Monday 2/8/10 Commodity Ideas

Opening Note:
After posting lower closes throughout the second half of last week in many of the commodity sectors, fueled by money flow, the stock market and currencies led a sharp short covering rally at 2 P.M. Friday that erased much of the losses for the day. The velocity and size of the rally caught me off guard as I believed that market participants would not be willing to carry new long positions over the weekend with the increased skepticism and volatility coming into the market. However, with currencies like the Euro and Dollar Index completing their second leg downward projections and the metal sector taking a serious hit on the chin over the last couple weeks it is possible that the market may have found another temporary consolidation point in some of the sectors as money is willing to own commodities at these levels. After the fact, I made note of some of the potential warning signs of the short covering rally that occurred that I think should be looked at going forward as indicators. Some of the strength markets on the recovery since last March like Copper, NASDAQ, and Australian Dollar all displayed strength among their sector throughout the morning and afternoon despite most markets breaking midday, and being some of the weaker markets over the past weeks. I would keep an eye on these individual markets as an indicator of a potential rally if they are acting unusually strong. Even with the rally late Friday Crude Oil and the Australian Dollar have set off large downside patterns that could lead the rest of the market down as the month continues, but I would be more cautious with which markets you short with some of the weakest reaching their projections. Watching the markets while I am writing this I also have noted that as markets made new lows at 6:30 A.M. the bottom buying kicked in hard to take most of the markets back to the middle of their overnight ranges, so an added note of caution today. I still feel there are fundamental problems in the global economy and believe that selling rallies is the profitable path to maintain.

Buys to Watch:


Sells to Watch:

Crude Oil- A large topping projection below $72.40 was set off on Friday, despite bullish unemployment data, that quickly ran stops down to $69.50. The late rally saw Crude make up most of these losses however with prices overnight rallying all the way back to $72.39 overnight. The energies have mimicked much of the stock market action over the past weeks so an equity rally could cause a temporary failure on the move. Still, with the pattern holding I believe Crude will continue downwards to it's $60 projection. The market has been held up during the recovery by fund money and speculation well above what fundamentalists believe is a fair price and the strength of energies should fade over the coming weeks.

Australian Dollar- A doublee top pattern was set off similar to Crude Oil below the 8665 price level. The downside projection is to 8055. With Australia's economy largely based on resources and commodities the continuation of the move should be viewed as a sign of further weakness in the market. Overnight price traded above the 8665 level briefly, but this is a strong pattern that I believe should be sold. Like Crude, an equity rally could hold up the market providing a fake out on the break however.

Put on the Radar:

Euro/Yen Cross- As one of the best indicators of future stock market action the Euro/Yen Cross looks extremely troubling. After a large downward move on Thursday the market only slightly recovered losses on the Friday equity rally. The weekly close was the lowest since February 16th of last year. Psychological levels of 130 and 125 have shown support on the YR CQG chart, so I believe 120 is the next level of support as the Cross nears levels from the bottom of last year's stock break. I have written more about the Japanese Yen side of the equation below.

Copper- Despite showing some strength on Friday I still like Copper as a short going forward in the market. Metals have suffered a serious draw down in price over the last two weeks as the weakest sector, but Copper still has a lot of room to liquidate speculative long positions. I believe that halfway back on the recovery move around 2.30 to 240 is not unreasonable to reach in the near future. Overnight prices rallied into the 2.90 to 2.96 range that I have as a low volume sell zone. Above this another low volume sell zone sits between 3.03 and 3.07, but I do not think that prices will rally that high.

Silver- If you have been sitting short silver with a profit I think that it is time to take profits on at least half of your position. The downward projection from the weekly $17 head and shoulders breakout is to the low $14's, but with nearly a $4 break in silver over the last three weeks the battle to take prices lower becomes a bit harder. If the Crude and Aussie projections hold true silver should continue to be an overall market weakness, but may need a little room to breathe right now. I do not see a good low volume sell zone in the market until $15.70 to $16.10 so I would rely on 15 minute chart indicators for entry.

Notes:

Euro and Dollar Index- The Euro reached it's second leg down projection of 136.50 and the Dollar Index reached it's initial second leg up projection of 80.50. It appears that these currency markets could have difficulty continuing their move and could be heading toward a consolidation period after being one of the best movers. Fundamentally I see the Euro as the weakest currency still so I would still be willing to take a shot selling it on rallies. The next good low volume sell I have is 137.90 to 138.20 and above that 138.55 to 138.70. I believe that a third leg down still exists for the Euro with an estimate projection from 125 to 128.

Japanese Yen- If you look at a weekly chart you will notice that each time the Yen has moved toward 115 against the U.S. Dollar that a curious spike followed by a break has occurred. This is not coincidental as the Japanese government has picked these levels to intervene and preserve the global value of it's exports by devaluing it's currency. Sitting around 112 we are approaching this area again so I would caution against holding longs near 115. If the Euro/Yen cross continues downward the downside move on the Euro should be the driving factor as it continues.

Grains- The grains have been the strongest sector out of any over the last two weeks. With amplified moves across the commodity world the seasonal money flow and reallocation into the grains has held prices steady to up in contrast to the rest of the markets movement. This is why I am not looking for places to sell grains right now and they have not been on my radar lately. It has been a small range and tough trade as the markets rest at an equilibrium. The Bean Oil vs. Soymeal chart does look strong however and above the January 7th 1054 close could show more momentum as the fundamentals strongly support the oil.