Thursday 3/18/10 Commodity Ideas

Opening Note:
Throughout the morning and into midday yesterday commodities, equities, and foreign currencies all saw strong positive gains, but an afternoon break led by equities has me extremely cautious in my market approach right now. Overnight there was continued weakness in the European currencies on news that the EU will not likely provide support for Greece and let them work out their own debt problems. Commodities are only slightly negative on the day right now, with grains showing the most weakness, but with world markets trading lower I am hesitant to step in and buy them. The Fed announcement Tuesday afternoon supported investment flow into the market for another month and price action for the next 24 hours supported this idea. However, like I have noted for the last week, I am concerned that the rally since February 5th is very over-extended, with yesterday afternoon's give-up showing that it is losing steam. I take note when market reaction is not how I expected, and I believed that the broader market should continue to solidly rally after the announcement. I think that we could be heading into a sideways market for a while, with potentially choppy swings, that could form a top for a new leg down. Because of this I am liquidating some market supportive positions for right now and keeping trades and markets that are not clear on my radar for the time being until the market gives better signals on it's direction.


Buys to Watch:

Bonds & Buy Bonds vs. Sell 5 Year Note- The large bottom head and shoulders pattern has a breakout of 118.02 again today with a projection to 121.21. Yesterday the Bonds weakly attempted a rally above the breakout level that immediately failed. This morning the market is currently sitting just above the breakout, but does not have much rally momentum thus far. Two days ago Stochastics gave a buy signal on the daily chart, which was confirmed yesterday. Because I have little trust in the head and shoulders pattern I am looking at buying the Bonds versus selling the 5 Year Notes as a spread to enter the trade. Using Bonds*3 - 5 Year*7 (or the similar 2:5 ratio), with the same execution ratio, you can enter a trade that continues to be technically strong and take off the short 5 Year position if the bond projection begins to work. The weekly chart on this yield curve spread also has a potential bullish cup and handle pattern set off above the January highs. Normally I would say that a sideways or topping pattern in equities and commodities would support the bonds, but the relationship between these sectors has been inconclusive lately.

Sells to Watch:

Put on the Radar:

Metals- Gold along with the other metals has sat in a sideways range for the last couple weeks with a number of false upside and downside breakouts. If you have been trading them you have likely gotten chopped up on the swings. However, Stochastics on Gold, Silver, and Copper continues to sit on the verge of a buy signal. A strong momentum indicator could set off a volatile move after the recent sideways action. Open Interest in metals has grown throughout March after a significant drop-off in the first two months of the year. The open interest could be the fuel and momentum the catalyst for a rally out of the sideways market, which I am keeping my eye out for.

May - November and July - November Soybean Spreads- The story on these trades is just developing with rumors of labor strikes and exporting inefficiencies in South America, so I would continue to monitor these stories while holding off on executing the spreads. Both of the inter-crop spreads displayed strength yesterday, but fell apart a little prior to the close. Yesterday I said that I was leaning towards the May - November spread more than the July, but despite having a chart that could support a rally, the May - July portion of the trade is running out of time to rally before bearish pressure enters the market in anticipation of and during the early April roll out of the May contract. Both the May-Nov and July-Nov spreads have supportive double bottom bases that technically show rally potential, but the fundamental South American story is needed for them to work. A 20 or 30 cent rally in either spread likely means another 20 or 30 on top technically, so there is good reward potential.

Notes:

Dollar Index- On the Greece news and some commodity weakness the Dollar Index has traded all over the place overnight. The 80.135 breakout was rallied through, again rejecting the down leg projection to 79.07. It appeared that the currencies were finally moving out of the range trade they have sat in the last month, but Greece's solvency has shaken any moves that began. If you are still short the Dollar I recommend liquidating for right now as the market appears to be tail-whipping back and forth with indecisive market pieces. The correlation between the Dollar and the broader market still appears to be returning to strength, but because I believe the broader market's direction is undecided right now then so is the Dollar

British Pound- If you used good execution on this bullish trade you likely still have a profit or a scratch if you are sitting long, but I recommend liquidating the long for right now. The Pound is strongly tied to the Euro and Franc and is effected by the back and forth Greece news. The market was very strong yesterday morning and broke nearly perfectly into the low volume buy zone I was looking for. However, after rallying back to it's daily highs in the early afternoon, it suffered on the late equity break. The stronger support from 152.10 to 152.30 held nicely, but I do not like trading rumor or news based markets much. If the move to 155.08 becomes clear again there should be opportunities to get back in later. Note: Take a peek at the Pound - Euro chart. If you are bullish the Pound still this looks like a better way to play the trade as it has a nice technical base and continues to strengthen.

Soybeans- So what do you get when you take bullish rain, bearish supply, bullish South American rumors, sliding demand, and inconclusive technicals and put them all together? For me it is just confusion. Right now I am afraid to sell rallies, but I am also weary of looking for momentum to buy. The only thing clear to me is that open interest is on the rise again and Stochastics gave a buy signal two days ago. The chart could be in a channel, forming a bullish cup and handle or just rejecting a rally on a leg down. I do not look at the bean market right now as a great trade and I am staying out of it.