The Line in the Sand July 06, 2010
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Energies Crude oil prices dropped nearly $7/barrel last week and could challenge the lows from late May. We don’t read too much into the sideways action in the last five weeks and instead view it as a trading range. As position traders well know there has been enough movement to trade Crude from both the long and short side. As it stands now if $69/70 is challenged and holds we will be looking for long opportunities with clients. I would expect to have some ideas in September and October contracts this week…stay tuned. With Crude oil falling nearly 9%, RBOB and heating oil have also stalled dropping 8.5% and 10.5% respectively. Like crude we expect the lows made in late May to act as solid support in the distillates; these levels are just below $1.90 in the August contracts. Natural gas is trying to find its footing but to date has run into resistance at the 20 day MA; in August at $4.87. As long as $4.50 holds in that contract we favor long exposure with clients. Presently we’re advising scaling into long futures in September and October as well as purchasing October call spreads. Perhaps on warmer temperatures or potential hurricane threats we see an attempt at $6 in the coming months.
Livestock Live cattle have not been able to wander too far from the 20 day MA but we feel it is just a matter of time. We continue to advise accumulating longs in December live cattle at these prices thinking we could see 95/96 cents in the coming months. On a settlement above 93.50 in the December contracts this should be confirmed. Feeder cattle appear to have made an interim top and are expected to retrace; we see support at 111.40 followed by 110.60 and then 109.75. Continue to use rallies in October lean hogs as selling opportunities as the path of least resistance should continue down. We expect prices to depreciate another 2.50 – 3.50%. As long as the demand continues to taper off, as is normal in the summer months, we advise bearish exposure.
Financials
Stocks: Ten out of the last eleven sessions indices have declined dragging prices to fresh 2010 lows and the lowest levels since September 2009. Though we will not get long we do expect a rebound in the immediate future. We expect to see prices lift 4-6%; this would carry the S&P to 1055-1065, the Dow to 10000-10150 and the NASDAQ to 1800-1825. Selling would then resume and we will be looking to get clients short the S&P into the fall to ride the next leg lower to sub 950 level. We see no reason, with the lacking consumer confidence, unstable job market, horrific housing numbers to see anything more than a dead cat bounce. We are far from doom and gloom, but get real, look at the most recent financial numbers. Those who feel speculating on indices falling is immoral should at least consider hedging their portfolios. Do you forget how you felt in 2008 when the stock market was falling apart?
Bonds: Fear is driving prices of Treasuries higher and yields lower but take a step back and digest 2.90% for 10-yr notes and consider that investors are essentially locking in a loss. The rational perhaps is a small loss is better than a big loss elsewhere but I would rather look for more. As for trading we think both 30-yr bonds and 10-yr notes are too high but we’ve felt that way for several weeks. Examining the charts, if last week’s highs are not re-visited this week we would say an interim top is in. Aggressive traders could get short either instrument with stops above the highs. We will likely be moving clients into NOB spreads (short 30-yr bonds/ long 10-yr notes) this week. Long dated Euro-dollars in the later part of 2011 should be in your radar as they appear to be rolling over again. We would suggest scaling into shorts with tight stops and adding to the position if this proves to be an interim top.
