The Line in the Sand July 12, 2010
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Energies For the last six weeks Crude oil has been in a $10 trading range and as of the close last week prices are just about in the middle of that range trading at $76/barrel on the front month. We suggest buying dips near $73-74 with a target of $79. For futures traders we would trail stops on longs and for option traders a possible play could be October call spreads; Friday’s close had the $80/85 at $1600. As we’ve said in recent blogs as long as indices are trading higher we think the risk trade is on and could lift crude back near $80/barrel. The distillates should continue to take guidance from Crude as we expect to see a 15 cent appreciation on both heating oil and RBOB in the coming weeks. Natural gas closed lower for the third consecutive weak and prices are now below the $4.50 level We advised futures traders to take a loss when that level gave way. We continue to feel that purchasing 50 cent call spreads in October makes sense after the 50 cent retracement and prices being within 30 cents of what we view as significant support. With just under three months time we think it is feasible to see a 15-20% pop in prices on continued warm weather or a hurricane disturbance.
Livestock Live cattle seem to be running into some mild resistance at the 50% Fibonacci retracement level; in December at 94.50. After the near 4% appreciation in recent weeks it would be healthy for this “bull” market to take a breath. We suggest gaining bullish exposure via futures and options in December live cattle as long as prices remain above 92.00. Unless August feeder cattle can trade above 114.00 we think a correction will ensue. Aggressive traders could get short with stops just above that level but most likely our will not clients. On a pullback, the trend line at 110.00 that has supported for the last seven months should hold. Lean hogs continue to take one step forward and two steps back. We expect to see lower ground with prices potentially challenging the lows form early June, but as of this moment clients have NO exposure.
Financials
Stocks: With upside surprises in earnings this week we think the indices have a bit more upside. NO this is not a buy recommendation but rather a warning that prices could be fluffed higher allowing our clients to get short. We initially put out a sell recommendation at 1065 in the S&P but we’ve since revised our sell objective closer to 1100 on the September contract. We will first need to see a settlement above the down sloping trend line that has capped rallies for the last three months; that level is at 1073. The 50 day MA comes in at 1095 and a 100% Fibonacci retracement would lift prices to 1115’ish. Our suggestion would be to start scaling into shorts just below 1100 and we will also be purchasing September put spreads for clients. One of the newsletters that I read and am most impressed with on the financials has the S&P moving to 1125 and the Dow to 10600 by month’s end before prices roll over so do not waste all your bullets just yet.
Bonds: We do think September 30-yr bonds and 10-yr notes put in an interim top last week; bonds just above 128’00 and notes just below 123’00. Aggressive traders could be short futures with stops above the recent highs or purchase put options as we see prices drifting to 123’00 and 120’00 respectively in the coming weeks. As we’ve said in recent posts we would like to lighten up in some of our clients’ currency plays before gaining more exposure to the financials sector being the price action is so correlated. Those not in currencies or indices are suggested to initiate NOB spreads; short 30-yr bonds and long 10-yr notes. On the agenda this week is retail sales, PPI and CPI as we see as the biggest potential market movers.
Currencies The BoE left rates unchanged at 0.50% as did the ECB at 1.0%. While there are no Central bank meetings on the docket this week some of the crosses may have reached a crossroads. The Euro has had an impressive rally gaining 6.5% in the last four weeks but prices were unable to take out the trend line mentioned last week. This line that comes in just above 1.27 and has served as stiff resistance for all of 2010, without a breach this week we would expect a trade back to at least the 20 day MA at 1.2390. The Cable did exceed our expectations on the upside but 1.5250 appears to be the ceiling and aggressive traders could gain short exposure with a target of 1.4900 followed by 1.4750. We also like the September 1.45 put for just over $500 per. The move higher in the Swissie has been relentless, though last Thursday could have signaled an interim top. On the daily chart we’ve completed a 61.8% Fibonacci retracement, prices are extremely oversold and on the MACD momentum appears to be fading. Some of clients remain short taking a little heat but have stayed in expecting .9200 in the coming weeks. All the commodity currencies were well bid last week with the Aussie gaining 4.2%, the Kiwi 3.2% and the Loonie 3.0%. We advised clients to take their profits on their bullish Loonie plays and to move to the sidelines. In my opinion the easy money has been made on longs in the commodity currencies and we do not see prices above the highs from mid-June with a retracement first…trade accordingly. The Yen is about 2 cents off its intra-week high last week and as long as indices track higher we think this is just the beginning of a trade lower. We see the Yen trading back closer to 1.10 in the coming weeks. The US dollar has lost 5.7% in the last month but that could be it for now as we’ve completed a 61.8% Fibonacci retracement. We should know early this week but if 83.75 holds in September we could see a trade back to 85.60. Additionally prices are oversold so we should get a dead cat bounce.
