For March 2nd– March 6th 2009

By: Matthew Bradbard

“Capital Preservation vs. Capital Appreciation”

There is a significant difference between preservation and appreciation. In this environment traders/investors must be at the top of their game as unpredictability is widespread and the magnitude of movement in all asset classes is voracious. We want to expand upon one of our posts from last week titled, “nerves of steel”, you must have conviction and do your homework before putting on a position as your nerves will perhaps be tested instantly. Don’t let the market noise shake you out of your positions. Although the public assumes there is little opportunity in current conditions, we are seeing tremendous opportunities, more frequent now than ever. Be alert this week as a number of Central banks meet on rates, NFP will be issued on Friday and stock indexes, the dollar and oil are all at critical decision points establishing their next course.

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 up 700,000 barrels, supplies of gasoline were down 3.4 million barrels and heating oil supplies were down 300,000 barrels. April crude oil jumped up $5.03 or 12% last week helped by improved gasoline demand, a 13% drop in imports over the last month and rumors that OPEC is sticking to its production cuts. With 2 consecutive closes over the 20 day moving average we feel prices could be destined for higher ground. The last time prices closed over the 20 day m.a was in the beginning of January when prices were near $52. We see current support between $41.50/42 with resistance at $46 followed by $48. Getting long crude last week and holding until 5/11 has been profitable 21 of the last 25 years for an average profit of $2700 per contract. Past performance is not indicative of future results. April heating oil picked up 7.79 cents last week and being that 1.14 has been able to hold for the last 2 weeks, we think heating oil has forged at least a temporary bottom. Resistance comes in at the 20 day moving average at 1.2825; on a move above that level expect the mid 130’s. April RBOB gained over 19 cents or 16% last week. We have been advising clients to buy 20 cent bull call spreads in June. Resistance since mid-December has been between 1.40/1.41, on a move above that level look for the mid 150’s. Ultimately, if crude can move to $60 in the upcoming weeks to months we expect 1.80/2.00 in RBOB. Buy dips to 1.25/1.30 via June bull call spreads.

The US Department of Energy said underground supplies of natural gas were down 101 billion cubic feet last week. Supplies are now up 14% from a year ago. April natural gas was up 13 cents and formed a bullish engulfing candle to end last week. We expect the gap that was formed 2 weeks ago to be filled at 4.38. On that, we would see prices advance back above the 20 day moving average at 4.40. We have been trying to scalp on a daily basis for clients in mini-natural gas and are trying to pick a bottom expecting when prices will turn to see a quick move to $5. Getting long natural gas last week and holding for approximately 2 months has been profitable 16 of the last 18 years for an average $3075 per contract. Past performance is not indicative of future results.___________________________________________________________________

After the close Friday, the USDA estimated the week's beef production at 486.1 million pounds, down 0.6% from a year ago. April live cattle were higher by 2.075 cents or 2.5%. Support comes in at 84.50 followed by 83.35 with resistance at the 20 day moving average at 86.35. As we have said in recent commentaries and blogs our upside target remains 87/89. We have clients long futures against call options that we sold to lessen the exposure. We will be looking to cover the entire position this week at a net profit. April feeder cattle were higher by 3.475 cents or 3.8% last week and if the momentum carries this week we should fill the gap at 95.25 from 2/13. We have an upside target of 96.50 and would expect support to hold between 92/92.25.

Pork production was estimated at 444.5 million pounds, down .2% from a year ago. April hogs closed up 2.775 cents or 4.8% attributed to better demand for cash hogs and technical patterns. We’ve been advising long futures in April and June and have recently bought 65, 70 and 74 calls in April for clients. Over the next few weeks we will be looking to roll our April exposure into June. We are operating under the premise that the low was made last week, we currently have a target in April at 63.50 followed by 66.00. ____________________________________________________________________

Stocks: Hopefully gov’t officials have figured out by now that the market would prefer honesty and reality, albeit downbeat as opposed to the sugar coating and false hopes that have previously been highlighted. The NFP number promises to be horrible, with most expecting over 600,000 job losses and a potential for unemployment to exceed 8.0%, but could this already be factored in? February brought the worst stock market performance in recent history with the worst 6 month stretch since 32’. The Dow was lower by just over 300 points or 4% last week to its lowest level since 97’ losing 11.7% on the month. The S&P has been lower 7 of the last 8 weeks and declined 35 points or 4.5% last week, losing 11% on the month. The NASDAQ shed 63 points or 4.4% last week and lost 6.7% on the month. The good news is that the decline has been orderly and not like the panic selling we have witnessed in recent market declines. This week will determine if we are able to dodge a bullet as we have client’s long March 800 mini-S&P calls looking for a bounce. Additionally, we are lightly long futures from 763, hopeful for an exit at a profit before Friday’s NFP report. Because a market is oversold or looks cheap does not mean it’s a buy!

