For August 25th–August 29th 2008
By: Matthew Bradbard
With the 2008 Summer Olympics now behind us China is back from vacation, look for buying to emerge on commodities as we have seen prices come off 25 plus percent on select metals, energies, and agriculture. We maintain our conviction on the secular bull market and that over the long haul we will be scaling into longs on dips. Historically bull markets in commodities have lasted 18 years and we are in year 8 so NO we don’t think the show is even close to being over. My birthday is on Saturday, August 30th; for my present I would like all readers to start taking commodities more seriously as an asset class using the most recent correction to gain more exposures in their portfolio. Although in the short term it may appear like a gift to me, 2-3 years from now you should be rewarded if you are disciplined.
To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.
____________________________________________________________________
The 200 day moving average at $109.23 remains as solid support, but it may not come into play as October Crude oil seems to be consolidating about $5 above that level. For now, the low on August 15th at $111.50 is the line in the sand with immediate resistance at last week’s high just above $122. Monday thru Thursday of last week oil gained $7.17 and it appeared we were starting another leg higher, but on Friday nearly all the week’s gains were given back as oil faded $6.96 to close, only 58 cents higher on the week. The plunge on Friday was the largest one day drop since 1991. Technical forces, including relatively light volumes in addition to breaching support levels added to the declines. The good news is that we didn’t make a new low last week, the pace of the decline has calmed and although we didn’t hold the gains, it appears we may try to move higher in the days to weeks ahead. We have a long bias, but until we break out of the sideways consolidation we would suggest buying near $113 and selling near $120.
Heating oil and RBOB acted similar to oil being that Monday thru Thursday it appeared we were heading higher, but that came to a screeching halt on Friday. On the week, October heating oil closed 32 ticks lower just below the 9 day moving average. October RBOB was the only energy within the complex to finish higher gaining 1.63 cents. We bounced off the 200 day moving average on Tuesday and that level should remain as support with resistance at last week’s high at $2.9727. We have no suggested trades presently in heating or RBOB.
Between this week and last week we expect the low to be made in natural gas before prices start heading higher. We were down on the week 6 cents just under the $8 level. As we said last week, we are long with our clients in the futures and sold call options out of the money bringing in between $5-7,000. Once the market confirms a turn we will look at option spreads and out right futures. For the last 16 years in September we have been higher 12 years and lower 4 for an average move of 11.9% which from current levels would be a move of roughly 95 cents. Past performance is not indicative of futures results.
___________________________________________________________________
After the close Friday, the USDA said that there were 9.869 million head of cattle on feed as of August 1st, down 4.2% from a year ago and less than expected. July placements were up 2.4% from a year ago and marketings were up 1.1%. Additionally, the USDA estimated the week's beef production at 518.7 million pounds, down 4.1% from a year ago. October live cattle finished down .47 at 105.78 on the week, unable to get above the 9 day moving average. On a close above 106.30 look for prices to resume the uptrend. October live cattle has been strong from late August into mid-September 12 of the last 15 years. October feeder cattle was off 2.20 on the week as prices have come off 600 points in the last 3 weeks. The 50% Fibonacci retracement on this contract is 111.50 and we are looking for the selling to slow and a sideways pattern before the uptrend begins after a slight pause.
After the close Friday, the USDA said that there were 492.2 million pounds of frozen pork in storage on July 31st, up 8% from a year ago. Frozen pork bellies totaled 59.2 million pounds, up 87% from a year ago. Furthermore, pork production was estimated at 434.6 million pounds, up 6.4% from a year ago. October hogs were down 2.05 on the week approaching over sold levels. We expect to see a trade down to 73.00 this week, but anticipate buying to emerge around that level. October lean hogs have gained 16 of the last 25 years in September. The best Septembers have followed August weakness. Past performance is not indicative of future results.
____________________________________________________________________
Stocks: Federal Reserve Chairman Bernanke told a symposium at Jackson Hole, Wyoming that the current financial storm "has not yet subsided," but the "FOMC is committed to achieving medium term price stability and will act as necessary to attain that objective." That is all well and good, but will it be too little too late as the PPI last week came in at a 27 year high? Economists say it is a lagging indicator and prices of commodities have started to back off which is apparent, but what happens when prices start advancing again, which we ultimately think is the case. We cannot make a bullish case for stocks in this environment at all. The Dow ended last week down 32 points or 0.3% to 11628. The S&P 500 gave up 6 points or 0.5% to 1292. The NASDAQ ended its 5 week winning streak to lose 38 points or 1.5% to 2415. September/October has witnessed some of the worst stock market declines in history. Resistance in the September Dow is at 11725 followed by 11850 with support 11440 followed by 11300. The S&P finds resistance at 1310 with support at 1267 followed by 1255.
