Monday 4/26/10 Commodity Ideas

Opening Note:
Friday was another strong day for the macro market as gains in Gold and Crude Oil led the way for Commodities while Equities again finished higher, definitively rallying above their range of the last week and a half. It appears to me that whatever break and sideways range we have had in the market since the start of April is about all that the market will yield to the downside for right now as we move forward to around Day 60 of the early February rally without a significant pullback. Although it is difficult to continue buying the unprecedented rally on even higher continuation I believe that this is the best approach for Commodities and Equities for right now. My fundamental opinion that the stock market, and Commodities for that matter, are priced higher than they are actually worth has changed little and I still believe that the market is creating a "bubble" effect where out of control investment buying is extending the market past equilibrium and setting up a potentially nasty correction later in the year. However, I have seen enough examples of this over-enthused market psychology and I believe that we are now just entering the acceleration mode on the rally. With the government continuing to back nearly free money and pumping stimulus into the economy money continues to be thrown at nearly every investment market regardless of fundamental or technical concerns. With markets like Crude refusing to break significantly, despite technical and fundamental signals that pointed towards a correction near $75, and higher projections in Gold and Equities I believe that the strongest rally portion of the recovery is coming over the next couple months as shorts are continually squeezed out of the market each time they enter. While I recommend playing the long side of the market over the next couple months it is important to keep in mind the underlying reality that credit is still not being lent, the consumer still is spending less income, and employers are not hiring at a rate fast enough to eat into the Unemployment Rate significantly. Ride the coming rally wave, but keep in mind the strong prospects that this rally is led by stimulus that will end soon enough, and that when this stimulus ends we will likely find ourselves in an over-priced market with the strong potential for more than just a 10% correction.

Buys to Watch:

Gold- Despite the break on the Goldman news and concern that the Paulson Gold fund may be force to liquidate Gold was able to keep it's large head and shoulders pattern on the daily chart intact and appears to have built some bullish momentum in the process. The daily head and shoulders has a neckline from the highs on Jan. 11th to Mar. 3rd that provides a value of $1129.1 today and an original projection of $1244.1 still. The break in Gold over the last week was rather weak overall with numerous attempts to close below the neckline failing as open interest and buying continued to flow into the market on any dip. Now Stochastics is nearing a buy signal on the daily chart and RSI has reversed to a positive mode as Gold looks to rally on the large projection. I have a low volume zone from $1144.6 to $1152 from the acceleration rally on Friday that has stronger support from $1140 to $1143 for entry into the market on a break.

S&P 500- Although the S&P was hit the hardest of the Equity Indexes on the Goldman news it has recovered nicely and now is broken out on a continuation triangle on the daily chart. The breakout value on Friday was 1209 and yields a projection to roughly 1232. I was looking at possibly executing this pattern in the stronger Nasdaq Composite, but believe that sticking with the S&P in this situation might be more beneficial as it may have some room to catch up after the bearish news.

Cotton- This is one of the old Turtle/Donchian Trend System trades, where you purchase the new 20 or 55 day high close on the prospects of a continuation breakout. Money piled into the market early last week on this trade, but prices failed temporarily as the market was not able to extend. However, the cup and handle daily pattern and new weekly leg up have held and still provide projections to 89.08 and 95 cents respectively. Cotton can be extremely volatile and thin at times, so I recommend using options for long entry to capture the move. Although I do not see a definitive long entry point I would look for a pullback to the moderate support around the 86.00 to 86.25 cent level for entry on an initial long position in the options.

July Soybean Meal- Soy Meal continues to chug away on it's daily head and shoulders pattern towards the $307.5 projection. The Meal chart continues to be the strongest among the Grain sector, although the July Beans and Wheat are also enticing, as Meal was able to bounce off of its daily trendline Friday of 290.9 and reverse higher overnight. Today the daily trend value sits at $292.9 as support and lacking a great entry point today I would use this level as long entry support. Stochastics and RSI continue to flirt with their overbought zones, potentially signalling that the Meal market may need a rest, but I still recommend this as buy while the trend continues and July Soybeans gain some steam. I also still have a cup and handle pattern projection on the Oil Share (Bean Oil - Soy Meal, with 5 to 3 execution for equal tick size) that has a projection to 825 below the 1121 breakout.

Sells to Watch:


Put on the Radar:

Japanese Yen- As we head towards the time period where interest rates will eventually unlock the Japanese Yen is showing signs that the market is beginning to position itself for this occurrence. With a looser tie to interest rates on the borrow and reinvest abroad carry trade the Yen is beginning to weaken. The monthly uptrend in the Yen from the base in the summer of '07 was negated last month and the weekly chart has now re-initiated a cup and handle pattern below the breakout of 106.79 that has a projection to 100.12. I have had the Yen on my radar for about a month now and repeatedly noted the large low volume gap from 109.18 to 110.34 for initial entry on a short position, but this low volume zone was only entered for a brief time frame before falling away. The Yen has another important characteristic that provides more value to it than the interest rate markets in that it has what appears to be an artificial top around the 114 to 115 level as the government has repeatedly intervened to deflate it's currency and keep export prices reasonable globally. Because of this gap I believe that you can sell far out December Calls around the 114 and 115 levels with more reasonable expectations that the market will not support rates at this level. For shorter term entry I am looking at the low volume zone from 106.56 to 106.80 with stronger initial resistance from 107.02 to 107.16 on short entry. Because this is a weekly chart trade that has some support on the previous lows to muscle through I recommend looking at some longer term options plays on the downside move.

Buy Bonds vs. Sell Five Year Notes- This is a very similar trade to the Japanese Yen in that it is positioning for higher rates and the unwinding of the long shorter term yields versus short longer term yields spread from '07. To chart enter (Bonds*3 - Fives*7) , with the same execution contract values. This portion of the Yield Curve has built up a large base over the last 5 months and is now on the verge of setting off a large head and shoulders pattern on the daily chart with a neckline value of -452.145 from the Dec. 31st to Mar. 19th highs and a projection to roughly -444.00. Like the Yen, I have noted in the past the gap on this chart from -457.29 to -457.19, but it was only briefly filled non-coincidentally on the day before the Yen reached it's low volume zone. Although the chart has been very strong since entering this gap early on April 16th I recommend waiting for the breakout before entry.

Notes:

Cocoa- Cocoa just reached it's daily cup and handle projection of $3231 this morning and it is now time to take profits on the trade. Over a nearly painless 4 days Cocoa has rallied nearly 200 ticks and over 6% overall on the pattern with only some slight intraday pullbacks on the uptrend.

Natural Gas- The Natural Gas market tends to get very thin and volatile recently, so I am hesitant about placing it in the buys, but the daily chart now has a base cup and handle pattern. The breakout on the pattern is 4.269 and has a projection to 4.659. Friday's close was just below this breakout level, so the pattern is not technically in play until a higher close is potentially made today. On a lower risk shot on the a break prior to the potential breakout though there is a low volume zone from 4.208 to 4.238 if the market trades there today. Daily Stochastics has produced a buy signal in Natural Gas and open interest has begun to decline in the market showing a drop in the large number of shorts that have invaded the fundamentally weak market. This is again a do at your own risk trade though as I am less certain about the continuation prospects.