The Line in the Sand July 26, 2010
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Energies Crude oil is back within spitting distance of $80/barrel having gained nearly $8 in the last three weeks. We are mildly bullish and as long as the 50 day MA continues to support we will suggest clients to remain long. That level in the September contract comes in at $76.40. The next hurdle from here will be the 100 day MA which we expect to be challenged in the coming weeks at $80.95. The October $80/85 calls we suggested in recent weeks closed Friday at $2000. We would propose looking for an exit door on a possible reversal lower this week. The distillates have been able to keep up the pace with heating oil gaining 8% and RBOB 9% in recent weeks, as Crude has trudged along. Look for this pattern to continue with Crude leading and the distillates following. The flag and pennant formation is still recognizable on the daily natural gas chart but we would like to see a settlement above the 50 day MA in September at $4.65 early this week. On three occasions prices have violated that level but we’ve yet to see a close above the 50 day MA since the first week of July. Clients are purchasing 50 cent call spreads in October natural gas with a target of $5.50-5.75.
Livestock The Cattle on feed report Friday was viewed as neutral at first glance but we will see how the market reacts this morning. Our clients that remain long December were advised to purchase August puts into the report for protection. On a trade lower clients should be able to book profits on the August puts and hold their December positions. On a trade higher they will likely cut losses on their August puts and hold their December for a higher trade looking to exit closer to 98. Feeder cattle closed positive every day last week; a feat not accomplished for several months. We do not expect much more upside and as we’ve hinted at in recent weeks we’re anticipating a retracement back to the trend line about 3.5% lower than current prices. A trade lower was rejected in October lean hogs as prices reversed mid week closing out the week back above 77 cents at three weeks highs. Aggressive traders get ready to reverse as you should be long from 74’ish. We will be looking to gain bearish exposure this week with clients as long as we do not see a settlement above 77.50.
Financials
Stocks: Indices had a big week last week as the S&P was higher by 3.1% and the Dow by 3.4%. We expect the Dow to have a challenging time getting above 10500 as a trade to that level would lift values to over bought levels and the 61.8% Fibonacci retracement over the last 4 months comes in at 10515. Like wise the NASDAQ, Russell and S&P should have limited upside from here. Our vehicle of choice for clients is the ES so let us speak to the key technical developments there. The 200 day MA comes in at1104, a 50% Fibonacci retracement at 1111 and a 61.8% retracement at 1134 on the September contract. Clients will be fading rallies and also have bearish options exposure. We would suggest to our traders in the August/September ES trade booking a profit on the August calls on higher trade when you can use that premium to buy back the September 1000 puts. That would leave you with a small realized profit and long the September 1075 puts looking to capitalize on the next leg down in the coming weeks.
Bonds: Here is our disclaimer; Treasuries appear to be rolling over but we’ve been fooled numerous times before. Both 30-yr bonds and 10-yr notes failed to follow thru after making fresh 2010 highs in price and lows in yield. On consecutive closes below the 20 day MA we would want to gain bearish exposure with clients. Those levels are 127’6 in bonds and 122’17 in notes. For now our intention is NOB spreads (short 30-yr bonds/long 10-yr notes.) We think if Treasuries trade lower September 30-yr bonds could quickly find their way to 122/123. We may still be early buy lightly scaling into puts in 2011 and 2012 Euro-dollars or starting to build a small short position in mid to late 2011 futures makes sense. We would suggest an exit strategy as we’ve been caught like a dear in headlights in this trade before.
Currencies The US dollar has gotten man handled in recent weeks but if the greenback can dig in its heels and hold 82.25 we should get a bounce. Circumstances are far from rosy in the states but after an 8% decline prices may reflect the current situation. As opposed to buying dollars we’ve advised clients to sell currencies that we feel have appreciated too much. The European stress tests were a non-event and caused little to no stress in the markets. The fact that $1.30 is acting as stiff resistance we feel prices are destined for a set back. Some clients own September puts expecting a trade back to $1.25. The Swiss franc appears to be consolidating before we get a move lower with the momentum shifting and the stochastic already declining. Some clients have bearish futures and options exposure looking for .9200 in the coming weeks. As for the Cable it has been one of the standouts showing some resiliency, though our clients will remain spectators as we think prices should be closer to 1.4800 vs. the current 1.5400. The Aussie, Kiwi and Loonie pushed higher to close last week near their highs but we’ve yet to make a move. Clients will be looking still to be a seller from higher levels assuming the Euro and Swissie trades are positive. The appreciation in the Yen in recent weeks has been remarkable but based on the price action it looks to be in the last inning and traders should not rule out a quick trade back to 1.1200. We would change our opinion only on a settlement above 1.1600.
Grains December corn was lower four out of five sessions last week and closed Friday 6.2% off its recent high. We continue to like corn longer term but as we’ve said in recent posts a correction is expected first. We will be looking to re-establish client’s long exposure in December via futures and options and add to their existing exposure closer to $3.70. Additionally a correction of an additional 10-15 cents would allow clients to exit their remaining September short hedges virtually unscathed. As for the soybean complex we are interested in buying clients November soybeans near $9.40 and December soy meal near $270. Though we do not wish to make a directional play in wheat we will likely be working a gtc buy order in December KCBOT/CBOT wheat spread. As it stands now an entry closer to even money with a target of 15 cents. The agriculture sector has been one of the top performing sectors in recent weeks and commodity traders that have yet to take advantage of the latest appreciation are advised to be a buyer on this dip.
Softs For several weeks cocoa has been range bound; a buy near 2925 and a sell near 3125. We see no reason for that to change so those interested trade the range. With Fridays’ move October sugar has completed a 50% Fibonacci retracement and low to high has gained just over 30% in the last 7 weeks. The majority of our clients have exited their calls while a select few hold out for higher ground. This move has largely been caused by a bottleneck in Brazil as sugar is being shipped over seas for the start of Ramadan. As buyers disappear we feel a violent correction will happen, so again our suggestion is exit longs and move to the sidelines. We will be looking to be a seller of December cotton futures for clients above 77 cents and also to establish 5 cent bear put spreads as we feel the next leg down in prices will penetrate 70 cents. If coffee prices remain below $1.70 early this week clients will be shopping December 15 cent bear put spreads with a target of $1.50 in the coming weeks. Aggressive traders that do not mind the lack of liquidity can lightly buy November lumber with a target of $240.
Metals September copper appreciated just over 9% last week lifting price back to the 100 day MA. This level has not even been in play for the last three months. This move caught us off guard but we feel it highly unlikely that we see much more as a probe of $3.30 would mean prices advanced 20% off their lows in June and I cannot justify that type of magnitude. I’ve been wrong before but again I think this move north is unjustified and prices should do an about face this week or next. A $20 range restricted August gold prices last week and until we get a settlement above $1200 or below $1180 it’s anyone’s guess. Clients have no exposure but forced into the market I would rather be long than short. Mixed signals in silver as the September contract is back and forth flirting on the downside with the 200 day MA and the upside with the 100 day MA. As long as $17.40 holds aggressive traders could remain long September futures. Our favored play would be to purchase December call spreads as they allow flexibility and we feel prices by December will be above $20/ounce but in the next 2-3 weeks the picture is not so clear.
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: bonds, bradbard, calls, cocoa, coffee, commodities, 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, puts, RBOB, S&P, silver, softs, soybeans, spread trading, sugar, treasuries, us dollar, wheat
