Wednesday 3/31/10 Commodity Ideas

Opening Note:
Yesterday was a very quiet day volatility wise for the market and other than some Currency jiggles there was not much to report from yesterday. Overnight the market is moderately supportive thus far, with the Dollar Index down and Commodity markets firmer. The stock indexes are weaker than Commodities right now, which is a small emerging trend. After leading the way for much of the last two months Equities have lagged behind the other correlated markets despite supportive macro price movement. Right now I am keeping my eye closely on the Euro/Yen Cross Rate, which is a good indicator of macro market and Commodity direction. Using the YR symbol chart on CQG, the Euro/Yen has a bullish cup and handle pattern that has set off today on a rally above the sideways base from the last two months. The breakout on the pattern was 125.13 with a projection to 129.26. Looking at the individual pieces of this rate it appears that a bearish move in the Yen is the catalyst for this move with the Euro sitting in more uncertain sideways territory. This move is an indicator of strength for the overall market and especially for Commodities as they have a tighter correlation to the Currency market than Equities currently. Because of this move I recommend caution when trying to short the market for the next couple weeks. There are a number of bullish Commodity patterns right now, so I would focus on looking for momentum strength to buy and taking profits on decent moves as continuation is uncertain on the recent moves. The important Grain stocks and prospective plantings report is this morning at 7:30 as well, and the Grains will trade this news, so do not get caught in the dark.

Buys to Watch:

July - November Soybean Spread- Port and trucker strikes in Argentina have begun to spread, as was rumored over the last couple weeks. This fundamental news is very bullish the inter-crop spread at least for the short term and should support the technical double bottom pattern further. With a breakout from 40-45 cents the double bottom pattern has a projection range that has a projection range from 60 to 75 cents. Yesterday the spread settled well above the 50 cent resistance level and old school technicals dictate that a move above 50 leads to 75 cents. However, there is moderate resistance at the 60 cent level, so this is the next level to watch. I have a small low volume zone from 50 to 50 1/4 cents, which was entered as the bottom overnight, with stronger support from 47 to 49 for stop placement. Note: The stocks and prospective plantings report is this morning. A bullish stocks number is obviously supportive of the spread, but a supportive prospective plantings number could also continue the spread rally on its own. May Soybeans are on the cusp of a bullish cup and handle pattern this morning with a breakout of 9.76 1/2 and a projection to 10.11 1/4. Bullish report numbers should rally the outright market as well, leading the spread higher.

Cocoa- Like yesterday I still have two separate bullish cup and handle pattern breakout levels with differing projections. The more modest cup and handle had a breakout level of $2929 with a projection to $3076 and the larger pattern had a breakout of $2963 with a projection to $3144. Yesterday the market broke into the low volume buy zone that I was watching and found support in the overnight gap between 2940 and 2944, closing near the high of it's range yesterday. The market is again stronger this morning and with a higher close will confirm these patterns. I have a lower volume entry level from 2958 to 2966 from yesterday's action with mild support from 2951 to 2957 as well. While open interest has not had a huge spurt during this move it has increased on a trending scale during much of the formation of Cocoa's base over the last month. Stochastics momentum indicator has also confirmed the buy signal from two days ago as well.

Crude Oil (or Heating Oil)- Crude has a bullish double (or triple) bottom technical pattern on it's daily chart that has a breakout of $83.36 and a projection to $87.18. I believe that there are still a number of shorts in the market after last week's "commodity leg down" fake out, which is fueling the rally through short covering. Stochastics produced a buy signal on Monday, which was confirmed yesterday, and Open Interest appears to be increasing and falling with price as a sign of a strong bull market. I would wait for the breakout and possibly confirmation before entering a position. It is likely that if this move is to happen with conviction that it should happen today. The Heating Oil has a similar, and possibly stronger, chart than the Crude right now so this could be the same trade with some added edge as the RBOB looks weaker.


Sells to Watch:

Japanese Yen- The Yen has sat on the radar the last couple days, but is finally ripe for selling. The topping pattern that can most closely be associated with a double top had a breakout level of 108.60 with a projection to 104.10. Yesterday the Yen rallied just above the low volume sell zone from 108.30 to 108.50 into the resistance from 108.50 to 109.00, but topped at 108.60 before closing near it's lows. This morning the Yen again has rallied off of it's lows and I am watching the first low volume sell zone of 107.43 to 107.56 with greater resistance above from 107.60 to 107.82. A rally above this resistance takes the market into another low volume pocket from 107.86 to 107.92 with better resistance from 108.00 to 108.20. As I stated in the Opening Note the Euro/Yen cross is on a bullish pattern move now so the Yen should continue to weaken.

Put on the Radar:

Copper- Despite stronger Commodities this morning Copper is having difficulty holding prices above the old high contract trade of 355. The RSI momentum indicator is approaching overbought territory now showing some potential weakness in the product right now. Although it did settle above this level at 366.35 I would wait for further confirmation to look at buying this strength.

Silver- Although Copper is the strength in the Metal sector I am watching Silver for possible momentum on a short covering rally. Above $17.60 Silver has a projection to $18.65. Overnight the 17.60 breakout level was tested, but failed. Stochastics now has a confirmed buy signal in Silver from two days ago, but the Metals have been a tricky trade as of lat with many false patterns. Another encouraging indicator though is that the Gold versus Silver ration (Gold - Silver/2) has a downside move out of it's consolidation range indicating Silver strength. I am looking for a strong breakout on the pattern to buy the momentum and would hold off on executing a long if the move is not decisive.

Dollar Index- Although the Dollar had a nice rebound out of dangerous territory yesterday it has again given up overnight and sits on the precipice of negating it's third leg bullish continuation. The final support level is from 81.00 to 81.15 with a move below this support negating the 83.48 projection. I believe that if the Euro/Yen cross continues to rally that the Dollar will break into its range from the last two months.

Notes:

Five Year Note- With a rally this morning I am taking the 5 Year Note off of the sell list. It has sat in or just below the low volume zone from 114.215 to 114.245 and has finally rallied into higher resistance over a 4 day span. This no longer is a strong sell despite the bearish head and shoulders pattern as it has sat idle to higher for too long.