The Line in the Sand 11-30-09
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Energies Reacting to the Dubai news on Friday Crude oil traded intra-day to its lowest level in 7 weeks, just below $72 in the January contract. We could see that level revisited in the coming weeks, only time can tell. The dilemma we are facing is will this be a one-time off event or a precursor of more to come. We suggest using $75.50 followed by $74.00 for support. We have yet to commit any capital but like the idea of purchasing January or February heating oil against RBOB expecting heating oil to gain on RBOB. We got our wish with the come of cold weather in the forecast and natural gas responded. In the last 6 days from the recent lows January natural gas has appreciated by 65 cents or 14%. We would suggest trailing stops on mini-futures and will be looking for new entries in February call spreads for clients. On a set back closer to $5 in February, we advise long exposure expecting a test of $5.70 plus.
Livestock Live cattle have been range bound for the last 2 weeks, encouraged they’ve been able to hold their ground we’re still waiting for a trade above the 20 day moving average to confirm a leg higher. At the moment we have clients positioned long futures and February calls in addition to a spread long December and short April. Though we rarely trade feeder cattle for clients a trade above the 20 day moving average would also signify higher action. As for lean hogs the uptrend remains intact with prices trading to 5 month highs last week. In December lean hog prices tend to flat line or consolidate as producers work off inventories. Past performance is not indicative of future results. If this year holds true we would expect a pullback and try to get clients long near the turn off the year. A 38.2% Fibonacci retracement would carry February back closer to 61.50 cents.
Financials
Stocks: Additional surprises form Dubai or abroad coupled with investors booking profits on the year is in my opinion going to hinder higher trade in equities. That being said, we continue to advise clients to sell rallies thinking the 1110 level in the S&P and 10500 level in the Dow should serve as solid resistance. As a longer term speculation, client’s still hold their January ES puts to take advantage of further selling. The true test will come as the equities open this week and traders return from vacation and more details trickle in from the Middle East. A small downward revision in Q3 GDP was not much of a market mover but the jobs # this week could be, a loss of 120,000 jobs is expected with unemployment unchanged at 10.2%. The rising tide that has lifted all boats could cause a nasty sell off in most asset classes so be quick to go to the sidelines on further signs of trouble.
Bonds: Rates have been lower and prices have been higher, that has been the trade now for the last 3 weeks but will it continue? Prices on 10-yr notes and 30-yr bonds have traded to over bought levels and we feel the easy money on longs has been made. The only exposure we have in the debt complex is playing the short end of the yield curve for clients scaling into short futures and purchasing long dated puts in the Euro-dollar. It may sound like a broken record but we want to be early to this party and though we are the minority, we’re in the camp that a rate increase could happen in the first 2 quarters of 2010.
Currencies We advised last week to pay close attention to the yen which broke to the upside last week trading to a 14 year high. What this signifies is an unwinding of the carry trade and that investors are very comfortable taking additional risk. As long as the trend continues up look for that to be the case. If we were to see a dramatic reversal in the yen look for most asset classes to suffer. The dollar printed a new low but to me it appears it is being supported and do not see a sharp break in the immediate future. As for Central bank action, this week expect the RBA to raise rates 0.255 to 3.75%. The ECB should stand put at 1.0% though expect some talk on their exit policy which could lead to volatile movement. We will continue to look for selling opportunities on rallies in the Pound and Euro-currency for clients. On a further liquidation in commodities look for the commodity currencies to get hit the hardest; Aussie, Kiwi and the Loonie.
Grains We will continue to be a buyer of March and May corn for clients on setbacks, but at the moment have advised them to step to the sidelines until the dust settles. We took a small profit last Friday on the options and futures purchased on Tuesday. We view 20-30 cent moves lower as buying opportunities and we expect shortly after harvest for prices to make their way towards $4.50/4.70 in the March contract. Soybeans of late have been sideways and we’d prefer to see prices 50 cents lower before establishing longs. We’ve also priced out plays for clients in soybean meal and soybean oil but have yet to commit capital. With year end around the corner we expect sideways consolidation in soybeans and corn as farmers tend to defer sales until the New Year. Last week we took a small loss ($300/per) on clients December KCBOT/CBOT wheat spreads and moved a majority of clients into the same positions in March where we expect to make up that small loss and more.
Softs It’s too early to celebrate, but sugar could have made a key reversal Friday closing almost 1.5 cents off the intra-day lows. We’ve advised long calls for the month of March and may start to explore futures if this turns out to be a turning point. We’ve been expecting a trade back to 25/26 cents and this could be the beginning of that leg. March cotton reached a fresh high for 09’ last week but at the moment prices look as if they could come off. The trend line dating back 4 months and a 38.2% Fibonacci retracement could carry prices back to 69/69.50 which could prove to be a good long entry. OJ has started to move higher on prospects of cooler weather in Florida, where I reside, but 50 degrees is far from a freeze so we would expect prices to back off as this was a false alarm. We may not see enough to turn a profit on January puts but a trade lower should get clients more premium back. Coffee remains on our radar but we see no viable pattern or trade at this time. We still want to see a deeper correction in lumber to get clients positioned long.
Metals Gold and Silver trends are up and will continue up most likely for several quarters, but it’s not as easy as buy and fall asleep at the wheel as seen on Friday when gold and silver both experienced over $6000 trading ranges per futures contracts. We caution clients about owning too much of either metal at these levels and have tried to avoid heavy exposure to both metals simultaneously. That being said we took most clients out of their gold at a profit last week and used the $1 setback in silver as a buying opportunity getting long $3 call spreads in May. If and when we get a 7.5-12% correction in these metals we suggest using that as a buying opportunity or a time to increase your metals exposure.
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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