Thursday 3/25/10 Commodity Ideas

Opening Note:
After an active break for the market on the European session yesterday there was only a slight continuation downwards on the U.S. session followed by uptrending strength overnight today. The break during the European session was based on fundamental news suggesting that Greece would not be bailed out by the EU and would have to go to the IMF for help. This news is obviously bearish the Euro, but should probably be more bearish the rest of the market than it has shown. I thought that the market had an opportunity during U.S. trading hours to break much more than it did. Paired with the straight uptrend overnight I find myself a little confused that there was not a larger fallback, and therefore cautious with my bearish commodity and equity opinion right now. I have the most confidence in the Currency sector moves right now as the Euro and Dollar Index are clearly stating they are beginning another leg. However, Equities again have pretty much thrown out bearish fundamental news from the rest of the world, sitting near their recent highs again, and have pulled the physical commodity markets along with them. Because of this move and deviation from expectations I would recommend lightening your bearish commodity position for the time being and to pick your spots carefully. Barring a low volatility sideways day, direction should become more clear during this session as we head into the end of the quarter. On a side-note, I have heard reports that the always long commodity funds are net losers on the year thus far, and with money beginning to flow out of them, the next wave of allocation in April should be lighter. Contrary to this however is a report that since the 4th Quarter of 2008 the U.S. government has purchased over $1 Trillion in Equities after not holding an Equity position for many years. So, take into consideration these money flow dynamics as we move forward.

Buys to Watch:

July - November Soybean Spread- At the cost of sounding repetitious, the fundamental story behind the spread is South American inefficiencies in managing the export of a historic crop along with labor strikes and continued Chinese demand strength. The Double bottom technical pattern has a breakout from 40 to 45 cents with the 40 to 42 cent portion being more important and a projection that ranges from 60 to 75 cents. Yesterday the spread settled at 40 1/4 cents, but overnight strength has rallied it to a 42 3/4 cent close on the morning session. In recent discussions I have said that I believe that it is a good buy above the 42 cent level and continue to feel the same way. There is good support from 37 1/2 to 38 3/4 cents for stop placement, with a break below this level likely continuing to 33 1/2 to 35 cents. One of the most impressive things about the spread is that on Tuesday when the outright July beans gave up their rally and suffered a significant down day on Wednesday the spread still continued to work. This is atypical action for the spread normally and shows great strength, which is why I feel confident buying it above the 42 cent level.

Dollar Index- Strengthened by the Euro move, the Dollar Index has decisively shown that it is beginning a new leg on the rally. The estimate projection for this rally is to 83.48. If the market provides the opportunity there is a good low volume price zone from 81.49 to 81.63 to buy with support from 81.40 to 81.48 for stop placement. I also encourage looking at June options positions to get a foot in on the rally as I know it is easier for me to hold options than outrights for the duration of a move.

Sells to Watch:

Euro- The Euro has the weakest technical chart of any of the currencies and has confirmed that it is beginning a new leg down. The rough projection estimate for this new leg down is 127.50. There is a good low volume price zone to sell, that correlates well to the Dollar's buy zone, from 1.3992 to 1.3400 with resistance above from 1.3412 to 1.3430. Like the Dollar Index I also recommend looking at bearish June options plays for entry and the ability to absorb more of the move. I feel the most confident in the currency moves right now so this is my favorite trade.

Five Year Note- Yesterdays bearish head and shoulders breakout was at 115.01 and has a projection to 113.21. I have a good low volume price sell zone that was almost achieved this morning from 114.215 to 114.245 with resistance above it from 114.25 to 114.295. This move has some interesting fundamental correlations to the rest of the market as I believe that the lowering of fixed income prices (raising of rates) should weaken the broader market, which is contrary to the usual contrary correlation. I also am taking the Buy Bonds vs. Sell 5 Year Notes trade off of my radar for the time being so this is good as just an outright trade. Note: The Bonds suffered a massive price break yesterday setting off a bearish double top technical pattern with a breakout of 115.27 and a projection to 113.10. I am very suspicious of this move as the breakout was managed on such a large move yesterday. I think that it does not have a great chance of holding this pattern and believe that a rejection should rally to between 116.31 and 117.08.

Silver- This trade is now just barely on the sell list and I would recommend lightening your short position currently if you have one. I thought that with the stronger correlation to the Currencies that the Metals should have had a larger break yesterday than they did and with the overnight uptrend I am worried about the success of this trade. However, the Silver still has a double top pattern with a breakout of $16.835 and a projection to $16.07. This is supported by the Gold topping head and shoulders pattern that remains intact with a projection to $1048.8. Neither of these Metals is a bad trade, but looking at the Gold vs Silver ratio (Gold - Silver/2) I believe that the Silver may weaken against the Gold. The Silver has resistance from $16.92 to $16.96 with a small low volume sell zone from $16.90 to .92. Above the resistance I would completely abandon the silver. Note: Today is option expiration for the Metals, which has a tendency to move towards a high volume traded strike price. If another rally gets going it is possible that the Silver moves to the $17 area. Also, Gold open interest has risen on the recent break...hmm

Put on the Radar:

Crude Oil- I have a low volume area in the Crude from 81.00 to 81.10 today with resistance above from 81.17 to 81.33, which the market has been battling with as I have written this letter. It is possible that this could be the top for the day, but I would take a strong rally above these levels as a sign to watch out on your commodity shorts and possibly liquidate. I do not think that selling this zone is a great trade right now so I would just use it as an indicator for the day as this top has appeared to stall the rest of the market. The farther out sell is the double top pattern with a breakout below 79.41 and a projection to 75.46.

Notes:

Corn- The top head and shoulders pattern has a breakout today of $3.59 with a projection to $3.30 1/2. Yesterday the market found support as it touched this breakout neckline. With the stocks and planting intentions report on Tuesday of next week I think that it is unlikely that this pattern is set in motion, so I would look at this neckline as continued support for May Corn.

Bean Oil- The market close below the bearish flag pattern breakout yesterday, but has rallied back above overnight rejecting the pattern. For purposes of not getting chopped up in this action I would wait for prices below 39.00 to sell Bean Oil on the pattern projection to 37.63.