Wednesday 2/17/10 Commodity Ideas

Opening Note:
Commodities began yesterday on a positive note overnight and with large buying on the open and throughout the rest of the day closed with their largest gains in a single day as a group for 2010. Commodities having a nice day up was not surprising to me, but the magnitude of the day caught me off guard and with no explanation for why it happened or what was the real story behind it. The only time you will see me with the television on a financial station is if an important number is being released, yet I found myself turning to it just to hear what others were making of the move. It was when I analyzed the statement that I repeatedly heard, "Dollar weakness rallies commodities" that the light bulb came on. This was not a dollar story nor a vote of confidence for Europe, but rather it was a "Commodity Story". While many of the physical commodity markets were opening the Euro and Pound were sitting only in slightly positive territory while Crude and Copper were rallying animal-style. Only at 9:30 a.m. yesterday did the European currencies really begin to rally, almost as just a concession to the commodity correlation "because it is supposed to". I do not believe that the rally yesterday was a true piling into the Euro, and the real story here is that people would rather own physical commodities rather than European currencies, or currencies at all for that matter. Spreading commodity markets against currencies can be tricky to chart and properly execute for the result you are seeking, but in the Put on the Radar section I discuss a few of the relationships that caught my eye.

Because I am confused by the V bottom commodities are making, and I believe that the market is just about as confused, I am staying flat other than relationship trades for the time being. Technicals have continually set off patterns or signals followed by rejections and points of support and resistance seem to have little significance within the market movement right now. The best technical trade honestly has been finding a trendline and buying or selling off of it, which I have learned the hard way over time is not a great strategy. Furthermore, trading a fundamental story has also been extremely difficult as the swings have been volatile and hard to withstand. I recommend taking profits on day trades if you have them and looking for intra-day momentum as these have been the most predictable moves to capture.

Buys to Watch:

Canadian Dollar - British Pound- This cross rate looked strong coming into yesterday morning as the Aussie and Canadian rallied while the European currencies sat fairly idle. However, this changed when the Euro and Pound began to rally at 9:30 a.m, giving back any gains on the day and closing lower. Despite the European currency rally the Pound still was the weakest gainer percentage wise to the Euro and Swiss Franc, which supports my theory that it has the weakest volatility on rallies, making this trade much more stable than versus the Euro. A weekly cup and handle "W" pattern remains intact above -6249 with a projection to -5188. I still believe that European currencies will remain the lagger of the currency sector with resource "commodity" rich economies like Canada's outperforming them. This should be looked at as a longer term trade that may take 2 or 3 months to complete. Below -6350 the trade does not look as promising for the time being and would be a good place to abandon it. The Canadian vs. Euro chart also looks strong with a better short term uptrend, but obviously with more painful volatility. Note: Stochastics gave a sell signal yesterday in overbought territory on the daily chart so take this into consideration.

Sells to Watch: You can get very hurt and run over selling individual commodity rallies right now, so I have nothing


Put on the Radar: If you would like further help charting or how to execute the trades below email me because it can be tricky to calculate tick size and expected volatility across commodities.

Gold/Euro- My officemate has talked up this chart for the last few weeks, but because there are about 4 different fundamental reasons to buy gold I have slightly ignored it as the reasoning behind it escaped me. Gold can be used as a currency substitute, a run to safety, an investment, and it actually has a couple physical uses. After the light bulb went off yesterday afternoon though I think I finally understand the chart a little better, as it is saying that commodities as an investment are stronger and better to own than European currencies. We had debated whether it was a buy or sell signal for commodities as a whole, but I think that it is saying right now that regardless of commodity price direction they are outperforming the Euro. The market is sitting just off of it's all time highs of 8185 and with an elongated triangle/wedge breakout projects to about 8770 if it can close above the old highs.

Crude Oil/British Pound- I looked at the Crude vs. Euro initially, but I like the technical look of this chart better. A double bottom pattern was set off with yesterdays action above the 4845 close on Feb. 3rd. It has a projection to 51.40. Looking at Crude Oil alone I am not a big fan of the chart technically, as the reversal pattern that it is setting up has a lower bottom on the most recent leg down, whereas this chart has a double bottom. I have found that the projections are not as strong or accurate when this second bottom is lower than the first, so this chart looks like a potentially better way to play crude oil as well as the commodity vs. European currency story.

Dow- Crude Oil- I am putting this chart in the put on the radar section as it appears on the verge of a convincing break out of a reversal triangle formation. Draw the top from Dec. 14th to Jan. 21st and the bottom from Jan. 6th to Feb. 2nd for the best view. Commodities, and especially crude oil, have rallied hard over the last week, but this chart is showing that a bigger move could continue as commodities gain strength on equities.

Euro/Yen Cross- Fueled by a fairly large Yen break today the Cross is up again today after a large rally yesterday. On the YR symbol CQG chart it has set off a bullish cup and handle projection that projects to about 126.90 or just near the top of the swing high from Feb. 3rd. I still have the trendline though from the low of Feb. 5th to Feb 9th on my chart as it may have difficulty rallying above it at 125 today. This is a bullish signal for commodities and equities for the short time being.

Notes:

Sugar- Sugar has gone from one of the better looking charts over the beginning of the year to one of the worst looking charts right now in about two weeks. It is severely under performing the other commodities for right now and is down again today while most of my board is slightly green. If there is one you are going to sell then look at this one.

Silver- Basically everything that could have gone wrong against this trade did go wrong yesterday. The Gold vs. Silver ratio had it's first significant down day in a while, the silver rallied straight through the sell zone on the tails of gold and the rest of commodity world, and a 20 cent rally at 8:30 p.m. last night on Asian buying or a margin blowout took out a number of good stop areas. This is one that stings for me because it looked like a great setup, but the conditions all over were just not right.