Wednesday 2/3/10 Commodity Ideas

Opening Note:
With another strong rally yesterday in equities and commodities, especially crude oil and gold, I am cautiously looking for opportunities to re-enter short positions in the market. Led by the energy sectors failure to hold new lows below it's swing lows from mid December, the macro market has had two consecutive days of short covering rallies keeping many of the markets in what still appears to be a topping range. With increased volatility since the new year the swings in these markets have become more violent than the market has become accustomed to over the previous eight months. What I believe is key to focus on right now is the strength and weakness of particular sectors and markets versus one another,because despite the wild changes in sentiment in individual markets it is clear that certain ones have performed better than others. Crude oil and gold have shown individual strength and an unwillingness to make and hold new lows, while copper, the currency sector, silver, and the NASDAQ have all displayed lower volatility and an unwillingness to strongly rally. I will discuss a few of these relationships more in depth, but I always like to chart the strength and weaknesses across these sectors against each other to see if a new story or a better chart to trade emerges from their correlation. As we go forward these relationships will be a good way to play market movement with an extra edge and without being as susceptible to quick directional changes.

Buys to Watch:

Gold vs. Weakness- When the market and commodities break gold is always one of the strengths among the group as it has buying money flow in as a run to safety out of riskier assets or unreliable currencies. By charting the gold versus silver ratio (Gold - Silver/2 to get it in dollar terms) you can see that since January 19th the ratio has rallied over $80 (in gold terms). It was obvious that gold has been stronger than silver by looking at the two individual charts, but if you enjoy trading trending markets and looking for pullbacks this chart creates a market that is viable,but not necessarily on your radar. Gold vs. silver is not the only chart that exists like this so you can take any of the strengths and weaknesses listed in the opening note and play around with them to better see which markets are truly winning and losing the relationship battle. I believe the gold vs. silver chart continues back to the top of it's weekly range of $350 as commodities display more weakness throughout the spring.

Sells to Watch:

Copper- The market was the strongest volume traded market during the recovery and after violating it's uptrend last week has performed as the poorest in commodity land over the last week and a half. While even silver as a weakness had a decent sized rally off of it's bottom the last two days copper has barely budged. After showing some strength overnight it has completely given up going into it's open. I had a low volume sell zone between 315 and 320, which was nearly reached overnight. It can be difficult to find a perfect spot though so I would look for pullbacks similar to the one over the last 2 1/2 days as spots to sell.

Australian Dollar- With Australia's monetary system deciding to not raise rates any rally bounce in the Australian Dollar was squashed yesterday while similar markets like the Canadian and Euro rallied. With Australia's economy, like Canada's, based on resources and commodities more than others; as these markets break so does the Aussie. With the market rally yesterday ignored by the rate decision this chart is beginning to look like one of the better downtrends among the currencies.

NASDAQ vs. S&P 500- By looking at the weekly differential chart between the two you can see a strong uptrend that only failed two weeks ago. I have watched this chart most of the way throughout the recovery as the technology stocks led the rally over the financials and other large cap stocks. This market is clearly beginning a downtrend so I encourage selling the NASDAQ the most of the stock indexes. With greater tick volatility in the NASDAQ because of the larger index number you can sell more of the NASDAQ while purchasing some S&P or Dow as a spread to hedge against directional swings like we have seen the last two days. This is another good example of a viable market and different chart to trade other than the flat price of the equities.

Put on the Radar:

Euro/Yen Cross- This has been on the radar for the last couple weeks and should continue to be for the foreseeable future. It obviously has rallied over the last 2 1/2 days but has given up much of it's daily gains as the markets have opened. Watch this as an indicator for the magnitude of commodity and equity breaks.

Silver- Despite a sizable short covering rally over the last 2 1/2 days silver remains one of the weakest commodities out there and maintains it's head and shoulders weekly downside breakout of 17.10 today. I still look for the market to travel to the low $14 range, but with more caution now after the fast rally off of it's lows.

Notes:

Bean Oil- As crude oil has become more volatile over the past couple months while maintaining a price above $70, do not overlook the correlation between crude oil, palm oil, and bean oil as energy source alternatives. Despite soymeal breaking slowly throughout the soybeans break it was apparent yesterday that the nearly $3 rally in crude oil fed into the large bean oil rally along with soybeans. This leaves meal a move that is equivalent to the leftovers in the crush calculation between the three and the loser in the real story department.

*If you are interested in ideas on how to chart some of the inter-commodity strength and weaknesses shoot me an email and I can help you figure out how to best chart it in dollar terms and figure out a correct ratio to spread.