Wednesday 3/24/10 Commodity Ideas

Opening Note:
Yesterday the market was fairly quiet in outright commodity movement with another rejection of bearish metal patterns and more solid equity gains being the highlights to the unscrupulous eye. However, the most notable occurrence to me was a sneaky new low close in the Euro for the first time in a month of sideways consolidation. Thus far overnight the market seems to have taken note of this new low close and has turned my entire screen red other than the Dollar Index (and Sugar?). This new low close in the Euro and continuation today is bearish for commodities and equities as it signals confirmation of a new leg down in the Euro, and likely many of the other foreign currencies. While it is extremely unlikely today, still make sure that the Euro does have another lower close to confirm the leg down as rally attempts have continuously saved the Euro from this fate. The equities are still in continuation mode on an almost unbelievable rally that has lasted for 33 days now with very little pullback. I have noticed that this rally has been curiously saved a number of times, like Monday of this week and towards the end of February, but I believe that a new leg down in the Euro is more bearish news than this rally can handle without a downside correction. What is bearish for the Equities is even more so for commodities. The Equities have clearly been the strength over all other sectors with physical commodities continuing to lag on the rally. Because this move is initiated by currencies I believe that Metals continue to be the best sale (along with foreign currencies) because they have the closest sector correlation to them currently. Right now I see a number of reversal and continuation patterns, and therefore trades, but I hope to pare down these ideas into the best risk/reward moves and executions.

Buys to Watch:

July - November Soybean Spread- More reports of isolated port strikes in South America continue to come in with rumors that these isolated incidents are more likely to spread. South America is dealing with harvesting and exporting the largest Soybean crop they have ever handled, which is highlighting the inefficiencies in their infrastructure in dealing with such a sizable crop. Furthermore, Chinese Soybean demand is beginning to pick up and is believed to be larger than originally estimated. Both of these factors are contributing to more tightness in U.S. old crop stocks and causing the spread to rally. Yesterday the spread traded 40 cents which is the breakout level on the technical double bottom and a price level of significant resistance. The true breakout for the pattern is between 40 and 45 cents, but most of the resistance is between 40 and 42 cents. For preemptive entry on a break in the market I have a lower volume zone from 33 3/4 and 34 3/4 for entry, but I do not feel confident that this pullback will happen. Instead I recommend waiting for confirmation above 42 cents to buy the spread, with the all clear coming above 45 cents. The pattern has an initial projection to between 60 and 75 cents. Note: Be cautious of the resistance at 40 cents. It could be a battle to rally the spread above this level, especially only a week prior to the March 31st report.

Dollar Index- This morning the Dollar Index looks almost like an identical inversion of the Euro chart, meaning that it is above all the trade in the consolidation range and is confirming a new leg up. Unlike the Euro the Dollar Index did not make a new high close yesterday though, with the February 24th close of 81.24 still the highest. However, with the decisiveness of the Euro taken into account I believe that buying the Dollar Index on a leg up is now in play. Based off the previous leg, the projection for the new leg up in the Dollar Index is roughly 83.46. On a pullback today I have a decent low volume area from 81.49 to 81.63 to buy from the overnight acceleration. If you have difficulty staying with outright positions I recommend looking at purchasing outright call options, a call spread, or possibly a more risky combo of selling some 80 puts to fund the purchase of 83's. Note: If you are purchasing Dollar Index options I recommend purchasing the higher volume traded June contract as you likely have to give up a sizable edge on the wider market May options (I learned this the hard way). Also, I recommend putting your order into the ICE options pit as any screen traded market is much wider.


Sells to Watch:

Silver- I have finally decided that Silver is the better sell here than the Gold. On large-scale commodity moves Silver tends to have much higher directional volatility than the Gold because it is not traded as a run to safety. Furthermore, the Gold to Silver ratio (Gold - Silver/2) is showing strong reversal signs today, meaning the Gold should continue to gain on the Silver. The Silver has a bearish double top pattern with a breakout of $16.835 and a projection to $16.07, but I believe that with the gains on Gold and the currency moves that this projection could be modest in the bigger picture. As I noted over the last couple days, the Metals are more correlated to the Currencies than the Equities and Energies, making this the best sector to sell off the Currencies. For comparison's sake the Gold has a head and shoulders breakout of $1103.7 today with a projection to $1049.8. For silver entry today I would look for a pullback to the $16.65 to $16.75 area near this morning's open and look to place a stop above the resistance from $16.92 to $16.95 for today. Note: I had a discussion yesterday around noon about how the silver rallied all the way into the low volume area near $17.15, but that the Gold did not reach it's low volume area above $1110 at the same time. You can get burned on the trade from time to time, but if the setup is right I like to look at a Silver or Gold move to sell the other weakness off of.

Euro- The Pound and the Franc are not as weak as the Euro right now, so I believe the Euro is the best sell of the European Currency group right now. Unless there is a miracle the Euro is now beyond saving so I think that it is in play as a sell on this new leg down. Where the first and second leg begin and end on the Euro chart is highly debatable, but I estimate this third leg down projection to roughly 127.50 for right now. On a pullback today there is a decent low volume area between 133.95 and 134.05 to sell. I think that like the Dollar Index you can also look at using options now to capture more of this leg down.


Put on the Radar:

Buy Bonds vs Sell Five Year Note- I have become more disinterested in this trade with the new currency developments. This trade is still dependent on a bullish head and shoulders breakout in the Bonds or a bearish head and shoulders breakout in the 5 Years. The Bonds are not close today, but the 5 year head and shoulders has a breakout of 115.01 today with a projection to 113.21, which has set off today. Right now the Bonds are having a largely bearish move today so I would wait on this trade and possibly play the 5 year as an outright position.

Crude Oil- The Crude Oil double top pattern that was negated two days ago should come back into play later today or tomorrow. The double top pattern has a breakout of 79.41 with a projection to 75.46. On a side note Heating Oil may look like the worse chart among the energy crack, but a strong downside move in the RBOB vs. Heating Oil spread has the RBOB falling apart in a major way. I think that the RBOB could be the best sell here. Note: If you have been holding the RBOB vs. Heating Oil spread I would liquidate. It has a bearish double top and the fundamental story is not happening so far.

Notes:

Grains- The grains have the report on March 31st so large moves before this are less likely, but with the world down today and possibly continuing I think the grains could fall with it. I am running out of time so I will run down a few projections that I have. Wheat to 4.47 on a new leg down. Corn head and shoulders breakout at 3.59 1/4 today with a projection to 3.30 3/4. Bean Oil flag pattern breakout at 3917 today with a projection to 3763. I like the Bean Oil trade the best because it is based on open interest and long liquidation on the breaks. I also think that Meal looks fishy with this strong bottom rally, but I can not find a way to sell it and would hold off.

Stock Indexes- I would hold off on selling entry for Equities for right now. It looks like they could be forming a reversal volatility top, but the Equities have a way of disregarding anything else that is going on lately.