Monday 2/22/10 Commodity Ideas

Opening Note:
On Friday the buying that began in the morning continued throughout the afternoon with commodities and equities finishing with strong gains throughout the day and week in most cases. Overnight thus far, commodities are only up slightly with a little buying coming in after the European opening. It has been fairly consistent during the commodity rally over the last two weeks that strong buying around 1 a.m. has been followed by buying on the U.S. open and throughout the morning. The most effective trade has been to wake up around 1 a.m., buy your commodity of choice, and sell it at noon later that day. The reason this trade has worked so well is because a lot of this rally has been more about money flow than anything else. The majority of this money is coming in during this time frame with larger orders consistently moving the market after there has been buying on Europe's open. Despite this strong rally the volume over the last two weeks is lower on average than the weeks prior when the market was breaking and open interest has not had much of an increase or decrease in the markets either. These are not typical symptoms of a healthy bull market, but with the rally still intact across the board I suggest that buying and looking for momentum on a day trade level is the best way to make money right now.

Buys to Watch:

Canadian Dollar vs. British Pound- The trade continued to rally Friday, but with little movement to report today. I still believe that buying Canada's resource based economy against the European weakness is a trade that will continue to work. The Canadian, again, has lower downside volatility than the rest of the currencies, while the Pound has lower upside volatility than the others, giving this trade increased value. The cup and handle weekly breakout above -6249 projects to -5188 with only a spike of resistance to -5656 from last January. There is a low volume support level from -6000 to -5920. I would look to abandon the trade below -6050.

Sells to Watch:

5 Year Note or 10 Year Note- The fixed income market turned negative right after The Fed hiked the discount rate, but has sat mostly sideways for the last day and a half. Looking at the chart from a purely technical standpoint I like the 5 year and 10 year head and shoulder charts as a better sell than the other markets. They also may be a safer bet to continue downwards as it is uncertain if the yield curve will continue to steepen with the two year gaining price on the bonds, or if the trade will unwind a bit. The 5 year has a breakout of 116.09 with a projection to 115.08. A low volume sell zone sits from 116.05 and 116.085, and if sold a stop should be placed at or above 116.13. The 10 year note has a breakout of 117.16 with a projection to 116.00. A low volume sell zone sits between 117.10 and 117.145 and a stop should be placed above the resistance around 117.23. Note: The head and shoulders pattern is the most recognizable and also one of the least reliable ones lately. Furthermore, the 30 year bonds rejected a close beneath the neckline and rallied off of the neckline value on Friday.

Wheat or Soybeans- With option expiration on Friday there was low volatility on the day with prices gravitating towards higher volume traded option levels. With a bleak fundamental story in each market I am looking for opportunities to sell both markets. The daily Stochastics indicator on the wheat has given a sell signal today and the soybeans Stochastics appears to be on the verge of doing so as well. Open interest has also leveled off and began to decrease slightly for the first time since 2010 began, signalling that cyclical speculative money has stopped flowing into the grains for the growing season. I believe that beans should test their support level of $8.90 and wheat it's $4.72 support level within the next couple weeks. For soybeans I have a small low volume zone to sell at 9.68 and in the wheat I have one at 5.14. The low volume rejection zones have not worked well lately in markets where money is flowing in, but it appears that this may not be the case in the grains anymore.

Put on the Radar:

Euro/Yen Cross- I have not written much about it lately because there has not been a lot to report. For the last two weeks it has sat in a range between 121 and 125 on the YR symbol CQG chart. This has been a very tight range in comparison to the volatility in the market since the start of the New Year. The market is still sitting in the range from the move from Feb. 4th to 5th. With the currency markets being flatter relative to commodity and equity markets this is not odd action for the market. Equities tend to mimic the cross with a month or two of lag. The large move down in the Euro/Yen began after the first week of January. It has acted as a fairly reliable indicator over history, but we could be seeing an occasion where commodities and equities hold higher values while currencies move much more.

Notes:

**The metals and softs have shown weakness since they have opened. It does not look like there will be fund buying or allocation out of the box this morning in some of the other markets as well.