Wednesday 6/23/10 Commodity Ideas

Opening Note:
After buying on Commodity and Equity opens yesterday and a resilient effort at a rally continuation, despite a poor Existing Home Sales number, the market collapsed in the early afternoon to close on it's lows for the day. Equity markets have bought weak economic numbers for the last few weeks, but yesterday marked what could be a shift in market sentiment as the U.S. fundamental data has failed to meet expectations for the last two months. Many analysts that have held an overwhelmingly bullish opinion over this calendar year are now beginning to second guess some of their previous statements as much of the Bullish case was linked to signs of recovery in the U.S. What we are seeing now is that with stimulus running dry, a scary economic picture overseas, and only a pipe dream of a recovery in Unemployment and the Housing Market that the Fundamental story is beginning to fit the Bearish technical picture that has emerged throughout 2010. It is now possible that we have put in the top on the right shoulder of the large bearish head and shoulders pattern that should create a top on the macro market and lead to some severe legs down over the rest of the year.

Looking forward to today there is the important New Home Sales number at 9 am (CT) and the less important FOMC announcement around 1:15 pm (CT). With the home purchase tax credit now ended we will begin to see what the "real" housing picture looks like without the veil of stimulus. Although the numbers have been poor this month, I believe that we are seeing more of the tip of the iceberg in what could be another dip in the all important housing market. The market should be relatively quiet today ahead of the FOMC announcement this afternoon, but nearly 100% of market participants are expecting The Fed to keep rates locked near zero "for an extended period of time". Many will focus on the language surrounding the economic recovery, which could see a downgrade and have an effect on the market. However, The Fed tends to be behind the 8 ball when it comes to their market analysis on economic recovery, whereas I would rather form my own opinion than take Bernacke's word for it.

The macro market is still in a larger sideways range trade that is rather difficult to predict on a day to day basis. Until Gold rejects it's upsloping trendline or the S&P 500 is able to rally out either side of the 1040 to 1130 range I recommend reducing market exposure and limiting expectations on any directional move. I think we could continue to trade in this range until the end of the 2nd quarter, but volatility and directional moves are not far away once the 3rd Quarter begins.

Buys to Watch:

Sells to Watch:

Put on the Radar:

Buy Bonds- On the heels of the break in the Equtiy markets yesterday afternoon the Bond market had a rally breakout from it's consolidation triangle. Bonds and the other Fixed Income markets have held gains extraordinarily well in the face of the Equtiy rally over the last few weeks as they should have experience a much larger price break on the relationship. For the top end of my consolidation triangle I am using a trendline from the high on May 21st to the high on June 8th that had 4 points of contact prior to yesterday's breakout. The triangle formation has a projection to around the 129 handle, but keeping with the theme of limiting expectations I am looking for a move to 127.17 on the cup and handle pattern with a move above 125.00. I was able to enter with a full position yesterday afternoon and after taking off half to lock in profits I am now waiting for a move above 125.00 to re-initiate a the other half of my long position. Today this top-end consolidation trendline has a value of 124.11, which the market has tested already this morning and found support. For stop placement I am not giving much more room below this level. For initiation I believe that you could enter a half position on another test of this 124.11 level, but I recommend waiting for a breakout above 125.00 for a confirmed better move. This is the best buy and trade that I currently have, but it will be withheld from the Buys column until a move above 125.00.

S&P 500- In past newsletters I have focused on the 61.8% Fibonacci Retracement level for the S&P 500 as a potential top, but it is now possible that the market does not even reach this level on this rally leg prior to setting off it's large bearish head and shoulders pattern. Two days ago the market failed on a brief trade to 1130, which coincides with the 50% retracement level at 1125.50 for the market when measured from the high to low close on the bearish move. With the swift manner of the rejection and many other Commodity and Currency markets giving overbought sell signals I believe that we may now be heading towards the large macro leg down. Below 1040 the S&P 500 has a projection range of 865 - 900 on the topping pattern, but this appears to be only the second leg down on a potentially larger move. The Equity trade has been unpredictable for me on a day to day basis, so I am just using the market as an indicator for other trades and will hold off on any initiation until there is a move outside of the 1040 to 1130 range.

