Commodities take a Breath
June 22 – 26, 2009
by: Matthew Bradbard
Any sustainable bull market needs to take a breath and rest up for the next leg. The long commodity trade that has been working for the last several months has been momentarily put on hold. So what to do as a trader? We have taken profits on longs, decreased our long exposure, tightened up stops or in some instances done the unimaginable, gone short. Yes that’s right, what investors need to understand is when speculating in commodities it’s only a wager on if prices are too high or too low. The contract size is the same, the leverage is the same, the risk parameters and profit potential don’t change that much. The only change is the direction. I’m sorry if you only manage your portfolio as long, in commodities you will have some rough patches. As long as the global economic recovery is in question we may get some dollar strength and commodity weakness but we feel that will be temporary.
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The DOE reported crude oil supplies were down 3.9 million barrels, supplies of gasoline were up 3.4 million barrels and heating oil supplies were up 600,000 barrels. August crude oil ended down $2.87 finishing lower last week for the second time in the last nine weeks. Prices failed to make a new high last week for the first time in 7 weeks. Resistance comes in at the 9 day moving average at 71.68 with support at 68.00 followed by 66.00. Trade idea: buy the August $70/65 put spread, our fill on Friday was $1800. August heating oil was lower by just over 5 cents closing 8.75 cents off the high. 1.88/1.89 should serve as resistance with support at 1.75/1.76. I would not rule out a trade down to 1.60 if Crude was to come off more than $5. August RBOB traded lower by 10.78 cents last week as it appears an interim top has been made. After a move of 170% from late December, prices are overdue for a correction. Resistance comes in at 1.98/2.00 with support at 1.88 followed by 1.83. Over the next few weeks we expect a trade down to 1.72/1.75.
The DOE reported underground supplies of natural gas were up 114 billion cubic feet last week. Supplies are now up 32% from a year ago and up 23% from the five-year average. Prices in August were higher by 10 cents to close just above the 9 day moving average last week. We’ve advised clients to lighten up on longs or step aside entirely for now as we expect to see a pullback and will re-position long once again. Resistance is seen at 4.45/4.50 with support first at 4.00 followed by 3.75. On new entries we suggest out until September or October.
The USDA said that there were 10.407 million head of cattle on feed as of June 1st, down 3.8% from a year ago. Placements in May were down 13.8% and marketings were down 8.8% from a year ago. August live cattle closed up .625 closing just above the 20 day moving average. Support comes in at 81.70 while resistance is seen at 83.00. The spread we advised has not started to move yet and if you haven’t put it on yet do so, buy August/sell October at -550. August feeder cattle also gained on the week picking up .60. Support is seen at 97.00 while resistance comes in at the 20 day moving average at 98.50. On a close above that level look for 100.00.
Have lean hog prices been beat down too hard? August lean hogs jumped up 1.475 cents last week, most likely caused by short-covering. We feel an interim bottom has been made and will be looking for ways to get clients long thru a combination of futures and options. Support is seen at 60.30 followed by 58.75 with resistance at 63.00. We are expecting a trade up to the 20 day moving average at 65.17 before we run into any serious resistance.
Stocks: The Dow ended the week lower by 260 points or 3% to 8540. The S&P suffered its second loss in the last eight weeks losing 25 points or 2.6% to 921. The NASDAQ gave up 31 points or 1.7% to 1827. As stocks failed to get through resistance to the upside on thinning volumes, the 10-15% correction we’ve foreshadowed may be in the first inning. Still not all signs are pointing lower, more money is expected to come into the market and the volatility levels have decreased. Presently we are content on the sidelines but on a trade below 895 in the S&P and 8300 in the Dow we would expect the selling to pick up. This in fact could be the calm before another storm, time will tell.
Bonds: September 30-yr bonds were higher by 21.5 ticks last week. Prices have now moved higher for 2 consecutive weeks which had not happened since February. Support comes in at 113’00 while resistance is seen at 116’00 followed by 117’10. Expect a move up to 120’00 in the coming weeks but it may be a bumpy ride. September 10-yr notes were higher by 1 tick last week. Support is seen between 113’10/113’16 with resistance at 115’00 followed by 116’10. Fade rallies in the Euro-dollar! Last week prices were virtually unchanged. We’re advising clients to get short futures after the recent 50 tick advance over the last 2 weeks or to buy puts in March 10’ contracts. Contact us for further clarification. FOMC meeting this week, we expect no change in rates but we will be particularly interested in the Fed’s assessment of the economy and interpretation of the change in yields since their last meting.
