Wednesday 2/24/10 Commodity Ideas

*I will be out of town this evening until Sunday so there will be no newsletter Thursday or Friday, but will resume Monday.

Opening Note:
With the violation of recent trendlines in major directional indicator commodities I believe that the commodity and equity markets are beginning their second leg down. Copper and Silver were good market predictors in Mid-January for the first bearish correctional move, and with a lower close yesterday, appear to be signalling that another down move is starting. The Euro/Yen Cross, which has predicted larger market moves when it has broken out of consolidation range, also had a close below this upsloping range yesterday. Technicians look for 2 daily closes for confirmation of the move, so today is important in establishing downward momentum. But, with the market looking slightly weaker today these markets would have to make a significant rally to negate their breakouts. With many of the commodity markets just breaking the trendlines on their recent rallies there are not many good reversal top formations, or others that have small patterns with easy entry and projection parameters. I will most likely be looking at the second leg projections in many of the weakest markets as an end goal, but hoping to catch some momentum for a day or two by selling rallies and taking profits instead of focusing on the whole move. With the end of the month coming on Friday there will likely be long profit taking. As we have seen for the last year there has also been allocation into commodities and equities so it will be interesting to see if Monday has new money coming into the market. While January saw a two week rally off of this new money entry I believe that it will more likely be a two day rally like we saw in the beginning of February.


Buys to Watch:

Canadian Dollar vs. British Pound- Until 6 a.m. this morning the chart was continuing to look very weak. Recently though the cross rate has rallied 60 ticks on Pound weakness. I am becoming a little weary of this trade because the Canadian had a sizable break yesterday on weak market action. It is difficult to tell from just yesterday whether a break in commodities will have a larger effect on a propped up Canadian chart or an extremely weak Pound chart that is beginning to look a little tired of falling. I believe the trade should easily be let go below -6050, but may be worth taking profits on before then. Despite the rally it is still sitting in the low volume buy zone from -5920 to -6000 and I am tempted to take it off if it does not close above the -5920 level. This is fairly common 2 day pullback action, but the large break in the Canadian side yesterday has me a little spooked on it's future prospects. The weekly cup and handle projection is still to -5188.

Sells to Watch:

Cocoa- In January Cocoa was sitting on it's all time highs but has set up an extended topping formation since October. The first leg down from Mid January to early February on a double top formation had a 500 tick down move. Cocoa suffered a massive break yesterday making it one of the weakest looking commodity charts currently. Based off the first leg move and the recovery to 3175 I am projecting the second leg down to 2675. I see a good low volume sell zone from 2972 to 3000 on a rally if the market can catch one. Note: On the monthly chart the upwards trendline from the November 2008 base sits at 2848 for February so it may find support at this level. However, monthly stochastics for cocoa looks on the verge of a sell signal in close to overbought territory after this month's close.

Copper- Copper had one of the most violent breaks of any commodity on it's first leg down, but also had one of the better rallies more recently. Because most of this volatility is due to the low volume of the market I believe that Copper again could be one of the worst performers. The second leg down has a projection to $2.70. A low volume resistance zone from 323.50 to 324.40 created the high on the overnight range. Other than this area I do not see an adequate entry point for today though. Copper has had a small rally since it's open this morning so there could be a push toward it's violated trendline, but sitting at 333.90 today it is unlikely that it will be able to re-establish it. Daily Stochastics for the market will put out a sell signal in overbought territory today with a lower close.

Put on the Radar:

Silver- Like Copper, Silver had one of the more volatile down moves starting in mid-January. The recent rally in silver was much flatter though in comparison to other commodity markets. Today a close of 16105 is needed to re-establish the trend and negate the breakout. A modest second leg projection for silver is to $14.15, which is nearly the same value that the weekly head and shoulders projection is that has not been reached. A minuscule low volume resistance area is between 1604 and 1605 today, but because of it's size is difficult to take seriously. Like its initial break in January I expect silver to be one of the weaker performing commodities, as it normally is during big picture commodity moves.

Bean Oil- Since the beginning of January open interest in Bean Oil has risen nearly 40% on spring growing season speculation. This percentage increase is huge in comparison to the rest of the grain complex and could be based off of bullish fundamental reports in comparison to Soymeal. It looks like the market may be setting up a double top (or cup and handle) pattern that could be reached within a day if it was to set-off. Below 3860 May Bean Oil has a projection to 3777 and is easily within the reach of this level today. Soybeans had a spike rally failure yesterday that is bearish looking and the Oil Share (Oil - Meal) also has a similar topping pattern like the Oil. All of these factors make the bean oil move very likely to happen soon.

Notes:

Nasdaq and Crude Oil- The Nasdaq and Crude Oil have both bounced off of their uptrends to create the lows on the range today. These trendlines are slightly modest though because they are drawn off the lowest possible values and only have a couple touching points. The Crude trend has a value of 7828 today and the Nasdaq of 1795.

*There has been small rallies on commodity opens this morning so far