Friday 3/19/10 Commodity Ideas

Opening Note:
Overnight the majority of commodities have been quiet with a Pound break and a Dollar rally the largest movers thus far. It appears that the "all clear on Greece" rally in the European currencies was just a fake out earlier this week as they have definitively rejected their rally attempt and are heading back into the range they traded for much of February and early March. It will be interesting to watch if they have the long covering momentum now to power through this range next week. A break out of the bottom of this range would likely negatively impact commodity prices as it would start an entire new leg down for the Euro, Pound, and Franc. Commodities have been stagnant over the last couple days after the FOMC meeting on Tuesday, with some sectors, like energies, showing a little weakness on the Dollar recovery. The relationship between the U.S. Dollar and commodities was highly correlated this week, so I suggest monitoring the European currency situation closer. As was the case in mid-January, a strong currency move in the near future could be the leader on the next move in market direction. Equities again found a way to close up on the day yesterday and remain the strongest sector of any and the strongest buy still. With low volatility and many sideways markets lately I do not see many good patterns or execution opportunities on trades. This is probably a good thing as I am unsure of the broader market direction for the rest of this month. I believe that it is likely that the market sits in a sideways "holding" sort of pattern until new fundamental news gives direction.


Buys to Watch:

Bonds vs. 5 Year Notes- To get this chart enter (Bonds*3 - Five Year Note *7), which is the same ratio for execution. The bonds rejected their bullish head and shoulders pattern the last two days in a row, but weakness in the five year has still made this trade a winner the last few days. The weekly chart is now on the verge of setting off a reversal cup and handle or head and shoulders bottom. If you look at a monthly chart you can see that buying the five year against selling the bonds is the overwhelming trend since the beginning of 2007. However, if the weekly reversal gains some steam it looks like this trend could violate this trend and cause a significant liquidation of the trade. When the FOMC announcement took the same tone as the previous months I believed that the buy the 5's and sell the 30's was back on, but this relationship reversal has continued. This reversal despite supportive news really pings my radar that something big might be happening here. I am using the more modest cup and handle projection on the weekly chart for right now that has a breakout of -456250 with a projection to -449315, which is right near the high of the range from the second half of 2009. Whether this is a trade you decide to execute when it sets off or not, I still would keep this yield curve relationship on your radar for a while because the monthly trend violation could have reverberations across the market.

May-November and July November Soybean Spreads- Both spreads have now rallied out of the bearish channel they have traded for the last two weeks and recovered nicely for a higher close, despite some bearish pressure the prior day and a half. The stories of isolated worker strikes and inefficient handling and shipping of the historic Soybean crop in South America are still isolated, but we have seen this situation blow up the last two years. Both charts still have good double bottom technical bases that with another 20 cent rally will likely gain another 20 to 30 cents on top. The May-July portion of the spread will have bearish market pressure entering in early April prior to and during the roll out of the May contract, but it has rallied slightly and does have nice support to rally off of prior to the roll. If you expect a good 40 to 60 cent rally then this trade has good risk/reward still based on support at the base, but if you only expect a 20 to 30 cent rally it would be beneficial to wait for a dip to buy. This trades success is reliant upon the fundamental South American worker and inefficiency story, which is just rumors right now, so proceed with caution and scrutiny.

Sells to Watch: I still have nothing good here for today.

Put on the Radar:

Bonds- The bullish head and shoulders bottom pattern still has a breakout of 118.02 with a projection to 121.21. The market has rejected breakout attempts over the last few days and looks like it needs some time to recover if another attempt is in order. Keep this pattern on your radar because if it sets off it could provide good momentum for the Bonds vs. 5 year notes trade, which I believe is the one to execute now instead of this outright.

2 Year and 5 Year Notes- I'm beginning to consider changing the name of the Newsletter to "Mike Mondi's Fixed Income Perspective", but honestly this sector is the most interesting and opportunity-filled right now. The shorter end of the yield curve has performed much weaker than the longer side lately and is setting up a potential bearish head and shoulders pattern on the daily charts in these markets. Like the Bonds above, I suggest keeping these markets on your radar as an indicator for strength in the better Bonds vs. 5 Year trade if the patterns breakout.


Notes:

Bean Oil vs. Soy Meal- What took a month to build up strength was taken completely apart in the last seven days. Bean Oil demand was predicted to rise throughout the Spring with support from energies and Palm Oil, but any strength ind the Oil has completely dissipated. Technically this break looks very tough to recover from, so I do not recommend looking for opportunities to buy dips on this free fall.

Sugar- Speaking of markets that fell apart, take a look at the Sugar daily chart. The market was very excited about the base of several months and the 30 day rally, but over the last month and a half long position liquidation has broken the market to prices well below the previous base range on a break of over 35%. I am writing about this market today though because I believe that it is in the process of forming a reversal base now. RSI and Stochastics momentum was in extremely oversold territory, but have begun to rally slightly, with Stochastics giving a weaker buy signal yesterday. The market has rallied the last two days and is rejecting slightly today, but I do not believe that it is a good sale anymore and wold recommend taking profits on shorts if you have them.