that the currencies will again lead the way down.

Buys to Watch:

Dollar Index- The dollar index had quite a scary break on the equity and commodity rally this last week, but despite yesterday's action has held up fairly well. Today it has convincingly broken out of the topside consolidation trendline of 8010 and actually rallied off of it on the low end of it's range. The only thing left to take out is the 8082 high trade, which it has tested today. The currencies have the best story of all the sectors right now, with less two-sided volatility, and I belive that the Dollar Index will continue to form a new leg above the last weeks consolidation. I am looking at this formation as a flag on the rally from the prior two weeks with a 3 point rally from it's base giving a projection of roughly 82.80.

Canadian Dollar vs. British Pound- I put this in the put on the radar section yesterday, but the more I look at it the more I like this trade as a hedged "Europe is bad" position that has some nuances adding to it's value. Although the Euro has had the worst action over the last two days I look at the British Pound chart as the worst because it had only a small rally off it's lows over the last week and also suffers when the Euro does. The Canadian has sat in mostly a sideways range while many of it's comparables like the Aussie have shown weaker action and higher volatilty. Because the Canadian has less downside volatility and the Pound looks like a ton of bricks with little upside volatility I believe this is a way to play a deflating Europe story with minimal risk (it works on days the pound rallies even, like yesterday). I am looking at a cup and handle "W" pattern on the weekly chart with a 6249 breakout and a projection to 5188. The spread is currently sitting at 6104 so you can look for entry on a pullback and other than a spike of resistance at 5656, halfway to it's projection, the trade is basically in open water. Because I think this is a pound is bad story I would also consider weighting the pound side slightly more, so I would sell 2 pounds for each Canuck, making it $12.50 for each pound tick and $10 for each Canadian tick.

Sells to Watch:

Euro- This is the weakest thing on the board right now as the European lending crisis unfolds further. It saw a decent rally on the Greece bailout news, but I believe the trade has sold the fact that the EU is going to have to shell out to solve the problem, and it is very probable that other countries face similar troubles. News can cause big short covering rallies in this so be mindful and have a stop in when short. Be mindful that like the Dollar Index it still needs to take out and hold prices below the 135.84 previous low. I am looking at this as more than just a pullback on the chart despite holding it's downtrend and more as a consolidation continuation like the Dollar with a projection to around 129. I would wait for a pullback for entry as it could give some jiggles and I see 136.00 as a decent spot and between 136.35 and 136.50 an even better one.

Silver- The silver has been awful compared to the gold and finally rallied into the $15.70 to $16.10 low volume sell range that I have been touting for the last week. Silver has led the way down on the commodity break, as one of the first indicators, and should continue to perform poorly as the highly speculated inflation trade unwinds. If it rallies into the sell zone again I would sell it there, but I believe that it may not reach that point again. Instead I would look at selling silver against buying gold for entry and removing the gold portion of the trade as it shows weakness. Look for a pullback to the 311 price on the gold vs silver chart as a possible entry point (Gold - Silver/2). The weekly head and shoulders top projection stands in the low $14 range still as it has not been met.

Put on the Radar:

Euro/Yen Cross- The cross has shown a little strength this morning on a Yen break, causing a rally off of its lows. It remains broken out to the downside below it's consolidation formation with a trendline level of 123.40 today on the YR symbol CQG chart. I do not think this is the best chart to trade however, as I have given a number of other currency plays, but is the one to watch as an indicator of future market action as equities tend to follow it.

July- November Soybean Spread- It was kind of a heartattack trade but my 42 1/4 buy stop did not get hit as the spread rallied above 40 but failed. It gave one last try before the close yesterday but sold off in the last fifteen minutes to close at 36. More long covering took place overnight breaking the price to 33 cents. The spread held it's topside trendline with an unviolating close and it looks to be in a downward channel as it continues to make lower highs and lower lows. I would look at taking some shorts off around the 20 cent price level as there should be support, but given five or six days to break the down channel bottom sits around 10 to 12 cents, which would be a nice price target to cover. If the spread catches a bid and tests the 40 cent level again I would likely cover it as I think it is more trouble than the reward.

S&P 500- The 1080 level on the chart looks to be a large resistance point. I am looking for the market to hold this level with a sell zone between 1077.50 and 1083.50. It may test it again, but I believe it should hold with the currencies giving red flashing sell signals. This is not a good sector to try and pick the top on though so I would keep this on your radar and wait for confirmation. The S&P has been the weakest of the indicators as the financials struggle to catch a bid so I would avoide the Nasdaq for right now even though it can give better volatility.

Notes:

Grains- The grains appear to be on another planet from the rest of the world. While the market fell apart at the end of January the grains sat in a tight sideways range, and again during the last week's rally have sat in a choppy sideways range, refusing to catch a significant bid. There is very little coorellation to outside factors so the trade appears to be focused on fundamentals as the planting season ensues.

Bean Oil vs. Soy Meal- The trade is tired and can not hold an upside breakout despite a soybean and energy rally. Without more bullish fundamental news I believe it is a dead story and would not focus on it anymore as there are better moves happening.