Wednesday 3/17/10 Commodity Ideas

Opening Note:
As expected The Fed announcement yesterday was more of the same with the language "exceptionally low" and "extended period of time" kept the same. Furthermore, there was still only the same one dissenting vote against the use of this language, which was one of the notes that I was paying close attention to (I tend to side with Hoenig right now, but that is another story). Barring another European country's insolvency, The Fed has renewed the market's lease on a slow crawl up for another month at least, with the less important April 2nd Unemployment Number the next significant piece of macro news. Commodities, equities, and foreign currencies should be supported by investment after this announcement despite the S&P having only 6 lower closes (only 1 significantly) in the last 27 trading sessions. Looking at the different commodity sectors, the equities have performed the strongest since the February bottom with energies slightly lagging and metals even further back, yet still strong. However, looking at the sectors right now I believe that the metals are poised for larger gains in the next month than the energies based on a recent influx of open interest, after a large decrease since the beginning of the year, and stronger buy signals emerging in momentum indicators. The equities should also still continue their strong trend rally with the Nasdaq and Russel 2000 still leading the way. Yesterday I noted that the currency markets led the commodity rally on the day and that the correlation between them and the rest of the market may have realigned. So far today this appears to be on target with a weaker Dollar against commodity gains. Keep an eye on this relationship for the next few days because this could add a new leading indicator into the mix that has recently been absent from the party. Finally, I would not recommend fading or selling commodity or equity strength going forward and would focus efforts on finding dips and momentum to buy.


Buys to Watch:

British Pound- In the midday update yesterday I proposed this trade, and with the Fed announcement on target with the market's bet, the trade worked well into yesterday's close and much more overnight. News has flowed in recently that the Greece situation is improving and that Europe may be on the recovery path. This trade is based on this fundamental news, but I like isolating this market rather than the Franc or Euro because the Pound was extremely oversold in comparison to the others. The beautiful cup and handle technical pattern had a breakout at 151.86 with a projection to 155.08, which I believe is modest with an opportunity at 157 with enough short covering momentum. At 4:30 a.m. there was a large rally, likely based on fundamental news or a report, so there is a good low volume zone to buy on a break from 152.65 to 153.25 with stronger support form 152.10 to 152.30. If you bought the breakout yesterday I would not be too eager to advance your stop into this range and would keep it just below the 152.10 support for today. Momentum on the chart is strongly positive for Stochastics and RSI so I expect this trade to reach it's projection. Side Note: It may be tempting to just buy the Euro on the Greece news, but along with the Pound I like the technical strength of the Swiss Franc chart better than the Euro.

Bonds- I am not the most fundamentally proficient trader of fixed incomes, but technically there is a gigantic bottom head and shoulders staring at me in the bonds right now. I have noted the last few days that the longer side of the yield curve is beginning to gain on the short side, so this makes the bonds the best buy of the fixed incomes currently. The breakout on the head and shoulders formation is 118.02 and has a projection to 121.21. A move to the projection would rally the bonds into resistance from highs in early October and November of last year, keeping the market in a narrowing sideways range for the last year. I am always skeptical of the head and shoulders pattern and sometimes like to wait for an initial rejection to enter on the second attempt. However, I think that by focusing on the Buy Bonds vs. Sell the 5 Year Note relationship you can have a hedged bet entry and can remove the 5 year piece if the Bonds start rolling. The chart to focus on is (Bonds*3 - 5 Year*7 or, Bonds*2 - 5 Year*5) with this also being the execution ratio for the trade. While I believed that The Fed taking the same stance would continue the popular "buy the short end, sell the long end" yield curve trade it appears that this is not the case since yesterday afternoon. Although there was a late afternoon pullback on yesterday's gains, overnight the bonds have continued to strengthen against the 5 Year. Technically the chart has a great base and has violated the daily trend. In addition, fundamentally I take special note of relationships that do not react the way I believe they should and I believe that there is potential for much more liquidation, making this a good trade on it's own.


Sells to Watch:

Dollar Index- This is the other side of the buy the Europe trade that also has a nice technical pattern and a couple other aspects that should help it. With a renewed buy commodities and equities approach for another month the resource based economies of Australia and Canada should improve their currency value based on the commodity price advance. Both of these currencies have strong technical trends and are at or near their yearly highs as well. As I stated earlier, I am also looking for a rally in the European currencies, so basically the Dollar Index has everything except the Yen working for a break. The breakout on the topping pattern was 80.135 with a projection to 79.07. Right now I do not see a good low volume entry point, but the risk reward for the trade still is not too bad if executed soon. For entry you may want to focus on the low volume area in the Pound that I listed earlier for execution. Also, like the Pound I would advise against moving down your stop too much for today likely leaving it near the breakout if you are already short.

Put on the Radar:

Buy Soybeans- After the close yesterday I received a report that South American countries are having difficulty handling and exporting the huge soybean crop leading to strikes and delayed cargoes. The infrastructure at many of the ports is not capable or used to handling such large amounts of worldwide exports and this looks like the beginning of a shift from attention on the South American Crop to focus on the U.S. old crop. What is the point of buying cheaper beans when you can not get them? With respect to this news, I would not recommend selling old crop (May & July) rallies for right now. I was becoming worried technically being short the beans a couple days ago and it looks like this was the news that was creeping into the market. Yesterday Stochastics gave a buy signal on the May Soybeans after rallying out of oversold territory yesterday. I believe that beans already had their chance to break, but the market was not willing to. Grain traders love a good Spring bullish story so I would look at going with this rally. This is about the time of year that the crazy Argentinian lady ineffectively deals with worker strikes and export problems as well, so that can not be too far away on the horizon. I would look for momentum short term on this trade, but would hold off on establishing a large long term position until the rumors become more clear. A potentially better play than the outrights on this story is:

Buy May - November or July November Soybean Spreads- I personally like the May - November Soybean spread better because on top of the July-Nov you get the May-July piece that can work well based on the South American crop, and you can always roll it to July-Nov for longer exposure. Right now both the May-Nov and July-Nov spreads have a technical double bottom pattern set-up. I also believe that there are a number of large bear spread positions out there that were convinced that there would not be U.S. tightness with such a large South American crop, allowing for short covering to be part of the rally. The May-Nov spread is in a channel on the daily chart for the last couple weeks and topside resistance sits near 22 1/2 today. However, if the spread rallies above 35 and 40 cents it projects to between 60 and 75 cents premium the May. I do not see great technical entry points right now, but buying a dip and putting your stop below 10 cents still has a good risk/reward right now. I put this in the radar because it is just developing so enter at your own risk right now.

Notes:

RBOB (Gas)- I warned about a potential double top in this market recently, but the rally yesterday and continuation today off the FOMC announcement has the RBOB chasing a new high close. If the market is able to rally and hold open water above it's old highs it could gain significantly on the Heating Oil as the Oil is choked up in a range with more resistance.