For February 16th– February 20th 2009

By: Matthew Bradbard

“A shortened trading week may deliver short opportunities”

It was evident very little could be done at the G-7 meeting to help the global slowdown. The G-20 summit in April could be more of a pivotal event. More than comments from the G-7, we would look for the passing of Stimulus Deux, the bank rescue and moratorium on mortgages, to be the big events this week that drive trading. The markets have been searching for any bit of positive news and if these most recent maneuvers deliver any confidence, we would expect for monies on the sidelines to be committed to various asset classes. The key will be following the flow of funds and to play the longer term trends. I am currently reading a book entitled “The Professional Commodity Trader” about Stanley Kroll a commodity broker in the 60’s and 70’s. In the first 5 chapters the theme is to play the major trend with your positions and use the minor trends; i.e. setbacks or advances for your entry. He stresses how critical money management is to be successful and I wanted to echo that to all regardless of the asset class you trade.

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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Rumors are circulating that OPEC will likely cut production again when they meet in March. The US Energy Department said in its short-term Energy outlook that it expects WTI crude oil to average $43 in 09’ and $55 in 10’. It also expects the price of retail gasoline to average $1.95 a gallon in 09’ and $2.19 in 10’ The US Department of Energy said crude oil supplies were up 4.7 million barrels last week, supplies of gasoline were down 2.6 million barrels while heating oil supplies were down 2.1 million barrels. April crude oil closed down $3.86, on a trade below the contract low made the day before Christmas at $39.83, prices could trade down to the low made on the Mach contract last week at $33.55. We see resistance between $42.50/43.00 followed by $45.30. Getting long crude mid to late February and holding approximately 60 days has been profitable 21 of the last 25 years for an average profit of $2700/per contract. Past performance is not indicative of futures results. April heating oil gave up 6.95 cents making its way towards the contract lows. On a close below 1.25 look out below. A close above 1.35 we see a trade up to 1.45. April RBOB lost 3.65 cents last week. On a close above 1.42 in April we see a challenge of the 100 day moving average at 1.56. Support is seen between 1.20/1.22; on a breach of that level we see 1.10. We favor 20 cent call spreads in June; on our radar 1.35/1.55 and 1.40/1.60.

The DOE also reduced its 09’ estimate of the price of Henry Hub spot natural gas from $5.78 to $5.01. The US Department of Energy said underground supplies of natural gas were down 159 bcf to 2.020 trillion cubic feet. Supplies are now up 2% from a year ago. April natural gas lost 33 cents last week and traded to a new contract low on President’s day. We advised clients to buy back their March $5 calls at a $700 profit and now hold $5 April calls that are slightly under water. We will be looking at new entries purchasing the April $5 and $5.50 calls looking for a trade back to $5 in the next few weeks. Buying natural gas in late February and holding until on or about April 22nd has been profitable 16 of the 18 years for an average profit of $3075/per contract. Past performance is not indicative of futures results.

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Cattle on feed out Friday 2/20

After the close Friday, the USDA estimated the week's beef production at 480.8 million pounds, down 0.4% from a year ago. For 09’ the USDA reduced its estimate of beef production from 2654.0 to 2611.0 million pounds and reduced the price estimate of choice steers from 94.0 to 89.0 cents per pound. April live cattle were unchanged on the week but did have a 240 tick trading range. We see support at 86.10 followed by 85.10 with resistance at 88.00 followed by 89.00. March feeder cattle were higher by 40 ticks but failed to hold a rally, closing 240 ticks off their weekly highs. Support comes in at the 20 day moving average at 93.50 with resistance at 96.00. We continue to hold the August live cattle/March feeder cattle spreads for clients. Currently just under-900 and we are looking for the spread to narrow to at least -600 in coming weeks.

Pork production was estimated at 456.3 million pounds, up 1.2% from a year ago. For 09’ the USDA reduced its estimate of pork production from 2303.5 to 2298.0 million pounds and reduced the price estimate of barrows and gilts from 49.0 to 47.5 cents per pound. April hogs closed up 3.55 cents or 6% last week just as we had predicted. Did you listen? The contract lows at 59.80 should serve as the low for all of 09’ that’s right you heard it here first. On a close above the 20 day moving average at 64.90 a bottom should be set. We are advising clients to buy April 65 and 70 cent calls or to get long the futures in either April or June and sell calls against your position, contact us for exact pricing. If this is the bottom we should see a grind to 70 cents in April in the next 2-4 weeks.

