Tuesday 3/9/10 Commodity Ideas

Opening Note:
Oh what a difference a day makes. Yesterday the market sat fairly idle with little to report other than a $10 break in gold. Overnight however the story is European currency and commodity weakness, with many of the physical markets beginning to sell off on the European opening. On a 15 minute chart it appears that some commodities are trying to set up a base over the last couple hours, but European action has acted as a reliable indicator lately for continuation on the U.S. market opens, so I anticipate further weakness. We are now on Day 22 or 23 of the V bottom uptrend since February 5th and even the strong commodity markets are displaying a lack of upside momentum recently. I like to use a base of 20 as an indicator for a move to gauge the time factor better. More recently in December, January, and February the market has started a decided move shortly after the Unemployment Report for the month. With commodities giving up strength yesterday and showing further weakness thus far today it looks like if there is a committed move to come that it will be a commodity break. It also looks possible now that the European currencies are ready for a downside breakout of their consolidation ranges, which will be confirmed or negated within the next two days. If the currencies do start a new leg down I find it very difficult to believe that commodities will continue to rally for the time being. I would be cautious entering long outright positions in commodities with the intention of holding them right now, but would still look at equities as a safer buy. I have a lot that is on my plate this morning, so I tried to cut some of the fat and organize it so it flows better in this email than on my own notes paper this morning.

Buys to Watch:

Nasdaq vs. Crude Oil or Nasdaq Outright- So this is the bread and butter one that I spotted this morning after discussing it yesterday afternoon. First I will discuss the less favorable Nasdaq Outright. As the strength among the stock indexes, the Nasdaq is pushing against its highs from this year in early January and is a one day pullback from the highs yesterday around noon. A low volume buy zone is between 1874 and 1882, which was entered briefly this morning. Minor support lies at 1868 with more major support at 1860. This is a good play if you believe that the market will continue to rally to new highs without a pullback despite being on Day 23 of the rally. Currently Stochastics and RSI momentum indicators are both in over-bought territory and on the verge of giving sell signals as well. I do not feel as confident in this one right now, but wanted to at least discuss the Nasdaq position to use as execution on the next spread.

*I know some people only trade Dow or S&P so here are the similar values: Dow buy zone = 10475 to 10510, with decent support around 10435. S&P 500 buy zone = 1128 to 1132.25, with minor support at 1126 and better support at 1123.

Crude Oil has tried to follow the equities on this recent rally, but with much less success recently as it struggles to hold a rally much above $80. Early on in the V bottom from February, Crude was stronger than equities with many other commodities but this trend has reversed and is about to breakout the other side. The Nasdaq/Crude relationship chart has built a base over the last two and a half weeks and looks to be building momentum on a W pattern that could rally it above the range it has traded this year. This signals equity strength gaining against energies/commodities. Ideally the best execution point to sell Crude is between 8080 and 8140, but I believe that you can execute the Crude sale based on entry into the long side of the Nasdaq. Stochastics for Crude produced a sell signal a couple days ago in over-bought territory and RSI looks to be topping as well. The Crude side could be more important to execute first as it usually has more volatility and could slip further to the downside faster. I would look at using a 3 or 4:1 ratio for Nasdaq to Crude and a 2:1 or 3:2 ratio for the S&P to Crude.

Bean Oil vs. Soy Meal- I have covered this extensively the last few days so I will be brief. Strong fundamental story that looks to continue with Chinese demand. I think 2000 premium bean oil is easily reachable. Low volume buy zone from 1382 to 1400 on a pullback.

RBOB (Gas) vs. Heating Oil- Again I will be brief. Seasonal trade that typically works until late April early May. Based on the use of more gas and less heating oil as temperatures increase. Decent support buys against 1660 and 1700. It hit the 1700 on the dot this morning already, so could have to wait for another entry point. Potential to rally from 4000 to 5000 premium the RBOB. Good for a small position longer term trade.

Sells to Watch:


Put on the Radar:

Gold and Silver- Gold had a weak attempt at a rally breakout on its head and shoulders base. Today the two point uptrend from it's base in February sits at $1113.6. Two consecutive closes below this wedge project back to the base around the $1050 level. I have debated the fundamental reason behind this move, looking at the relationship to the Euro as a safety trade, but have come to the conclusion that this is Gold trading as a commodity and potential indicator for the rest of the markets. The metals along with the currencies were the first indicator of trouble in January for the "10% correction". If it is a commodity move, as I believe it is, I like to trade silver because it has more volatility than the gold and better moves on whole commodity moves. Keep this on the radar to see if gold sets off the wedge and head and shoulders rejection.

Cotton and Copper- They have no direct relationship other than they both begin with a "C" and they both look toppy after being strengths.

European Currencies- Watch for a move out of the consolidation range


Notes:

Soybeans- I moved the soybeans out of the sells to watch list because I believe that if you are short them currently it is good to hold, but I do not recommend selling them if they rally again. The May Soybeans have a projection to around $9.00 on the head and shoulders downside move. They have showed weakness overnight and with the metals and other commodities having a weak opening thus far I expect the same for the beans. I am putting my stop at 9.51 1/4, but it would be fine to put it above yesterday's highs. If it rallies above these levels I would forget about it and look at some other markets.

Cocoa- Again, I moved this out of the sell list because you either have it or not at this point. Cocoa was weak yesterday and has continued into today. A good resistance level to put a stop above is 2858 or if you would like to lock in more profits you can use 2832, just above today's highs. The projection is to 2650 on the second leg down and I am looking for this target on my short right now.