For February 23rd– February 27th 2009

By: Matthew Bradbard

“Does the Gov’t intend on giving everyone fishing poles?”

In his infinite wisdom I quote one of Rick Santelli’s comments from last week, “Instead of giving away fish we must teach the public how to fish.” Although I think he tweaked the original, this version is more suitable in its current context. The way I view it is that with more government involvement, their labors will not fix the ailing economy but only prolong the recovery. Whatever happened to the saying no pain no gain? Let banks fail, companies go out of business and overzealous speculators lose money. Why should everyone else who played by the rules have to sacrifice. I agree with Marc Faber, “The best policy response would be to do nothing and let the free market correct the excess brought about by unforgiveable policy errors.”

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 crude oil supplies were down 200,000 barrels, supplies of gasoline were up 1.1 million barrels while heating oil supplies were down 700,000 barrels. This was the first withdrawal in crude oil inventories since December. April crude oil finished down $2.05, closing just over $40. As long as last week’s low at $37.12 holds, we like being long oil as we expect the weakness in January and February to turn into strength come March. We see the first resistance at the 20 day moving average at $43.87. April heating oil was lower by 9.60 cents last week; current support is eyed between 1.12/1.16 with resistance at the 20 day moving average at 1.3150. April RBOB was lower by 11.30 cents last week, but did show some life rallying 6 cents off the weekly lows. 1.15 should serve as support with 1.30 acting as resistance. We favor 20 cent bull call spreads in June, with 3 months time we expect at-the-money or just out- of- the- money spreads to go intrinsic. 

The US Department of Energy said underground supplies of natural gas were down 24 billion cubic feet last week to 1.996 trillion cubic feet. Supplies are now down 10% from a year ago. April natural gas fell 28 cents to a 6 year low, briefly below $4. We will continue to scalp for clients trying to time a bottom and in addition to buy April $4.50 and $5 calls, looking for prices to make their way to $5 in the next 2 weeks.

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After the close Friday, the USDA said there were 11.288 million head of cattle on feed as of February 1st, down 5.7% from a year ago. January placements were up 4% and marketings were down 6% from a year ago. In its monthly Livestock Outlook, the USDA reported: "Based on current expectations for feed prices and in the absence of any sustained rallies in fed cattle prices, negative margins for cattle feeding will likely continue for several more months." That being said it was no surprise as how live and feeder cattle reacted. April live cattle lost 3.45 cents last week challenging the contract low from December before paring losses. Support is seen at 82.40; the contract low and potential double bottom with resistance at 85.25 followed by 86.50. March feeder cattle gave up 6.10 cents or 6% taking prices back to levels not seen since mid-December. Support is seen at 87.50 followed by 86.00 with resistance at 91 followed by the 20 day moving average at 92.80. The cattle spread we had mentioned over prior weeks came in 185 points or $833 per spread.

We are looking for the spread to narrow more this week and may look for the exit door. After the close Friday, the USDA said that there were 595 million pounds of frozen pork in storage as of January 31st, up 3.5% from a year ago. Frozen bellies totaled 67.7 million pounds, down 4% from a year ago. As for hog prices, the USDA said: "Worldwide recessionary conditions have created more uncertainty about the prices that domestic and foreign consumers of US pork are willing to pay for pork products." April lean hogs closed down 3.45 cents at the lowest levels seen since June 06’. Without a stabilization and higher trade early this week we will be looking to cut losses on recent futures entries. We will continue to monitor the options positions but at this point would not commit fresh capital.

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Stocks: Is bank nationalization really a viable option? The Dow ended last week lower by 485 points losing over 6% to 7366, its lowest close since October 02’. The S&P 500 shed 57 points or nearly 7% to 770 making last week the sixth time in seven weeks this index has lost value. The NASDAQ fell 93 points or 6% to 1441. The severe pessimism is growing, so for that reason we are still expecting a rally. This will not be the ultimate low and we do expect to see lower levels but for now we anticipate a 10%+ rally. Even if we are right with our assessment, besides scalping and conceivably day trading, we will use this rally to get short from higher levels and perhaps to help navigate in other trades. This will not be a rally we want to be in as a position trade, only because we expect there to be another closet full of shoes that could drop.

Bonds:  March 30-yr bonds were higher by 1’04 points, support is seen at 125’16 and resistance between 129’16-130’00. Selling has come in near the 20 day moving average as prices have failed to close above that level in the last 4 weeks; currently at 129’15. 10-yr notes for March were higher by 9.5 ticks and continue to lag the movement of bonds. Support is seen at 122’16 followed by 121’20 with resistance at 124’16. We continue to advise selling rallies in the March 10’ Euro-dollar and will stay the course until we see a trade above the double top at 98.74. Prices last week gained 7.5 points or $187.50 per contract which is a move against current shorts, but fairly insignificant. We would look to add to the position on a close below 98.20.

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Japan reported that real GDP was down 3.3% in Q4, the worst quarterly performance in 35 years. The BOJ also met and kept interest rates unchanged at 0.10%. The March yen lost 96 ticks last week, shedding value for 4 consecutive weeks now. We see solid support at 1.06 with resistance at the 9 day moving average at 1.0850. We bought March 110 calls on Friday and on our best fills were out in the same session at a 70% net profit, for others we are looking for an exit of 80-100 points on a move to 1.09 in the futures early this week for an 85-100% profit. The risk we run is that there are only 10 days in these options so we will be quick to take profits or losses.

The March Euro reversed off a 12 week low closing 259 ticks higher last week. We see support between 1.2700 and 1.2750 with resistance at 1.3025/1.3050. On a move above those levels the 38.2% Fibonacci level may come into play at 1.3325.

