Friday 2/19/10 Commodity Ideas

Opening Note:
Right before yesterday's 3:00 p.m. (CT) stock market close The Fed announced that they were raising the discount rate (rate for emergency bank loans) a quarter percent. Equities, commodities and foreign currencies plummeted in the last 15 minutes of trade as the move was unexpected and caused a negative reaction in fixed income prices as well. This was a move that many believed was on the horizon as stimulus would be pulled back as the economic recovery has advanced, but few thought that the move would come this soon. Further worry has entered the market that The Fed may begin to raise the Fed Funds rate sooner than expected as well, with the market now betting it will begin at least before September. This move in the discount rate is only moderately bearish for the time being in commodities and equities, mostly for bank stocks, but the long covering was more of a fear trade based on future expectations from The Fed. The biggest story here may come from the yield curve as the steepening of the yield curve trade (long 2 and 5 year vs. short 10 and 30 year) is tested. Huge money has been riding this trade and the potential for a massive swing correction is now out there.

Despite the huge break before the close and continuation into the late evening there appears to be signs of recovery as buying since the European open has come into commodities and equities. With bullish trendlines maintained in many of these markets speculative and fund money has support to buy off of and may be taking this break as an opportunity to buy lower. Be cautious getting short outright commodities today as European buying has signaled large long money coming into the market around the opens for the last two weeks. However, with Crude coming within 35 cents of the $80 price target on a $10 rally over the last 10 days, gold failing to hold it's upwards trendline, and many markets heading into overbought territory on the daily stochastics I imagine that some long profit taking is coming after the V bottom swing rally. I also have a difficult time believing that this commodity rally can continue at it's current pace. This Fed move has created a lot of new opportunities so I will briefly cover some of them below, but weighing the best opportunity right now is tricky. Please respond if you have any incite or ideas you would like to look at as I am interested in discussing what this move could mean.

Buys to Watch:

Canadian Dollar vs. British Pound- What I thought might be a 2 month trade is looking like it could be a 2 week trade if the momentum of the move keeps up. Today the British Pound is the worst thing on my board with a decisive breakout below the consolidation range over the last 2 weeks. Although the Canadian is not stellar today either, it has served very well as a consistent strength with small downside volatility. The breakout on the cup and handle pattern at -6249 maintains it's projection to -5188 and with the market currently sitting around -5875 is approaching the halfway there point. A weekly spike close at -5656 from last January is the only point of resistance that stands in it's way for the rest of the move as it is at all-time highs. The buy zone of -6070 to -6040 worked perfectly yesterday as well and there is another one from -6000 to -5960 if the market pulls back there. It is safe now to move a stop to just below -6125, or if you would like to lock in more profit then just below -6030.

Sells to Watch:

Beans or Wheat- I believe that it is take your pick of which story or chart you believe more, but both look like decent trades. With soybeans recovering to $9.70 and with each report on the South American crop increasing yields, beans have little bullish news to hang their hat on right now. Furthermore, it appears that speculative and fund positions on U.S. wheat have kept prices much higher than the cash/fundamental situation, as European wheat traded to contract lows two days ago, making the U.S. wheat non-competitive with the rest of the world. Large long speculative positions have come into the grains for most of 2010 and with the recent topping action I see little reason for more to come in. I have sell zones on the May beans of 956-957 and above that at 968, and I believe that they will break to test their $8.90 support level in the coming weeks. In wheat I have sells from 496-497 and above that from 503 to 505, on a move that should test the 472 contract low and continue to around $4.50. I believe that selling corn right now is more of a battle to the downside than these two markets right now.

Fixed Income- The Fed move to raise the discount rate yesterday had caused a severe bearish reaction in the fixed income sector with many of the markets gapping lower after the move. Technically, topping head and shoulders patterns were set off in basically all of the fixed income charts that I watch. Here is a list of some of a couple of the pattern's breakouts, entry points and projections: Five Year - Breakout: 116.08, Pullback Entry: 116.05 to 116.08, with a stop above 116.13, Projection: 115.08 Ten Year- Breakout: 117.06, Pullback Entry: 117.10 to 117.15 with stop between 117.20 and 117.25, Projection: 116.00

The bonds and two years also have the similar topping head and shoulders. The entire world is long the short term 2's and 5's while short the 10's and 30's, betting on a steepening yield curve. The move yesterday and continuation today looks like a slight unwinding on the trade, so I would lean towards shorting the 2's or 5's rather than the 10's or 30's as there could be momentum for a much larger unwinding of the trade, giving you a bigger edge. Another question is, is this a fake-out scare where the market momentum could swing upwards to new highs (like the crude below $72 two weeks ago) or is this a real move. I am often skeptical of head and shoulders as they are the most widely recognized pattern and therefore one of the easiest to get screwed on. I would recommend looking at these charts under your own eye before just taking my word and executing as I am not the best fundamental fixed income trader under the sun.

Put on the Radar:

Gold (as a sale of other metals)- The gold is basically the first (similar moving to the stock market) commodity that has violated it's uptrend from the last two weeks. Gold was one of the strengths over the last year and the beginning of the recent V bottom. It looks like it was spread long against other commodity shorts, like silver, and the unwinding has pushed silver higher with gold lower. I look at the failure of the gold as an indicator that commodities may have trouble continuing the pace of this rally. Furthermore, Copper and Silver, depending on where you draw it, have bounced off of their trendlines anywhere from 4 to 8 times in the last 10 days. While this has been a great fade as a day trade I have found that markets that continually do this usually slam out of the bottom hard as positions have accumulated along the move on the over-confidence that the trendline continues to hold. If commodities break I am looking at selling silver and copper off of gold weakness, but again I am waiting for confirmation of trendline failure.

Dow - Crude Oil- I had this listed as an indicator on Wednesday as well, looking at the difference between the stock indexes and commodities/energies. The triangle/wedge pattern now has a clear reversal downside breakout, indicating that stock indexes could begin to lose on a move compared to commodities. As I stated above, I believe that crude will have a difficult time above $80, so this differential indicator could swing the other way. I would not put this on as a trade, but keep it on the radar as a continuation on the downside move could indicate the stock indexes as a better sell or commodities a better buy directionally.

Notes:

Crude Oil / British Pound- I had this chart up on Wednesday in the put on the radar section, but took it out yesterday as I felt that the crude/commodity rally was a bit overdone. But, with crude on a destiny trade to $80 and the British Pound breakout to the downside the trade projection has been completed to 5140. I would take this as a sign as well that Crude may have trouble holding a rally above $80 as the Pound looks like it will continue downwards, meaning for the ratio to break Crude would have to as well. Side-note: Although natural gas has moved contrary to the crude oil for some of 2010 the chart looks poor and if crude fails at $80 natural gas could be the best sell on a commodity break.

Cotton- I do not know the fundamental story on the Cotton, but directly after the supply and demand report from February the market exploded upwards. It looks like it could be a similar, but opposite, story to the corn report in January where big money was caught the wrong way on a poor looking chart, fueling a massive short covering rally.