For July 21st–July 25th 2008

By: Matthew Bradbard

The talking heads are calling a top in commodities and claiming the bubble has burst, we prefer a pullback in an ongoing bull market to explain the recent slump in commodity prices. Remember that whether they are bull trends or bear trends, long-term trends don’t die easily. Based on current market conditions the current corrections are just that, corrections and nothing more. That being said you may want to wait for the volatility to subside before repositioning.

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

____________________________________________________________________

The U.S. Department of Energy said that crude oil supplies were up 3.0 million barrels last week at 296.9 million barrels, more than expected, and 100,000 barrels were added to the Strategic Petroleum Reserve. September crude oil dropped $15.88 or 11% to $129.47 to post its largest one week drop in history. The prognosticators fail to point out that even with the recent sell off prices are still up over 60% ytd, so we are not out of the woods just yet. Next support comes in between $122 and $124 with resistance at $133, followed by $139 on September. We would caution traders to throw in the towel for higher prices and to shift to a bearish bias as the recent decline has taken prices to over sold levels and we still would not rule out a trade above $150 in coming weeks to months. For now we would stand clear until the sell off has fully run its course.

Supplies of gasoline were up 2.4 million barrels and heating oil supplies were up 1.3 million barrels. Over the past four weeks, gasoline demand was down 2.1% from a year ago while distillate demand was up 2.5% from a year ago. In terms of price, RBOB was a looser shedding 38.26 cents, or 11% trading to levels not seen since the first week of June. Support comes in at $3.12 followed by the 100 day moving average at $3.0650. September heating oil lost 43.12 cents or 10% and was successful in filling a gap on charts from early June. Significant support comes in between $3.55 and $3.60. We will most likely look for a long entry in heating oil, but would like to see a confirmation of an interim low and reversal in both heating oil and crude before initiating longs for clients.

The U.S. Department of Energy said that underground supplies of natural gas were up 104 billion cubic feet last week to 2.312 trillion cubic feet, more than expected. Supplies are now down 14% from a year ago and down 2% from the five-year average. September natural gas closed down $1.40 on the week at $10.64, the lowest level in three months. Late last week we saw a quick $3 drop and have now reached the 50% Fibonacci retracement level. With prices extremely oversold, expect prices to reverse and find their way to higher ground on warmer than expected weather or a hurricane forecast. We are pricing out-of- the-money call spreads for September and may probe futures from the long with stops below last week’s lows for clients this week.

___________________________________________________________________

Total beef imports are expected to fall 12% from last year. Exports are expected to expand as Japanese and NAFTA markets have been strong heading into the peak of summer. Live cattle imports are expected to be above last year's levels. Imports from Canada continue to have a higher percentage of feeder cattle due to more advantageous feeding opportunities in the United States. After the close Friday, the USDA estimated the week's beef production at 530.1 million pounds, down .2% from a year ago. August live cattle ended down 2 ¾ cents at 97.50 and are currently trading at 8 week lows. The 100 day moving average gave way last week and prices may attempt to fill a gap at 96.40 from April, but we are still looking for a reversal soon. We recommended a light long last week and if you are holding a looser don’t add to it just yet. If you took the long off, look to re-establish longs in August or October once prices turn. August feeder cattle closed 212 points higher, but we are still waiting for a push through 114 and to the contract highs at 116.50. To reiterate the same message from last week, we currently prefer feeder longs to live cattle. Look to add to longs on setbacks as we see feeder cattle tracking higher.

Last week the USDA estimated pork production at 423.6 million pounds, up 9.4% from a year ago. Hogs were up on the week at varying levels depending on the month; currently we are working clients out of August longs and getting positioned long futures and options in October and December. Support on October comes in at 71.60 with resistance at last week’s high; at 74.00.

____________________________________________________________________

Stocks: The minutes of the Fed's latest meeting said that "members generally agreed that the risks to growth had diminished somewhat since the time of the last FOMC meeting, while the upside risks to inflation had increased." Apparently, Chairman Bernanke's outlook for the economy has gotten more pessimistic since then. Although we are seeing a recovery, we would not buy into this as the beginning of a bigger move. Whether armed with a squirt gun or bazooka, the Fed is running out of ammunition to support the stock market, we would advise using this rally to exit longs and continue to suggest investing defensively. Stocks are bouncing off 2 year lows on decent volume, but we don’t think we will get much more than bounce as circumstances are not any different than they were to cause the recent sell off. Also, what we are seeing more so than a commitment of new money, is the shuffling of money that was already in the market. The Dow ended last week up 396 points, or 3.6% at 11497. The S&P rose 21 points or 1.7% to 1261.  The NASDAQ added 44 points or 2.0% to 2283. 

