For February 2nd– February 6th 2009

By: Matthew Bradbard

“Reading the Tea leaves”

The new Administration may have its hands full with a total lack of bipartisanship, the new good bank bad bank policy, and a total lack of confidence, evident by the record money on the sidelines and violent selling, showing little signs of stabilization. We expect investors to stay defensive, but when money starts being committed we anticipate some coming into commodities. Being that the infrastructure plan should support in addition to the coming inflation. Furthermore, we expect emerging markets to show more resiliency than most. If you have not already read our 08 review/09 outlook we suggest you do.  We are going to start shortening up our weekly commentary as to provide 2-4 additional market specific reports monthly.

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

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The US Department of Energy said that crude oil supplies were up 6.2 million barrels last week, supplies of gasoline were down 100,000 barrels while heating oil supplies were down 1.9 million barrels. March crude oil ended down $4.30 but remains largely range bound between $40 and $50. The bottoming process may take several weeks, but we feel we are close if we have not already put in the lows. March heating oil has been down the last 4 weeks closing 70 ticks lower last week. 3 of the last 4 weeks we have traded above the 9 day moving average on the weekly charts; currently 1.4575, on a close above that level it would suggest a low has been made. March RBOB gained 8 ½ cents last week and has advanced 45% off its contract lows made only 6 weeks ago. We like the idea of 20 cent bull call spreads in June; with 4 months time we expect to approach $1.70 on the June contract. 

The US Department of Energy said that underground supplies of natural gas were down 186 billion cubic feet last week to 2.374 trillion cubic feet, a bigger drawdown than expected. Supplies are now up 1.5% from a year ago. March natural gas closed down 1 cent after making a new contract low and holding.  Two potential trade ideas would be to buy the March mini contract with a 15-25 cent stop and for options we are suggesting selling the March $5 calls while simultaneously buying the April $5 calls; effectively a calendar spread.(Friday’s settlement approximately $1000)

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In spite of the recent bullish on feed report, April cattle fell 115 ticks, the lowest levels in over six weeks, weighed down by a poor economic outlook. For now, we expect the contract low made 12/5 at 82.45 to hold. At this time we are not suggesting out right longs, but it may be a recommendation this week so stay tuned. April feeder cattle closed 208 ticks lower, but the 61.8% Fibonacci retracement level held as support helping to ease the pain. We would look to trade a move below 90.00 or above 94.00. The only cattle exposure we have with clients is long August live cattle against a short in April feeder cattle looking for the spread to narrow. The semi-annual inventory report out last Friday was also viewed as bullish but for the most part this is not a market mover. We feel we must first put in a low in the cash market and then the futures should follow. After the close Friday, the USDA said that there were 94.49 million head of cattle and calves in the US on January 1st, down 1.6% from a year ago and less than expected. The USDA estimated the week's beef production at 492.2 million pounds, up 3.8% from a year ago.

April hogs ended down 143 ticks on the week but 238 ticks off their lows on concerns about unprofitable packer margins. We used this set back as a buying opportunity and would suggest getting long April and June futures with stops below last week’s low. Scale into this trade as we could have made a significant bottom however if we are wrong we would act quickly to cut losses. Additionally, we already owned April 74 calls and we advised clients to buy 70 calls last week. Assuming that last week’s lows hold we would expect to see a trade up to 72.00 in April and 82.00 in June over the next 2 months. Pork production was estimated at 463.7 million pounds, up .6% from a year ago.

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Stocks: The US Commerce Department said that real GDP was down an annual rate of 3.8% in the Q4, the worst quarter in 26 years, but not as dreadful as expected. Equities suffered their worst January in history. This to me shows a total lack of confidence in any of the government programs that are supposed to help stabilize the economy. The Dow finished 77 points lower at 8091. The S&P gave up 6 points to 826. The NASDAQ was flat at 1426. On a breach of 7850 in the Dow look for a test of the lows and for the S&P a trade below 790 would likely mean the same. As January goes, so does the year. That may in fact be true but looking at the statistics this is a much more accurate predictor when January is higher; on weaker January history is not as compelling; about 50/50.

Bonds:  The FOMC concluded its meeting and kept the federal funds rate unchanged, as expected. They expect "exceptionally low levels of the federal funds rate for some time," noting that since they last met, "the economy has weakened further." What was disappointing though is they didn’t talk about an inflation target or how they intended to get the rates lower on longer term debt. In an effort to encourage the markets, the Fed said that it will "employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability." Easier said than done. March 30-yr bonds gave up just short of 3 basis points missing our objective by 1 tick at the low. Last week’s low at 126’09 should support, but if we see support give way next stop is 123’16. Resistance comes in at 129’28. We would recommend the sidelines. The March 10-yr note lost 1’07 ticks last week closing below the 50 day moving average for the first time since mid-November. The 50 day moving average should now become resistance at 124’08 with support at 121’14. We advised clients to book a profit on the march Euro-dollar puts and are now recommending June 99.00 puts. Additionally, we are advising clients to get short March10’ Euro-dollars.