Japanese Yen- It may be difficult to see on your daily chart of just the September contract, so make sure you use a chart that rolls over at expiration. Drawing lines from the Close March 3rd or High March 5th to the High May 20th or Open May 21st you receive the neckline on a large bullish head and shoulders pattern that ranges from 111.61 to 112.00. This pattern has about a 7 point projection that ranges near the 119 handle. In the past I have noted that the Japanese Government has intervened near the 114 and 115 levels to deflate their Currency and keep exports competitive globally, so proceed with caution if the market reaches these levels.

Metal Sector Radar and Comments:

Gold- In my technical analysis I have the Gold market completing a 3 leg advance and a bullish head and shoulders pattern on May 12th when it first tested the $1250 level. Since that time the market has slowly traded higher on the upsloping trendline from the lows on March 25th to April 22nd as Open Interest has continued to flood the market. With about 20 bounces off of this trendline now and no meaningful continuation rallies that have held gains I believe that the market is very much on borrowed time for it's bullish continuation. Open Interest recently climbed to new all time highs again, but many of these new entrants have entered at well above $1200 and appear to be really late to the party. The trade in the market has been to buy any test of this trendline and with major players holding substantial positions it appears that the market has been almost "protecting" this level on each test. When a trade works this many times in a row it is usually destined to blow up in the participants faces and in major way.

With a number of clear stop levels ranging around $1230, $1213, and below $1200 it looks like the Open Interest liquidation dominoes are now in place for what could be a one day $60 + move lower as the trade fails. Today the trendline is sitting at $1237.7 after holding yesterday's $1235.3 value and the lower (weaker) trendline sits at $1213.7 as another liquidation/support level. I am sitting on the sidelines in the market waiting for the opportunity to pounce on the short once this potential liquidation commences.

Silver- The Silver market is highly correlated to Gold in it's recent similar uptrend, but this again looks like a bullish trade that is destined to fail as the industrial metal should have a precipitous fall to rebalance with economic demand. I have outlined some of the fundamental differences between Silver and Gold, but one of the more basic things anyone can see is just through the TV commercials. There are a number of companies that are willing to buy your cash for Gold as well as some that are willing to sell you Gold, but the majority want to buy. However, there is now an influx of commercials looking to sell you Silver as a precious metal store of value, with one in particular that has a seemingly nice man with a British accent that looks like he knows how to invest. Do Not Listen To The British Guy! There's a reason nobody is looking to buy your Silver, and that is because it's price does not hold up as a precious metal under economic strain.

21,000 new longs have entered the market since June 8th (out of 143,000 total) and only very few have an entry level any lower than $18.10. This has HUGE puking liquidation written all over it once a break in the uptrend emerges. For the Silver daily chart I have a trendline drawn from the low March 25th to the Close May 25th, which illustrates the flat slope on the "buy the trend trade", as well as a trend from the low May 5th to the low May 21st to show the bearish head and shoulders neckline. The market had a sharp short covering rally the day after the first attempt at the head and shoulders pattern initiation, but with bearish momentum coiling it will not likely fail a second time. The large Silver break will likely coincide with the negation of Gold's trend, but the move in Silver will be much sharper and an overall better short. Keep this trade on your radar because it could be one of the trades of the year.

Copper- Copper continues to under-perform the overall macro market and like the other Metals is setting up a momentous fall as longs liquidate in the market. For today I have trendlines on the large topping pattern ranging from $2.9160 to $2.9625 as the area that will again set off this bearish pattern. Like Silver and Gold, Open Interest has piled back into Copper over the last few weeks, but the market has not even seen the gain in price that the other Metals have. I believe that there is a lot of confusion from investors within this Metal sector and with Copper near all-time highs in open interest still there is plenty of liquidation fuel. A move below $2.9160 projects a move between $2.12 and $2.32.

Gold Relationship Trades- You may be wondering, "Why is he telling me to buy Gold when he thinks it is ready for a strong liquidation move?". Well, Gold is a store of value and in macro moves lower it tends to hold it's price much better in relation to many of the other Commodity markets. Crude, Silver, and Copper are on my radar as the worst performing Commodities in the near future so I am keeping these trades still on the radar until the time is right for entry.

Gold + Dow (Short)
Gold/Silver (Long)
Gold/Copper (Long)
Gold/Crude (Long)

Notes: