Wednesday 3/10/10 Commodity Ideas

Opening Note:
The majority of commodity markets opened on their lows yesterday after European market weakness, but money entry and dip buying across the entire market rallied commodities and equities to close higher in many cases. It appears that this was a timed purchase across the entire market covering almost everything except for the treasuries and softs. This move came as a surprise to me as I could understand why equities might be enticing to buy, but could not understand why a weakness like Soy Meal or markets that have lost their upward momentum should be bought with such vigor. In most cases this buying appears to be longer term as open interest increased in many markets, with Crude open interest rising over 45,000 contracts or more than 4%. This very well could be reallocation based in Euros, but I am not too certain as the Euro has sat mostly sideways for over the last month and the Euro was bought to a lesser degree on yesterday's rally. Going forward I am taking into account the length of this current rally and the loss of upward momentum in many commodity markets, but sitting back and waiting for better opportunities in the outright markets. With prices sitting in a sideways range in many cases I think it would be prudent to see a definitive breakout before looking for entry rather than trying to catch it. Equities look strong and should be bought on dips still and it looks like momentum is on your side still for short term purchase of many commodities.


Buys to Watch:

Bean Oil vs. Soy Meal- The supply and demand report for grains is released today at 7:30, but I believe that this relationship spread continues to gain into the spring based on fundamental oil demand. The next low volume entry spot I see is 1422.


Sells to Watch:

Cotton- The softs did not have the buying spree that the rest of the market had yesterday so I feel better about shorting them when I see the opportunity right now. As you might have noticed, both sugar and cocoa have taken apart strong rallies very efficiently over the last month (Sugar has acted awful). Stochastics and RSI momentum indicators have gave sell signals in extremely over-bought territory and have a decidedly negative trend right now. I expect a short term move in the market to support around 7850 with more to come in the future on the downside. Looking for a 1 or 2 day rally to sell, I have a low volume sell zone from 8132 to 8138 with resistance above it from 8170 to 8185. If the market rallies above yesterday's high of 8204 I would definitely give the trade up as there would be upside momentum.

Put on the Radar:

RBOB vs. Heating Oil- This is the last time I will be posting this on the newsletter unless something significant occurs in the relationship. I believe that the spread has the potential to rally from 4000 to 5000 premium RBOB by late April or early May. I would continue to look at buying pullbacks and encourage holding a small position for the seasonal trade.

Buy Nasdaq vs. Sell Crude Oil- The Nasdaq side of this relationship trade worked well yesterday, but Crude like many commodities had buying on its open that caused this to be a slight loser. I think that Crude has some potential to continue to rally or at least sit sideways for right now after yesterday's action, so I would hold off on entering if you have not already. I believe that this is a trade that would work better on a commodity break and Crude likely needs more time before prices are ready to concede. The relationship here still looks strong and I believe that it is a short matter of time before it continues to work. Look at the ratio chart (Nasdaq/Crude) for a close above the breakout on the W pattern above 23414 for entry.

Notes:

Treasuries- Fixed income markets look like they have a top formation in place and rejected a 2 day rally yesterday. The long end of the curve (10 year, bonds) looks weaker right now so look for rally pullbacks to sell.

Soybeans- I was extremely surprised by the dip buying yesterday, especially in the Meal. Like I said yesterday, I do not like holding a long above 951 1/4, which prices rallied above slightly overnight. The supply/demand report and crop production should have an effect on the market this morning, but technically I do not like the chart as much so I am flat.

Cocoa- Sugar was the much better short here among the similar looking charts, but I am still holding my short looking for 2650. I believe that a safe stop can be moved at least to 2830, but after this mornings break I would feel good placing it at 2810.