The Line in the Sand October 26 – 30
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Energies Crude traded above $80 and made its way to the highest levels in 14 months but my opinion is that unless we get fresh upbeat news this bull will rest. On a daily chart the Bollinger bands seem over stretched and the stochastics show an extremely overbought market. Those not wishing to get short like our clients should lighten up on longs, tighten up stops or establish a bearish hedge. We have clients in January $5 bear put spreads expecting a correction. After the 25% appreciation we’ve had in the last 3 weeks a 38.2% Fibonacci retracement takes prices in December back to $75.70. If we are right RBOB and heating oil should follow Crude lower. RBOB should correct 15 cents and heating should come down 20 cents. If this was to happen we would start shopping long plays via options for clients. We expected to stay longer in the recent longs for clients in natural gas but instead we captured a quick profit and stepped to the sidelines. We did not like how the charts were progressing and hindsight being 20/20 we made the right call, since our exit prices have come down 40 cents in the futures and we have more too go. At this point we would not rule out a trade back below $5/BTU.
Livestock Live cattle have appreciated 5% in the last 2 weeks but have gone from an oversold market on the daily charts to an overbought market. Cash prices seem to be picking up and although the trend has clearly shifted we’ve advised clients to book partial profits on longs. We will be looking to buy on the dips and expect both December and February contracts to gain ground in the coming weeks but only after a mild correction. On a trade back near 85.00 in February we would advise to be a buyer with both hands. As for feeder cattle they too have appreciated in past weeks but to a lesser extent and we prefer trading live cattle for now. Lean hogs were sideways much of last week as we still expect prices to come off before establishing fresh longs. Aggressive traders could get short with stops above the recent high; in December above 55 cents.
Financials
Stocks: Equities appear to be tired which is not surprising after their latest performance. The move has been notable but the volumes seem to be waning. As more Q3 earnings trickle in and the market fails to make a new high we suspect there could be a profit taking led correction. If the S&P fails to get convincingly above 1100 in the next few weeks a trade back to 1040 and possibly 1000 is likely. On the Dow without a trade above 10,100, we would expect a trade back to 9600 and potentially 9200. We have clients in December bear put spreads to take advantage of this potential. A hedge in your portfolio or at least booking profits after this remarkable move is warranted. Do not wait for the correction to be begin to start taking profits; be proactive not reactive.
Bonds: The markets seem to be pricing in not a change in rates but rather a change in language from the Fed which most likely will come in the next 1 or 2 meetings. Rates gained last week as prices came off in the Treasury complex. Depending if the double bottom holds in 30-yr bonds at 118’20 in December we may look at getting out right long or re-establishing NOB spreads for clients (long 30-yr and short 10-yr). This also considers that if equities sell off that money will flow into Treasuries taking prices higher. Stay tuned. Continue to accumulate long dated puts in the Euro-dollar and scale into short futures with stops above the recent highs. This trade is far from glamorous but investors who stay with this in the coming IR cycle should be generously rewarded.
Currencies About a 1 penny trading range contained the dollar index last week and it appears if these lows can hold we may get a bounce. We’ve been voicing our suspicions of a bounce to come for several weeks and been early obviously. Assuming current lows hold on an advance higher we expect a trade up to77.50/78.00 not much more. What this would do is get most if not all the crosses back to reality and we’d also see a correction in the majority of commodities. As for moves in the currency market, now that the Euro-currency has printed 1.50 we should get a set back. We will continue to sell rallies in the Loonie for clients. When we get a breach of the 20 day moving average we should get a probe down to .9300 or under on the December contract. On our radar is selling the Pound on rallies and buying the yen on dips for clients. Stay tuned.
Grains Oats signaled the up move that started in early September in Agriculture, could it be foreshadowing the correction we’ve been waiting for? December oats fell just over 5% last Friday to end the week. We have clients short via puts there and will be looking to buy wheat and corn if this correction gets legs. Last week corn was able to trade through $4.10; which signals a 61.8% Fibonacci retracement form the June highs and September lows. Assuming that cycle has run its course a 40/50 cent break on improved weather conditions looks like an ideal long entry in the March 10’ contract. Getting long corn this week and holding until mid-May has proved profitable 34 out of the last 40 years and for the last 10 out of 10 years. Pas performance is not indicative of future results. We should not ignore soybeans either being both corn and beans are off to their slowest harvest in 25 years. Furthermore we will be shopping for an entry to get long March 10’ wheat closer to $5 for clients.
Softs Cocoa has advanced 8 out of the last 9 days to trade to a 3 decade high. We hold puts for clients and unless we get a 10-15% break in the next 2 weeks will lose on this effort to pick a top. Eventually when the dollar rallies cocoa should get hit hard but we’ve tried 3 times and been wrong so this will be our last attempt. Sugar prices could go either way in the short run; we favor a trade to 21 cents in the March 10’ to allow longs to be re-established. OJ prices should fill the downside gap this week on their way to a trade back near $1 on the January futures. On that we will be taking a profit for clients on their $1.05 puts bought 2 weeks ago. Coffee appears to be heading lower as well. On a trade through the 20 day moving average at 1.36 in December the trend line comes in at 1.31.
Metals On the weekly chart last week was an inside week for gold as prices continue to meander around the $1050 level. Longer term we expect much higher pricing but in the short run a pullback to $990/1010 is not out of the question. As opposed to suggest a long or short we would let the market action determine the direction and play a break out of the recent range. On a trade above $1070 or below $1040 that should be the direction of the next move. We hold light longs for clients via $100 bull call spreads for April 10’. Like gold, silver has been sideways now for the last 2 weeks trading in a $1 range. We have similar feelings about silver that months from now price should be convincingly above the $20/ounce level but a washout to $16 in the interim is doable. The long metals trade has worked for months now but this trade just seems to be getting awfully crowded.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
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