The Line in the Sand March 29, 2010
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Energies For the last three weeks oil has been unable to make it to higher ground, though we’ve yet to see the break we’ve been anticipating so it remains a trader’s market. It has not been uncommon to see $2-4 swings for no apparent reason. We like the idea of selling rallies and as long as prices in May do not settle above $82 we would remain short still expecting a trade to $76/77 in the coming weeks. As we’ve commented in recent weeks, until we get a break in oil we would avoid trading the distillates. A break of 15 -20 cents is what we are predicting but at the moment clients have no exposure in heating oil or RBOB. Natural gas last week traded below $4 for the first time since October of 09’. We advised clients to cut half their long May futures at a loss when prices breached $4. Additionally on their June call, if their top leg was above $5 we advised them to buy it back. That leaves them long a small position in May futures and long the bottom leg in options. We think prices should find an inflection point and reverse soon, but we also felt that way 50 cents ago. The June $4.00/4.50 settled Friday at $1650 and the $4.25/4.75 at $1070.
Livestock Now it’s official that live cattle reached an interim top, just over 1 week ago as prices have come off 5 out of the last 6 sessions with prices as of last Friday back under the 9 day MA. With prices fast approaching the trend line that has held since December, this week’s action should be interesting. We still favor selling rallies in June live cattle that stay below 93.00. May feeder cattle have too started to back off losing 4 out of the last 5 sessions, closing Friday at the low on the week just above 108.00. We see prices making their way back closer to the 20 day MA at 105.40 in the coming weeks. Stay short April lean hogs as the path of least resistance remains down now that prices have broken some key MA’s. Tighten up stops though as hogs have lost just over 5% last week.
Financials
Stocks: Last Thursday could prove to be an interim top as the Indices reversed but it’s too premature to call a top yet. Key levels to watch as a ceiling this week are as follows: 1176.50 in the S&P, 10900 in the Dow and 1975 in the NASDAQ. We will be searching for confirmation this and coming weeks. On new highs for whatever reason, expect the S&P to challenge 1200, the Dow 11000 and the NASDAQ 2000. The 2 key factors I see this week are the end of Q1 and the NFP# on Friday. We’ve advised clients in recent weeks to buy June ES puts and we still like that idea but as for shorting futures we’ve had little luck outside of intra-day scalps, so we suggest waiting for a top before playing futures at this juncture. As of Fridays close here were the prices on a few different strikes in June ES puts; 1125- $1255, 1100-$955, 1075-$725, 1050-$550.
Bonds: Much fuss was made about the spike in yields and the move lower in 30-yr bonds and 10-yr notes last week but in actuality prices and yields are only back to levels seen 5-6 weeks ago. The bigger story was fluctuations in the yield curve and how debt instruments traded against one another. As we’ve posted in recent commentaries traders in this sector may opt to trade 30-yr bonds against 10-yr notes or 10-yr notes against 2-yr notes as opposed to just an outright futures play. We expect an inverse relationship with equities so make sure debt traders follow the movement in stocks as we feel this will be important in the weeks to come. The strategy we continue to employ with clients on Euro-dollars is a small short position out until 2011 with stops above the most recent highs.
Currencies Outside of the Yen it appears all the majors are looking for direction from the US dollar. If the dollar is firm and remains above 82 I would be looking for short opportunities in the Pound, Euro and Swissie but if we see selling in the dollar and prices move convincingly below 82 we would suggest looking for long opportunities in the aforementioned currencies. We have started to see the weakness we forecasted in the 3 commodity currencies; the Loonie, Aussie and Kiwi and we expect this to continue, again if the dollar can hold above 82. Our favored play remains short exposure in the Loonie expecting prices to find their way closer to .9550. The Yen has a mind of its own as prices were off 2.2%, last week trading to a 7 week low. After a rally we’ll be looking for ways to get clients short exposure here…stay tuned.
Grains USDA Planting Intentions report out Wednesday
May oats were higher by 2.5% last Friday to end the week, could this be a bottom in the making? I bring this up not because I trade oats often, but rather oats are generally the first Ag commodity to move, so agriculture traders should pay attention to movement in oats. May corn lost 4.6% last week dragging prices down to the lowest levels we’ve seen since the fall of 09’. There has been no chart damage and being prices are nearing over sold levels we are most likely very close to turning higher. Clients are positioned long via July options and December futures expecting a bullish report this week and for prices to resume heading north. May soybeans were down on the week but prices were supported at the 40 day moving average at $9.40. We are expecting bearish to neutral news from the USDA and have advised clients to buy from lower levels. November soybeans we feel are a buy closer to $8.80; current price $9.23. As for wheat, clients have no direction plays on but we do think that prices should continue moving south unless we get a surprise from the Planting Intentions report. The only exposure clients have is long December KCBOT wheat against a short in December CBOT expecting KCBOT to trade at a premium to CBOT.
Softs Cocoa prices remain range bound as the 2925 level in May continues to cap any rallies. Prices could go either way so we would stand clear at the moment. The selling is slowing but it may not be over as sugar closed down for the 6th consecutive week. Prices are oversold but have been since prices traded at 20 cents/lb and the current price is 17 cents/lb, so that alone is not reason to be long. If we can hold at these levels we may take another stab at longs but sit on your hands for another week. May cotton is below 80 cents and on its way to 78 and then 76 in our opinion. The only thing that would void that call is a much smaller crop in Wednesday’s report but that is not what we’re expecting. In the last 2 weeks OJ prices have dropped nearly 10% but we still would not be willing to be a buyer until we see about another 5-10%. Coffee prices have quietly made their way back above the 50 day MA for the first time since mid-January when prices were about 10 cents higher. This up move is most likely the market pricing in a frost premium for the crop in the Southern Hemisphere. This could last into the seasonal peak which is generally sometime in May so on a break we may look to be a buyer for clients…stay tuned.
Metals The 20 day MA has served as a magnet for prices in copper; for the past 2 weeks prices have been unable to move more than 2-3% from that level. We favor short exposure as we are expecting a large break in the coming weeks to months, so accordingly we suggest selling into strength but we highly suggest options in case we are wrong, this market is not the most liquid and it could get ugly very quickly. Gold’s sideways action is boring for trend followers but we are expecting a breakout relatively soon. Why we say this, is both the dollar and stocks are at a critical decision point and as they figure out where from here, they should aid in determining a direction in gold. We favor a downside move and have advised clients to either sell rallies or step to the sidelines and be ready to be a buyer from lower levels. Use a break above $1115 or below $1085 to help determine the direction of the move. Silver has traded higher 5 out of the last 7 weeks, but for the last 3 prices have not really gone anywhere but rather drifted in a $1.00 trading range. Though we’re not advising shorts we do expect a trade lower closer to $16/ounce if prices cannot manage a settlement above $17 early this week. Ideally we would be a buyer on the break for clients via $2-3 call spreads and starting a scale trade in futures in either July or September contracts.
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, cocoa, coffee, commodities, commodity, corn, cotton, crude oil, currencies, dollar, energies, euro-dollar, futures, gold, grains, japanese yen, lean hogs, live cattle, livestock, Loonie, matthew bradbard, MB Wealth, oil, options, S&P, silver, softs, soybeans, spread trading, spreads, sugar, USDA, wheat
