Monday 3/14/10 Commodity Ideas

Opening Note:
Overnight the market was relatively quiet, with the most notable move being a British Pound rejection on its bullish cup and handle projection. Starting this week the trade is focused on the FOMC meeting tomorrow so I expect the market to remain quiet with the possibility of some continued long covering in commodity markets, with a little less probability in equities. Looking at the nearby Fed Funds contracts of March and April there is a low probability that The Fed raises rates within the next couple months, but prices have declined more recently for the first time in a couple months. This shows that some longs are uncomfortable holding positions into the announcement and that the expectation that rates are raised by September may be moving up in time. The "language" that The Fed uses tomorrow is what the marketplace has an eye on to hear if the "extended period of time" phrase is continued to be used on holding rates steady near zero, and to see if there are a growing number of dissenters from the previous announcement on the use of this language. I believe that there is a lot more risk right now in holding long positions in commodities and equities than holding short positions through this report. If The Fed keeps the same language and stance there should be support for these markets with continued entry, but a shift in the statement likely would cause a wave of liquidation in the economy as lending stimulus begins to unwind. I am conscious that the most recent rally is extended time-wise and that a break in prices is becoming overdue. So, I am cautiously short term bearish with a bigger emphasis on commodity metals and less so on equities.

Buys to Watch:

Nasdaq vs. Crude Oil- I wrote about this trade multiple times last week in the radar section, but a strong rally in the relationship Friday set off the cup and handle bottom pattern on the Nasdaq/Crude chart. The differential chart has looked strong for a while now (Nasdaq - Crude) or (Nasdaq/10 - Crude to change the side values), but this can be deceptive because the Nasdaq is an index and does not relate well to other markets. This trade fundamentally works best on a commodity break I believe, and Crude is beginning to look vulnerable after only a slight rally on recent sideways action and a convincing reversal on Friday. I believe that commodities are overdue for a leg down right now, but that equity markets will not suffer as bad. For entry I am watching the Nasdaq/Crude chart and looking for a pullback into the acceleration from Friday between 23470 and 23610 to execute in the outright markets. The cup and handle pattern really only projects to 24000 conventionally on the chart, but I believe that technically the base in the relationship could rally the relationship out of the sideways range it has traded for the last several months. To execute I would use a 4 or 3 Nasdaq to 1 Crude relationship. I believe that a Crude break is more likely than a very strong Nasdaq right now so I would lean towards a 3:1 relationship. Note: S&P and Dow are bouncing off their highs from this year so Nasdaq could find weakness off of them, and it can be dangerous holding positions into the FOMC announcement even if little change is expected.

* Feel free to email me if you have questions or suggestions on this trade idea because it is tricky execution wise with a number of moving parts.

Sells to Watch:


Put on the Radar:

Sell Gold and Silver- I was hoping that the markets would be weaker by this point today and I do not have great entry points currently so I am moving this out of the sells for right now and into the radar. Metals have acted the weakest lately among the commodity sectors and I still believe that if there is a commodity break to come, where the metals will lead the way and perform the weakest. While Copper is one of the weakest markets on my board today the Gold and Silver have held up relatively well while I thought there was an opportunity to really break them. I do not have great entry points right now and would recommend lightening up your short position for the time being if you are holding one as they are not acting the way I expected. Resistance in Gold is from $1112 to $1114 and at $17.22 in silver for stop placement orientation. The bear wedge projection to around $1030 in Gold is still intact and the next level of support is just below $1090 in the Gold, with silver being traded off of these levels as well. There should be more opportunities to come in these markets shortly.

Sell Soybeans- While there was a small rally on the open Friday, Soybeans only glanced off the low volume zone that I was looking to add short positions in above 9.38. Today there is a small low volume sell zone between 929 and 931, that could act as resistance for the high today. If you were able to hold a short position in the market I would look at resistance from 9.32 to 9.37 for stop placement. The head and shoulders projection on the May Soybeans is still to just above $9.00. Fundamentals are still very bearish the market so I am looking for continued weakness in the market below the first $9.00 support level.

Notes:

Cotton- The market had a huge short covering rally Friday followed by strong action again today. If you are still sitting short I would liquidate and take profits if you still have them. On a weekly chart the market still looks possibly strong and I would wait for a more clear setup to have a position in the market right now.

Bean Oil and Bean Oil vs. Soy Meal- Led by a break in the Energies, Bean Oil had a significant bearish reversal day Friday. Open interest has been pouring into Bean Oil and the Energies as of late as they are both fundamentally tied when Crude is above $70. There is a possibility for long liquidation and further weakness in the short term so I do not recommend trying to buy it for right now. Furthermore, I would avoid buying the Oil share versus the Soy Meal as I believe that the Energy part of the trade is risky. The Oil Share did trade into a good dip buying range from 1382 to 1400, but I am uncertain of energy direction so I am staying flat the relationship right now as well.

British Pound and Dollar Index- The British Pound this morning had a strong reversal rejection on its bullish cup and handle pattern. The U.S. Dollar Index also rejected it bearish topping pattern that projected to a break of at least a handle. Right now the currencies are trading a volatile range without much fundamental news to act as a catalyst for moves. When these markets moved past their breakouts on Friday they were already extended on the day and did not have the momentum to continue, allowing for the false breakout and rejection. I do not believe that they will have the momentum to fulfill their patterns before the FOMC meeting Tuesday, so I would be mindful of the patterns, but hold off on executing.