Thursday 3/11/10 Commodity Ideas

Opening Note:
Coming into yesterday commodities and equities showed strength with potential to continue rallying. Strength on the opening was followed by a bullish Crude storage number at 9:30, but by 10:30 many commodity markets suffered a price swing from the highs of the day to the lows. The move in the metals was the strongest and is alarming to commodities as a whole, which I will cover more later. The equity index strength in the Nasdaq however maintained strong positive gains on the day, leading me to believe that this continues to be the best buy in the market. The currency markets have proved that they are disassociated from the rest of the market right now. The Euro and the U.S. Dollar have sat relatively sideways over the last month, so I do not associate daily moves in them with moves in the overall market. I continue to be mindful that the rally from February 5th is now entering the 24th or 25th day. Basing this move off of the standard 20 day move shows that it is becoming quite extended. Leading into the FOMC meeting on Tuesday I believe that there will be some long covering as the market awaits the wording The Fed chooses to use.

**7:50 am Note- Slight weakness on commodity opens thus far...does not bode well for opening rallies later.
Buys to Watch:



Sells to Watch:

Gold or Silver- Over the 2010 year Gold has set up a head and shoulders base in what could be misconstrued as just a sideways market. Gold has failed to hold prices above the breakout level on the pattern on multiple attempts over the last week. With the break in prices over the last three days Gold has instead broken the trend on the right shoulder of this formation, setting off a bearish wedge instead. This pattern has a projection to around $1030. Like I stated earlier, I believe that currencies have diverged from the rest of the market action, so I have difficulty equating this move in gold as a run to safety or as the use of it as a currency. Instead I think that this Gold move is more as a commodity, with a correlation among silver supporting this idea. It is difficult to recommend jumping into selling gold right now as there is a low volume trade zone from 1114.5 and 1118 with greater support above at 1122 from yesterday's downward acceleration, but after failing to enter this range overnight it looks possible that it may not before continuation down. I like using silver to execute ideas in metals as it usually has stronger moves than gold when it is traded as a commodity, but it has not violated its trend yet. However, Stochastics produced a sell signal in over-bought territory yesterday in Silver and is looking for confirmation today. A similar low volume area is from 1716 to 1722 in silver with support at 1728 and 1736 to 1740. I would look at possibly selling at least a half position in silver based off of the gold on a rally into this area.

Along with the currencies, the metals were one of the indicators I used when predicting the market correction in mid-January. Because I think the currencies are basically useless as a predictor right now I am interested in the metals divergence from Energies and Equities. This weakness in the metals could be an indicator again of weakness to come in the market after an extended rally.


Put on the Radar:

Buy Nasdaq vs. Sell Crude Oil- The relationship was all over the place yesterday because of the Crude Oil number reaction and ended up closing close to the cup and handle pattern breakout. While I still like this chart technically with its nice base forming I am becoming slightly concerned fundamentally as I think about it. At first thought I believe that it should work better on a Crude break because the volatility is often higher than equities. On the contrary though, I note that the Nasdaq did suffer a sizable break on the market correction earlier this year. I am fundamentally confused right now about my opinion on this relationship's reaction to a market break right now so I would hold off on entering for the time being. Do keep Nasdaq/Crude on your screen though because the move should become more clear if the market reverses. (Just as a note, the execution ratio that works best is probably 4 Nasdaq vs. 1 Crude)

Sell Treasuries- The fixed income markets look like they are in the beginning stages of a 20 day move downwards. The longer maturities have acted weaker since October, but yesterday the shorter end of the curve had a little more weakness in comparison. Either way, I believe that focusing on selling rallies right now is the most effective strategy.

Notes:

RBOB vs. Heating Oil- Right now the RBOB is having difficulty rallying above it's old highs from this year. Heating Oil has found support and has acted strong the last week as well. This is causing downward pressure on the relationship right now technically.

Cotton- I had a low volume sell zone from 8132 to 8138 yesterday. On the coat tails of the Crude yesterday the market rallied to 8127 and violently broke below the range on the day in the next thirty minutes. If you did happen to get filled on a sell I would look for a move to support around 7850 (could happen today) on the short term. I believe that Cotton is starting a sizable downtrend so there will be new entry points and projections to come.

Cocoa- The market found strength midday yesterday on a number of failed breaks. I was stopped out as was anybody that was looking for a similar short term move as me. I do not see good reason to short this market right now and I am removing it from my radar.

Wheat- You only had to wait a couple months to finally get the Wheat break that the market has expected fundamentally. I personally became so disinterested with trying to short it that I am not participating right now. If you squint you can make out a double top on the recent daily chart that has a projection to 458 - 460. This is below the old contract lows and I believe is a short term stop on further weakness to come.