The Line in the Sand February 1, 2010
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Energies Crude oil is trading at a one month low having lost ground 12 out of the last 14 sessions. Shorts have made some good money but we would advise taking a profit because we feel it is time for longs to have their way. Examining the daily chart we’ve had a 61.8% Fibonacci retracement, the stochastics read oversold and as we alluded to in our blog last week we see a “W” formation. That being said we continue to like May call spreads; however this week we may re-enter long futures with clients depending on the action…stay tuned. Crude generally makes a seasonal bottom in February; buying in February has been profitable 20 out of the last 26 years. Past performance is not indicative of future results. Likewise heating oil and RBOB have come down enough in recent weeks where we feel they may be approaching a buy zone as well. The weekly chart of natural gas is ugly but the daily chart is not so bad. Being prices have come down 15% in the last 3 weeks aggressive traders could take a stab at some light long exposure with futures adding stops just under $5. For option traders look at 75 cents to $1 call spreads in April. Buying natural gas around this time has been a profitable trade 15 out of the last 19 years. Past performance is not indicative of future results.
Livestock We advised clients to go flat on their June live cattle positions late last week as we have too many unanswered questions. In the short run on a breach of the 20 day moving average; 89.00 in April we could get some pressure. This would be ideal because we’re looking to gain long exposure in June and August contracts from lower levels. Similarly in feeder cattle, 100.00 should serve as resistance and a trade down to 97.00 is expected on the March contract. In just 2 weeks April lean hogs have shifted from an overbought market to an oversold market. The 20 day moving average at 68.40 serves as the pivot point. If this level holds this week we may start gaining long exposure via options. On a breach of that level expect a trade to 67.00 and potentially 65.00 which are the next two Fibonacci retracement levels. Seasonally, February into March generally shows weaknesses in hogs so we’re not prepared for futures just yet.
Financials
Stocks: Whether you believe the number or not, the fact that a 5.7% Q4 GDP could not help the stock market leads me to believe that we have more downside to come. With the Dow, S&P and NASDAQ now closing below the 100 day moving averages we’re convinced selling rallies is the way to play these markets. We’ve moved our sell objective down in March ES and S&P for clients to 1105/1110 from 1125/1135. Assuming we get a 10% correction from the highs we saw in early 2010, ultimately that would drag prices down to 1030. If January is any indication of what Equities have to offer this calendar year we recommend traders lighten up in this asset class and look elsewhere; Dow down 3.5%, the S&P down 3.9% and the NASDAQ down 6.8%. Unemployment report out this Friday!
Bonds: March 30-yr bonds are overbought on the charts but as long as the 200 day moving average acts as a floor prices may remain sideways. That support level comes in at 117’16 on the March contract. Likewise the 10-yr prices are overbought but the trend remains up. We suspect the catalyst to get prices on both of these instruments moving north would be a further stock sell off. As opposed to playing the long side we are suggesting to be a seller from higher levels. In 10-yr notes closer to 119’16 and in 30-yr bonds closer to 121’00. We continue to suggest scaling into shorts in Euro-dollars or buying long dated puts. At this time we suggest moving future entries into March and June 2011 contracts.
Currencies In 2009 on the year the US dollar depreciated 5% and just in the last 8 weeks the dollar has appreciated 7% and I just don’t think circumstances have changed that much. What I’m getting at is the 5 cent move has been impressive but we’re in the 9th inning of the move. For the next several weeks we expect sideways action between 77 and 80 as the recent accent is unsustainable. If the dollar was to back off just a touch we would most likely see a move higher in the commodity currencies so we are staring to look for entry points in the Aussie and Loonie. We would like to get clients long closer to .8650 and .9200 respectively. Clients have had a lot of success selling rallies in the Cable and until that trade stops working we continue to advise selling rallies that are contained by 1.6200. The Yen looks like a sale just based on the charts but factoring in expected equity action and the risk aversion trade we are torn. Needles to say we should have some suggestions in this week’s blog so stay tuned.
Grains This Friday the USDA is providing baseline projections and then next Monday a USDA supply and demand report so look for the grains to find a base unless we get additional bearish news. Though the trade has yet to materialize we continue to suggest buying May and July call options in corn and to scale into long December futures. Clients are under water on most of their positions here but we expect a violent correction very soon and then one is chasing the trade as opposed to adding to a winner. As a way to utilize leverage some of our clients have started to build positions in July $5 calls; they purchased these positions Friday for just $262.50/per. We’ve hinted at gaining long exposure to soybeans from lower levels and now we feel the time has come. At this moment we’re suggesting light long exposure in May futures and calls in soybeans and soybean meal. Though we may get a trade below $9/bushel we do not see a settlement below $8.85 on the May contract. If wheat prices continue south we want to see how they respond to the lows seen in early October; this is about 15 cents lower on both CBOT and KCBOT wheat. We’ve yet to advise any outright buying or selling but we still like the KCBOT/CBOT wheat spreads. Look for an entry in the May spread closer to 2/4 cent premium to KCBOT.
Softs In the last 6 sessions March cocoa is lower by 7.6% dragging prices to their lowest level in 10 weeks. This market should continue to exhibit inverse action to the dollar so all things considered there may be a touch more downside and then sideways action is expected. Those who are short look to take a profit on a trade close to 3100. March sugar failed to close above 30 cents/lb after 3 attempts last week. We continue to think the up move has legs but first a correction. Clients that are positioned in the calendar spread (short March/ long July) were advised to get long calls in May in case we are wrong about the impending correction. Another 2-3% trade lower in cotton and we will start to explore longs in July cotton for clients. Volatility heats up in OJ but as long as prices stay above $1.35 in May clients stand a chance to cash in on their May back ratio spreads. They were on the verge of taking profits until the action late last week that dragged prices 12 cents lower in 2 sessions. Coffee is nearing a point where we would be interested in gaining long exposure so that market should be on your radar…stay tuned.
Metals Enough people have started to throw in the towel on being long gold and silver that they are most likely nearing a turning point to begin their next leg up. April gold has been down 9 out of the last 10 weeks losing 11.5% but as long as $1075 holds we think light long exposure is merited. We stress light as prices are trading at the 50 day moving average and if this level was to give way a trade down to the 100 day at $1040 would most likely happen very quickly. We suggest June call spreads and then when an interim bottom is confirmed to come back in with futures positions. $16 in the March contract tells the story in silver! If prices were to penetrate this level a trade down to $15.10/15.30 should happen. If prices start moving north early this week we think this correction is over. What has me a bit nervous about getting too bullish with clients is in the past 37 years silver has declined 29 years or 78% of the time from February to April. The good news is this did not happen in the last 3 years and that past performance is not indicative of future results. As for trading gold we prefer call spreads and the re-entering futures once an interim bottom is confirmed. The copper trend has broken and the path of least resistance is down with March closing under its 50 day moving average last Friday for the first time since mid-May 09’. We feel prices have an additional 15-20 cents downside but unfortunately getting a bid/ask on put options last week was a joke as the spreads were too wide to trade.
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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