For June 8th– June 12th 2009

By: Matthew Bradbard

Economic Recovery vs. Inflation

Call it what you want but traders make money on identifying an opportunity and capitalizing on it, not the why. To me inflation is a foregone conclusion, the timing is the tricky party. When you have Nassim Nichols Taleb setting up a new fund to exploit volatility and what he views as hyperinflation to come, it is time to gain exposure in commodities. When China is diversifying out of US dollars and Treasuries into commodities, it is time to gain exposure in commodities. The trend has reversed in most commodities from agriculture to metals, softs to energies and we would advise investors to allocate a portion of their portfolios to commodities.

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 official start of hurricane season was last week so depending on the activity or lack of we could see an impact on energy prices.

DOE reported crude oil supplies were up 2.9 million barrels, supplies of gasoline were down 200,000 barrels and heating oil supplies were also down 200,000 barrels. July crude oil was higher by $1.96 on the week but briefly traded above $70 for the first time since November 08’. Last week’s high at 70.32 should serve as resistance with support seen at the 9 day moving average at 66.42. July heating was higher by 9 cents on the week; 1.80/1.81 should continue to be resistance with support at the 9 day moving average at 1.7050. On a break in the energies market, which seems likely, we expect a trade to 1.55/1.60. July RBOB was higher just shy of 5 cents closing in on the 2.00 level which should act as resistance, support is seen at 1.83/1.85. We currently have no exposure with clients in these three markets.

DOE reported underground supplies of natural gas were up 124 billion cubic feet last week to 2.337 trillion cubic feet. Supplies are now up 31% from a year ago and up 22% from the five-year average. July natural gas was unchanged on the week but did have a 73 cent range so tread lightly. Support is seen at 3.50 while resistance comes in at 4.05 followed by 4.30. We have been buying clients $1 call spreads in August and September in addition to scaling into mini-futures. We continue to hold the 1:8 fence positions as well. Bottom line, over the next 2/3 months we expect a trade up to $5 and will be positioning to take advantage of this move. __________________________________________________________________

August live cattle were lower by 65 ticks last week. Resistance comes in between 80.25/80.50 while support is seen at 82.00. August feeder cattle were lower by 5.825 losing almost 6% last week. Resistance comes in between 98.50/99.00 while support is seen at last week’s low at 95.625. With beef prices down it may be a good time to start approaching cattle from the long side. Fundamentals show that beef consumption starts to decline in hot weather, but so does supply as feed lots are short of inventory. Traders should look to enter longs on or about June 18 and hold through February 5. This trade has worked 34 times in the last 38 years. Past performance is not indicative of futures results.

July lean hogs were lower by 5.425 last week losing 8.5% on the week. Support is seen at 59.325; last week’s low, resistance is at 62.00 followed by 64.00. The US is working on getting China, Russia, South Korea, and several smaller importers to end their ban on buying US pork but until this happens demand is lacking. Health officials agree that eating pork is safe, but lower prices have encouraged these countries to protect their domestic markets. ____________________________________________________________________

Stocks:  Stocks started the month of June strong with the Dow gaining 263 points, or 3.1% to 8762. The S&P rallied for the eleventh time in the last 13 weeks adding 21 points or 2.3% to 940. The NASDAQ gained 75 points or 4.2% to 1849 trading to levels not seen since October 08’. Equities have advanced to what we feel are unsustainable levels. We ask all existing and prospective clients that are enamored by the recent activity that are thinking this is the beginning of the next bull market one question, have things really gotten 40% better? They all have the same answer.  So we’ve been perhaps too early suggesting paring back longs in the stock market but I would rather be early than get out after a 20% correction.

Bonds: The US Labor Department said the unemployment rate increased from 8.9% to 9.4% in May, the highest level since 83’. NFP were down 345,000, a smaller decline than expected and based on the market reaction it was almost like 345,000 jobs were created. September 30-yr bonds lost 4’03 points to trade at new 09’ lows. Resistance is seen at 115’00 with support at 112’00. September 10-yr notes were lower by 3’12 points to also make new lows for the year. Resistance is seen at 115’00, though we don’t see any support level and the trend remains down. We feel the easy money has been made shorting the long end of the curve and have advised clients to now focus more on the short end of the curve. Euro-dollars were down across the board last week, most of which came on Friday as the market smells a recovery and feels the Fed may eventually act by raising rates. We hope that readers have been listening and accumulating puts and building a short position in futures.
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The RBA met and kept its interest rate unchanged at 3.0%. They made it clear there is room for rates to go lower, should the economy require more help. Their currency lost 75 ticks last week and looks as is there may be more downside. Resistance at .8150 with support at the 20 day moving average at .7795. On a break to near .7500 we will start to explore September calls.

The BoC, the BoE and the ECB all met and kept their interest rates unchanged. The BoC at 0.25%, BoE at 0.50% and the ECB at 1.0%. The Loonie was lower by 224 ticks last week. Resistance is at .9100 while support is at .8850 followed by .8700. We advised clients to take profits on their .8900 August puts and roll the profits down to August .8500 puts. We’ll be looking for an exit from lower levels this week. The Euro was lower by 172 ticks last week and it looks like over the coming weeks we could see a trade back down to 1.3200. For now resistance comes in at 1.4175/1.4225 and support between 1.3750 and 1.3800. The Pound was lower by 209 ticks and much like the others, looks destined for lower ground expecting 1.5200 in coming weeks. Resistance is seen at 1.6250 while support comes in at 1.5750. Further weakness could be attributed to shuffling in the UK government.

