Thursday 2/4/10 Commodity Ideas

Opening Note:
For the first three days of February it is apparent from the rally of weak markets, the continued large open interest climb in grains, and the buying on the open of the stock market that a large amount of new long money has entered the market from the sidelines. What is interesting to note is that while the grain markets have continued a slower and steady break on the large increase in open interest the metal markets have seen a a moderate to sizable decline in open interest with more volatile downside moves. Since January 7th copper's open interest has declined over 18% leading the exodus out of the metals. Although part of this decrease can be attributed to the fund reallocation one of the indicators of a healthy bear market is a decrease in open interest with the decrease in price. This action makes me look at the metals as the weakest in the commodity world because people clearly would rather own grains, equities, and energies than metals. Make sure to keep an eye on the open interest across the sectors as we head out of winter and into spring as it is much more difficult to break markets when big money is grabbing and holding it. Despite the open interest increase in many of the commodities the prices continue to fall meaning an even larger increase in selling and that the bears are in the lead moving the markets. Continue to sell pullback rallies as I suspect that this is merely the top forming on a larger bear correction.

Buys to Watch:

Gold vs. Weakness- The price of gold has fallen the last day and a half after a decent sized short covering rally after failing to hold new lows. Some new longs also likely entered the market expecting a volatility swing out of the top of the range like the market had succeeded in doing for much of last year. The market's failure to do so on new money allocation is another sign that money is now unable to remove the bearish mentality of the market and that a decline in price should continue. Gold continues to stay in a fairly flat downward channel while the other metals and many other markets continue downside breakouts. Gold should not have the downside volatility of these other markets so it makes it the optimal spreading tool

Dollar Index- After a slightly troubling break starting at the beginning of the month the dollar has impressively recovered to it's highs on the move. It should continue to rally as money flows out of riskier assets and into the safety of cash. Depending on which pattern projection you choose to rely on I have a second leg move going continuing between 8050 and 8200 modestly.

Sells to Watch:

Copper- I covered much of the open interest story in the opening note and with continued troubling price action I believe copper is just beginning a large correction in a market that was largely over speculated in. The market, like a rubber band, was stretched the most of any during the recovery and should continue liquidation as large long positions that were accumulated on the rally unwind.

Silver- Silver should continue to encounter some support today on the lows from last week in the low $16 range. This support should not last for long though as I maintain a projection to the low $14 range on the weekly head and shoulders top. There is also a slight pullback today in the gold vs. silver ratio so as silver is held up I would look for entry into the market around low volume price trade at 288 and 281.50 to 283. (Gold - Silver/2 to get the chart).

Australian Dollar or Euro- It is pretty much your pick on which chart you prefer, the topping action of the Aussie or the continuation on the down leg of the Euro. On a weekly chart the Aussie sets off a double bop below 8665 that projects to 8055 and the Euro has a second leg projection to 136.50 modestly. Both have poor fundamental stories with Europe leading the way back down and Australia having an economy based on falling commodity prices so I do not think you can go wrong with either.

Put on the Radar:

Euro/Yen Cross- Like I stated in the dollar index the euro/yen had a more volatile correction than I had expected but with a large move so far today is sitting back near it's lows from last week around 125 (on the YR chart). I expect some support from it at these levels but like silver I expect it to easily continue downward shortly.

NASDAQ and NASDAQ vs. S&P 500- I moved this out of sells to watch to put on the radar as money flow into the stock market continued yesterday, and has been the trend over the last 11 months the money flowed more into the NASDAQ than the other markets. I believe like copper that the NASDAQ rubber band has been stretched more than others so I expect more downside potential than the S&P or Dow. With the rally in the NASDAQ yesterday and with the S&P staying relatively flat I believe today is a good opportunity to enter the short NASDAQ vs. S&P trade with minimal risk on a three day pullback.


Notes:

Grains: After a strong outside day down in the grain markets I believe the price will continue to fall, but as I stated earlier the large continued gain in open interest is propping up the markets for the time being.

Sugar: One of the stronger markets over the last few months is on the verge of setting off a double top below 2816. After it's open this morning the breakout was attempted but temporarily failed. The projection is to 2632.