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The RBNZ reduced its interest rate from 5.0% to a record low 3.5% last week. Perhaps more than the market was anticipating because on the week prices were off 215 ticks making a new contract low. The last 3 week prices have come off 13.5%. Any one taking our long recommendation should have gotten stopped out at a loss between $750-1,000 per contract. We will shop for another long entry once a low looks like it has been established.

The March Aussie dropped 205 ticks on expectations that the RBA will cut the interest rate 100 basis points to 3.25%, when it meets on Tuesday, the lowest levels since the mid 60’s. Over the last 4 weeks prices have come off 12% and it doesn’t appear support comes in for another 3-5%. We have recently suggested bullish option plays for March and if in you are down; we would not add to this position but will stay in at least this week to see how the market reacts to the RBA decision. Ultimately once a low is established we expect to see a trade up to 70 but we are still working on the timing.

The March Swissie has lost ground for the last 5 weeks giving up another 68 ticks last week trading at a 7 week low. We see the next support at .8525 with resistance at .8775. We currently have no exposure and being the trend is down we should see prices continue south.

The March Euro tried to rally last week but failed closing 184 ticks lower and now has been lower for the last 5 weeks. Now that prices are below the previous week’s low we could see a trade down to 125.50. Resistance comes in at 130.50. The trend remains down and unless Trichet can put a remarkable spin on things at the ECB meeting, we would continue to sell rallies. The ECB is expected to hold but we expect a cut by 25 points, currently rates are 2.0%.

The BOE meets on Thursday as well and is expected to cut rates 50 basis points from 1.50%. All 5 sessions last week yielded higher pricing in the cable which allowed us to trade out of our 1.50 calls for clients at a 36% net profit. We currently have no exposure but would expect a setback after the recent 7% advance. Resistance is at 1.4500 with support at the 9 day moving average at 1.4085 followed by 1.3900.

The Loonie gained 19 ticks last week though 180 ticks off its weekly high. Being that we expect a setback in metals and not a whole lot from energies we will likely see a pullback to .7800/.7900 this week. On the upside, resistance should come in at .8200 followed by .8315.

The March Japanese yen lost 145 ticks last week and looking at the weekly chart had an inside week. That alone should forecast a down week but investigating further we see an ascending triangle and as we start the week it appears we are breaking out to the upside. Just under 111.00 the yen should find support with first resistance at 1.1290 followed by 1.1380. If we see a sharp contraction in equities we could see a new contract high this week. We should have some suggestions on some bullish March option plays this week.

The dollar index only gained 20 ticks last week, although the trade buoyed prices from lower levels as we closed almost 2 ½ cents off its weekly low. This was the 5th consecutive positive week as momentum has shifted hands from the bears to the bulls. The 100 day moving average at 84.05 should support any pullback, on a trade above resistance at 87.25 we could see an additional 100-200 points. Prices will most likely rally early in the week, but depending on the BOE, ECB and Non-farm payrolls Thursday and Friday could reverse or heighten that move.

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Corn: March corn lost 14 ¾ cents last week ending the week at the 40 day moving average which has acted as a magnet the previous 3 weeks. We are still looking for guidance from outside markets and weather in S.America that remains dry. Last week the exports were impressive as commercials are locking in prices anticipating more adverse weather from S.America. We expect to see a move to 3.45/3.50 this week but do not expect prices to stay at those levels for long. We would use a move such as that to cover remaining shorts and to get long May. A move in March as we expect should take May close to 3.55. On a move above 3.82 in March prices would make their way back above 4.00.   

Beans: March soybeans lost 35 cents last week and have now closed lower for the last 3 weeks giving back 8%. Much like corn we are looking for guidance from outside markets and what type of precipitation we get out of S.America. The 40 day moving average at 9.38 should serve as support with resistance between 9.92/10.00. We have no directional trades on for clients, but we are positioned in a spread long November 09’and short May 09’. We would acquire more of these at -60 cents on the spread and are ultimately looking for the spread to narrow to -30 cents.    

