Thursday 2/18/10 Commodity Ideas

Opening Note:
While the majority of commodities sat flat to slightly down yesterday the European and other foreign currencies had a sizable break, contributing to a large reversal rally in the Dollar Index, which was beginning to look weak. The break in the European currencies confirmed my opinion yesterday that the Tuesday rally in them was not a vote of confidence for Europe, but rather more of a concessionary rally because they "are supposed to rally" along with commodities and equities. The bearish action and continuation of the move overnight has again left the Euro, Pound, and Swiss Franc charts looking weak and at or below the lows of their consolidation range over nearly the last two weeks. Standing alone these have the weakest looking charts with a fundamental story to back them up. Despite the European weakness, commodities and equities have held fairly steadfast with the metals, grains, and sugar showing a bit more weakness over the last 24 hours. Early last evening through the European opening commodities appeared to have some downward momentum, but have rallied since early today. With the Mardi Gras and Carnival season now over and Chinese New Year celebrations waning, more participants will be returning to the market. It is looking more likely that the Tuesday rally was a bit overdone and with the strength of metals like gold looking weaker, these returning participants may step in to sell the rally. With uptrends in many of the commodity markets and other entry points to buy off of I am still sitting flat on longer term trade entry. I am however looking for these previous strength markets to show more weakness in the coming days. As the short term bull trendlines in many cases have had multiple successful bounce rallies off of them I would look at confirmed violation of these lines as a sell signal. I wrote extensively yesterday about the commodity rally that has gained greatly over the European and other currencies. While I believe the relationship charts I suggested yesterday are ones to still keep on the radar, I am now feeling less certain that this is a trend that will continue if commodities turn weak as they can have large volatility and with confirmed weakness would be a better sell as an outright than as a spread.


Buys to Watch:

Canadian Dollar vs. British Pound- Since yesterday morning the trade has rallied nearly 175 ticks fueled mostly by British Pound weakness. Despite the large break in most of the foreign currencies, the Canadian Dollar was only down slightly and currently is positive on the day. This confirms to me that the Canadian side of the equation has less downside volatility than the other currencies with similar movement, adding to the value of the spread. The weekly cup and handle chart breakout was -6249 and has a projection to -5188. There is another entry point buy zone from -6070 to -6040, but this may be one of the last opportunities to buy it with a decent risk to reward ratio over the life of the trade if the upward momentum continues. If you are already long I would look at moving your stop up to just below the -6225 level that held yesterday, as you no longer need to give it to -6350 as I suggested yesterday.

Sells to Watch:

- Right now I am waiting for confirmation on trendline violation before entering short positions.

Put on the Radar:

Gold / Euro - Looking at the gold against the weakness of the Euro paints a picture that is not as apparent when viewed against the Dollar. It is currently sitting just off of the all time high close that it set yesterday. A bullish triangle/wedge breakout pattern continues to be set off with a projection to 8770. I do not believe this is a great trade to initiate right now though as the gold has shown weakness after failing to hold a rally above it's $1126 swing high against the Dollar. I would use this chart as more of an indicator right now because if it shows weakness it is a good signal that commodities are weak even against the awful European currencies and prime to sell.

Euro/Yen Cross Rate- The cup and handle bullish reversal pattern that broke out yesterday failed miserably as the Euro fell apart as the day went on. It is still sitting in a range, but obviously looks weaker today. With a little more momentum it looks like it is heading out the bottom of the range after the rally failure. I am looking for a move to 118 on the YR symbol CQG chart, which would be a bearish sign for equities and commodities.

Notes:

Metals- After being the strength of the rally on Tuesday the metals have taken a much different tone over the last 36 hours. Gold failed to hold prices above it's $1126.4 swing high and it appears that it was bought as a spread against silver and other commodities, with profits being taken starting Tuesday. Gold, Silver, and Copper all had bounce rallies off of their short-term bull trendlines this morning and have rallied back to near their highs for the session. I still have a close eye on the silver as it tends to perform the weakest during commodity breaks. I believe that the rally Tuesday and into Tuesday night in the silver was panic/mania and that it went a little too far. It is still sitting in my old sell zone of $15.70 to $16.10, but I am waiting to sell it. I would look at a violation of the metal trendlines as an opportunity to enter a short with the weekly head and shoulders projection still sitting in the low $14's.

Grains- When asked about a month ago how I felt about selling grains I responded that I was looking for the March Wheat to rally into the $5.07 to $5.11 area to wait to sell it and other grains. Extrapolated to the volume traded May contract that is values between $15.18 to $15.23 roughly. Tuesday Wheat rallied right into this zone, held, and rejected sharply out of it yesterday. With the reports on the South American crop continuing to improve and with soybeans reaching my recovery level of $9.60 to $9.70 I believe that it is better to sell rallies in the grains than buy dips going forward.