Monday 3/22/10 Commodity Ideas

Opening Note:
The reformed Health Care Bill finally was passed by The House yesterday evening, providing a sigh of relief for President Obama and Democrats. However, what may be a positive sign for our President is not being received as one by the markets thus far, with commodities and equities beginning a third day of weakness this morning. I currently have a number of medium-sized topping pattern formations that I am watching, with at least one market in each commodity sector having one (how about that for solidarity). The only difficulty right now is deciding, which markets are the best to play the downside breakout trade in once it sets off. Looking across the sectors the stock indexes have acted the strongest since the early February recovery and do not have great patterns right now, so I am just keeping them on the radar today. Furthermore, the currencies have only recently come back in line with moves from the rest of the market, reestablishing the "Dollar Up, Commodities Down" relationship over the last week. So, I am waiting for further confirmation on another leg down before executing in the currencies. Lastly, the Grain markets have an explosion of contrary long and short term bearish and bullish news, confusing the market and making it a difficult trade. This means that right now I am focusing on the energies, metals, and the longer term fixed income trade. I will still describe the other trades, but will leave them on the radar or in the notes for today as I believe that the buys and sells are more reliable trades for right now.

**8 AM Note- Weakness on commodity opens in Crude and the Metals thus far. I believe these are strong sells today and have the opportunity for more downside volatility. I would not recommend purchasing commodities today.

Buys to Watch:

Bonds vs. Sell 5 year Note- Use the relationship of Bonds*3 - Fiver Year*7 to chart and also execute the trade (or the similar Bonds*2 - Five Year*5). The weekly chart has a bottom cup and handle reversal with a breakout of -456250 and a projection to -449315. Today this relationship has weakened slightly, but is providing a good low volume entry zone to buy. This morning the market has only slightly breached the top of this zone, which sits from -453160 to -452200 with greater support from -454000 to -453200 for stop placement. The success of this trade is based on the continued unwinding of the popular "buy the short end, sell the long end" trade of the yield curve. The bond market on it's own has a bullish head and shoulders pattern with a breakout of 118.02 and a projection to 121.21, and the 5 Years have a bearish head and shoulders with a breakout today of 115.00 and a projection to 113.20. While each of these are a trade on it's own, I am using the confirmation of one of these patterns as further momentum support for buying the bonds against the 5 years.

Sells to Watch:

Crude Oil- Crude Oil has a solid double top pattern on the May contract today, that was briefly set off and rejected this morning already. The breakout is 79.41 with a projection to 75.46. Stochastics on the daily chart also gave a sell signal on Friday that should be confirmed today on weakness. Selling breakout extensions can be risky as it often takes multiple attempts to reliably continue, so if there is a rally before another attempt keep an eye on the overnight resistance from 80.35 to 80.50. If the market rallies above this level today it will likely rally into a low volume zone from 81.28 to 81.80 that could be a good opportunity to sell for preemptive entry. The Crude is likely tied to the breakout of the metals, so if you see them both breaking their levels at the same time I would take this as a sign of trade strength and support.

Silver- Silver, Gold and Copper all have topping formations right now, but I am focusing on the Silver market for the sale on the breakout. Looking at the Gold vs. Silver chart (Gold - Silver/2), the Silver appears to have a weakening reversal where the Gold should continue to gain in relation to the silver ($1 Gold Move = 2 Cent Silver Move). The breakout on the silver double top is 16.835 and has a projection to 16.07. So far this morning the Silver has rejected a breakout attempt around the same time as the Crude, so it is likely that they will travel together. There is overnight resistance from 16.90 to 16.98, but like Crude, a rally above this level will likely continue into the low volume area from 17.15 to 17.20, which could be a good opportunity to sell. Use the Gold as an indicator for this trade as well. The head and shoulders pattern on the gold has a breakout of $1102.1 today with a projection to $1048. If the silver breaks out while the gold does not it is unlikely to hold and continue.

Put on the Radar:

Currencies- The European Currency break on Friday was one was of the catalysts leading the rest of the market down, and I believe that it is important to keep them on the radar for a breakout below their range over the last month. Further weakness would indicate another strong leg down in these currencies, which is extremely bearish the overall market with the recent strength of the correlation between the two. The Pound was the strongest on the recovery attempt last weak and also the weakest on the rejection, as well as the market correction from January and February. Because of this I am watching the Pound as the leading indicator for a new low close today. The previous low close was 1.4958 from March 2nd. Two consecutive closes lower would project a third leg down of another 9 points. I am also keeping my eye on a double top that could be forming in the Australian Dollar, which would indicate further commodity weakness.

Buy July November Soybean Spread- I am taking off the May-November Bean Spread because the May - July portion is nearing the May roll, which puts bearish pressure on the spread. The July - Nov spread has a potential double bottom pattern forming that is based on inefficiencies in South American shipping and labor. This is a largely rumor-based fundamental story that is continuing to develop, but is necessary for the spread to rally. There is resistance right now at 30 cents, but a rally above this level should continue to 40 cents premium the July. Above 40 and 45 cents the spread has a projection from 60 to 75 cents. I still do not have a good pullback entry zone so it is still execute at your own risk for right now, but I would likely wait for a breakout above 32 cents to enter.

Bean Oil- The Soybean Oil has a flag pattern breakout today at 3905 that has a projection to 3756. The Beans are not my favorite market right now as there is a lot of push and pull, but this could be a decent trade if the Crude Oil sets off it's double top pattern. Look for weakness in the Crude after 8 a.m. to execute this trade. If the Crude does not continue down, then it is unlikely to come into play today.

Notes:

Stock Indexes- The stock indexes are now beginning their second day down, so I am watching them for further weakness before attempting to sell them. The Nasdaq has been the leader so I am looking for particular weakness in it. Friday's candlestick in relation to Thursdays produced an engulfing bearish candlestick pattern for the Nasdaq. Momentum for the Nasdaq has also begun to turn negative as Stochastics produced a sell signal Friday on the daily chart in overbought territory and RSI maintains a strong negative move while still sitting in overbought territory. Lastly, From the February 5th base I have drawn an amended trendline that keeps all closes above the trend, but with some trade below it. Today the trend value is sitting at 1910 for the Nasdaq so I would wait for confirmation below this line to begin selling.