The Line in the Sand June 14, 2010
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Energies In the last four weeks prices in Crude have been back and forth in a $9 trading range so from here where do we go? We have a bullish bias but would not be recommending new entries, if already long continue to trail stops. We would expect a settlement over $76 would lead to higher ground and a settlement below $72 would indicate a trade back under $70. June tends to be a month of price consolidations if we get big moves in May. That being said the $9 range may continue to hold for the coming weeks. Take your trading size down until we get a defined trend. The distillates should move in the same direction of Crude as we would expect the magnitude to be 2-3 cents in heating oil and RBOB for every $1 move in Crude oil. The up move in natural gas is expected to remain intact but we anticipate a retracement before we see higher ground. The game changer could be increased tropical activity. We’ve advised to buy 20-40 cent setbacks and will be trading September futures and options for clients looking for an entry closer to $4.50-4.60.
Livestock Live cattle lost ground last week dragging prices to four month lows. From their highs, prices have come off nearly 9% but this has taken prices to oversold levels. We would need to retake the 200 day MA before establishing a large position for clients but we’ve advised clients to begin gaining long exposure to December live cattle via futures and options thinking we’ve overshot to the downside. Feeder cattle may lead live cattle higher as they‘ve advanced for the last two weeks and appear to have bottomed around 108.00. The downside in lean hogs, in our opinion, is limited as well so clients were advised to cover their remaining shorts. Now that the gap has been filled from March we expect the double bottom near 78.00 in the August contract to act as stiff support. We’ve yet to get long with clients and at this time recommend the sidelines.
Financials
Stocks: With the sentiment about as bearish as I can remember in several months I expect prices in indices to rally. We are not long but would prefer to be a seller for clients after this rally develops. With varying results from retail sales, consumer confidence and conflicting opinions with central banks globally, expect 2-3% swings to become more commonplace. Last week’s lows should serve as interim bottoms and if prices violate the 200 day MA this week this rally could temporarily get legs. The NASDAQ was able to overtake the 200 day last Friday; in order for the Dow to do so we need a close above 10215 and in the S&P above 1100. We will explore shorts for clients in the S&P from higher levels and see resistance as follows: 1107, 1125, and 1145. As for this week the CPI and PPI could be potential market moving events.
Bonds: Treasuries should continue to display an inverse relationship to indices so in the short run if we catch a bid in equities expect Treasuries to lose ground. We have advised clients to get short 30-yr bonds and have positioned some of our clients in NOB spreads anticipating a trade to 120/121 in the September contract. The 20 day MA comes in at 120’20 and that would also equate to a 38.2% Fibonacci retracement. Euro-dollars have traded back near their contract highs and aggressive trader could fade this rally with stops above the highs. On days that you see a spike higher we would also advise buying June, September or December 2011 puts.
Currencies Last week the RBNZ raised interest rates 0.25% taking them to 2.75%. The ECB stood pat at 1.0% as did the BoE at 0.50%. The dollar traded below the 20 day MA for the first time since mid-April last week and though it may be premature to call a top pay very close attention this week. Use 88.60 as resistance and 87.00 as support. The Euro could bounce from here as 1.20 acted as stiff support. If shorts were to cover we could get a violent move to 1.2600-1.2800 very quickly. We’ve yet to decide if we want to take a small long position or get short with clients if we get a 5% rally…stay tuned. The Pound remains a sell rallies market though we missed a narrow window to be a seller for clients last week. If given an opportunity this week we would likely get short. Prices in the Aussie closed back above the 20 day MA last week and clients remain long expecting a breach of .8450 this week. Our next upside objectives are .8595 and then .8730. Those long should be looking for an exit door or to lighten up at those prices. As long as the Swiss government is intervening in their currency we have no interest with clients. Traders that do should be buying dips as we could fill the gap from mid-May taking prices to .8985. The Kiwi and Loonie appear like they have turned the corner and could move higher but we would prefer an entry from lower levels; closer to .9500 in the Loonie and below.6700 in the Kiwi. If we are correct with our assumption, indices appreciating in the short run, we would expect the Yen to falter. Some clients are positioned short to play a trade below 1.0800 trade this week.
Grains Two positive things happened last week in the agriculture sector; oats were higher by 10-15 % depending on the contract and a friendly USDA report. Why I bring up the move in oats is not because clients are trading oats but rather oats generally move first and the others follow. The important thing to remember is while past performance is not indicative of future results just go back and look at the oat charts and how the other grains trailed frequently. We are operating under the assumption that the USDA report in January put in an interim top in grains and the most recent USDA report last week put in an interim bottom. A smaller carryover, higher ethanol demand, larger exports may have put a base in on corn. Clients are gaining long exposure by purchasing September options or December futures. Now depending on the weather, the final crop size, the dollar and other outside market influence we expect to see a rally of 40-80 cents north in corn. Aggressive traders could again shop longs in November soybeans and December soy meal with stops below last week’s lows. Our upside targets are as follows: $9.50 in soybeans and $270 in soy meal. We think wheat is worthy of some exposure as well being prices are generally finding a seasonal bottom this month. Past performance is not indicative of future results. Clients will be trying to buy September CBOT wheat and sell September KCBOT wheat this week 25 cents premium to the KCBOT.
Softs Until September cocoa overtakes 3025 we expect the trade to be down. That being said clients have no exposure based on my trade recommendation and would be looking to get long near 2850. October sugar has gained six out of the last seven sessions overtaking previous resistance from three weeks ago. Clients remain long and expect to see 16.50/17 in the coming weeks. If 79 cents continues to cap rallies in December cotton traders could get short futures. Less aggressive traders we suggest purchasing put options as we think a trade back to 70 is likely in the coming months. As long as the trend line that has held in OJ dating back twelve months continues to hold we will start to work some of our clients long September and November OJ. Stay tuned for trade ideas this week. Coffee rallied 6% to end last week near seven month highs. This trade alluded us and being we’ve been absent with clients for a 9% move we would like to see prices settle down before gaining exposure…stay tuned.
Metals Copper bottomed last week with prices bouncing 7% off a nine month low. We will be on the sidelines but those wishing to trade copper are advised to play from the long side as we think prices could make their way back to $3.20-3.30 in the coming weeks. August gold hit record highs last week trading above $1250 and its previous highs from early May. This is notable but we expect to see much higher levels in the weeks and months to come. That is not to say we will not get corrections as we think corrections are probable and healthy for the bulls to stay in control. For now the trend line and 20 day MA at $1215 should support but if it were to be breached a trade $50-75 lower would do NO longer term chart damage. Some clients have a small long position in December $75 call spreads. A bullish flag and pennant formation appears to be in the making in July silver. For this to be confirmed we would need to see a break out to the upside this week. Clients are positioned long futures and September call spreads anticipating $19 and possibly $20 in the coming weeks. For clients to remain bullish silver prices in July need to hold above $17.25; the 50% Fibonacci retracement level. Above that we see support at $17.80 and then the 200 day MA at $17.47.
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, metals, natural gas, options, S&P, silver, softs, soybeans, stock market, sugar, us dollar, USDA, wheat
