The Line in the Sand May 17, 2010
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Energies What took 3 months on the upside has been virtually erased in the last 2 weeks as Crude prices have dropped $14 or almost 16%. We are approaching the support from early February and at this juncture we think prices should hold at those levels; in the July contract about $2-3 lower. On Friday clients started buying $5 call spreads in August. We feel that in the next 30 days prices will be back in the mid $80’s. This week we will likely be probing long futures for clients so stay tuned. In the past 2 weeks the distillates have come off as well with RBOB and heating oil losing approximately 13%. We feel the majority of the damage has been done and expect an interim bottom and bounce from here. If prices trade back to $2.25/2.30 in heating oil and $2.30/2.35 in RBOB we would suggest abandoning all remaining longs. Natural gas closed higher for the second week in a row but longs are far from out of the woods. In the July contract we need to see a settlement above $4.50 this week to be convinced there is more upside. Depending on the individual client’s risk tolerance we have advised looking for the exit door on longs. Some clients have already booked small profits on their longs. If we penetrate $4.50 we have a chance at $5 but in our opinion a trade higher than that is not in the cards in the immediate future.
Livestock Across the board from cattle to hogs last week we may have had a trend change. August live cattle broke hard Friday closing below the 20 day MA for the first time in 6 weeks losing almost 3% on the session. We expect this to be the start of a move that drags prices back under 89 cents. We saw chart damage in the feeder cattle as well and anticipate a trade closer to 106.00 in the coming weeks. Clients rarely trade feeder cattle but we felt it worthy to report on the price action. We’ve been waiting for a break in lean hogs and finally the market cooperated with prices down for the second week in a row closing below the 20 day MA for the first time since the gap higher in late March. Clients are positioned short in August looking to capitalize on a trade back near 80 cents.
Financials
Stocks: Whether the name”flash crash” sticks or not, the erratic slide in stocks should keep investors nervous and make them question the system. In the past 12 months the typical daily swing in indices has averaged 1.0-1.5% but seeing violent swings 5-9% should not be a daily occurrence, I feel we will see more of this than in the past. Regulators will likely try to temper this volatility by regulation but I don’t see this helping much and would caution the government on trying to have too much control over what should be a free market. As for the trend with prices on the indices penetrating the 100 day MA we feel there is more downside to come. Could we see big rallies on news from regulators and on further bailouts, yes, but we will be advising clients to sell these rallies. As for downside targets we think the S&P could see 950 in the coming months, the Dow 9500 and the NASDAQ 1675.
Bonds: Treasuries appear to be acting as one of the asset classes that will serve as a flight to quality for the time being but our assessment is that these circumstances will be temporary. Looking at the daily charts we sense this is a sell rallies market, the dilemma is when looking at the weekly data a settlement over 123’20 we could quickly see a trade to 127’00-130’00. That being said, we are suggesting aggressive traders whom wish to be short to have an exit strategy if the trade moves against you. One could use options, stop loss orders or trade a combination of futures to do so. We think in months down the road prices will be lower but we believe at the moment a trader wishing to be short here should be very cautious in the short run. Playing the short end of the curve in the Euro-dollar should be on your radar but it appears one can be patient as prices should make new contract highs this week; we are speaking to the June 2011 contract.
Currencies The slide in the Euro continues with prices hitting a 19 month low last week. This trade is tough because there is compelling reasons to be short but we think at any moment we could get a violent bounce in the neighborhood of 4-6%. Those short, congratulations, those wishing to get short we would suggest waiting for a bounce and those contrarian traders we’ll possibly be looking to buy some September calls in the coming weeks so stay tuned. The Pound remains a sell rallies market and we are still looking for a new contract low and potential test of 1.4000 in the coming weeks. On continued weakness in commodities expect to see more downside in the commodity currencies; the Loonie, Kiwi and Aussie. Our downside targets are .9500, .6940 and .8725 respectively. With the recent instability traders wishing not to open themselves up to unlimited risk with futures but still wanting more exposure than what an option can deliver we have used a combination of futures and options and we will likely continue to do this until things calm down. Much like the Euro the Swissie did some chart damage last week and the path of least resistance should remain down. Aggressive traders could buy the Yen as long as 1.0700 supports with an upside target of 1.1100/1.1200 in the coming weeks. In the last 5 weeks the US dollar has appreciated almost 7% lifting prices to their highest level in 13 months. A strengthening dollar is less than ideal for a speedy recover and is not a trade we want to have clients involved in. On signs of an interim top we will be looking to either get short dollars or use that as a signal to get long other commodities.