Grains With the quarterly USDA report and supply/demand report at our backs, the driving forces in grains should be the weather, exports and outside market influence. In both corn and soybeans the coming week’s weather will be critical in the crop development and ultimately the final yields. As we’ve said in past commentaries we are not meteorologists but we do expect something to go wrong. Whether it is too much precipitation, not enough, too hot or too cold, apart from ideal conditions, it should have a bullish impact on pricing. December corn has appreciated 15% in the last two weeks lifting prices back near four month highs. This has allowed some of our clients to make money while others still tread water being we’ve yet to lift their hedges. We are still bullish and do expect higher prices so those still holding hedges do not fret we expect to see a pullback in the coming weeks. Traders who have yet to take advantage of this move look to buy on a setback; we will look to get long closer to $3.80 with an upside target of $4.40. November soybeans closed over the 200 day MA for the first time since the beginning of May last week. Strive to buy 20-30 cent setbacks and remain long as long as $8.90 supports. Even more impressive than soybeans has been soy meal as December soy meal has appreciated 12% in the last five weeks. We suggest gaining bullish exposure here as well; support is seen at $263-268. Both KCBOT and CBOT wheat have moved over $1 in the futures market just since the 6/30 USDA report. Much of this may be due to short covering but just like corn and soy beans we believe wheat is a buy on retracements. We will say again this week that the recent lows in the grain complex may not be re-visited in 2010 and could serve as a major low.
Softs Cocoa seems to be finding its footing at 2950 but we would not rule out a probe to 2850 on a dollar rally this week. We would be willing to start scaling into longs for clients around those levels if we do get prices to back off 3-4%. Clients were able to trade out of a good percentage of their October sugar longs late last week but some still remain in as we just missed their limit orders. A doji star followed by a bearish engulfing candle is generally not a very bullish recipe in any market. On a rally back above 17 cents we would exit all remaining longs for clients at a profit or loss. The fact that December cotton could not penetrate 73.50 we expect a bounce from here. Clients that were short from higher levels were advised to move to the sidelines. We would be willing to sell again closer to 77/78 cents. OJ prices collapsed 9% last week but we would like to see additional 5-8% depreciation before we’d be willing to gain long exposure in November juice for clients. Coffee could go either way, we mentioned potential short opportunities in recent weeks but we would refrain from either direction currently. Lumber remains about 12% off its lows two weeks ago and as long as $200 holds we think a trade 10-15% higher could play out in the coming weeks.
Metals “Dr. Copper” closed back above the 50 day MA for the first time since mid-April when prices were trading near $3.50 or almost 15% higher than current levels. We expect prices to climb to $3.25-3.30 in the coming weeks and likely find a top around the same time the S&P rolls over late July early August. August gold seems to be finding some interested buyers around the $1200 level which could serve as solid support without a market catalyst to drag prices lower. We suppose prices could make an attempt at $1174 which currently serves as the 100 day MA and 50% Fibonacci retracement. We would be a buyer for clients on such a set back. The other scenario that would get clients long again would be consecutive settlements above the 50 day MA; at $1217. Resistance is eyed at $1230 followed by $1260. The 100 day MA served as a magnet in silver last week as prices did not wander far from that level; in September at $17.92. We’ve advised clients to scale into longs in September futures as long as $17.25 hold and we’ve also been purchasing December call spreads for clients. It would take a trade over the trend line at $18.30 for silver to gain some upside momentum. On that we would anticipate a trade back above $19/ounce in short order.
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, oil, options, puts, S&P, silver, softs, soybeans, spreads, sugar, treasuries, us dollar, USDA, wheat