September Euro lost 30 ticks last week on two-sided trading. Support comes in at 1.3730 with resistance at 1.4025 followed by 1.4125. On the daily chart it looks like we could see a trade higher but the weekly chart is not so convincing, so for now we would stand aside.
The Aussie was lower by 25 ticks last week but prices did close over 2 cents off their lows. Support is seen between .7780 and .7800 with resistance at .8150. We may see a bit more upside but we ultimately expect a trade down to .7500 before any significant upside.
The Swissie managed to gain 16 ticks last week as selling has been rejected now for the last 2 weeks. With verbal intervention last week having little effect, prices could go either way at this juncture. Resistance is seen at .9300 followed by .9400 with support at .9130.
The Loonie gave up 113 ticks last week and on further pressure in energies and metals we would not rule out a trade down to .8500 in the coming weeks. Resistance is seen between .8925 and .8975 with support at .8675.
The Cable advanced 98 ticks on the week but prices have remained largely range bound and we see no reason to have exposure. Support is seen at 1.6150 with resistance eyed at 1.6650. The only play would be to trade the breakout above or below the aforementioned levels.
The yen was the best performer last week gaining 223 ticks and allowing clients out at a profit on their 3 cent July call spreads. Our objective was met mid-week as we advised clients to liquidate their positions at a 33% net profit. Resistance is at 1.0475 while support comes in at 1.0275 followed by 1.0150. We currently have no exposure.
The Kiwi was positive 4 out of the 5 sessions gaining 63 ticks last week. Resistance comes in at .6450 followed by .6550 with support at .6250.
July corn was lower by 23 ¼ cents last week. December corn closed on the trend line dating back to March, we suggest waiting to see how corn trades over the next few days but we’re very close to getting long. Trade idea: long September futures while simultaneously selling 2 $4.40 calls for approximately 17 cents each. The idea is that on a move higher you will make more on the futures than lose on the options. On a move lower you have 34 cents of protection and it is unlikely to see corn break that much. Support on July comes in at 3.89 while resistance is at 4.10.
July soybeans gave up 65 cents last week and are $1.12 off their highs from just 2 weeks ago. We’ve warned you in recent weeks of a violent correction and our prediction is now becoming a reality. We’re still looking to be a buyer of November beans closer to 9.80 prior to the 6/30 USDA report. The weather and traders positioning ahead of the report will determine if a trade to 9.80 is viable. Resistance is seen at 12.15 and support at 11.50 in July.
July CBOT wheat was lower by 31 ¾ cents last week having closed lower 11 out of the last 14 sessions. Support is seen at 5.44 with resistance between 5.70/5.74. July KCBOT was lower by 24 cents last week. Support comes in at 6.00 with resistance between 6.27/6.30. Both CBOT and KCBOT wheat have traded down to oversold levels so we should see bargain hunting on longs and short covering very soon.
October cocoa closed down $264 last week shedding 9.5%. Resistance comes in between 2580/2600 while support comes in at 2470. On further dollar strength do not rule out a trade below 2400. We failed to take a trade recommendation from one of the floor traders to get short cocoa near 2800, we will certainly be eager to here his next idea.
October sugar lost 23 ticks last week trading lower for the fourth consecutive week, losing ground 5 out of the last 6 weeks. Resistance comes in at 16.25 while support is seen at 15.60. The trend line comes in closer to 15 cents and on a break in oil we may get close to that level. Be patient.
October cotton gave up 4.85 cents last week and since 5/12 prices have come off just over 8 cents or 13%. Resistance comes in at 56.50 with support at 53.25 followed by 51.00. Cotton looks poised to move even lower so stand aside for now.
September orange juice was lower by 3.85 cents last week. Last week’s low at 79.40 should serve as support with resistance first seen at 84.00 followed by 87.00. We are advising clients to lightly start buying November $1 calls. These options were intrinsic 3 weeks ago, we are paying just over $500 looking for at least a double willing to risk the premium paid.
September coffee was lower by 11.45 cents last week. Coffee, like cotton, has been hit hard in the last 3 weeks, since the beginning of June prices have come off 25 cents or 17%. Support is seen between 115.00 and 117.00 with resistance coming in at 125.00. We sense that most of the freeze premium has been removed to date so there should not be much more downside unless the fundamentals shift. We have started to price our December call spreads and at the top of our list currently is the 125/150 spread for $2000.
August gold traded lower by $4.10 last week failing to break below the 50 day moving average at 927.70. Last week we saw sideways action with a $17.50 trading range. Resistance comes in at 940 followed by 960 with support at the 50 day moving average followed by 900. As long as prices stay above 900 this week we like the idea of purchasing $100 call spreads in October gold. Last week we were buyers of October 975/1075 call spreads for just under $2000 for clients.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions.
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