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Stocks: US Treasury Secretary Geithner announced his plans to help the country's credit problems last week to much disarray with markets showing obvious disappointment that the plan fails to remove troubled assets from banks' balance sheets. Virtually all of the previous week’s gains were given back as the Dow fell 430 points or 5.2% to 7850. The S&P fell over 40 points just under 5% to 827 with the NASDAQ shedding 57 points or 3.6% to 1534. Last week’s % decline was the largest since the mid-November selloff just before the most recent bounce. Will history repeat itself? We are still expecting a rally, call it the Obama honeymoon or a policy inspired bounce; whatever the case we would not get long but rather use this bounce as an exit to get out of remaining longs and to get short for another leg down and new lows. The bad news is that although we feel the stock market has already discounted a normal recession what if this recession is more severe than normal which seems to be the case.

Bonds:  March 30-yr bonds were 13 ticks higher last week. We expect to see prices remain range bound this week between 125’16 and 129’16. March 10-yr notes were higher by 29 ticks last week. Support is seen at 121’16 with resistance at 124’16. March 10’ Euro-dollars were lower by 4 ticks which is $100 per contract. We are advising clients to buy puts in September 09’; current recommendation is 98.75 puts for approximately $825. This option has 209 days, a 56% delta at these levels and is intrinsic as of this posting. Additionally, we are advising clients to build short positions in March 10’ contracts. We would not dive in head first but rather start selling at these levels and look to add when the trade has moved in your favor by 20-30 ticks. Looking at the weekly charts it appears we are making an interim top. See our special report issued last week for more info: EuroDollar.

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Australia reported that the unemployment rate increased from 4.5% to 4.8% in January, the highest level in almost three years. The March contract lost 2 cents last week. Support is seen at .6250, resistance at the 9 day moving average at .6552, on a trade above that level look for .6725. We have no client exposure, but it is on our radar.

The March Euro gave up 121 ticks last week but could go either way from here. We see support at 1.2715 followed by 1.2400, resistance at 1.3120.

The March Swissie was higher by 40 ticks last week.  Buying has supported for the last 3 weeks between .8500 and .8550 and we expect that to continue.  We would advise a buy stop above .8700 to get positioned long. We see a break out of the most recent sideways consolidation this or next week with a bullish bias.

The March Loonie was lower by 167 ticks. Not too bad considering Canada reported the first monthly trade deficit in 32 years. We covered a long position on Tuesday and then advised clients to re-establish the position after a 100 point sell-off. Currently we’re positioned long futures against short March 80 cent calls. Our previous positions were similar; long futures short 81 cent calls. We see support at .7950 and expect a re-visit of .8200 soon.

March yen has been lower for the last 3 weeks which had not happened since April of 08’. Last week prices shed 34 ticks, perhaps anticipating that the GDP report due this week will show a big contraction in Q4. Support comes in at 1.0850 followed by 1.0725.  We are still looking for long entries near 1.0850 but will let the currency settle in this week after the G-7 meeting and new stimulus announcements. We have 4 cent March call spreads on our radar; the110/114 and 111/115. Resistance is at 1.1100 in March. BOJ may try some verbal intervention but what can they really do with rates?

The March Cable lost over 5 cents last week retracing after 2 strong weeks. On a close below 1.41 look for a re-visit of the lows near 1.35. Resistance comes in at 1.46. The pound still looks weak and for short-term traders we would still be selling rallies. Talk of quantitative easing has the market on edge.

The March Kiwi was lower by 125 ticks with support at .5150 followed by .5050 and resistance at .5300.  We have clients on the sidelines but will be looking for evidence of a true bottom.

The US dollar index was higher by 83 ticks last week, now gaining 6 out of the last 7 weeks. Prices have been unable to wander too far from the 9 day moving average; failing to trade higher or lower by more than 2 cents. Resistance is eyed at 87.40 followed by 88.60 with support at 85.00 followed by 84.00.

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The USDA's 08-09 ending stocks estimate of corn was unchanged at 1.790 billion bushels, largely a non-event. May corn was lower by 12 ¼ cents closing lower for three consecutive weeks now. Considering the December low and January high $3.62 ½ serves as the 61.8% Fibonacci retracement level and should act as support on a closing basis. We are advising clients to buy this dip in corn via July calls or if they decide to get long futures to sell calls against the futures in either May or July.

The USDA's 08-09 ending stocks estimate of soybeans was reduced from 225 to 210 million bushels. The USDA's estimate of soybean production this spring in Argentina and Brazil was reduced from 49.5 and 59.0 million tons respectively, to 43.8 and 57.0 million tons. Taken together, the new estimate is down 6% from a year ago. May soybeans closed lower by 46 cents or 4.5% last week. On the way down we see support at $9.27 ¾; the 50% Fibonacci retracement followed by $8.94; the 61.8% Fibonacci retracement.  Resistance comes in at $9.94. Like corn, we will be advising clients to buy this pullback in beans either via July calls or if in futures to sell May or July calls against your longs. Furthermore, we have stayed with our long November/short May spread; we still view this spread as a buy under -65 cents looking for 30 cents and for the spread to narrow. 

