For December 1st– December 5th 2008

By: Matthew Bradbard

"Even dead cats bounce"

Hurricane season is now behind us, however there were some serious storms brewing last week in Mumbai, India as terrorists killed more than 150 and injured over 300. China announced their biggest interest rate cut in decades, raising the prospect that the country’s booming demand for commodities will weather an economic slowdown. This, in combination with the recently announced stimulus plan, ought to help China remain as the global engine that should propel commodities higher into 09-10. We are not excepting prices to rush higher immediately, but do contend that traders exercising patience are getting entries at bargain levels in a number of commodities. It appears a good amount of commodities are stabilizing and we even see some markets moving higher, although we wouldn’t read too much into this as last week we experienced a light volume holiday week.

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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Oil has traded higher only 2 of the last 9 weeks and last week was one of them as January Crude gained $4.21 or 8.25%. As long as prices are able to hold the previous week’s lows at $48.25 we would suggest being long lightly. Current support comes in at $50.50 with resistance at $60.00. Over the next few weeks we would not be surprised to see oil make a run at $70. Members of OPEC left an informal meeting in Cairo this past weekend without an agreement to reduce production but with rising doubts about fraying discipline and tensions within the group which accounts for 40% of the world's oil exports. A great uncertainty still looms over the market. Have producers managed to draw a line in the sand, or will oil prices keep falling in coming months? Overproduction remains a concern if countries are producing with waning consumption. OPEC meets again on December 17th in Algeria.

January heating oil gained 3.44 cents in a volatile week, a trading range of 17.22 cents. On a move to $70 in crude we would expect prices to trade back above 2.00. For now support comes in at 1.67 with resistance at 1.84/1.85. A move over the 20 day moving average at 1.89 would signal a potential move to 2.00. RBOB put in an impressive showing lifting January 13.34 cents or 12.2% on the week gaining 4 out of 5 trading sessions. Prices closed above the 9 day moving average for 2 consecutive days, which last happened in late September when prices were above 2.60. Expect a bounce with support at 1.15 in January.

January natural gas ended down 21 cents with mild temperatures over most of the US. Last week’s AGA report showed a larger than anticipated withdrawal in injections which we have not seen in several weeks. Charts show a potential triple bottom around $6.25. We are suggesting buying the $8 February calls for approximately $2000 with an objective of $4000-4500. We expect to see a short covering bounce that could propel the futures $1-1.50 higher. Playing the futures we would look for a long entry in January with a stop at 6.18. The previous support from 06-07 comes in $2 higher at 8.50 on the charts; this being our ultimate objective. 

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After the close Friday, the USDA estimated the week's beef production at 446.2 million pounds, down 15.5% from a year ago (holiday distorted). The US Meat Export Federation announced that three major discount retailers in South Korea will start selling US beef again on Thanksgiving Day. February live cattle were 65 ticks higher last week after an early week advance failed to show much follow thru. Last week’s high at 88.50 should serve as resistance with support at 85.60. Prices could go either way, with a gun to my head forced to pick a direction I would suggest being short with tight stops looking for one more test of the lows. January feeder cattle were 180 ticks higher last week.  89.70 should serve as support with 92.325, last week’s high, serving as resistance. We could see a trade up to the 20 day moving average at 95.06.

Pork production was estimated at 417.9 million pounds, down 14.3% from a year ago. Grocers are expected to promote beef and pork again, now that the Thanksgiving holiday is over. February hogs closed up just over 225 ticks or 3.5%, the highest close in seven weeks. Hogs have moved nearly 500 points or 7.4% in the last 2 weeks. As we expressed last week, we are fairly convinced the lows are in and are comfortable recommending the purchase of futures on dips. We are still expecting to trade out of the April 90 cent calls in coming weeks at a price of 90 points (purchased for 50 points)on a move to 77.00-79.00 cents in April futures.

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Stocks: Equities finished the week higher all 5 days last week, though volumes were light and concerns still remain. This was the first 5 day winning streak since July of 07’. On the week performance was good, but for the month stocks had their worst November since 91’. The longest drought since 75’ without an IPO also was ended with a small deal on November 20th.  Volatility remains the problem as this year’s stock market is poised to surpass 1929’s as the most volatile ever. The Dow gained 783 points or 9.7% last week to 8829. The S&P 500 climbed 96 points to 896, a 12% surge was the best percentage gain since 74’. The NASDAQ rose 151 points or 10.9% to 1536. The key this week will be to get thru the next resistance levels; 9000 on the Dow and 910 on the S&P. We remain skeptical that any sustained rally will continue in the current environment. We continue to suggest decreasing exposure on extended rallies and would keep your powder dry for lower lows into 09’. NFP numbers are expected to rise to 300,000 in November with the unemployment rate expected to leap to 6.8%. 