Bonds:  U.S. Labor Department reported that CPI and PPI were up to levels not seen in decades. Excluding food and energy, prices were up but to a lesser extent. Although the government refuses to include energy and food in their core numbers, inflation is affecting consumers as the rise in energy and food is spilling over into almost everything. With inflation readings near 5.0%, yields must move higher to encourage any money to stay in treasuries; with higher yields we will see prices back off. Last week in September, 30-yr bonds lost a little better than 1 basis point closing at 114’10.5. 113’30.0 serves as support and the 61.8% Fibonacci retracement with resistance at the 50 day moving average at 114’24.0. 10-yr notes lost just better than ½ basis point closing at the 50 day moving average of 113’19.5. We expect September notes to track lower finding next support at 112’28.0. On the short end of the curve we have clients positioned short euro-dollars.

____________________________________________________________________

Eurostat said that consumer prices in the Euro area were up 4.0% in June from a year ago; up from a 3.7% gain in May and the biggest annual increase since records began in 1997. The September euro closed down 95 ticks at 1.5796 but was unable to follow through on selling early in the week. We will continue to advise clients to sell rallies looking for a move to 1.55 in coming weeks.

Statistics Canada said that manufacturing sales were up 2.7% in May, stronger than expected. That alone could not help prices stay afloat, while selling in the metals and energies may have contributed to a stalled rally as the Loonie gained 26 ticks last week. As we said last week, we like playing the Loonie from the short side for September expecting prices to make their way to .9850 followed by .9750. We would suggest selling any strength with stops above last week’s high of 1.0018.

The U.K.'s Office for National Statistics reported a budget deficit of 24.4 billion pounds in the second quarter, more than expected and the largest quarterly deficit since records began in 1946. Inflationary pressures continue to mount amid growing concerns for a slowing economy. Last week prices were virtually unchanged with prices closing slightly positive after prices bounced off the 9 day moving average. We expect last week’s high of 2.0074 to act as resistance and we should see September work back to the 1.9650 area with first support at 1.9740.

The Swiss franc seems to follow the Euro in terms of price direction, but with a little bit less movement. That being said we will be advising selling rallies in this currency as well looking for last weeks high of .9993 to serve as resistance. To date the 20 day moving average has been able to support but when it gives way look for the next stops to be .9670 followed by .9600.  

The Australian dollar faltered with the recent commodity rout, but was able to stay within 140 points of the 25 year high made early last week. We continue to favor the long side, however as we have expressed on a strengthening dollar and prolonged commodity correction, the Aussie could loose its allure in a hurry so use stops. At present the 9 day moving average supports at .9613 with resistance at last week’s high of .9770.

As expected last week, the BOJ kept rates unchanged at 0.50% and more of the yen movement was dictated by the flow of money. The movement south in the yen signals a rebound for the market’s risk appetite. We maintain the inverse relationship that the yen has exhibited with securities and for the time being we would let the yen drift lower into support looking for a long entry in the next few weeks. If we were to revisit the lows in September and hold near .9250 we may test the long side, but until then stay clear.

The dollar index for September printed a new contract low mid week, but pared those losses by the end of the week closing 12 ticks higher. The 20 day moving average at 72.72 should serve as resistance with support coming in just under 72.00. With the Fed likely in a holding pattern for quite some time we would look for interest rate moves with other central banks to govern the movement in the short run. If the stock market continues to track higher and commodities come off, we cannot rule out a bounce to 73.50/74 which we would sell with a vengeance. Continue to monitor the dollar if not to trade to help in managing other positions.

____________________________________________________________________

Corn: Weekly export sales showed 369 t.m.t. of corn was sold last week. With prices coming off roughly $1.80 or 22% we expect exports to start picking up again. Current action now is being governed by liquidation and nearly ideal growing conditions. Practically all support levels have been penetrated the last 2 weeks and for the time being this trade has gotten away from us. As prices have moved lower we have lightened up or spread longs off and remain optimistic as we feel prices have one more run higher before the most recent accent is complete. It could take adverse weather, dollar selling, a jump in exports, fund buying, or a bullish USDA; whatever the reason we have not abandoned our long December futures and options for clients as of yet. Only time will tell if this is the right strategy, but at the moment we are long and wrong looking for prices to at least fill the gap from 2 weeks ago at $7.47 and potentially trade above $8.00. From a technical stance, prices are extremely over sold on the daily charts and stochastic and RSI have not been this low since corn was below $4. Buy December…have some faith!  For new entries risk a close below 5.93, play by trading futures or buying either the 7.50 or 8.00 calls.