The USDA's 08-09 ending stocks estimate of wheat was unchanged at 655 million bushels. May CBOT wheat lost 22 ¾ cents last week lower for the third consecutive week. We see support between $5.25/5.00 with resistance at $5.70. May KCBOT wheat was lower by 13 ¾ cents and is now 70 cents off the highs from just 6 weeks ago. Support comes in at $5.75 followed by $5.60 with resistance at $6.00. There is only 2 weeks left on the March contracts so we would suggest looking for an exit on the March KCBOT/CBOT spread. You should be long from around 20 cents, as of Friday’s close the spread was at 39 cents and our target remains 45 cents. We suggest having a gtc exit order of between 43-47 cents.

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May coffee lost 6 cents or 5% last week and on the weekly chart formed a bearish engulfing candle.  Short term prices could come under pressure, but we would use this weakness as an entry to buy May and July calls. 112.80 may hold as the 61.8% Fibonacci retracement, but more likely prices will see 110.00.  We own 130 calls for clients in May and will be shopping for 120 and 125 calls this week.

The USDA's 08-09 ending stocks estimate of sugar was reduced from 1.072 to 1.066 million tons. March sugar gained 5 ticks last week with current support coming in at 12.50 and resistance at 13.40. On a setback we would be a buyer for clients of the 15 and 17 cent October calls. Currently we are positioned long the October 14 calls against a sale of the May 14 cent calls. For new entries we still like this trade for options and for futures we like being long May with some option protection either buying puts or selling calls.

The USDA's 08-09 ending stocks estimate of cotton was increased from 6.90 to 7.70 million bales. The USDA's estimate of US cotton consumption at 15.4 million bales which is the lowest in 10 years. May cotton fell 5.27 cents just over 10%. Last week’s low was the 61.8% Fibonacci retracement level from the November low and January high. On outside market weakness we could see a trade down to 41.00. We would entertain a long entry from those levels as we feel cotton is a good candidate to benefit if and when we see a recovery in global economies.

The USDA reduced its estimate of the 08-09 Florida orange crop from 162 to 158 million boxes and also reduced the projected juice yield from 1.62 to 1.61 gallons per box. May fcoj lost 1.55 cents last week and has been lower for the last 3 weeks. Support is at the contract low 71.15 with resistance at 74.00. We are lightly long in May but see no sign of a bottom yet even with a sizeable gain in open interest from 3,000 to 9,000 since the first of the year.

In the Ivory Coast, cocoa farmers are blocking trucks in protest, hoping to get more funding and fertilizer from the government. This turmoil helped pare losses as cocoa only lost $61 last week after being down over $115. Resistance comes in at 1935 followed by 1975 with support at 1875. A 38.2% Fibonacci retracement from the October low and January high has prices coming down to 1735 and we think this is a viable target.

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April gold gained $28.80 last week to trade at levels not seen since July. Clearly flight to quality buying has shifted from the US dollar, yen and Treasuries into metals. Prices are approaching the upper end of the trading channel; prices have been in this $100 channel since mid-October. With a close above $955 we could take a run to $1000 but we would expect a correction prior. We say that because everyone is now onboard the gold train and everyone is generally wrong. As we have voiced and to date been wrong we expect a steep correction to $860 in the near future. First support comes in at the 9 day moving average at $924. We are positioned in 900/1000 June call spreads with clients and also hold March 900 puts. These puts expire on 2/24 so without a correction very soon they will lose most of their value on time decay. The total cost of this trade as of last week was $4700 before fees.

March silver gained 63 cents or 5% last week but unless prices punch through the triple top at $13.70 early this week prices could back off. On a trade above those levels look for the next stop to be $13.90/14.40. We have advised clients to lighten up on their $15/20 December call spreads being that we do expect a short-term retraction. We are eager to re-establish longs after the setback. We have also advised clients that if their objectives have been hit in their long July positions not to be greedy. We have clients currently long March and May mini-contracts and have been trailing stops up under the market and recommend you do the same. From mid-January to today, basically in the last 30 days we have seen a $3.30 or 32% advance so a correction of 15% taking prices to $11/12 is not out of the question. We cannot stress how important it will be to buy this correction because if we are right prices will pop back up almost as quickly as they sell off. Be ready!

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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.