Bonds: The trend remains up in Treasuries with the 30-yr in March gaining just shy of 3 basis points last week, closing near the contract highs at 127’15.5. Resistance comes in at the contract high at 128’12.5 with support in the mid 124’s. This complex looks over-extended and we could get a violent correction at any point, so stay flexible. 10-yr notes in March picked up just greater than 3 basis points trading to a new contract high, having advanced 8.5% in recent weeks. With the next Fed meeting just about 2 weeks away look for the market to start pricing in trader’s expectations. Yields remain at ridiculously low levels; the yield on the 10-yr treasuries slipped below 3%; it’s lowest in decades. Is the FOMC going to take rates to 0? Some firms including JPMorgan think so.  

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If you intend to be in a currency position for more than 2 weeks we would suggest trading March as opposed to December.

The December Euro gained 114 ticks last week, but closed 377 off its weekly high. Prices remained within the 5 cent trading range we’ve seen over the last 5 weeks with 125 serving as the floor and 130 the ceiling. Over the same time period traders have continued to sell rallies so we would advise the same and still hold our bearish bias. Our expectation would be at least a 50 basis point reduction in rates on Thursday, potentially more. The current rate is 3.25%. 

The Swiss franc too saw a failed rally but was able to muster a 50 tick advance on the week, closing 225 ticks off its weekly high. Last week we saw a brief rally only to see a reversal mid-week, ending the week below the 9 day moving average with new lows expected this week. Although we expect a reduction in rates the Swiss National Bank does not meet until December11th.  

The Aussie was able to gain just over 2 cents on the week, but how long will that last, with the RBA largely expected to reduce rates 100 basis points on Tuesday bringing rates to 4.25%. Support comes in on December just above .6400 with resistance at .6675. We expect a trade higher to .6900 over the next several weeks, but this week all bets are off. 

It was fairly impressive last week to see a gain in the Japanese yen even in the face of a sizeable gain in equities. The yen gained 22 ticks and a positive streak has now carried on for 4 consecutive weeks. We see support at 1.0250/1.0300 and resistance at 1.0530/1.0570. We are expecting a move up to 1.08 in coming weeks. Futures can be traded, but one will not be on top of their game because of the volatility. We prefer options for most clients and are currently positioned in the March 105/110 calls spreads; they are investing just over $1500 with an objective of $3000-3750. 
The Loonie gained 163 ticks last week and as long as we see gains in metals and energies that trend should continue. Support comes in at the 9 day moving average at .8017 with resistance at .8200 followed by .8325. The double bottom at .7690 should serve as solid support on a pullback. 

The BOE’s Governor King hinted that interest rates may have to be reduced again to cope with the growing recession with the current expectation of a 75-100 basis point reduction on Thursday. The current rate is 3.00%. The pound was able to gain 487 ticks last week or 3.25%. Prior to last week, we had not seen 2 consecutive positive weeks since mid-September. There is no real resistance until 1.6100, however last week’s high at 1.5530 may slow the acceleration higher. We see support at 1.5000 although on an aggressive rate cut look out below. 

The US dollar lost 93 ticks last week continuing on the wild ranges with a high to low of over 325 ticks.  We did see a trade below the 9 day moving average as we forecasted, but losses were pared by the end of the week to end just 10 ticks under the moving average. Support comes in at 85.00 with resistance at 87.70. This week prices could go either way with numerous Central banks meeting and a new month underway. The upside objective would be 89.00 and the downside objective would be 83.50. 

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Corn: March corn was 6 ¾ cents higher last week after testing the previous weeks closing lows and holding.  We would like to see a close back above the 9 day moving average; which currently sits at 378’4 to suggest a bottom. We would propose being positioned long March corn with stops below the recent lows or long May calls. One possible idea would be the $5 calls for just under 10 cents or $500. This option has nearly 5 months time and with an 18% delta a move to $4.50 in the futures you should pick up 100-150%.  Very aggressive traders could sell the $3 puts and potentially have a free trade. Selling options has unlimited risk and traders should recognize selling options is a lot different than purchasing options.  Support comes in at 3.60/3.65 on March with resistance at 3.80 followed by 3.95. 

