Friday 3/12/10 Commodity Ideas

Opening Note: *Roll your currencies, equities, and treasuries to the June contract
Yesterday remained relatively quiet for the market into the close with the Soybean complex taking center stage on weakness following the export sales release. Equities did have a nice 2 pm rally, but commodities stayed range bound with continued energy strength propping up the market. Overnight European currencies have rallied off of a strong base leading the rest of my commodity board to be slightly green for the day. I do not believe that the currencies role in the overall market is significant right now, but strong moves still will have an effect on the other sectors. Equities and energies remain the strength in the market and provide the best opportunity to continue to buy dips on the extended rally (check out the huge open interest rise in energies). However, I am closely watching the metals today to see if they rally above close resistance levels or if they break off of them. The metals have led many of the overall market moves lately so I would take their action over the next two days as a sign that the macro environment will continue to be strong or reverse to weakness. We are now on days 25 or 26 of the February 5th rally, and although it is beginning to sound like a ridiculous count-down, I expect that there should be some long covering and profit taking leading up to the Tuesday FOMC announcement.

Because lending and Fed policy will begin to take center stage later in the year when rates unlock I am playing around with a theory on macro relationships. Throughout history and in most markets equity and commodity prices tend to rally when fixed income prices decrease. However, I think that as rates unlock and fixed income prices fall that this will have a negative impact on the economy leading to decreases in equity and commodity prices. This could be an unorthodox spreading opportunity. If anybody has any thoughts on this I would love to here back as I am still working through the idea fundamentally.

Buys to Watch: Energy and equity dips for right now. I have no constructed trades on the buy side.


Sells to Watch:

Gold or Silver- The metal markets are sitting right in or around their low volume resistance sell zones on the rally pullback, but have sat for such an extended period of time that I am becoming concerned. I believe that the metals should lead a long covering break in the market after the extended rally and leading into the FOMC report. Gold has been the high volume traded commodity weakness for the last week, and a downside breakout on a wedge pattern after the failed bullish head and shoulders has a projection to around $1030. As you have surely noticed, I like selling the silver market on moves that I believe are entire commodity weakness, so I am looking at executing at least half the position in silver despite it being a little stronger than gold lately. The low volume sell zone in gold remains between 1114.5 and 1118 with resistance above the market at 1122. For the silver the low volume zone is 1716 to 1722 with resistance just above the current price from 1736 to 1740. I would recommend doing smaller size than normal if you are executing right now as the rest of the market looks strong today. I also view a rally and close above these resistance levels as a sign of continuation on the commodity and equity rally. Note: Weakness on the U.S. open, I feel much better about selling them than when I wrote the section above.

Soybeans and Soy Meal- Soybeans finally look like the camel that got an extra straw of poor export news to break it's back. Many market participants have been waiting for a fundamentally led break in the beans because there is so much bearish news piling up with supply/demand and South America. I believe that beans continue to $9.00- 9.02 in the short term with further weakness to come. The Soy Meal is extremely weak and one of the worst technical charts out there right now, with stronger Bean Oil demand accounting for a larger portion of the Soybean price. I am looking at a projection range from 2325 to 2450 depending on how you calculate for the Meal, but I lean towards the lower end. There is a large low volume sell zone on the downward acceleration from yesterday from 9.38 to 9.50, but I would focus on the resistance levels from 945 to 946 1/2 and 950 1/2 to 955 to execute trades off of with lower risk. The Meal has a similar sell zone from yesterdays acceleration from 2546 to 2572, but I would focus on constructing the trade around the resistance from 2576 to 2592. I have written it to death already, but I also still like buying dips in the Bean Oil vs. Meal.


Put on the Radar:

Lean Hogs (April)- The market looks like it could be forming a double top. The breakout is 6567, which is way off, but I would look to sell rallies for right now as it appears Hogs are starting a leg down at least. I do not really trade hogs and know little about the fundamentals, but I thought I would throw something in here for you meat guys.

European Currencies and Dollar- I have about three different markets and relationships I am watching right now, so take a peak and decide what feels best to you. The nicest technical setup is in the British Pound, with a pretty cup and handle pattern that sets off above the breakout at 151.86 with a projection to 155.08. I do not believe that this will be set off today, and if it does will not have much rally momentum as the Pound is already up a bit on the day. The next is a topping (sort of cup and handle) formation on the Dollar Index with a breakout below 8013 1/2 and a projection to 7907. The market broke below the breakout earlier today, but has since rallied back, rejecting the initial set off. I would not execute this today as I do not believe there will be strong momentum on further dollar weakness, but keep it on your screens. Lastly, the Euro Yen Cross is approaching (YR symbol chart on CQG) it's bottoming formation breakout of 125.21 with a less reliable projection to around 130. Again, currencies are already extended today and I do not believe that they will have good momentum to carry these trades successfully until next week. If these moves happen with conviction it should support commodity and equity prices, but the currencies have diverged in their movement from the rest of the market lately so do not make too much out of a move.

Treasuries- I believe that Treasuries should be sold on rallies for the next couple weeks. I believe they are nearing a third of the way on a 20 day move down. This is especially pertinent leading into the FOMC meeting Tuesday as the market anticipates what The Fed will say. The focus is on when rates will begin to rise, long covering could continue on the shorter side of the curve. I especially have my eye on the 5 Year Note right now. It has acted the weakest the over the last week and appears to have a potential double top formation with a breakout at 114.25 1/4 and a projection to roughly 113.13 near the lows at the beginning of the year. Also, looking at the relationship on the FOB (5 year vs. Bonds, Bonds*3 - 5 Year*7 to chart it) it appears to have the best base of any on the curve, leading me to believe that the bonds could gain on the 5 year coming up. This would be a corrective move to the popular buy the short sell the long side of the yield curve and could be significant if it gains momentum.

Notes:

Cotton- Cotton basically met the move that I was looking for to the support at 7850. It is acting strong this morning, so I hope you took some profits already if you were short. There is resistance nearby at 7983 and higher at 8030 if you are still short, but I would not initiate a short right now. There will be more entry levels when a new projection emerges.

Wheat- I like selling beans and meal better right now, but if you like the wheat I have a low volume sell zone from 483 to 485, which the market closed in at 7:15am. Resistance is above from 486 1/2 to 489 1/2. I am looking for a move from 458 to 460 in the short term, but beware of support on the old lows.