The Line in the Sand April 5 2010
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Energies Crude oil had not traded above $85/barrel since mid-January and now with that feat behind us the question is: are we heading for $90? Crude has a tendency to fall the first part of April and then resume its rally through mid-May. Use this early April break if the market delivers to buy into this strong seasonal tendency. This trade has worked 17 out of the last 27 years. Part performance is not indicative of futures results. We were thinking there could be a setback in the distillates but because that has not happened we would stand clear. Off their February lows heating oil and RBOB have advanced over 30 cents/gallon so new buyers are getting in too late in our opinion. After 7 down weeks natural gas claimed a small victory gaining slightly last week. We have yet to determine if the bullish engulfing candle last Thursday was just an April fool’s joke or an actual key reversal day. Volumes were good and with prices back over $4 we may get a bounce form here. We are advising a light long position in May futures and also July call options. As of Friday’s close the July $4.75 settled at $1890 and the $4.25/4.75 at $1830.
Livestock Based on the price action in live cattle the market is trying to decide where to next? On the June contract the trend line that comes in at 92 should act as solid support, though we would give it a week to consolidate before committing capital either direction. Feeder cattle are trading at their highest price since the fall of 2008 and both the daily and weekly charts look like we are in need of a set back. Prices have moved up for 6 consecutive weeks and the trend remains up but we would wait for a break perhaps closer to 108.00 before pricing out bullish strategies. June lean hogs gapped up last week and didn’t look back taking prices to fresh highs. We suggest using 84.25 as first resistance; however we would not rule out some back and fill action before seeing that level and more.
Financials
Stocks: To have the NFP# come out on a shortened market day in my opinion is not wise, but what is done is done. Last Friday’s report showed unemployment at 9.7% and a gain of 162,000 jobs for the month of March. If this is not just a flash in the pan and we continue to employ more people this could be the turning point, but I’m yet to believe that will be the scenario. The recent short exposure on indices with clients has yet to pan out as last week again equities were able to stay afloat. The FOMC minutes will come out this week hoping to shine light on their presumed exit strategy. Being prices are so close to major physiological levels we may see prices challenge higher ground in the NASDAQ at 2000, the Dow at 11000 and the S&P at 1200 but we are still expecting a shoe to drop and see a 10-15% leg down. We are advising clients to have a small position in June ES puts and to add to it or short futures once a top is confirmed.
Bonds: Treasuries are back to their recent lows after their reaction to Fridays NFP #. Previously we reported for aggressive traders to buy dips, but we have since cancelled that recommendation. On the long end of the curve in 10-yr notes and 30-yr bonds we have no trade advice at the moment. In Euro-dollars we continue to advise short exposure in long dated contracts with stops above the recent highs. Though we do not anticipate any Fed action at the end of this month at their next meeting, we think it’s feasible to see rates start moving higher the later part of this year. That being said, being short in 2011 contracts as the market starts to price in tightening we could see the Euro-dollar grind lower.
Currencies The pivot point in the June dollar index contract comes in at 81.00 as prices above that level means other crosses should be dragged lower and below that level should equate to a trade higher. We favor a move to the downside but there is a gap in the chart from Friday the 26th at 82.32 that has yet to be filled. While the BOJ, ECB, and BoE should leave rates alone we could see the RBA increase 0.25% from their current 4.0% this week. We have voiced this in the past that on the daily charts continue to use the 20 day MA as the pivot point on all currencies. The Euro, Pound and Swiss appeared to be in rally mode until Friday’s jobs number so observe how we resume this week. The Aussie and Kiwi look like they are due for a rest and a potential break lower; our targets are .8800 and .6800 respectively. The Loonie is back at the highs but we continue to sell rallies with stops above .9975 and still own June puts for clients thinking a trade down to .9500 is due in the coming weeks. 8 out of the last 9 days the Yen has lost ground losing almost 5% within that time frame. Prices appear to be destined for lower ground as we advise clients to sell rallies that are contained by 1.08 as a move to par could happen.
Grains Corn acreage came in at 88.8 million, up 3% from last year and in line with expectations. Soybean producers intend on planting 78.1 million acres, up less than 1% from last year’s but if realized the largest on record. All wheat planted is estimated at 53.8 million, down 9% from 2009. With the planting intentions behind us crops will focus on the weather and farmers progress in the fields. On the weekly chart May corn has held the 40 day MA but if that level gives way we could see prices drift back to the September lows about 20 cents lower. We are not anticipating this as we think talk of planting delays and help from outside markets should attract buyers before that development. Clients are currently spread off short May futures and long December looking to lift their short as soon as an interim bottom forms. Additionally we are advising long call options in July. Soybeans closed below the 40 day MA as clients are looking for long exposure from lower levels. November should be on your radar on a trade below $9/bushel and we would be a likely buyer for clients near $8.80. We are advising clients to buy dips in July soybean meal as well, thinking a trade near 250 is a buy ultimately expecting a trade back over 300. The only exposure clients have in wheat is a KCBOT/CBOT spread. Long December KCBOT and short December CBOT anticipating KCBOT wheat to trade at a premium to CBOT wheat.
Softs Cotton plantings in 2010 are expected to total 10.5 million acres, up 15% from last year. With May cotton closing back above the 20 day MA we advised clients to exit and will again advise a sale from higher ground. On their next short entry we may look to sell July or December…stay tuned. May cocoa gained the last 5 sessions and as you look at the correlation between trades in the dollar and Pound you can see why we suggest looking for guidance from those currencies. Use 2925 as support and 3025 as resistance. A trade below 16 cents was rejected last week but prices in sugar still closed marginally lower for the seventh consecutive week. After speaking to a few floor traders last week it appears some big call buying is coming in for out of the money July and October calls. We may have some bullish suggestions this week…stay tuned. On the daily chart OJ prices are approaching over sold levels but we still think there could be a bit more downside before we want to be long with clients. On a breach of $1.34 on the May contract we should see a trade closer to $1.25. We will most likely be looking to the September contract…stay tuned. As we’ve said in recent posts we are looking to be a buyer of coffee on breaks for clients thinking the market may price in a weather premium (potential frost in South America). Ideally about a 5% break in the July contract would be an entry signal.
Metals Last week copper raced to a 19 month high as signs out of Europe and China indicated stronger growth than previously anticipated. This move to me appears to be unfounded and I view it a selling opportunity. At the moment we are advising clients to start buying out of the money December puts but in time we will suggest getting short futures. Brought to my attention from a prospective client observing historic copper charts over the last 5 years, May seems to be a pivotal turning point in which copper reaches an interim top. Will that be the case this year, time will tell. In order to feel comfortable short futures we would like to see a settlement back below the 20 day MA; in May at $3.43. For the last 6 weeks June gold has been in a $55 trading range and as of last week’s closing price we are smack dab in the middle. We did however close above key MAs so we are likely moving higher form here. Clients currently have no exposure but we are starting to track June and August positions thinking we may want clients to be long on a break…stay tuned. May silver poked its head above $18 last week for the first time since late January having gained $1.50/ounce in the last 6 sessions. We continue to be friendly to silver longer-term but we would not be a buyer until we get a break as we feel the most recent leg may not be justified. A seasonal trade previously mentioned short silver in mid-February until late April has yet to play out but the 78% success rate in the last 37 years has us a bit skeptical. Of course past performance is not indicative of futures results.
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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