Opening Note:
Heading into Unemployment this morning I wanted to make sure I sent out the letter prior to the announcement because opportunities can occur or change based on the reaction to the news. What I thought would be a quiet day yesterday turned out to be a day of long profit taking and weakness for commodities heading into Unemployment. I do not take a lot away from the action yesterday in many of the markets other than that it was long covering with only some slightly positive news out of Europe and a fairly uneventful jobs report. Like I stated yesterday, I believe that Unemployment is a lot less relevant to the market right now than lending and solvency news, so I believe that the report will not greatly effect market direction regardless of the news. While I believe that bullish lending policies should continue to flow money into commodities I am a little put off by the fact that equity indexes are performing much better than the commodity sector over the recovery of the last month. Leading into the report today commodity prices have waned while equities have continued to rally as well. This will all become clearer after the report obviously as much of the trade is waiting for the report to enter positions. Take all of the information today with a grain of salt as I am releasing it prior to the report and conditions could likely change afterwards. I would also like to give a welcome back to relevancy shout-out to the soybean complex.
Buys to Watch:
Bean Oil vs. Soymeal- I received an opinionated report yesterday that Bean Oil currently sitting at 42% of the Soymeal crush should rise to 50% in the coming future. This is a similar situation to the 2008 growing season when Oil rallied to 3000 over the Meal. I do not believe that this level is achievable in the current market because prices are much lower comparatively, but sitting just above 1400 I think that 2000 is not out of the question. The spread is on a relentless rally to new highs with no pullbacks lately. I usually like to look for pullbacks of a day or more to buy, but I will also give a day trade entry level that has worked well lately on the half day pullback. For the day trade I am looking at the 1372 to 1380 level as support to buy off of. For a better two day retracement entry level I like the low volume zone from 1320 to 1332 as a buy against support from 1320 to 1304.
Sells to Watch:
Soybeans- With export demand shifting to the enormous South American crop, expectations that Chinese demand is in decline, and unexciting exports, Soybeans have a nice bearish fundamental story. The chart finally has a topping head and shoulders pattern that was set off by the close yesterday, but has been negated temporarily on an overnight rally. Today the head and shoulders neckline breakout sits at 944 3/4 with a projection to 901 1/2. You have probably picked up that I am not a huge fan of head and shoulders patterns, but I believe that it is a long time coming for a Soybean break. If today's rally ensues I am also looking at the low volume zone from 948 to 954 as a high of the day to sell and possibly hold, with larger resistance from 956 to 960. With the market closed during the Unemployment report the overall market reaction could shift greatly without any trade in Beans, so if there is a strong bull reaction I would hold off on selling beans today. I was also thinking about hedging risk and likely improving profit by selling half a position in soybeans and half a position in Soymeal off of bean chart action as the Meal is greatly losing to Bean Oil right now.
Cocoa- If Cocoa does not rally into the sell zone today that I have been watching for the last two then I will pull this as a sell. Despite the warning, Cocoa has acted independently weak from commodities and the long term monthly and weekly charts look to be bearish as well. The low volume sell zone is from 2878 to 2906 with larger resistance above from 2910 to 2930. The second leg downside projection is to 2650.
Put on the Radar:
Buy RBOB (Gas) vs. Heating Oil- This is a large seasonal trade that has worked almost every year since the contracts were created (2008, the year it did not, I got beat up pretty good). It is pretty logical that Heating Oil is more in demand in the colder winter months and that Gas is more in demand in the summer and this is what the trade is based off of. Right now the spread is in the high 1600's, but easily has the potential to go to 3000 or higher, as it often has. The spread usually rallies until the last week in April or first week in May so there is plenty of time to still catch the wave. One thing I like about this trade is that it continued to work even when Crude Oil broke to under $70 this year and while Heating Oil held up fairly well versus the Crude. The fundamental difference in this trade from a decade ago is that there are more diesel engines being put into cars now, which is a derivative of Heating Oil and not Gas.
Notes:
Natural Gas- A bearish draw report yesterday sent the market tumbling to new weekly lows and I have heard predictions the market could continue down to $4. However, I have concerns about the bearishness of the chart on technical terms. Momentum indicators are in oversold territory with Stochastics showing extremely oversold and close to a buy signal. Open Interest has also risen sharply showing me that many shorts are entering and holding positions. While I think that it is a good opportunity to sell Nat. Gas as a spread against buying a stronger commodity like Copper, I do not like selling the Natural Gas outright as I believe the risk is not worth the reward with a move to $4. Natural Gas has a history in the last year of having very bearish fundamentals but support from money and investment. It smells to me like this could be a trap to screw the bears again.
Canadian Dollar- I am moving this out of the buys today because the upside momentum is basically lost. The market held up very well compared to other foreign currencies yesterday, but European weakness dragged it down again. I would recommend covering your long if you have one for the time being. I believe that the Canadian is the best currency to buy as a spread against selling a weak commodity, but there are better things to do with your margin than sit long it outright.
Mike Mondi
Mondimc@gmail.com
http://mikescommodityperspective.blogspot.com/
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment