Monday 3/8/10 Commodity Ideas

Opening Note:
As I suspected, after a slightly better than expected Unemployment number on Friday there was not much of a volatile reaction across the market. However, equities showed uniquely strong gains compared to commodities, with Crude Oil and Metals leading the gainers in commodities. I believe that this is a trend likely to continue for the rest of the month, with equities gaining on the overall commodity picture. I also theorized last week that larger money might be waiting to enter the market until after the Unemployment Report today. Although this is still undecided for the U.S., this was not the case in Europe. Since the European opening the market has shown slight weakness in prices, indicating that a large entry is not taking place and that prices on the U.S. open may show minor weakness. I expect that the market will remain quiet in volatility for the next week while managing continuing gains in the strong markets. Worldwide lending policies and government stimulus is now what I believe is the "real" story, so the market should not have major moves prior to the linguistically important FOMC meeting next Tuesday the 16th.

After really delving into the charts I see many strong trends in individual markets and the relationships between them, but do not see many strong patterns or projections to formulate trades off of right now. I advise looking for 36 to 60 hour pullbacks on these markets for entry and continuation (look at strengths like NASDAQ, Crude, and Bean Oil versus weaknesses like Natural Gas, Cocoa, Sugar, and Wheat).

Buys to Watch:

RBOB (Gas) vs. Heating Oil- I first put this seasonal relationship trade in the put on the radar section on Friday, but I am confidently upgrading it. Last week I stated that the market could easily rally to 3000 premium RBOB, but now believe that there is even more potential. Despite a moderately cold winter this year Heating Oil never had a significant move to premium over the RBOB. Looking at the relationship historically, in the last ten years when the Heating Oil did not move to a large premium against the Gas the relationship often moved to between 4000 and 5000 premium the RBOB. The trend over the last couple months has acted strong, and with the recent roll to the April contract a gap up was left on the weekly chart. I think that this is one that you can put a small position on and let it profit until the last week in April or first week in May when it seasonally tops.

Soybean Oil vs. Soy Meal- The relationship remains very strong and many fundamental analysts believe that it will continue to strengthen. With much of the grain complex sitting sideways to a little weak, the Soybean Oil is the glaring sore thumb, sticking out with its strength. I am looking at 2000 as a reasonable projection for the time being based on historically similar situations and price levels. A low volume entry zone is between 1380 and 1400 that was briefly entered after the open last evening.

Sells to Watch:

Soybeans- I do not have the confidence in selling beans right now that I did on Friday, but I still believe that with decent resistance above and a projection near $9.00 that it is worth a shot. The low volume sell zone still exists between 9.48 and 9.54 with stronger resistance above the market from 9.56 to 9.60. On Friday the market hit the high of it's range just below 9.50 displaying this resistance. Furthermore, the head and shoulders pattern has a breakout of 9.45 today with a projection to 9.02. The market has toyed with this breakout level the last few days, so I do not take it very seriously. But, with an increasingly strong bearish case I believe that Soybeans should break at least to this $9.00 level. I also still like the idea of selling a half position of beans along with a half position of Soy Meal because the Meal has performed poorly lately, and I think you can increase your risk/reward this way.

Cocoa- On Friday Cocoa finally rallied into the sell zone I was watching for the last three days between 2872 and 2906. The second leg down projection still is to 2650 with larger resistance above from 2910 to 2930. Cocoa along with most of the softs has shown individual weakness versus commodities lately. Along with Sugar, Cocoa has turned from one of the strengths to a weakness, with longer term weekly and monthly charts turning negative with bearish momentum indicators.

Put on the Radar:

Euro/Yen Cross- The 10% retracement in the market this January and early February was led by the downside breakout in this relationship, but when another downside move was attempted in late February the market rejected it. After trading in consolidation for over a week the relationship had a strong rally Friday, led by a Yen break. I believe that the Euro still has a short covering rally coming in the near future and this relationship should benefit. A bottoming pattern with a breakout of 125.21 (on the YR symbol CQG chart) is close to setting off with the market in the mid 123's currently. This pattern has a rally projection to just above 130. Keep it on your radar and I will discuss it more as it approaches.

Silver- Silver has a bottoming pattern that projects a rally back to near the highs of the year between $18.50 and $19.00. Silver is one of my favorite markets to trade, as it is often overlooked, because commodity strength or weakness often means stronger moves in Silver than in Gold (check out the Gold vs. Silver chart (gold-silver/2) on the recent commodity rally). Gold does show potential to rally now, but you have likely spun your wheels if you are buying it. If you like the gold right now I would recommend buying the silver as it is much stronger.

Notes:

Dollar Index- The topping consolidation pattern has acted rather violently, but nonetheless I still believe the Dollar is in for a break. Commodity strength should rally currencies like the Aussie and Canuck while the European currencies have formed a bottom to rally off. Some stops along the way down for the Dollar are 7935 and later at 7845, but I would not sell it right now looking for these.