Beans: Beans are struggling to not go lower and we would expect further short covering rallies to help lend support. Index funds have continued to reduce longs with speculative funds increasing longs and commercials cutting their short positions. This pattern usually indicates a near term bottom is in, but I remain skeptical. January soybeans were 31 cents higher last week with prices nearing the 20 and 40 day moving averages. Last week we were a buyer of the 9.20 calls for 22 cents with an objective of 38. If one wanted more time we like the May 11.00 and 11.20 strikes citing the open interest. Playing the January calls if you do not get a friendly December 11th USDA report it will most likely be a losing trade. We see current support at 8.60/8.65 with resistance coming in at 9.00 followed by 9.20. On a sizeable setback we would consider long futures expecting the 8.35 level to serve as strong support on a closing basis in January.

Wheat: March CBOT wheat gained 37 cents last week and although prices look like they are basing out we have no interest in gaining exposure. We see support at 5.35 followed by 5.20 with resistance at 5.75. March KCBOT gained 31 cents last week. Support comes in at 5.65 with resistance at the 5.95/6.00 level. The spread we spoke about last week, long KCBOT and short CBOT, lost 10 cents last week closing just above our recommended stop level. Depending on your stop placement this may end up to be a loser for traders already in. For fresh entries, we would look for an entry around these levels risking an additional 5 cents on the trade. We still have a target of 50 cent premium to KCBOT but we may go lower first. Do not get married to the position; taking a loss is part of trading. We will re-visit this spread next week. Follow the charts, if the triple bottom was to give way in wheat look for a 50 cent decline fairly quickly.

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Sugar prices in March were 55 ticks higher last week and if we see a move in Crude to $70 in the coming weeks, we imagine that could lift prices in sugar back to 15 cent/lb. We are currently recommending clients to buy the May 14 cent calls. 11.20/11.30 should serve as support in March with resistance at 12.30. Whether it is via futures or options we maintain that all commodity portfolios should gain sugar exposure as we feel sugar is the most undervalued commodity.  

January orange juice closed down 3.10 cents at a new contract low while the Florida crop is said to be doing well and there is no threat of freezing temperatures in the ten-day forecast. We have now been lower for the last 3 weeks and without trying to pick an exact bottom we have recommended clients to get lightly long with stops at 72.00 cents. We suggest getting long at current levels with buy stops looking to add exposure at 81.00 followed by 86.00 in January.

March cocoa was positive all 5 days last week and 9 of the last 11 sessions. Cocoa closed up $235; a gain of over 18% in the last 11 days, helped by the weaker US dollar and concerns about the size and quality of the current cocoa crop in the Ivory Coast. There was also news about some fighting in the western half of the Ivory Coast. The momentum and trend is clearly up with support at 2215/2230 and resistance at 2350.

March coffee gained 5.05 cents last week and has been able to hold multiple challenges of support at 111.00 for the last 2 weeks. December serves as the strongest month on record for coffee as the fear of drought increases with an average gain of 3.0%. Past performance is not indicative of futures results. 118 still serves as resistance although we are looking for the 122 level to serve as an exit for 125 calls for clients.

March cotton gained just under 6 cents last week or 14% as deliveries are being made against the December contracts, signifying a pickup in demand. A 14% move may not seem significant but all things considered with a margin amount of $2520 per contract this represents a $3000 move or 120% gain or loss based on the leverage. This is a powerful rally, however some of this move is attributable to short covering not necessarily new buying. We would advise buying a 3-5 cent pullback with light exposure, but would not rule out a move back below 40 cents. 

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March silver gained 60 cents last week, reaching our objective at the 50 day moving average already by Monday. We made a prediction to hit this level last week (see previous commentary). On a move above 10.80 we would expect to see a further push to 12.00. Our greatest attention still lies on accumulating December 09’ $15-20 call spreads for clients. Additionally, we would be a buyer of March 1,000 and 5,000 ounce futures contracts on setbacks to the 9.50 area. For option traders looking for a move sooner rather than later, with just under 3 months time you could purchase the March $15 calls for $1000. Upon getting filled we would suggest placing a gtc sell order at 40 cents or $2000. 
 
February gold was $16.50 higher last week, adding on the previous weeks gains. We have seen prices gain $74 or just under 10% in the last 2 weeks alone. In November gold picked up 14%, which was its biggest monthly gain in 9 years. This was aided by dollar weakness and the flight to quality play getting more attention. Also, talk of more rate cuts around the world has been supportive to the price of gold.  Resistance comes in at 824 followed by 865. A move down to 780-790 should be bought as we see that support level holding over the next few weeks. The 800 level should also support to some extent because of the physiological relevance. For more precise strategy contact us.

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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.