The March Aussie was higher by 111 ticks last week, although the 9 day moving average capped any further gains. Support comes in at .6325 and resistance at .6625. Buy a close over .6650.

The Swissie for March too was higher by 111 ticks last week. A bullish engulfing candle formed on Friday and the weekly chart to end the week, so consequently we say higher prices are to come. We advised a buy stop in last week’s commentary at .8700 so some may be positioned long already, we would trail stops and currently advise placement at .8500. 

The March Loonie was higher by 10 ticks last week. Support is at .7875 with resistance at .8075. We still expect a move to .8200 and potentially .8400 if energies catch a bid. We have client’s positioned long futures against a short call option.

The Cable moved higher by just under 2 cents last week exhibiting signs that a bounce is due. Support comes in at 1.4100 with resistance at 1.4500 followed by 1.4650.

The Kiwi dollar gained 62 ticks last week, closing higher 4 out of 5 days but we have yet to re-commit client funds. Support is seen at .4985 with resistance coming in at .5200.

The US dollar index lost 26 ticks last week, considerably off the highs; practically 2 full cents. Strong resistance comes in at 88.50 with the first support at the 100 day moving average at 85.75. The 100 day moving average has been the line in the sand since mid-January, on a penetration of that level look for next support at 85.00 followed by 83.75.

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May corn was lower by 14 cents last week, corn has been lower now 7 of the last 8 weeks. Last week’s low at $3.42 is the 61.8% Fibonacci retracement from the lows in December and highs in January and should prove to serve as the correction before the next leg up begins. We see support at 3.50 with resistance at 3.67 followed by 3.75.  We have advised clients to get long May futures with stops below 3.50 and also to buy May $4 calls, last week we bought at 11 cents or $550/per.

Global economic worries on top of much needed rain in S.America reducing the threat of severe crop damage attributed to the recent loss in beans. May soybeans were lower by 92 ¾ cents or 9.7% last week. Aggressive traders could buy May with stops below, 8.50 but only do this lightly as prices could trade down to 8.00 with no real chart damage. We prefer getting long July against 4 sales of $10.60 July calls. As of Friday’s close at 23 cents, you would collect $4600 which is virtually the margin for one contract. On a move higher you would make more in the futures than you would lose on the options, on a move lower we would look to buy back ½ the options at an 8 cent profit and the remainder at 12-15 cent profit.

May CBOT wheat closed lower by 19 cents last week to make it the 4th consecutive losing week. Support is seen at 5.19 with resistance at 5.50. Likewise KCBOT wheat was lower by 17 ¾ cents just about 10 cents below the 9 day moving average. Prices have yet to close above that level in the month of February. Support comes in at 5.50 with resistance between 5.72/5.75. On the March KCBOT/CBOT spread prices traded above 45 cents, so those with resting orders may have gotten filled, if not we would look to trade out between 40-45 cents this week. This should be a profit of approximately $1000 per spread as we advised this trade several weeks ago at 15-20 cents. 

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Searching for some bullish news in sugar; Kingsman increased their estimate of 08-09 world sugar production deficit from 9.7 to 11.6 million tons due to lower production in China and India. May sugar ended down 51 ticks, but the 20 day moving average held as support. 12.50, which serves as the trend line from mid-December, should serve as solid support as 13.60 serves as resistance on the upside. We will look to cover the May 14 cent calls we sold for 30 points or better this week for clients. Assuming that happens we will most likely be at levels to acquire more 14, 15 and 17 cent October calls looking for all to go intrinsic by expiration.

May cocoa was lower by $163 or some 8.5% last week. Read our comments last week and you will see we predicted this on purely technicals. Our target remains the 38.2% Fibonacci retracement level at 1735 and perhaps the 50% level at 1645. 

May cotton was lower by 1.40 cents last week and has been lower 7 out of the last 8 sessions trading at levels not seen since mid-December. We would start scaling into longs this week between 40-42 cents if given the opportunity.

May fcoj has been lower for 8 consecutive days as it appears nobody has vitamin C in their diets anymore. May fcoj gave up 5.3 cents or 7.5% last week to trade at new contract lows. There are still no signs that a low is in place and we will be using a rally to cut losses on our May futures position.

After reading the article in Barron’s over the weekend I am more encouraged about the prospects for coffee in the months to come but as for the immediate futures prices they could yet trade lower. May coffee lost 2.95 cents last week and has lost 11% in the last month. Support is seen at 110.00 followed by 108.50 with resistance at 113.75 followed by 115.25. We have started to price out July calls spreads and may have some trading ideas in the blog this week. We currently own a light long position in May calls for clients.

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April gold gained $61.40 or 6.5% last week to close above $1000/ounce for the first time since mid-March 08’. We recommended clients to exit their long June 900/1000 call spreads last week at $5200-5500/per. On a pullback, which we have been anticipating, look for support to come in first at 950 followed by the 20 day moving average at 925. In addition to technical indicators screaming overbought, as equities bounce and some of the “flight to quality” money finds its way back into securities prices should back off. Our primary buy zone to re-establish longs is between 860/900. On futures we will still be active in April and would suggest on options to look at June and August.

May silver finished up 90 cents, the highest close in six months and has been positive for 5 consecutive weeks. In that time frame prices have advanced $3.23 or $16,150 on a 5,000 ounce contract. Quite a run and yes folks we did forecast this. Read our HI-HO silver report from November. Much like gold we have been calling for a retracement in prices and therefore haven been lightening up for clients as painful as that has been only to see prices make their way to higher ground. On a 50% Fibonacci retracement from Friday’s high and the low in October $11.60 is the ideal correction level. We will most likely start re-establishing longs on a move back close to $12 which would still be a 16% correction.

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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.