The Line in the Sand November 9,2009
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Energies For the last 3 weeks Crude oil has traded in about a $5 range and until we get a better idea on where prices are going, be it higher or lower, we would stick to trading the range; buying near $76.50 and selling near $81. The EIA comes out with supply and demand numbers this week so expect some downward pressure. For a position trade we would like to be a buyer from lower levels but have no exposure for clients currently. Heating oil and RBOB prices have come off as forecasted but we’ve yet to commit client capital. As with Crude we would like to get a more defined trend before a trade recommendation is issued. Natural gas prices have come down almost 25% in the last 3 weeks which we feel is too much. We’ve yet to enter futures but have been advising January 75 cent call spreads. Though we cannot rule out a test of the September lows, which would be another 20 cents lower, we feel prices are close to a turning point. Ultimately when we turn we are looking for a 70 cent to $1 appreciation.
Livestock With cash cattle prices trading off their recent highs the futures experienced some downside pressure last week taking prices to their lowest level in nearly 1 month. With the cash still trading at a premium to the futures market we suggest using this setback as a long entry and for those already long we would advise staying the course. In the grand scheme of things 2 months out we think this will be just a hiccup. We’ve suggested buying February calls or to get long futures and buy put protection. On a turn higher in prices we may suggest liquidating the puts at a profit. In February we see support at 85.90 followed by 85.25. As for feeder cattle, prices are trading sideways and we see no trading opportunities. On a trade above last week’s high prices should move higher but we will be on the sidelines with our clients. Last week’s highs should be an interim top in lean hogs, though we’ve been fooled before. The stochastics have started to roll over on the daily chart and a trade back to the 20 day moving average is likely. Seasonally November tends to be friendly to lean hogs so we may not see much downside. Buying at the beginning of the month and holding for 2 ½ weeks has been profitable 34 out of the last 39 years and has worked for the last 6 years. Past performance is not indicative of futures results.
Financials
Stocks: Equities have advanced for the last 5 sessions and have carried prices back above the 20 day moving average in the Dow and S&P. As for the Dow prices are back at the same level from 2 weeks ago as futures attempt to take out the 11000 level. I see support in the S&P futures at 1060 and expect prices to attempt a trade to 1100 this week or the next. As opposed to last week this week’s economic numbers release schedule is unfruitful. The path of least resistance is up and although we will be a spectator here we may look at short opportunities from higher levels.
Bonds: December 30-yr bonds have trade lower of late but looking at the daily charts we are very close to support. Clients are currently long bonds and short notes and carrying a loss. We will hold this position expecting when Treasuries turn higher for bonds to lead notes. Continue to scale into long dated puts in the Euro-dollar and short futures. As it stands now we’re trading the month of June and September 10’ for clients. The Fed has yet to signal a rise in rates but we’re the minority, thinking it will happen sooner than the market is currently pricing in.
Currencies Once again it’s all about the dollar and as we begin the week prices are down significantly trading near lows. On a breach of 75.00 on the dollar index look out below. With continued talk of the dollar losing its status as a reserve currency, things could get ugly relatively quickly. As opposed to playing this idea in the forex market we would suggest trading the precious metals. Additionally, most of the commodities are priced in dollars so if we continue south commodities should trade higher. Clients are holding a very light short position in Euro-currency put options, on a trade lower we will look to cut losses.
Grains All eyes will be on tomorrow’s USDA report. This could be a buy the rumor sell the fact reaction being I’m hearing that the recent wet weather, harvest delays, and potential yields losses will not be reflected in the report tomorrow. We expect the corn crop to come in light and a smaller than previously forecasted yield, so whether tomorrows report confirms that or not we suggest being long March and May corn. Depending on your risk parameters we are buying calls for clients and also getting long futures with some form of option protection. Outside of that soybeans and wheat are on our radar but we will wait for the dust to settle a few sessions before issuing trade ideas. We have accumulated KCBOT/CBOT wheat spreads that are still trading at near our entry; we’re expecting this spread to widen and KCBOT to gain on CBOT.
Softs Sugar prices have traded down close to the trend line that has held since April and as long as this level holds we will be suggesting long exposure to clients. If the 22 cent level continues to act as support expect a trade up to 25/26 cents in the coming weeks. Cotton and coffee remain on our radar but we’ve yet to commit any client funds. OJ prices rallied up to resistance levels; coming in at the 20 day moving average at 1.16 in the January contract. We expect a trade back to $1 and have clients positioned short via put options. Cocoa prices have come off 5% in the last 2 weeks and appear to be moving lower. As for the December put positions they expired worthless. We do expect a trade lower but will wait for the wounds to heal.
Metals 10 out of the last 12 weeks gold prices have traded higher so for momentum traders this has been easy as prices last week took out $1100/ounce. We exited client’s April calls at a 9% net profit which was far less than we were looking for but we think you could get a violent correction before we see a considerable leg higher. Furthermore, virtually all clients that exited gold own silver, so if prices continue north they did not leave the long metals trade entirely. If in fact we do get a setback we would expect it to be temporary so we will hold silver and re-enter gold. For the month of November both gold and silver futures have moved just over 6% but to me the chart for silver looks friendlier. We’ve yet to trade above the highs seen last month about 40 cent s above the current level. The story remains the same longer term we prefer the risk to reward dynamic in silver vs. gold.
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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