The Line in the Sand February 22, 2010
Please click spreadsheet to view
Energies April Crude closed back above $80/barrel last Friday for the first time since January 14th. The recent movement in oil has been anything but a smooth ride as the average daily trading range for the month of February is $2.70 or $2700 per contract. On a seasonal trade we will be looking to get clients long at some point this week. In a perfect world we would see futures trade back down near $75/76 to set up their long entry. Look this week in our blogs for specifics; we should have some ideas in futures and options. To those that are already long that took our advice on the June $80/85 call spreads, we would advise staying put. If you paid $2000 in premium, as of Friday’s settlement the spread was valued at approximately $2300. Our profit objective was hit on the recent RBOB trade recommendation and we would move to the sidelines and look to re-enter on a dip. We have no trade ideas in heating oil at the moment, but with the overall tendency for the energy sector to move higher in the coming months, we would prefer long exposure as opposed to short. As for natural gas we’ll be getting clients long mid-week, we have yet to decide if we’ll be trading May or June contracts but check out this week’s blog. We think it is still feasible to see May trade below $5. The chart looks like prices could even trade near the December lows but on a value basis we feel prices will be higher 60-90 days from now so catching the exact bottom is not necessary.
Livestock No real surprises in the COF report last Friday but on a technical basis prices in cattle are overbought. We’ve been expecting April to find an interim top as prices have surged 5% in the last two weeks and 10% from the second week of December. This is reminiscent of the move back in 2008 before cattle prices did an about face and plummeted 16 cents or 15% in 6 weeks time. According to a seasoned livestock trader we talk to on a daily basis this move smells eerily similar. Clients are under water on their April live cattle puts but are advised to hold their position as we still think a trade to 89.00 is likely. Our timing was less than ideal but with almost 6 weeks time we are still OK. Additionally clients are holding calendar spreads short April and long June. March feeder cattle looks toppish as well but being we already have exposure in live cattle with clients we have no suggestions as they both should move in the same direction. Until April lean hogs can take out the trend line, which had previously served as support and is now acting as resistance at 70.75, we think the action will be sideways to down. Clients have no exposure but on a trade back to the mid 60 level we may have an interest in being a buyer.
Financials
Stocks: The US major indices are back above the 50 day moving averages as of Friday’s close but we view this to be temporary. As we said last week we expect rallies to be capped at 1820/1830 in the NASDAQ, 10300/10400 in the Dow and 1100/1110 in the S&P. Why we pick these levels is for all three indices, those prices mark a 61.8% Fibonacci retracement for the action we’ve seen so far in 2010. We hope this advice does not fall on deaf ears as we are advising to exit longs, hedge off some of your long exposure you do not wish to exit and for aggressive speculators to get short the S&P. Clients will be selling at 1111 and 1125 in the ES and S&P depending on their account size and we are also suggesting buying June 1050 and 1000 ES puts. As of Friday’s close their prices were as follows; the 1050 closed at $1590 and the 1000 at $1015.
Bonds: If we have a similar interest in this week’s auction as the most recent auction, this should not go unnoticed. We’ve been pretty consistent in that we expect prices to trade lower in the Treasury complex but as we would prefer to be a seller from higher levels with clients, we think if equities get hit we could see a trade higher, perhaps closer to 120’00 in 30-yr bonds and 119’00 in 10-yr notes. It is way too premature to claim victory on the Euro-dollar trade but one should take note how this instrument reacted to the increase in the discount rate last week. While this move by the Fed was more of a signal and will have very limited if any impact on the yield curve it should not be ignored. If and when the Fed raises the funds rate which we view as a possibility later this year, the Euro-dollar should fall apart. We think all commodity accounts should have either futures or options exposure short long dated Euro-dollars. For now we suggest March or June 2011 contracts.