Wheat: March CBOT wheat lost 15 ¾ cents last week as the 100 day moving average acted as strong resistance. We expect to see a trade down to 5.40, if that level gives way we could see 5.00. March KCBOT lost 9 ½ cents and much like the CBOT, failed to trade thru the 100 day moving average, which should continue to serve as resistance. We see the first support at 5.80 followed by 5.50. The March KCBOT/CBOT spread picked up 6 ¼ cents closing at 38 cents making its way to our ultimate target of 45/50 cents. We would put in a limit order to book a profit. 

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The weather for central Florida looks warm now, but traders wait to find out how much the citrus crop was damaged by the recent cold temperatures. It is still not clear how much damage occurred in Florida's citrus groves, but it isn’t perceived as significant, based on the price action. March orange juice closed down 3.00 cents closing back below the 40 day moving average. We think there are better opportunities elsewhere and will keep our light exposure but at this point we’re not suggesting new exposure until we get a close back above 80 cents.

March cocoa finished up $100, the highest close in four months, with ongoing concerns about the size and quality of this year's crop in the Ivory Coast. Strictly based on the charts we would expect to see prices decline this week. A setback should find support at the 200 day moving average at 2579. Our assessment would only change on a trade thru 2850 on decent volume.

According to Dow Jones Newswires, Brazil's coffee crop seems to be receiving adequate rain lately getting a break from the extremely dry conditions. March coffee was down 15 ticks after hitting our upside objective at 123.50; see previous posts. We will look for an exit early this week on our remaining March options ideally from higher ground but either way we are out with only 9 days till expiration, time is running out. We are rolling clients from March to May recommending 20 cent bull call spreads. In the short run we may get a test of 1.12/1.16 which should be followed by a move over 1.30.

March cotton lost ground 4 out of 5 sessions last week giving up just over 1 cent closing near the lows.  The 100 day moving average acted as strong resistance, as we expected, and we should now get the move down we have been forecasting unless we get a surprise on next week’s USDA report. We expect to see prices make their way down to 44/46 in coming sessions. We are on the sidelines and will look to get long from lower levels most likely in the May or July contract.

March sugar gained an unimpressive 3 ticks but kept the streak alive now gaining for 5 consecutive weeks. Resistance comes in just above 13 cents with support at the 20 day moving average at 12.25 followed by 12 cents. We favor being positioned long, however do not have any thoughts where prices are going in the short run. That being said, we advised clients to sell May 14 cent calls and buy October 14 cent calls looking to take advantage of any sideways or downside action in the short run but also gain longer-term bullish exposure at a reasonable price point. Additionally, for clients that are positioned on the long side with futures we would suggest tightening up stops or gaining put option exposure to hedge against downward movement.  

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April gold jumped up $28.40 to $928.40, the highest close since early August, with ongoing support from low interest rates and poor economic news. Over the last 2 weeks we have seen an advance of 11%.  Prices have remained in a $75-$100 trading channel since Halloween and we’re approaching the upper end of that channel so the resiliency of gold may be tested this week. The last 4 occasions we hit the upper end of the channel, prices have backed off approximately $30. The trend remains up and if the environment remains the same we would except to see a trade above $1000 in coming weeks. The Federal Reserve statement suggested that the Fed is willing to print money. The overall sentiment is inflation is a forgone conclusion and not a question of if but when. The flight to quality/safe haven buying should also lend support. Trade idea; we still like April and June $100 call spreads in addition to building a position scaling into longs in June. We have many clients that are waiting for a pullback but in the meantime are on the sidelines with no exposure missing a sizeable move higher. One must use $20-40 setbacks to get long because a $100 correction may not come. Seasonal indicators point towards a decrease in prices for gold in the month of February but could this year be different? We see resistance at 930 followed by 948 in April with support at 88 followed by the 200 day moving average at 862.

March silver gained 62 cents last week trading as high as $12.66, the highest level since the 1st of October. Much like gold we are approaching the top of the $1.50 trading we have been in since mid- November. We hit our target in the futures at $12.50 that we forecasted some 12 weeks ago. Read our HI-HO silver report written in November where we forecasted this level before the Super bowl when prices were trading under $9/ounce. We advised clients to lighten up on the December $15/20 call spreads at 100% profit and hold onto the remaining positions looking for higher prices to come. The logic is that we could gain exposure on a pullback but we didn’t want to leave the position because we feel it is unlikely that we could get that entry price again. This is an example of disciplined money management and what we feel traders will need to do in 09’ to be successful. Currently we cannot rule out a $1-1.50 pullback at any time but as long as March stays above $10 we favor long exposure. Recent trade recommendations include building a long futures position in May in addition to buying July $3 bull call spreads; contact us for exact pricing. Next resistance in March is just above $13 with support coming in at the 20 day moving average at $11.40.

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Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.