Tuesday 3/16/10 Commodity Ideas

Opening Note:
Overnight the market was relatively quiet as the trade awaits the FOMC announcement this afternoon, with some strength in the European Currencies and Metals the only things standing out to me. Right now I do not have any great trades from a technical perspective and do not recommend entering trades that will be carried through the announcement today. Therefore, all suggestions will be in the Radar or Notes section today. I expect that The Fed will not raise rates, but their statement is important and likely will effect the direction that the market takes for the rest of the spring. As I stated yesterday, I believe that changes in The Fed's statement will have a more volatile effect on the market than if it decides to keep things constant, so if you are carrying significant longs today I would think about at least temporary lightening them. While I still believe that the recent rally is over-extended in many commodity and equity markets I am not convinced that the market is heading for a break just yet. Weakness in the metals last week led me to believe that they could be the leader to break energy and equity prices, but their strength thus far this week has me reconsidering my hypothesis. Today I tried to focus on a couple markets that have some nice technical bases and, depending on the announcement this afternoon, have the possibility of a strong move beginning. If The Fed keeps a similar stance I think that equities and energies are the best buys and will continue to rally on further investment.

**8 AM Note- Commodities are acting strong on their opens today so buying momentum will likely be easier on later opens like grains.
Buys to Watch:


Sells to Watch:


Put on the Radar:

Buy Bonds vs. Sell 5 Year Notes- To chart this enter either (Bonds*3)-(5 Year*7) or you can also use a similar ratio of Bonds*2 and 5 Year*5, with these proportions being the same ratio for execution. On the daily chart this component of the yield curve has formed a base over the last month and rallied above this base range towards the end of last week. Over the last year the strong trend has been 5 years gaining proportionally on the 30 Year Bonds, but this base could support a strong reversal move if the trade begins to liquidate. The rally last week violated the daily trendline that was intact from October. Looking longer term on a weekly chart, there also appears to be a base with a potential cup and handle pattern forming with a breakout above the highs from January of this year. And lastly, the monthly chart is hanging around support levels from 2002 and 2003. The Ten Year (*5) vs. the Five Year (*7) also has acted stronger lately further supporting this idea of a flattening yield curve. I believe that if The Fed shifts it's policy that liquidation will begin on the Bonds versus the 5 Years, so I would wait until after the announcement and then evaluate this trade.

Buy Nasdaq vs. Sell Crude Oil- Yesterday I was looking for a break into the acceleration from Friday's rally to execute, but a sharp break on the Crude open did not allow this opportunity. The trade continued to strengthen yesterday with Crude having it's second consecutive sizable down day and the Nasdaq recovering nicely on the day with a 2pm rally. Because the only way to really enter the trade yesterday was to enter on the Crude open I think it is improbable that anybody was able to get on the trade, and I am waiting until after the announcement to reevaluate it. The base on the daily Nasdaq/Crude Oil chart is strong technically and looks like it can rally the market on a breakout above the range it has traded for this year. Right now the ratio has rallied more than 2/3 of the way to the top of this range, with most of the move coming in the last two days. Crude Oil has tried to trade along with equities for the last year, but with a lesser degree of success. With Crude sitting near a lot of resistance from the last 5 months highs and the stock indexes in the process of creating new highs I believe that this trade continues to work, especially if The Fed shifts it's policy, as the move out of Crude should be swifter than equities.

Sell Copper- I will comment more later on the disappointing Gold and Silver action, but I have turned my attention more to Copper lately and it's topping action on the daily chart. Open Interest has not exactly poured into the metals lately, but Gold has much more consistent holdings along with Platinum and Palladium. Meanwhile, OI in Copper dropped significantly after the beginning of the year and has only slightly increased in March, with money flowing more into equities and energies. During last year's recovery Copper was consistently a little stronger than the equity indexes and looked like it was headed for more of the same in February. However, while the equity indexes are off making new yearly highs the Copper has a strong failure against it's yearly highs and has a sideways dome forming for this month. Stochastics confirmed a sell signal on March 10th and RSI also has negative momentum. I do not recommend executing a sale in Copper today, but I am keeping an eye on the effectiveness of the low volume sell zone from 336.1 to 337.5 as resistance on a rally and reevaluating this afternoon.


Notes:

Gold and Silver- Gold and Silver are strong again today and have both rallied above resistance levels that I believe were key. I am flat in these markets now as they have the potential for a reversal rally. Both still have bottoming formations in effect that could fuel significant rallies despite rejecting earlier this month. I was looking at these metals as an indicator for a potential leg down in commodities and this rally tells me that one is not coming just yet. I do not believe that this rally should be bought into just yet either, so I am moving them off of my potential trade list for the time being.

Soybean Complex- Soybeans just do not want to have continued break. On a daily chart it is looking more likely that they could continue sideways in a range for the Spring instead of having the fundamental break in prices many are expecting. This morning the market rallied slightly above my resistance zone from 9.32 to 9.37, so I would recommend sitting flat and waiting for another opportunity for right now. There still is the large low volume zone from 9.38 to 9.51 that could provide a sell opportunity, but I would hold off on executing today as the market closes at 1:15pm right before The Fed announcement. The Bean Oil vs. Meal trade also had a significant break based off a Crude break that was tied to the Bean Oil. I still think energy demand is a risky trade so I would not recommend buying the Oil Share for the time being.

RBOB (Gas)- The RBOB, which was the strength of the energy complex since February has a potential double top on the April daily chart. This could be detrimental to the RBOB vs. Heating Oil spread as well.