Tuesday 3/23/10 Commodity Ideas

Opening Note:
What began as an overall poor looking day for the market through 8:30 a.m. yesterday quickly turned into a strong reversal day, led by a strong equity rally on it's open and a trending reversal break in the Dollar Index throughout the day. There really was no indication of the strong rally potential on the equity open, so bearish patterns in energies and metals were rejected as the commodity markets were caught off guard. One thing of importance to note is that the commodity correlation is not universal between the Energies, Metals, Equities, and Currencies right now. While the currencies and equities appear to be the leaders right now they are not as tightly correlated as one might assume, with the equities pretty much taking or leaving whatever the currencies are doing that day. The correlation to take note of however is that Energies are tied much stronger to the Equities while the Metals are tied more to the Currency moves. Yesterday the Crude rejected it's bearish pattern well before the Gold and Silver rejected theirs. This was because the Equity rally out of the box was very strong and moved near it's highs for the day right away, reversing the Crude quickly, while the currency reversal was more of a creeper throughout the day causing Metals to rally slower. Today Metals, Energies, and Currencies are all weak thus far, but Equities are relatively unchanged. Looking at the leading Nasdaq throughout this 30 day rally, each time that it reversed from a lower day to a higher close, like it did yesterday, the market continued to rally over the next few days. So, I expect some continued Equity strength the rest of this week making them the best buy in the market. However, the European currencies are again threatening to post new low closes on their ranges leading Metals lower and also dragging Energies down with the unched Equities. I believe that this makes the Metals the best sell right now on their bearish patterns that are set off again this morning, but a close eye must be kept on this web of relationships to protect against risk



Buys to Watch:

July - November Soybean Spread- The spread is now clearly above the temporary resistance level of 30 cents and travelling towards the next major resistance level at 40 cents. A rally above 40 and 45 cents would set off the double bottom technical pattern that has a projection from 60 to 75 cents. Fundamentally this chart is based on South American inefficiencies in labor and shipping with the large Soybean crop, which is a necessary story to further develop if it is to continue to work. On a break in the spread I have a low volume buy zone from 29 1/4 to 29 3/4 that should reject lower prices.

Sells to Watch:

Gold or Silver- Right now I am undecided whether Silver or Gold is the better sale. Looking at the Gold to Silver ratio chart (Gold - Silver/2) I believe that there is a high probability of a further reversal with the Silver gaining on the Gold, but yesterday the Gold was weaker than the Silver and the Gold has decisively set off it's head and shoulders pattern today while Silver has not. For the Gold the head and shoulders breakout is $1102.1 with a projection to $1048.8. Resistance is strong in the Gold from $1105 to $1108, but a rally above this level could easily continue to $1120 in the huge low volume market profile zone. The Gold did close below this breakout level yesterday and a second close below it today would confirm the pattern. Silver has a bearish double top pattern with a breakout of $16.835 and a projection to $16.07. There is resistance in the Silver at $17.00, but a rally above this level will likely continue to the low volume area between $17.15 and $17.20. Because the metals are more correlated to the currencies than the equities I believe they have a better opportunity for weakness, but a close eye should be kept on the Dollar Index as an indicator. **At 8 AM this trade is not looking as strong with Crude and equities threatening to rally

Put on the Radar:

Bonds vs. Sell Five Year Notes- Again, the chart to look at is (Bonds*3 - Five Year Notes*7) with this being the execution ratio to use (or Bonds*2 - Five Year*5). The weekly cup and handle breakout was -456.25 with a projection to -449.315. Fundamentally this trade is based on the liquidation of the "buy the short end, sell the long end" of the yield curve trade, which has been the trend since 2007. Yesterday I noted the low volume buy zone from -452.20 and -453.16 with greater support from -453.20 to -454.00. Currently the market is sitting just below the buy zone in the support level. A better execution idea is probably to wait for a breakout on the bearish head and shoulders 5 Year pattern or the bullish head and shoulders bond pattern. The breakout for the 5 Year is 115.005 today with a projection to 113.205, but this is less likely to happen today. The breakout on the Bonds is 118.02 with a projection to 121.21, which is very close by today. If you took the trade advice yesterday on this trade you were likely stopped out this morning, so I am putting it on the radar to wait for the individual market patterns to emerge.

Currencies- The Pound and Euro are both going after new low closes on their range again today. The previous low close in the Pound was 1.4971 and the previous low close in the Euro was 1.3507. Keep an eye on both of these market levels because two consecutive lower closes would indicate strong potential for another leg down for the European currencies. The Australian Dollar is potentially forming a large double top pattern on it's daily chart that could lead to a leg down right now. There is an awkward head and shoulders on this chart right now with a breakout level of .9000 and a projection to .8840. The Aussie produced a Hanging Man bearish candlestick yesterday on the recovery rally and is slightly weaker today despite having the potential to rally overnight.


Notes:

Crude Oil- The bearish double top was briefly set off yesterday morning, but the was negated by the strong opening Equity rally. In a minuscule victory however the market did rally directly into the 81.28 to 81.80 low volume range that I was looking for after the negation of the pattern. I would look at 81.80 as resistance still, but with Equities unchanged thus far and with strong rally potential I do not believe that it is likely to hold today. The double top breakout is still at 79.41 with a projection to 75.46, but this is unlikely to come into play.

Nasdaq- This continues to be the strength of the Stock Indexes and after the strong reversal rally yesterday I do not recommend shorting it or any of the others for the next couple days. Each time the Equities have had a bullish reversal day they have followed with 2 to 3 days of continued gains.

Bean Oil- The flag breakout of 3905 did not come into play yesterday as the Soybeans were strong and much of the market reversal began yesterday prior to the open. The flag level to keep in mind today is 3911, which should not come into play. It is also noteworthy that the breaks in the market are coming on a reduction in open interest, so liquidation is leading them. Soybeans must show weakness for further liquidation of the large Bean Oil positions.