Beans: Weekly export sales showed 63 t.m.t. of beans were sold last week. Last Wednesday we saw a dramatic surprise when the house voted to veto the tax in favor of the farmers in Argentina. This takes the threat of port strikes out and suggests grain, especially soybeans will now move briskly out of Argentina competing with US beans. Much like corn, soybean prices will be dictated on if we have further commodity liquidation and what the weather holds. We have had a less dramatic pullback in soybeans than corn, as November beans are just now approaching the 38.2% Fibonacci retracement level at $14.12. If we trade below $14.12 we could see prices back at $13.50 so be patient. As of this writing we are $1 off the recent highs and roughly 20 cents below the 50 day moving average, so buying beans now is like catching a falling knife. If you should chose to do so, we recommend buying lightly and only adding to the position once a low is confirmed. We still favor the long side in November beans and December soy meal, but we are waiting on the sidelines with clients as most of our clients are already long corn and we don’t need to add more grain exposure when the current short-term trends are down.   

Wheat: Weekly export sales continued its five week bullish demand trend with 748 t.m.t. of wheat being sold last week. Everyone wants wheat after the price rationing we saw last year. However, demand is not driving wheat as the US crop overall looks to take ending stocks this year from 300 m.b. to over 500 m.b. next year along with a world record crop, leaving no threat of running out of wheat this year. On a close below $8 on September CBOT we should see prices track down to $7.75, current resistance is the 50 day moving average at $8.32. For KCBOT in September we have resistance at $8.69 with support at $8.36 with a gap from early June likely to be filled on a lower trade so be careful because we could get a quick move to $8.00.  If that level was to hold we would most likely look for a long entry.

____________________________________________________________________

The National Confectioners Association said that the U.S. cocoa grind totaled 80,415 tons in the second quarter, down 16% from a year ago. September cocoa fell $116 on the week to $2,799, the lowest close in six weeks. This was largely blamed on fund selling. Prices in the last 2 weeks have come off $500 or 15% and are fast approaching the 50% Fibonacci retracement level. If you took our long entry in cocoa last week you would have gotten stopped out at a slight loss. We will again likely probe for a long entry, but we will look for signs of a bottom before initiating the trade.

September orange juice was up 2.85 cents to $1.2610 ahead of Thursday's USDA orange juice outlook report. The Asian citrus psyllid remains a threat to California's orange groves. We have traded within a 10 cent trading range for the last 2 weeks holding above the 38.2% Fibonacci retracement level on a closing basis and have used this as a window to get positioned long via options for our clients. We feel we are 1 weather report, 1 USDA report, or large inflow of fund money into fcoj away from an explosive move to the upside.

For the last 3 weeks sugar has tried to trade to new contract highs and failed so with the sell off in crude oil and overall commodity liquidation, sugar stumbled last week coming off 1.42 cents or 9%. We closed for March 09’ just above the 100 day moving average and do not forecast much more of a correction in the short run. The most we expect is a trade back to 13.50 so we are buying futures and options for customers looking for the move higher to resume.

Cotton is one of the few commodities that did not get hit last week as December cotton only lost 24 ticks. For the last 9 days we have been basing out trading back and forth between 70 and 74 cents looking to determine the direction of the next leg. We favor an upside breakout and the longer we consolidate the larger the move should be expected. We have been and will continue to expect 90 cents in the coming months for the December contract.  We would like to see a settlement above the 20 day moving average at 76.50 to confirm a short-term low is in.

Coffee prices continue to track lower as we were unable to get a close above the 100 day moving average last week after several attempts. September coffee lost 4.60 cents nearing levels not seen in 5 weeks. We were able to rally after making a new low for the month so there is still some interest from the long side but not from us. We expect to see a move down to near 130 and then we will start to look for long opportunities assuming the market warrants it at the time.

____________________________________________________________________

Prices tumbled on long liquidation in gold on the heels of a decline in crude oil and improved stock market performance as the jitters about the financial system have abated to some extent. August gold lost $8.80 on the week but closed $31.60 off the week’s high. We continue to favor the long side and will be advising clients to buy dips, but with all the uncertainty look for increased volatility where it will not be uncommon to see $25 swings on a daily basis. Resistance comes in on August at $969 with support at $946 followed by $923. Money coming out of oil may be finding a home in gold and if we were to get some further turmoil in the stock market look for gold to benefit. Investor’s positioning for the long haul can feel comfortable being long, but if you are just approaching gold as a trade there may be better places to allocate your funds as prices could come off significantly in the short run with no longer term chart damage. What I am saying is before buying gold ask yourself what you are looking for and how long you intend to stay with the position?

September silver lost 75 cents on the week and is approaching the 100 day moving average at $17.93. If you remember, the 100 day moving average acted as resistance in weeks past and it now should act as support. We are a buyer of dips for customers and would expect prices to stay above $17.70 on any setback before we would abandon our longs and become a little more defensive. Once the next leg resumes we would expect to see a trade to the highs so we will be looking in addition to futures at pricing out December $1 and 2 call spreads. 

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.