Currencies The answer is YES to all three of these questions: is the trend up in the dollar, have longs made money, is this trade getting too crowded. Last week the dollar traded to its highest level since June 09’ but as we near the 50% Fibonacci retracement for the last 2 years just below 82.00, this could be all she wrote for the greenback. On both a daily and weekly chart the dollar is overbought and though this move has carried prices a bit higher than we had anticipated we feel we are close to an interim top. We are not saying the dollar cannot trade through these levels or correct and then re-visit this level, but we are calling for a correction lower. The up sloping trend line comes in at 79.00, we will see if that level can hold. In the Euro-Yen trade client’s took a profit on their yen shorts and now will ride the Euro back up to leg out. Selling was rejected late last weak and assuming Friday’s low serves as an interim low we expect a bounce to 1.38 potentially 1.3950. On signs that we are wrong and the Euro is instead moving lower we will be selling Swiss Francs against Euro longs as we view their correlation to be the strongest. We were recently distracted and left the strategy of selling the Pound and we’ll try harder to keep that on our radar as we think this will be the weakest performer this year of the majors. The Aussie, Loonie and Kiwi will continue to track commodities and with too many unanswered questions we wish to observe at least for this week. The inverse trade with equities lives on with the yen, we expect this to continue.
Grains For the better part of three weeks now most Ag’s have treaded water at best. With the lack of a defined trend we have chosen to be a buyer on dips for clients. We think traders that are patient buying soybeans, soy meal and corn at these levels will pay off in the coming weeks to months. Soybeans have seen price advances 23 out of the last 41 years from mid-February to late May. Past performance is not indicative of future results. If China’s appetite for soybeans and their derivatives stays strong even in the face of an appreciating dollar, this too should lend to a higher trade. Likewise the export number for corn was awfully impressive. Clients are positioned long May and July calls in corn and also December futures anticipating that prices will make their way back to previous resistance about 60/70 cents higher in the coming weeks.
Softs Cocoa will continue to look for direction from the US dollar and Pound. Clients have no exposure but if we were forced to pick a direction we think a bounce to 3200/3250 is likely in the May contract. As of Friday’s settlement, May sugar is about 10% off its recent highs and we think it is time to re-establish long exposure. If prices close above the 50 day moving average this week, we’ll get confirmation; in May this level is just below 26 cents. We are advising clients to buy May 25/30 1:2 back spreads to take advantage of what we view is a move up to 28 cents in the coming weeks. Front month cotton has advanced almost 18% in the last two weeks taking prices to their highest level since March of 08’. We do not think a move of this magnitude is justified and are looking to gain bearish exposure for clients. One suggestion from a client was an options fence; to sell July 90 cent calls and to buy July 75 cent puts. This as well as other ideas will be voiced in our blog this week. Coffee prices have started to move up but it is not too late to get on board. As previously stated we expect a trade back over $1.40 in the May contract and have clients in 1.35/1.45 call spreads. A profit order is in at 450 points and if filled we will take that money out to July or use it for a cotton trade.
Metals Prices of copper are at the same price they were one month ago but this is only after trading 55 cents lower and then turning around and trading 55 cent higher. This represents a move of roughly 16%; factor in some leverage at $250/penny and you got a move of about $13,750/contract. With a margin of $4,725, this is not for me. Options are outrageous as the bid/ask is just way too wide so those looking to take advantage of swings in copper are advised to look elsewhere. However do not ignore these moves as they can help navigate trades elsewhere. April gold closed back above the 50 day moving average all four sessions last week so as we stated we are back long with clients. We suggest staying long as long as $1100 holds on a closing basis. On a close below that level we would move to the sidelines with futures, as a trade to $1030 is likely. Our favored play is purchasing August $1150/1250 call spreads, Friday’s close they were priced at $2820. There is no denying that silver is a bumpier ride than gold; the move down since January was a loss of 21% vs. 10% and the move off the lows since was an appreciation of 11% vs. 7%. That being said to those with the intestinal fortitude, we prefer trading silver rather than gold as we view the profit potential is greater. $15.70/16.00 should support March silver but we still cannot rule out one more attempt at $14.50 depending on Mr. Dollar. Clients are advised to have stops below those levels on longs and to hold their long options positions as we do think a trade back over $17/ounce is likely in the next two weeks. We will be in and out of silver a number of times this year as we do expect a trade north of $20/ounce in 2010 but to buy and hold that is not how we chose to trade this metal. If you do good luck that is your choice.
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: bradbard, commodities, commodity, corn, crude oil, currencies, energies, euro-dollar, futures, grains, live cattle, livestock, matthew bradbard, MB Wealth, metals, options, silver, softs, spread trading
