Monday 6/7/10 Commodity Ideas

Opening Note:
With expectations high coming into the Unemployment report Friday the market was dealt a devastating blow as an underwhelming number fell roughly 150,000 long term jobs short of the consensus estimate. Most current Bulls have used U.S. economic recovery as their fundamental evidence for why the market should continue higher, but they are now left with little backstory to support their opinions. With a lack of substantial reports until the FOMC meeting on June 23rd and another month until earnings take center stage again I believe that the technical bearishness of the macro market will now define the trade for the next month. I have stood by my opinion that the stock market as well as Commodities are entering a large deflationary move that I now believe will rear it's head by the end of this week.

Technically the S&P 500 now is on the verge of setting off a large topping pattern with the point of no return being the February lows of 1036.25. While there should be some fight early in the week to hold this level I do not see a significant demand that will enter the market to save it again. I have a projection range on the S&P 500 from 865 - 900 on this initial bearish move with the supportive markets also following suit with Equities down to this level. With debt concerns across the globe and bubble markets beginning to pop, including here in the U.S., the bearish news should continue to emerge as consumer confidence is already suffering. The market has not forgotten the ugly dip from '08 and early '09, so it is likely that this move will be much swifter than most of the previous breaks in the market. I continue to recommend holding a bearish macro position and selling rallies in supportive Commodities over the large dip coming over the next month.

*In the Radar section I provided some Equity analysis that should facilitate today's trade.

Buys to Watch:

Natural Gas- With concerns about the future of the Oil market after the Gulf Oil Leak the large money is now in the process of allocating a substantial position in the Natural Gas market. The chart for Natural Gas has now confirmed a breakout above consolidation with two consecutive closes above the $4.587 price level with a projection on the cup and handle pattern to $5.138. RSI has now crossed the bearish mode resistance level and has entered a bullish momentum level that supports further entry. I had a good low volume entry level for today from 4.712 to 4.748, but the market is in the process of testing this level and the underlying higher volume support already. The larger volume support lies from 4.700 to 4.680, which already had a stop running break that ticked below this level. I would wait for a price level above the 4.7 level for entry and getting out of the market quick if there does not appear to be large allocation on the open.

Sells to Watch:

Cotton- Cotton is broken out on a bearish daily head and shoulders pattern with a breakout level of 80.13 and a projection to 72.66. Since the breakout last week the market has continued to decline each day on a move that easily supported holding a short position. The market has already continued lower this morning, but between 77.40 and 77.50 there is a small low volume level for short entry with higher volume resistance up to 77.70. Above this there is also another low volume zone from 77.90 to 78.10 as another option to enter a short if this first level does not hold with larger volume resistance above to 78.35. This projection to 72.66 is again one of the larger ones that you can draw from the chart, but most still provide a move to at least the 75 cent level if you prefer to take profits sooner.

Silver- Silver is now broken out on it's large bearish head and shoulders pattern and is seeking confirmation today with another lower close. To form the head and shoulders pattern draw the neckline on the daily chart from the low May 5th to the low May 21st. On Friday the chart broke out below the $17.685 level and now has a projection to $15.085. For entry on a rally today I have a low volume zone from 17.675 to 17.73 with some higher volume resistance from 17.735 to 17.80. However, with Silver lacking a rally on it's opening I believe that Equities or Gold would need a substantial rally today for Silver to reach this level. If you are holding a short position I recommend placing a stop near the highs overnight and if you are stopped out then looking for re-entry at this low volume level.

Copper- Copper is broken out on a large topping pattern that looks very similar to the S&P 500 pattern that is forming. As Copper is often a good indicator of overall market direction I take this pattern initiation as a bearish signal for the market moving forward. Depending on whether you draw the pattern based off the "Flash Forward" levels or the lows from mid-May provides different projections, so I am using them as a range of expectations from $2.12 to $2.32. If you are already short I recommend placing a stop near the highs on the range overnight and looking for re-entry at a higher level. The low volume zone from 2.8860 to 2.9130 is great level for re-initiation if it is met with the neckline on the lower head and shoulders pattern sitting at 2.9275 today as resistance for the trade.

Australian Dollar- The Aussie was the poorest performing Currency on Friday on a percentage basis and is also again this morning. The market is in a large bearish cup and handle pattern on the weekly chart with a breakout level of .8547 and a projection to .7784. After breaking the base trendline on it's recent daily chart consolidation on Friday Stochastics also produced a sell signal confirming a loss of upward momentum. As I write the market is testing the higher volume resistance level from .8200 to .8235 as a spot to initiate a short position against. The Aussie, along with most of these other Commodities, will likely travel along with the S&P 500, so I recommend lightening short positions and looking for re-entry at a higher level if the 1775.75 level is breached by the S&P.


Put on the Radar:

S&P 500 as an indicator for today- After an initial break on the open yesterday evening the stock market has formed an uptrend over the last 11 hours that is now testing a higher volume resistance level. The S&P 500 has acted as the best indicator for Equities so I am keeping a very close eye on the higher volume resistance from 1770 to 1775.75 today. A rally above this level could lead the market back to the 1090 to 1095 level as shorts scramble to cover open positions from last week. Right now Equities, Commodities, and Currencies are all highly correlated, so a move above this resistance would likely mean a move higher for all of my suggested shorts today. If the S&P 500 is able to rally above 1775.75 then I recommend lightening up on short positions and looking to re-initiate near this higher low volume level for the equity market.

Gold- While Gold had the "gut reaction run to safety" rally on Friday I am still not convinced that it is a good outright buy and recommend holding a flat position in the market. Gold struggled overnight with the higher volume resistance level from $1223 to 1230 and has trended lower overnight. While I do like the idea of buying gold as a hedge against short positions in other markets, I still believe that this a large deflationary move across the macro market and that even the price of Gold should independently drop. Above $1230 I can understand entering a long position, but until this time I recommend staying neutral. When you put the same head and shoulders neckline from Silver on Gold you receive a value today of $1177.5, which would project a move to below $1100 if it was violated.

Notes:

Crude Oil- Although I do not have a good projection on Crude Oil currently I believe that the macro market is in a deflationary move that would include Crude trending lower. There is some higher volume resistance from 71.90 to 72.25 that correlates price-wise with the aforementioned resistance in the S&P 500. This is a good level to initiate a short position against in Crude on a further rally today if the S&P 500 also struggles with it's level.