Monday 3/29/10 Commodity Ideas

Opening Note:
Following a quiet day on Friday other than the currencies, the market is firmer this morning with a supportive foreign currency rally leading Commodities and Equities higher. One thing that is clear to me is that the broad Commodity sector is not heading towards a correlated leg down right now. While it appeared early last week that bearish patterns in the Metal sector could be the leader down on a weaker market, they have corrected the last 3 days, rallying back into their sideways range for the last month. As the quarter comes to an end over the last three days I suspect that the market will trade sideways to slightly higher as it is unlikely that a strong leg down will begin. Starting Thursday there will likely be some new allocation and position adjustment, which should hopefully shake up this sideways action. Many of the inter-sector correlations throughout the market are not too active, so I do not see a lot of profitable spreads between outright products across the market currently. However, there are some individual outright markets with patterns and pullbacks for entry right now. Repeating what I said Friday, I believe that looking for half day and 1 day trades and taking profits once you catch a decent sized move are the best strategies right now. Much of the market is sitting in a range trade with tomorrow often looking different than today, so do not expect large continuation moves in this environment.

Buys to Watch:

Copper- Copper was in this buy section on Friday, but could not gather the momentum to rally above it's breakout last week. This was a different story overnight though with a strong move after the open setting the market in motion. The bullish cup and handle pattern has a breakout of 343.60 with a projection to 355.15. There is low volume buy zone from 344.30 to 345.40 with mild support below to the breakout level for entry on a pullback. The first level of resistance is 348.70 from the high of the recent range on March 1st, which was eclipsed as I am writing this just prior to 7 am. Technically the market has a number of qualities that make it an attractive buy. Stochastics provided a buy signal on Friday, which should be further confirmed today on the strong action. Furthermore, open interest continues to climb, showing a "coiling of momentum" over the sideways action, with a 3% increase on Friday to just under a total of 140,000 contracts. The projection of the pattern is right to the previous contract highs and after being a strength for much of last year Copper could have the momentum to slingshot above these levels to regain it's Commodity leader qualities.

July - November Soybean Spread- After a strong rejection on the breakout attempt on Thursday the market recovered nicely Friday and is firmer overnight as well. Fundamentally based on South American labor strikes and exporting inefficiency and strong Chinese demand, the spread has a technical double bottom with a breakout between 40 and 45 cents with a projection zone from 60 to 75 cents. Before finding strength on Friday the spread briefly pulled back into the low volume zone I was looking for between 33 1/2 and 35 cents. I look at the brief entry and support at these levels as another sign of continued strength. Sitting around 44 cents currently there is support from 40 1/4 to 42 cents. However, there is a low volume zone from 38 1/2 to 40 cents for an opportunity to buy a dip in the spread. A close above 45 cents is strictly a go with move with the next temporary resistance level at 50 cents on it's rally to the projection.

Dollar Index- After a weak day Friday and a lower open yesterday evening the Dollar Index has pulled back into the low volume zone I have had my eye on for the last several trading sessions. The 3rd leg up has an estimate final projection of 83.48. This current low volume zone sits between 81.49 and 81.63 with medium support below from 81.48 to 81.40, which has supported the market thus far today. Be cautious of this trade though because below 81.37 there is another low volume area that does not have strong support until 81.15. Although it is a strong one this is still just a 2 day pullback for the market and I expect it to continue a rally from these levels towards it's third leg projection.

Sells to Watch:

Five Year Note- The Five Year Note has been quiet the last few days after breaking out on it's bearish head and shoulders pattern, but has finally rallied into the low volume zone I have had my eye on. The head and shoulders pattern had a breakout of 115.01 with a projection to 113.21 with the neckline of the pattern sitting at 115.03 today. The low volume zone between 114.215 and 114.245 with resistance above from 114.25 to 114.295 was briefly entered on this morning's highs. While the 10 Year and Bonds both also have bearish projections presently, the Five Year has been the most consistent with less volatile swings. The Bonds have acted as the tail on a large yield curve swing and is therefore less predictable in my opinion, so I recommend executing a short in the Five Year still.

Put on the Radar:

Euro- I have more confidence in the Dollar Index trade right now, so I am keeping the Euro on the radar for right now. As I warned on Friday, the market rallied all the way back to the 1.35 level after rallying above 1.3430. There is stronger resistance at and just above 1.35 to enter a short position against. The Euro still remains broken out on a bearish leg down that has a rough estimate projection to 1.2750. The Euro is not particularly strong this morning with the Aussie and Canadian having much larger percentage gains so far, so I still believe that it is a decent shot to sell at this previous breakout level with the expectation that the leg down continues.

Japanese Yen- Slightly under the radar compared to the Euro, the Yen may actually be the better sell. It is very quiet thus far today, but has not had the same rally pullback as the other currencies over the last two days and has a bearish pattern intact. The breakout below 108.60 on the double top pattern has a projection to 104.10. There is a good low volume sell zone between 108.30 and 108.50 with resistance above from 108.50 to 109.00 that was entered both Friday and overnight Note: Because the Japanese Yen has an interest rate related carry trade, where you can borrow cheaper in Japan and invest for a higher rate of return elsewhere, I have noticed an interesting correlation that is very strong right now. The Japanese Yen has an artificial boundary top around the 115 level where the government has repeatedly intervened to devalue the currency. Taking this into account put the Japanese Yen and Five Year chart up side by side and compare. They are nearly identical lately. With the Five Year in a bearish head and shoulders pattern you can use it as an indicator right now for Yen movement with a continuation in the 5 likely leading the Yen further down.

Sugar- Sugar looks like it might have found a bottom after the large-scale collapse over the last month and a half. I would hold off on entry for the time being, but keep it on your radar because there are good prospects for a sizable rally correction.

Notes: (We can just call this the grain section today)

Corn- With the stocks and prospective plantings report release on Wednesday and a supportive macro market I am concerned that the Corn will not continue it's bearish head and shoulders pattern. The breakout level was 3.59 and provides a projection to 3.30 1/2 with the neckline sitting at 3.58 1/2 today on the pattern. The Corn does not have a good resistance level until just above 3.60, so I believe that it will likely test these levels and likely will not have the catalyst to break further prior to the report.

Bean Oil- The flag pattern on the daily chart has a projection to 37.63 with the breakout line on the pattern at 39.35 today. Like the Corn I am not to keen on the prospects of continuation in the market prior to the report. There is resistance above the current market from 39.28 to 39.33, which could be a decent short term fade, but I would not position for a long term trade currently prior to the report Wednesday.

Soybeans- After the large down day Thursday the Soybeans have continually strengthened into this morning. The market finally has rallied to the first decent resistance level from 9.60 to 9.64, which could be a decent short term fade against these levels today.