Bonds: The flight to safety bid in Treasuries lives on as the global uncertainties have not abated and no quick end looks in order. From over bought levels the trend remains up and if we see equities get hit this week, we should push thru last week’s resistance and make our way to higher ground. We won’t be involved and we are still shopping for a short entry. As far as we are concerned, the higher prices we are able to sell from, the better. Support on 10-yr notes comes in at 115’25 with resistance at last week’s high at 116’27.5. September 30-yr bonds should find support at 117 with resistance at last week’s high at 118’09.5. On a breach of resistance levels on the upside we may attempt a run to the contract highs in March.
____________________________________________________________________
The Euro was higher 1 cent last week after 5 losing weeks closing at 1.4758. We would have expected to see more of a bounce after such a dramatic sell off and the fact that we haven’t expresses how much perceived weakness is reflected in the Euro economy and in turn their currency. We are still looking for a rally to re-establish shorts for our clients. Support comes in at 1.4650 with resistance at 1.49 followed by 1.50.
The UK economy moved a step closer to recession last week after official data showed growth unexpectedly ground to a standstill in the second quarter of this year, the weakest performance since the early 1990s. The Pound reacted losing 1.24 cents and closing below 1.8500 for the first time since July of 06’. The trend remains down, but we would need to see a rally to get clients short again, ideally we could see a trade back to 1.90 before establishing shorts. Resistance for now comes in at 1.87 with support at, nope there is no support, so don’t try to be a hero and pick a bottom.
Higher gas prices pushed Canada's annual inflation rate to 3.4% in July, its highest level in more than 5 years. As we voiced last week, if we were to get some support from the commodities; i.e. metals and energies look to get an advance in the Loonie and that is exactly what we saw as prices advanced just over 1 cent last week. We had a long trade recommendation last week, but have yet to reach our target of .9650. Buy dips as we still expect a trade higher after a pullback early this week.
The Japanese yen continues to react inversely to the stock market and although we do not agree with the recent path of securities, it will allow us a better entry to get long the yen. Last week the September contract was up 41 ticks, but we had expected more. We will start to work long this week via futures and options looking for the selling to abate and for the yen to see a steady crawl higher in the weeks to come. .9000 should serve as solid support and as we have said in previous weeks, once we get moving we are looking for a quick 400 plus point move higher.
There remains no reason to trade the Swiss franc as it remains largely range bound. Last week prices lost 14 ticks as we now have had 6 losing weeks in a row where this currency has lost 9% against the greenback. We should find support at .9050, but we don’t expect much more than a sideways market so look else where.
For a lot of volatility the Ausssie only finished up 10 ticks on the week, the important part was that it was up as prices have lost 11% in the last 5 weeks. We are still shopping for an entry to get long for our customers and if we see a capitulation low trade below .8500 this week that could be our entry point. It is still too early to get in December because of the lack of interest, but that will change over the next few weeks. September has moderate support at .8550 with resistance at .8750.
The US dollar index, which has rallied about 8% over the last four weeks, is nothing more than a bear market rally. Last week we failed at new highs and the dollar is showing signs of turning back down again. The dollar’s recent rise should be viewed as euro and sterling weakness rather than dollar strength. Looking at dollar fundamentals, we see nothing but difficulty ahead for the US dollar, because of the massive amount of money that has to be printed to pay for all these bailouts, the government and the Fed are committing to the deteriorating Federal and State budgets, not to mention the trade deficit that shows no sign of reversing itself.
____________________________________________________________________
Corn: Nothing really changes for this week as corn will continue to trade off the weather and outside market influences looking for direction. Funds have come back in recent weeks from buyers as dry weather may affect yields and the Pro Farmer crop tour is forecasting a yield slightly lower than the USDA at 153 vs. 155. The lack of moisture could be threatening to the crop which hasn’t matured as quickly as it normally would due to late planting and a cool, overly wet spring. December was up 51 ½ cents or 9% last week to close just below resistance from late July. We believe the pre-harvest lows are in and will be buyers on dips. Ideally we get a pullback to the 200 day moving average on some profit taking at month’s end or some timely rain. On a move higher look for next resistance to be $656, as we have said in past weeks or ultimate target is $6.90-$7.30 into harvest.
Beans: Like corn, beans too enjoyed a large rally last week as weather turned drier; the Pro Farmer came in with a yield of 39.9 which was lower than the USDA previous forecast as well as outside market influence. Last week November gained just under $1.00, expect volatility as the average daily range last week was 59 cents. Be cautious of a month end correction on rain in the forecast. If a correction comes we could push November futures to 12.60-12.70 quickly. We look to be long into September off any month end break, as we expect continued talk of late pod filling concerns. If the weather stays dry November could push to 14.10 which is the 50% Fibonacci retracement level. Although we like buying November beans on pullbacks, this will be a bumpier ride than corn because of the volatility. In addition to beans we favor a long in December Soy meal. Possible strategy here would be to buy the 400 calls, buy the 350-/400 call spread or to scale into longs looking for 353 to act as support. Our ultimate objective is to see a trade back above 400 in coming weeks.
Wheat: Wheat continues to follow the other grains as both KCBOT and CBOT traded higher last week with KC gaining 32 cents on the December contract and CBOT gaining just over 40 cents. Looking at the weekly charts you have a potential “W” formation and although we are looking for higher prices we feel it would be unlikely to see this pattern completed being that we are expected to grow the largest crop in history this year, pegged at a record 671 million tons which should allow the world to replenish their supplies. Last week the USDA projected food prices will jump 5-6% this year, which would be the largest increase since 1990. The shocker last week was that Iran bought wheat from the US which has not happened in 27 years. Due to an increasingly tight outlook for high quality wheat caused by the much lower percentages out of the Black Sea region left little choice. In the short term prices may back off from resistance reached last week, but we still favor buying dips. Look for an entry in December CBOT closer to $8.60 and KCBOT near $9.00. It is not going to have the action of an out right long but the December KCBOT/CBOT spread still looks good at 25-28 cents looking for the spread to widen to 50 plus cents.
____________________________________________________________________
After the close Friday, the USDA said that there were 1.42 billion pounds of frozen orange juice in storage, up 68% from a year ago. November orange juice ended down .55 cents at $1.0770 on the week. Prices have been treading water now for 2 weeks and we may need to see another hurricane to get speculators interested in the long side. We expect to see prices move higher, but are not really sure how much time we may need so we opted to buy some inexpensive January call options to be there if and when.
With help from a failing US dollar and news of cold growing weather in the Ivory Coast hindering main crop development, December cocoa was able to gain $201 on the week closing just below the 38.2% Fibonacci retracement level. On continued dollar strength look for a pullback that should be supported at 2690, the next resistance is 2920 followed by 3000.
The triple bottom on December cotton that was formed within the last 2 weeks should serve as sold support. We briefly traded below that level last week, perhaps trying to runs stops before decent volume emerged. I would like to see a close above the 20 day moving average this week which comes in at 70.25. We remain long December futures and options and remain convinced that cotton is the sleeper market and that we could see an advance to .85-.90 before this contract goes off the board. The wild card here is what type of demand we will see over the next few months from China and India.
It is starting to look more likely that coffee prices will be moving higher as opposed to lower. December coffee was up all 5 trading sessions last week gaining 7.50 cents closing just below 145.00 or current resistance. It looks like on this leg prices could get to 150; we will be looking for a pullback to get clients positioned long via options looking for an eventual move back to 160. On the weekly chart it appears a “W” may be in the making but for this to be confirmed we would trade sideways for the next few weeks between 135 and 145.
Much like coffee, sugar was able to post gains every day last week as March 09’ picked up 109 ticks or 7.5% to close near the contract highs. As we said last week we are looking for a new contract high which currently sits at 15.80. Sugar is not glamorous, but based on the affordability of quality options and a low margin rate; we think all commodity traders should have some exposure to sugar looking at an appreciation over the next few years. If not already positioned long look to sell options and buy futures on a breakout or wait for a retracement and look to buy some call options or sell put options underneath.
____________________________________________________________________
After 5 consecutive losing weeks gold was able to muster a rally last week with December gaining $38. As of this writing we are $47 off the lows and unless we see a significant advance in the dollar or a precipitous fall in Crude oil the low of $777 should serve as support. We have bounced from oversold levels but still remain in the summer doldrums so we are not piling in just yet. With demand coming in from India for the wedding season for jewelry and the Chinese back from holiday we could see some buying this week. We will not advise a heavy position just yet, but we will be buying December call spreads and long futures if we can stay above $800 this week. Although we are trading futures and options on the exchanges, it should be noted that the “American eagle” gold bullion coins sales were halted last week by the US mint for the first time since production began 20 years ago. What does this say about demand for gold and inflation fears?
We may have started buying silver one week too early, but I think the saying goes I’d rather be early to the party than late. We are long mini futures and have positioned clients long in bull call spreads and will be adding to the position on signs of strength. Coincidence or not, last year we put in a low on August 16th around the same level we saw a capitulation low this year on August 15th. Following that low into the end of the year prices advanced from the $12 level to $16 and eventually $21.50 by March. Both daily and weekly charts are bouncing from over sold levels as we expect to see prices back to the 200 day moving average by years end; currently at $17.10.
Back to Top
______________________________________________________________________
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. |