Currencies The BoE is expected to leave rates at 0.50% as is the ECB at 1.0% this week. The Euro is back above 1.25 closing at a six week high last week. In the last three weeks talk of the Euro going to parity has been ignored by market participants as prices have appreciated nearly 6%. The test this week is how prices react to the trend line just above 1.27 that has held since December 2009. We see upside resistance at 1.2825 followed by 1.3045. We will be looking to get clients short the Pound but need to see signs of either a top here or bottom in the US dollar. We do anticipate a trade back to 1.4500 in the coming weeks but could we see 1.5500 first? The Kiwi and Aussie we feel have more downside after a bounce early this week. The easy money has already been made on shorts as prices have declined 4% and 4.7% respectively. We are catching a failing knife in the Loonie with clients suggesting them to buy September around the .9400 level. Prices have come down nearly 5% and though clients may take a little heat initially we expect prices to trade back to .9650 so we favor the risk/reward being long at these levels. If you don’t like catching falling knives what about jumping in front of freight trains? Aggressive traders that agree we could get a bounce in the indices could look for bearish plays in the Yen. We feel prices have gotten ahead of themselves and could move back closer to the 20 day MA at 1.1100. A new trade recommendation last week was a bearish play in the Swissie which we established Friday. Clients went short futures and sold a September put against their futures 1:1. Our initial objective on shorts is .9150. The dollars safe haven status is being questioned as prices have now come off just over 5% in the last three weeks. We expect more downside and feel things could really come apart if prices violate 83.75.
Grains Traders holding bearish positions into last week’s USDA report were caught with their pants down in corn and wheat as prices are 13% and 12% off their intra-week lows. December corn has finally breached the trend line that has acted as resistance for several months and we think it is a green light for higher ground. We expect to see a partial fill of the gap created on the USDA report last week and would advise using that set back as a buying opportunity. In December corn we would use a buy objective at approximately $3.65 and a sell objective of approximately $4.20. On a pullback in either KCBOT or CBOT wheat we should have some bullish trade ideas. We will also be shopping longs in November soybeans and December soy meal for clients but from lower levels…stay tuned. We are operating under the assumption that the lows we are in the process of making in the grain complex will serve as the lows for 2010 so trade accordingly.
Softs 3000-3050 should continue to act as resistance in September cocoa and though clients have no exposure our feeling is prices should chop lower. On a trade closer to 2800 we may have some bullish ideas…stay tuned. October sugar closed at a two month high last Friday and looks poised to challenge the 17 cent level; a price not seen since mid-April. As long as prices remain above 16 cents we could see higher ground. Upside resistance is seen at 17.30 followed by 18.00. Those still carrying longs in October should view a trade at those levels as an exit door. December cotton was lower all five sessions last week losing 4.4%. Clients are advised to have bearish exposure in futures and options expecting a violation of 74 cents. OJ closed at 3 ½ month highs last week and is within 4.5% off the contract highs. Those wishing to be long could purchase call options but we think there are better places to be. As we voiced last week coffee looks to be in the process of making an interim top and we would expect prices to retrace 10-20 cents in the coming weeks. Lumber prices have exploded over 15% in the last two weeks and we expect more to follow. Clients were light buyers of November calls last week as that would be our suggestion on how to position a trade back to $250.
Metals August gold was hit hard dragging prices under the 50 day MA for the first time since late March. Without a settlement above $1218 early this week we think $1170 could be in play. Our clients have no exposure but are prepared to buy December if we see a trade at the above mentioned price. At this point we cannot rule out a trade as low as $1125 but we do not expect it and if it were to happen it likely would be a temporary spike lower and that price would not last. September silver got drilled last week as well with prices closing below the 100 day MA for the first time since 6/4. If you notice that lasted only one day so this week’s activity is critical. We have used the 8.5% correction in silver to gain bullish exposure for clients via December call spreads and also have advised them to start scaling back into September futures. At the most we could see $16.70 but we view the current prices as a buy being when silver reverses it generally happens on a dime. We expect to see $20/ounce so if we are 50-75 cents early that is viewed as acceptable. Copper continues to take one step forward and two steps back. We see resistance at the 20 day MA with support in September at $2.80 followed by $2.70. We would use trades higher as selling opportunities as we anticipate copper to see $2.50 before we see $3.25 again.
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, commodity, corn, cotton, crude oil, currencies, dollar, energies, euro-dollar, futures, gold, grains, japanese yen, lean hogs, live cattle, livestock, matthew bradbard, MB Wealth, metals, natural gas, oil, options, RBOB, S&P, silver, softs, soybeans, spreads, sugar, us dollar, USDA, wheat
