Tuesday 3/30/10 Commodity Ideas

Opening Note:
Yesterday was an interesting day for the strength of commodities and foreign currencies, but the lack of volatility in Equities and the yield curve stood out as odd with a market that was in motion. Much of the commodity strength was likely based on short covering rallies. Early last week I was on the commodity leg down bandwagon as well, so it is understandable to me that there were still a lot of shorts out there waiting on a Metal or Energy break. The weakness of the Dollar also fed into this rally. However, this Commodity and Currency move should have supported Equity prices more than it did. The stock indexes continue to post small gains on higher closes, but I have been skeptical of the continuation of this trend for a while now as we approach nearly two straight months of the same action. Keep an eye on the Commodity versus Equity sector relationship to see if stronger Commodities than Equities is an emerging trend. This relationship could be an indicator for market direction as the new quarter and allocation begin. The new leg up on the Dollar Index has now come under serious pressure as it needs to have a rally rebound soon if it is to continue. With the European Currencies trading the daily restructuring news and the Aussie and Canadian strength on Commodities I recommend sitting out of the Currency sector for the time being until things become more clear on a Dollar Index leg up. With all of this taken into account I am still expecting sideways to firmer trade across the market. With Copper, Silver, and Crude rejecting bearish patterns and now on the precipice of larger rally breakouts, and old crop Soybeans and other Food products showing bottom reversal strength, I believe Commodities have more short covering rally potential and should show strength for the next few days.

Buys to Watch:

July - November Soybean Spread- The Soybean spread continued to show strength yesterday with a breakout above the 45 cent level and a close of 49 cents that tested the high close since last summer of 49 1/4 cents from December 15th. Fundamental news of South American strike rumors has been quiet lately, but technically the chart is very strong. The double bottom pattern with a projection range from 60 to 75 cents is now in motion with a close above 45 cents yesterday and is looking for confirmation on another higher close today. The 50 cent level now stands as resistance in the face of a rally with the next level of resistance at 60 cents. Old school wisdom usually says July - Nov above 50 cents means 75 cents though, so this is likely the spread's destination if it clears the 60 cent resistance. I have a tiny low volume area at 44 3/4 and 45 cents for a place of entry on a pullback with greater support from 42 to 44 1/2. Note: Keep an eye on the old crop (May and July) Soybean outright charts. They appear to have a potential bottom to rally off of that would support the spread, but likely will not breakout until after tomorrow's report.

Cocoa- After sitting in a sideways range for nearly a month Cocoa finally looks like it has formed a base and is rallying to new highs above it's cup and handle breakout. I have two separate pattern breakouts and projections for the May contract right now based off the high close day of the range and the high trade, so there is a range of projections. The high close cup and handle pattern's breakout is $2929 with a projection to $3076 and the high trade pattern's breakout is $2963 with a projection to $3144. This provides a projection range from $3076 to 3144. Stochastics momentum indicator produced a buy signal yesterday, which is looking for confirmation today on higher trade. Also, similarly to the Copper market that had a rally explosion yesterday, open interest has steadily climbed throughout this month long base indicating a coiling of momentum. I have a low volume pullback buy zone from 2925 to 2945 with a small trade gap between 2940 and 2944 and with support from 2920 to 2890 for stop placement. You can also look at the minor support on the intraday chart today from 2950 to 2960 if you feel that the earlier pullback will not be achieved.

Sells to Watch:

Five Year Note- After establishing it's bearish head and shoulders pattern last week the Five Year has basically been a sleeper since. Entering it's third consolidation day after rejecting lower prices I believe that the market needs to continue lower by tomorrow or I will abandon the trade. The head and shoulders pattern had a breakout level of 115.01 with a projection to 113.21. The market has again entered the low volume sell zone today between 114.215 and 114.245 with stronger resistance above from 114.25 to 114.295. I would be tempted to just place my stop above the 114.25 level to limit the trade to a small loss if it trades above yesterday's action, but still have good reward if the market finally starts to break today.

Put on the Radar:

Buy Copper- Copper is now the obvious leader in the Metal sector and arguably the leader of all Commodities. Yesterday's close of 353.55 is the new high close for the May contract. The bullish cup and handle pattern has now reached it's projection of 355.15 this morning on a stop running rally to new contract highs above 355. I recommend taking profits on this trade now, but keeping it on your radar now as it is possible that market strength continues with more short covering potential. The previous high trade was 355 so I would look at a close above this level as continuation on a new leg and to look for long reentry spots. This is also a good indicator of Commodity direction as the leader.

Buy Silver- Despite Copper being the leader in the Metals I still have my eye on Silver because it could have strong short covering rally potential. Gold had a pretty dull day yesterday with a gain of only $6, but Silver closed with gains of nearly 50 cents. The Gold versus Silver ratio (Gold - Silver/2) had a breakout below consolidation displaying further Silver strength, and therefore Commodity strength in my opinion, as Silver has more volatility on Commodity sector moves. Open interest has also trended upwards on the sideways action with another strong gain yesterday displaying a coiling of momentum. I am weary of the Silver because it has been tricky with a number of bullish and bearish breakout attempts so I would look for a strong breakout on a short covering rally to buy the Silver. I am focusing on the $17.60 level at the top of this month's range, which has a projection to $18.65. This last shoulder is also awkward with a larger dip so the projection level is not as likely to be reached as most cases.

Dollar Index- The Dollar Index has it's final strong support from 81.15 to 81.00. I would take a break in the market below 81.00 as a sign that the Dollar is not continuing on a third leg up and rather heading back into the range that it traded for nearly the last two months. While you could get great value and risk/reward buying against this support I would recommend waiting for some signs of strength before looking to get long. With Commodities showing signs of strength it is fundamentally feasible that the Dollar weakens back into a range trade. The third leg up has a projection to 83.48 if it continues.

Notes:

Sugar and Coffee- Both Sugar and Coffee look like they have rally potential. The Sugar has a reversal cup and handle pattern breakout that it traded above this morning, but has subsequently failed. The small pattern breakout is 17.91 with a projection to 19.40. I do not know how to properly describe the Coffee chart right now, but the new leg on the base looks kind of like a parabola, or a market that creeps up exponentially. I would look to buy these markets rather than sell them now.