Tuesday 2/16/10 Commodity Ideas

Opening Note:
Over the last couple years one of my new favorite market indicators has not been a market, a currency cross rate, or a chart, but rather has been China's economic policy. China always seems to be a couple months ahead of the U.S. and the rest of the world in their central bank and government action. Whether it was cutting lending rates in 2007 before the rest of the world, beginning a stockpiling program of commodities last spring, cutting off commodity buying before the highs during the fall, or raising reserve requirements for banks twice recently they have acted well before it was popular in the rest of the world. Last Wednesday I received news of their second reserve requirement ratio increase for the year as they look to cut riskier asset and market speculation as well as lending. The Chinese obviously see another round of trouble coming economically and are proactively trying to set themselves up for prosperity in the long term and to limit the damage accumulated in the short term. I view their actions as a negative indicator for equities and commodities in the coming months as they have correctly front-run a lot of the general market price moves over the last few years, and is another reason I remain fundamentally bearish on the market for the next year.

Getting to market action over yesterday's holiday and overnight; as could be expected the markets were relatively quiet yesterday, but cumulatively with overnight action have seen a slight rally with Gold, Crude oil, and Copper leading the way. This is a continuation of the action from Friday afternoon that saw strong 15 minute chart patterns in equities facilitate rallies into high closes. While commodities appeared weaker during the equity rally this is not the case today as many have recovered ground against the stock market indexes. I still see flag consolidation patterns waiting to be set off across many of the sectors that have strong bearish projections, but with many of the markets failing to hold new lows it appears that they could also be setting up cup and handle reversal patterns to fuel a rally. I would continue to use caution while trading the markets as more than a day trade as they continue to sit in a consolidation range with news and money flow causing the majority of volatility across the board. I still maintain however that unless these markets show a rally breakout above their consolidation ranges (W or cup and handle patterns) that the best opportunity going forward is selling commodities and equities.

Buys to Watch:

Canadian Dollar vs. British Pound- I have been talking this trade up since last Thursday and I still really like it from a technical and fundamental perspective. On a weekly chart a cup and handle "W" pattern has been set off above -6249 that has a projection to -5188 with only a spike of resistance left on the chart at -5656 from it's highs in last January. This is a trade on the idea that Europe is bad while Canada is not as bad, and because of the markets chosen, has less detrimental volatility. Although the Canadian Dollar may not be the strength on foreign currency rallies it is often the strength on foreign currency breaks with a lower percentage decrease than the Australian Dollar it often moves similar to. Furthermore, the British Pound has continued to be the lagger among the foreigns with very little upside volatility on positive sector days. This is a good longer term trade with the move likely coming over the next few months. A break back into the -6170 to -6150 range would be optimal for entry, with a move below -6225 likely leading to -6300, so you can place fairly tight stops.

Sells to Watch:

Silver- It is convincingly in it's sell zone from $15.70 to $16.10 right now. Silver has rallied largely over the last two days on gold's strength, but this is a strong sell zone that I have kept an eye on for the last six or seven days. Much of the silver action could depend on Gold as it approaches a reversal pattern breakout at $1126.4. The gold reversal move seems a little forced to me so I do not have a high confidence that it will hold this breakout if it continues, but if it does silver should rally out of the top of the sell zone. To be fair to the trade i think that a reasonable buy stop should be placed at $16.27 at least. I believe that this is the best rally to sell currently. If you would like some protection you can also buy gold with it and sell off the gold side when the market breaks out of the sell zone, as gold should remain stronger than silver if it set off it's bullish reversal pattern.

Put on the Radar:

Dollar Index- The price action over the last few days in the market has caused me more concern so I would not recommend immediate entry but wait for confirmation before entering. Along with the Euro, the Dollar Index led some of the currency sector with moves out of their consolidation formation. Friday's close confirmed the rally breakout, but after testing it's highs the market failed to hold them and closed well off them by the end of the day. Today it is again performing weaker and a close below 8000 would be alarming to me as I would no longer look to sell. I do not see good entry points in the market right now as well and a new consolidation low close would set off a small double top pattern, so more reasons to watch this one and wait for entry till later.

Euro- The Euro has moved very similar to the Dollar Index (opposite direction of course) in that it led the foreign currencies with a downside breakout of consolidation. However, it also tested it's lows during the consolidation and failed to hold them and has shown some strength over the last couple days. Fundamentally this is likely the weakest currency, but I would hold off on entry right now because I do not see good points like the Dollar. I see a small single print reversal zone from 136.98 to 137.05 on the market profile chart as the best sell zone above to watch though. A rally above 138.40 would take this off of the sell list as a cup and handle breakout. If you are already short I would consider lightening your position or waiting for above 138.40 for your stop.

Euro/Yen Cross Rate- Like the rest of the currencies it is sideways to up slightly today while continuing to sit in a consolidation range. It has broken it's bottom trendline setting off a projection to 118 on it's flag pattern, but still looks to be in a sideways range. Just keep this one on your radar right now for incite into future stock market action as it tends to lead equity moves.

S&P 500- The 1080 level was fairly critical on the chart and a 1 a.m. rally went straight through it with little regard. I had a sell zone from 1077.5 to 1083.5 and the market is currently sitting just above it. I would hold off on selling the stock indexes right now as they have acted strong lately and have one of the largest buying money flows. The S&P and the Dow have also shown sector weakness compared to the NASDAQ so these are the one's to trade if you are going to sell.



Notes:

July - November Soybean Spread- With a rally above 40 cents overnight I am officially out of my short on the spread. It has had volatile swings over the last week with continued buying pressure up to the 40 cent level. This is at least the fourth time it has tested this resistance and it is clear that there are enough people that want to own it on the basis that bean supplies in the U.S. will be tightened some time this spring. I would step out of the way on this if you are trying to short it and look for another spot later in the spring to try again.