The Line in the Sand November 23, 2009
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Energies Oil is trading $5 off its highs reached a month ago but is $12 above the lows just two months ago so where from here? We maintain that prices should come down before establishing longs for clients; we’re expecting $76 and the $74 on the January contract. We have no exposure in the distillates but find it strange that heating oil and RBOB are trading at almost the exact same price, we’d expect heating oil to be at a higher premium and may explore that relationship in coming sessions. Natural gas prices seem to be stabilizing again but we could sure use a cold front to get this market moving north for our clients. We are still suggesting long mini-futures in the January contract and 50 & 75 cent call spreads. Those already in this trade are most likely carrying as loss but we suggest staying with the trade for now. Assuming last Thursday low serves as an interim low a 38.2% Fibonacci retracement carries prices back to $5.20.
Livestock There were no surprises last Friday in the COF report or cold storage report. The COF report came out with cattle on feed at 101, placements at 101 and marketings at 97. Prices in live cattle seem to be stabilizing. Notice the coiling pattern on the daily chart in recent sessions, the longer this pattern exists the larger the breakout. We favor a move to the upside and have been positioning clients in February calls and futures. On consecutive closes above the 20 day moving average we would suggest adding to your position Feeder cattle may be done moving lower as well as prices gained nearly 1% to end last week. The daily chart is showing oversold levels with the stochastic coming in at 10. We would like to see a trade back above the 20 day moving average; at 93.75 in January to confirm a bottom. Lean hogs continue their march higher but we’re on the sidelines with clients. The 20 day moving average seems to be support and if February can get through resistance at 65.20 we should see prices carry higher.
Financials
Stocks: The freight train in equities may be losing steam but the sentiment has yet to shift. It may be premature but we’ve opted to take a small short position in the mini S&P for clients. We would expect 1100/1115 to act as resistance and on a further sell off we feel prices could slide to 1060 in the coming weeks. We paid just under $600 for January 1000 puts that should be worth north or $1000 on that type of move. If we are correct with our assumption the Dow should find its way back to 9900. An indication to us that we could come off is volume has been weak on up days and waning all together. Additionally after last year’s brutal year we expect managers and investors alike to start locking in profits and moving to the sidelines. In a shortened holiday week it may not take much to bully this market.
Bonds: How low can yields go? It amazes me that smart money would rather have their money tied up in debt collecting minuscule returns than have exposure in other asset classes. This makes me consider that bonds investors see more trouble ahead. As for trading Treasuries we have no interest at this point as we feel prices could go either way. The trend is up in both 30-yr bonds and 10-yr notes but the recent appreciation has taken prices to overbought levels. As for the Euro-dollar September 10 is trading at 99.20 and as we see it there is a max of 80 ticks of risk which equates to $2,000 per futures so we still suggest scaling into shorts. Additionally you can buy at the money puts for $700 which we also suggest doing.
Currencies The ECB is expected to hold rates steady at 1.0%. As for the markets again all eyes will be on the dollar. I recognize this is a broken record but the dollar controls all for now. Though recent spikes higher in the dollar have yet to hold on we suspect that we are near a turn and do expect a trade higher. This would be key because all currencies with perhaps the exception of the yen would suffer. We advised clients to book profits on their December short Pounds and will be looking to sell March on rallies this week. Clients remain short March Euro puts expecting a trade down to 1.45 in coming weeks. The Loonie will look for guidance from energies and metals which remain a mixed bag. If in fact the dollar was to get some legs expect the Kiwi and Aussie to get hit the hardest as they’ve benefitted the most to dollar weakness and commodity strength.
Grains Soybeans have gained 10% in the last 2weeks carrying prices back to their highest level since mid-August. We are bumping up against previous resistance and would not rule out a temporary set back. We will be looking to establish bullish plays in both soybeans and soybean meal on that setback…stay tuned. As for wheat and corn they’ve started to come down but not enough for clients to re-establish longs. March corn is a buy closer to $3.75 and March wheat closer to $5.50. We’ve yet to roll clients out of their December KCBOT/CBOT wheat spread but we will be looking to do that as first notice is fast approaching.
Softs We’ve come to terms with the fact the only good thing about chocolate of late is the candy we buy at the store as we’ve not been able to predict the movement in cocoa with any accuracy. When that exists we chose not to trade this commodity and opt to go else where. For what it’s worth the charts say up but we do not trust it. Sugar is hanging onto the 100 day moving average but on a breach of that level which comes in at 22.35 on the March contract longs may be in trouble. We currently have clients positioned long via calls. Clients remain short January OJ and are still looking for more downside before getting long lumber again. As for coffee we have no interest and cotton this one got away from us. Prices have been sideways for the most part in the last month but since mid August price have risen by 24% and we’ve not done any trading in cotton. Here lies the problem I ignored the fundamentals and they suggest more upside. That being said on a setback we may get clients long. Here’s what we missed: cotton will have the smallest global acreage since 86’ and the smallest US acreage since 83’=bullish.
Metals Gold and silver made significant headway early last week but prices were sideways after that. Putting that into context gold still finished at a record high gaining $27 on the week and silver is now approaching $19, a level not seen yet in 09’. We’ve accepted we left gold too early but all things considered we would rather miss an additional $25-50 in the short run than jump in and ride gold $100-150 lower. We expect $1300 in the next 3-6 months and will be quick to be a buyer on a correction but just do not feel right buying heavy at these levels. Silver is a different animal. We recently lightened up for client’s long silver and moved the money from May to March. The biggest differences we feel is silver has outperformed gold ytd, the chart looks a bit friendlier and we’ve yet to get back to prices seen last year vs. gold which has never seen these prices. Depending on if we get a correction and our view on the dollar we may issue a considerable buy recommendation buying $5 bull call spreads into late next year…stay tuned.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
Tags: cocoa, coffee, commodities, commodity, corn, cotton, crude oil, currencies, dollar, energies, euro-dollar, futures, gold, grains, lean hogs, live cattle, matthew bradbard, MB Wealth, metals, silver, sugar, trading, wheat