Bonds: March 30-yr bonds were lower by 2’23.5 points last week to trade to the lowest levels since 11/25. What was support at 126-126’16, now becomes resistance with the new support at 123’00. We continue to advise clients to sell rallies. March 10-yr notes were lower by 1’12.5 points, moving in the same direction as bonds, but at a slower velocity. Support is seen at 121’00 with resistance at the 9 day moving average at 123’05. Continue to sell rallies in the March 10’ Euro-dollar contracts. We find it necessary to write this every week to ingrain this in one’s head, we will be implementing this trade for the next 3 months. Continue to build a short position looking to add more exposure on a close below 98.20.
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The March Euro lost 118 ticks last week trading lower 7 out of the last 9 weeks. The theme of late has been the inherent risks Central and Eastern European economies will pose to Western Europe. Support comes in between 1.2550/1.2525 with resistance at 1.2850. Prices could go either way, but should be determined by what the ECB does with rates; the market expects a cut of ½ point to 1.5%.

The Aussie was virtually unchanged giving up 8 ticks last week to close at .6427. Support is eyed at .6300 with resistance at .6550. We have clients on the sidelines as prices could go either way. We could see a small reduction in rates but more than likely a pause with more cuts to come; current rate is 3.25%.

The Swissie gave up 73 ticks last week and on the lows clients were 2 ticks from getting stopped out of their longs. Resistance comes in at .8650 followed by .8725. We go into the week with a slightly bullish bias but prices need to get thru .8700 to substantiate this. Keep stops at support which is at .8500.

The UK reported that real GDP was down 1.5% in Q4, the worst quarter since 80’.The March Pound dropped 80 ticks last week and like the Euro movement should be determined by the BoE decision on rates; we are anticipating ½ cut taking rates to 0.50%. Support is seen at 1.4080 and resistance at 1.4400 followed by 1.4550.

The March Loonie closed down 112 ticks as we chose to close out our client’s March positions at a scratch. We booked a profit on the call options we sold and a loss on the futures to break even. We see the RBC cutting rates ¼ point to 0.75% and depending if our assumption is correct we will look at long entries in March and June. We also suggest monitoring movement in energies and metals. In weeks prior metals were moving higher and energies lower while last week the opposite held, we want to be positioned when both are moving higher which we expect to be very soon.

S&P said that Japan is in its worst recession since WWII. The March Japanese yen continued its fall, closing down just under 5 cents and for the 5th consecutive week. We are a cautious buyer as long as last week’s low holds at 1.0132 in March. The small amount of March calls we own will expire at a loss this week. We advised clients to buy the June 103/107 call spreads for 130 points last week. We might see an attempt at the 9 day moving average this week at 1.0483. The inverse relationship between the yen and equities is dislocated as economic conditions are dreary in Japan with a stronger yen hurting exports. The yen as a safe haven is gone for the time being.

The Kiwi lost 75 ticks last week but did manage to stay above the contract lows which will serve as support at .4995 with resistance at .5150. Stand aside for now.

The US dollar index was higher by 2.23 cents or 2.6% its largest weekly % gain since late October. Resistance comes in between 88.50/88.75 with support at the 9 day moving average at 87.70 followed by 86.75. ____________________________________________________________________

USDA Ag Forum expectations:
Farmers to plant:
86 million acres of corn, the same as a year ago
77 million acres of soybeans, up from 75.7 million acres a year ago
58 million acres of wheat, down from 63.1 million acres a year ago
Predicted 09-10 ending stocks:
Corn at 1.72 billion bushels, down from 1.79 in 08-09
Soybeans at 380 million bushels, up from 210 in 08-09
Wheat at 664 million bushels, up from 655 in 08-09

There was no change in May corn as prices opened and closed at 3.59 last week. We see support between 3.50/3.52 with resistance at 3.65 followed by 3.80. We recommended clients to close out their May $4 calls at a very slight profit and to lighten up on longs last week. It will take a close over 3.73 for me to assume prices will go back over $4. Weather in S.America and its effect on grains is no longer the market ’s primary pricing force as crops planted late are at the end of key yield development time. The grain complex will pay more attention to equities, the dollar and crude. Crude will be the primary outside market for corn as the ethanol debate continues to garner headlines. According to Dow Jones Newswires, tensions remain high between Argentina's farmers and the government over the issue of export taxes. This could have an impact on prices this week depending if conditions change.