Grains The USDA report last week was a non-event with conflicting bullish and bearish news depending on if you looked at the domestic stocks or world stocks. What did impress me was the anticipated jump in demand for both feed and ethanol for corn. This was largely ignored by the market but I feel it is a mistake to overlook. July corn was able to trade above the 100 day MA for the first time since mid-January but prices failed to hold that line. By week’s end we had turned south and it appears we are heading back to support around $3.54. We will continue to advise clients to use setbacks to be buyers of September options and December futures. Additionally on this move down clients should be able to cover their July short hedges at a profit. We have yet to make a move in soybeans or soybean meal for clients but on a trade lower this week we may be prepared to start issuing long recommendations so stay tuned. At this point we think November soybeans closer to $9 are a buy. We feel that wheat prices are destined for lower pricing but have chose to be positioned in spreads as opposed to outrights for clients. Some clients are positioned long KCBOT wheat and short CBOT wheat expecting KCBOT wheat to trade at a premium.
Softs Cocoa prices are at the same price level they were 6 weeks ago but this market has been far from flat as prices first moved 16% higher only to lose 13.5% giving back all its gains just weeks later. Prices appear oversold and if 2800 can support this week we will be looking for a combination of long opportunities with clients. We expect sugar to hold the 13.50 cent level but if it gives way we would be quick to cut losses on recent long entries for clients. Those positioned in October call spreads have some time as we expect prices to ultimately trade to 18-19 cents but the July contract may need to make a move this week so stay tuned. As long as July cotton stays below the 9 day MA which is currently capping all rallies we like being positioned short expecting prices to make their way closer to 76/77 cents. We will continue to advise clients to scale out of their long OJ as we think that prices are due for a setback. We would be willing to re-explore longs on a trade below $1.30. The 20 day MA appears to be supporting coffee prices but we are not willing to have exposure for clients until prices trade closer to $1.30 in July. We do think that is likely in the coming weeks so be patient.
Metals The 200 day MA is acting as a magnet in July copper and though we feel prices could penetrate that level dragging prices back under $3/lb. we wish not be involved as prices could see a significant short covering rally after their 50 cent slide in the last month. We advised clients to exit all their copper puts last Friday as the limit order we’d been working for weeks did not get filled. We will continue to forecast the movement in copper but do not expect to see trade recommendations. As you can see we were right on the market movement and still lost money for clients so we likely will NOT be trading this market anytime in the near future. June gold got within 30 cents of out forecasted $1250 trade and that may prove to be close enough as prices in our opinion our overdue for a vicious correction. We could be wrong so what we’ve chosen to do for clients is to position them to capitalize on a $50-75 move in either direction. Aggressive clients bought June $1300 calls and June $1200 puts for a total cost of $850. We then placed a gtc order to sell the entire package at $1300. In order to get filled we would likely need to see a trade to either $1275 or $1175 this week. July silver was up on the week with prices briefly trading at contract highs but based on the charts and market sentiment we think a correction is looming. We’ve advised clients to lighten up on longs and to tighten up stops. We feel we could see a trade back below $18/ounce in quick order so consider yourself warned. Just to make things clear, prices could continue north in gold and silver but we’re not comfortable with the risks associated so that is truly why we’ve advised clients to momentarily step to the sidelines.
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, calls, cocoa, coffee, commodities, commodity, corn, cotton, crude oil, currencies, dollar, energies, euro-dollar, futures, gold, grains, lean hogs, live cattle, livestock, matthew bradbard, MB Wealth, metals, natural gas, oil, options, silver, softs, sugar, us dollar, USDA, wheat