The Swissie gave up 161 ticks last week closing just above the 20 day moving average. Resistance at .9325/.9375, support at .9125 followed by .9050. We expect .8900.

The yen was lower by 327 ticks last week as the carry trade may be back in play. The trend remains down though we may be exploring longs from lower levels on any signs of a bottom here or top in equities. Resistance at 1.0325, support at 1.0050.
The Kiwi was lower by 122 ticks closing lower for the first time in the last 3 weeks. Resistance is seen at .6400 while support comes in at .6050. We expect a trade to .5700 in coming weeks.

The US dollar gained 143 ticks last week moving higher from oversold levels. Resistance comes in at last week’s high and the 20 day moving average near 81.00. On a move above that level expect 82.75. Support is seen between 79.75/80.00. We’ll most likely be fading this rally with clients. As we have voiced in the past, even if you’re not trading currencies monitor the dollar to help entry/exit in other commodities.
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The USDA said that 93% of the corn crop was planted and 70% of it was rated good to excellent. July corned gained 9 ¾ cents last week making it the seventh consecutive positive week. Resistance is seen at 4.50 with support at 4.30 followed by 4.15. Weather, planting progress and growing concerns are kept at bay for the time being as Wednesday we get a USDA crop production report; markets expect a drop in ending stocks from last month’s 1.6 b.b. We’re still anticipating getting long December 09’on a break between now and the June 30th USDA planted acreage report.

The USDA said that 66% of the soybean crop was planted, down from the five-year average of 79%. July soybeans strength continued as prices were higher by 39 ½ cents last week. Resistance first comes in at 12.30 followed by 12.55 with support seen at 11.80 followed by 11.45. We continue to hold July puts for clients at a slight loss expecting a break in the next 2/3 weeks. Last month’s report put 09’ ending stocks at 130 m.b.  A cut to 100 m.b. or lower would be bullish, outside of that we think the market has factored in smaller ending stocks.

The USDA said that 89% of the spring wheat was planted and 73% of it was rated good to excellent. The USDA said that 45% of the winter wheat was rated good to excellent. July CBOT wheat was lower by 13 ¾ cents last week with KCBOT giving up 12 ¼. Wheat assumes a follower’s roll to corn and soybeans as wheat does not have the current demand. On CBOT wheat resistance is seen at 6.40 followed by 6.55 with support at the 200 day moving average at 6.11 followed by 5.90. KCBOT resistance is at 6.95 with support at last week’s low at 6.68 ¼ followed by 6.50. ___________________________________________________________________

Dow Jones reported that no damaging cold is expected for Brazil's coffee crop in the immediate future. July coffee was lower by 3.15 cents last week as longs seem to be booking profit after the 25% + move in recent weeks. Resistance is at 137.00 with support between 131.50/132.50. Expect to see 125/127.50 before we’re interested in getting long again.

July cocoa was higher by $107 last week but the coming strength in the dollar should temper any more up movement. Resistance comes in between 2550/2575 with support at 2650. On a move higher on the dollar look for a break to 2500 so institute bearish plays via short futures or options.

July sugar closed down 16 ticks as 16 cents proved to be formidable resistance. Support comes in at 14.80 followed by the 50 day moving average at 14.48. Short term we would not rule out a break especially with weakness in energies but longer term we expect higher prices. That being said we advised clients to align themselves with options to take advantage. Sell October 18 cent calls, sell March 14 cent puts and buy March 19 cent calls. All in this trade costs $280.

The USDA said that 77% of the cotton crop was planted, down from the five-year average of 81%. July cotton closed 188 ticks lower last week closing just above the 9 day moving average. Resistance comes in at 56.85 while support is seen at 54.00 followed by 52.50. We’ll start exploring longs in December on an additional 3-5 cent break.

July fcoj was lower by 4.20 cents last week closing down the last 6 sessions. We see resistance at 93.00 and support at the 50 day moving average at 87.40. On a trade near 80 cents we will start looking at long opportunities. ____________________________________________________________________

July silver lost 38 cents last week failing to close above the $16 level after multiple attempts. The average daily trading range last week was 74 cents. This volatility exhibited both in silver and gold commonly hints at a price reversal so we have advised clients to lighten up considerably on longs. Support comes in between $15/15.15. Our buy zone on a setback is between $13.50/14.00. On a break to those levels we would be a buyer with both hands on September/December options as well as futures. For those still long futures we have advised to buy puts or sell calls for protection.

August gold closed down $18.40 and much like silver was all over the place with an average daily range of $23.40. Resistance is seen between 980/990 with support at 950. We are expecting on further upside in the dollar a move down to 905/920. On that we would be advising clients to buy $100,150, 200 call spreads in October and December gold. Another red flag why gold could correct is that the speculative position in gold has reached the highest level in a year.

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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.