May soybeans were higher by 7 ¾ cent last week following $1 drop the previous week. First resistance is seen at 8.80 but prices need to close above 8.95 before we see higher ground with next significant resistance at 9.40. We feel being long July futures against sales of calls is reasonable. Support comes in between 8.35/8.40. Traders should get positioned long ahead of the March 31st Planting Intentions report especially after the USDA Ag Forum suggested less than 2 million more acres will be planted this spring with market expectations 4-5m.a. more to build safe ending stocks as world demand for protein crops increases. The wild card in March is like corn influence from outside markets. 

May CBOT wheat was lower by 13 ½ cents with KCBOT losing only 3 ¾ cents; both closing lower for the 5th consecutive week. Support in CBOT wheat is seen at 5.15 with resistance at 5.35 followed by 5.50. In KCBOT support comes in at 5.50 with resistance at 5.70 followed by 5.80. Buying the May KCBOT/CBOT spread below 30 cents looking for 45 cents is on our radar this week.____________________________________________________________________

USDA Ag Forum expectations:
Farmers to plant:  8.5 million acres of cotton, down from 9.5 million acres a year ago
Predicted 09-10 ending stocks:  Cotton at 5.7 million bales, down from 7.7 in 08-09

The USDA reported that cotton had impressive net sales of 587,000 bales. May cotton was lower by 114 ticks at a 12 week low. We will lightly buy if prices trade below 40 cents but we stress lightly because this would be a new contract low with no support seen. Resistance comes in at 45.00.

May sugar jumped up 62 ticks to the highest close in almost 5 months on news that PepsiCo announced that it will be offering a new line of products in April that do not contain high fructose corn syrup. On a trade above 14.00 this week momentum may carry prices back to 15.50/16.00 cents over the next few months. We will continue to scale into longs for clients in July and October. On option plays we favor the October 15 and 17 cent calls.

May cocoa was lower by $17 last week giving back over 17% from the highs 4 weeks ago. I seem to remember cocoa bulls making headlines in the newspaper around that time. A reminder, when the general media gets hold of a bullish or bearish market it generally reverses; a great contrarian indicator. Cocoa headed lower March and April in 28 of the last 36 years, so be warned. Past performance is not indicative of future results. Support is seen at 2300 and resistance between 2450/2500.

May fcoj started last week with a bullish engulfing candle setting the tone for the week trading higher 4 out of 5 sessions gaining 3.30 cents. This was the first positive week in the last 5 so things are far from optimistic. Support is seen at 65.00 with resistance first at the 50% Fibonacci retracement at 73.50 followed by the 61.8% Fibonacci retracement at 75.50.

May coffee was higher by 45 ticks last week which was only a small victory after losing 9% the previous 2 weeks. We are advising clients to buy 20 cent bull call spreads in July currently favoring the 120/140; Friday’s settlement was just under $1500. Last Friday we also directed clients to buy May 120 calls for approximately $700 with a target of $1100-1250 this week. Support in May comes in at 110 followed by 108 with resistance between 114/115 with an ultimate target of 120 in coming weeks. 
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April gold was lower by $51.80 with a trading range of $72.60, quite a change of events from last week, when prices gained 6.5% and lost 5.2%. I will not say I told you so, but this is the correction we had been calling for and the primary reason why we have been lightening up on our longs in gold. This again is an example of when the herd finds a market, it’s generally too late or near a top. Our buy zone to re-establish longs for clients comes in between 860-900 on April. We are tracking $100 call spreads in June as well as August. Our key numbers on April are 929, 906 and 881.On 2 consecutive closes above 970 we may work long even without a steeper correction so stay tuned.

The triple top just above $14.60 on May silver served as strong resistance and until that level is penetrated an interim top has formed. Last week prices moved lower by $1.31 or 9% and much like gold this was forecasted in recent weeks. Prices closed below the 20 day moving average for the first time since 1/15 when prices were near $10.50. Our buy zone to re-establish longs is 11.50/12.00. We will be tracking $3 call spreads in July as well as $3-5 call spreads in December. We will also position clients long in May futures once we feel the next leg higher has begun. Be cautious jumping in long too early as silver is still in decline mode seasonally with prices typically declining into April. Past performance is not indicative of future results.

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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.