For July 28th–August 1st 2008

By: Matthew Bradbard

Consolidation and pullbacks are normal and should be viewed as healthy for the sustainability of a bull market in commodities. This may be the perfect time to load up on commodities that have lost their luster where the fundamentals are still sound. The recent correction was attributed to the shifting market sentiment that we may have a global slowdown and threats from regulators as opposed to a change in supply and demand characteristics. Instead of exiting commodities completely, the smart money is likely to move from the more high profile contracts such as energies to more innocuous contracts such as livestock and softs. In the case of crops, any substantial increase in the supply of one crop is invariably at the cost of some other. The world’s arable land is diminishing, while demand driven by population and incomes are increasing. The world has consumed more food than it has produced for the past five years. That being said we are still friendly to agriculture if one can deal with the volatility.

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 down 1.6 million barrels last week to 295.3 million barrels and 100,000 barrels were added to the Strategic Petroleum Reserve. September crude oil fell $6.24 to $123.26, with prices now almost $25 off their highs. We have yet to give up on seeing $150 but the path of least resistance for now remains down. Presently, we are not interested in trading oil long or short as the volatility is a bit rich. Support comes in at $122, which is the 100 day moving average in addition to being the level where the last run started in early June when prices rose from $122 to record levels. If that level was to give way the next stop should be $116 followed by $106 on a total collapse. If we were to change direction once again resistance comes in at $132 followed by $135.  

Supplies of gasoline were up 2.9 million barrels, while heating oil supplies were up 1.2 million barrels. Over the past four weeks, gasoline demand was down 2.4% from a year ago while distillate demand was up 3.6%. Gasoline and heating oil will continue to look for guidance from crude and where crude goes they will follow. September RBOB lost 14 ½ cents last week and closed under the 100 day moving average for the first time since August of 07’ for this particular contract. Prices have come off 17% from their highs just 2 weeks ago, but with continued demand destruction we could see prices come off more.  Heating oil gave up ground as well as prices in September lost virtually 20 cents on the week closing at the lowest level in 12 weeks. We could find some moderate support at last week’s lows, but if we trade south and break support we may not see any buying emerge until we get closer to $3.32 on September.  First resistance comes at $3.74. We would stand clear of gasoline and heating oil until we get a clearer picture on crude.

Natural gas suffered the same consequence as prices were hit particularly hard giving up $1.56 in September; in the last 3 weeks prices have come off 33% or in dollar terms $44,000 per contract in the futures market. EIA reported an injection of 84 BCF which was greater than the 5 year average of 57 bcf and higher than last year at 70 bcf. Total gas in storage stands at 2.396 trillion cubic feet which puts stocks 12.7% under last year’s levels and 0.9% below the 5 year average. We want to be a buyer of call spreads into September and October but have exercised patience as opposed to try and catch a falling knife. If we start to see signs of a bottom we will be quick to act as we think this correction may be a bit overdone and on any signs of increased demand or perhaps a hurricane we could see prices pop back $1-2 relatively quick. Although on the daily chart we are oversold we did trade below the 200 day moving average last week, which is not particularly bullish. We expect the selling to not necessarily abate, but to slow this week.  Support comes in just below $9 with resistance at $9.80 on September. If probing for a bottom make sure to use stops as this market is unforgiving because of the massive leverage and sporadic movements.

___________________________________________________________________

October hogs closed just over 100 ticks higher on the week even with the USDA saying that frozen pork inventories on June 30th were up 11% from a year ago, which was more than expected. We remain long October call options for clients and also put on a calendar spread buying October and selling August looking for the spread to narrow going into expiration. We entered the spread with October at a 5 cent discount to August and are looking for 2-3 cent move. August pork bellies were up their 3-cent daily limit 3 days last week after their storage numbers were less than expected. This is a classic example of how one could get into trouble positioned the wrong way in a thinly traded market.

October live cattle were marginally higher on the week but, still not able to break away from the 100 day moving average that has been acting like a magnet to prices of late. Last week’s low should support at 103.80 with first resistance at 105.75 followed by 107.25. We are currently positioned long in October with clients looking to add to the position on a move above 106.70. August feeder cattle were down 220 ticks on the week and are approaching a buy point. We will most likely start scaling into longs for clients closer to 111.00, ultimately expecting the 100 day moving average at 110.50 to support. The on-feed number came in as expected with placements a bit smaller than anticipated. The report should support the deferred contracts. The marketing’s number was a little lower than expected, but is not expected to be a market mover. 

The first shipments of US beef in 4 years arrive in Korea this week.

____________________________________________________________________

Stocks: The Dow ended the week down 126 points or 1.1% to 11371. The S&P lost 3 points or 0.2% to 1258 while the NASDAQ rallied for the second week in a row to add 28 points or 1.2% to finish at 2311.  The most recent rally in stocks may be attributed to a rule change on short selling as the government orchestrated a short squeeze trying to force a bottom as opposed to let nature take its course. If it was not for falling energy prices, there could really be no justification for stocks to continue moving higher. The banks are still not lending, global economic growth has slowed considerably, job cuts are on the rise and house prices have yet to bottom. As we have repeatedly voiced, use rallies in the stock market to work out of longs as we expect more pain and new lows. The Dow and S&P closed just below the 9 day moving averages and we would expect prices to continue moving lower this week towards 1235 on the S&P and 11100 on the Dow for September.

Bonds:  Treasuries cannot make up their mind as they try to balance growth, inflation and the flight to quality play as investors move from asset class to asset class. With data trickling in from around the globe, which has led to another leg lower in global stock markets, expect the debt market to act as a flight to quality and exhibit an inverse relationship to stocks. It is not as clear as stocks go down and treasuries go up, though as selling debt also reflects the belief that faster inflation will likely eat into the value of longer-term assets. In terms of ten-yr notes and 30-yr bonds we are not clear short-term where prices will lead so we are not recommending any trade. We have a bullish bias but no exposure with clients at the moment; support comes in at 113’00 on notes and 113’10 on bonds with resistance at 114’10 on notes and 115’10 on bonds. We remain short in euro-dollars for clients but will be looking for an exit on the next leg down.

____________________________________________________________________

Although we rarely trade the New Zealand currency, we thought it be notable to share that the Reserve Bank of New Zealand reduced rates last week a quarter point to 8.0%. This is significant because they have not lowered rates in 5 years and it could be sign of what is to come for central banks around the globe.

Statistics Canada said that consumer prices were up 3.1% in June from a year ago, up from a 2.2% gain in May and the biggest annual increase in over two years. The September Canadian dollar continued its downward march as prices lost 140 ticks last week closing near the lows. We have been recommending shorts for the last 2 weeks and will continue to advise selling rallies looking for prices to reach .9750 on the next leg down in September.

Australia's Bureau of Statistics said that consumer prices were up 4.5% in the second quarter from a year ago, the biggest gain since 2001. The September Australian dollar was down just under 150 ticks on the week. As we warned last week the Aussie could get hit on any dollar strength. We still expect to see parity down the road but for now prices could track lower. The 50% Fibonacci retracement support is .9460 which is followed by the 61.8% retracement at .9385. 

Reports last week showed euro-zone economic activity at a seven-year low and a further drop in German confidence. With a faltering economy it may be which currency the dollar or euro investor’s view as the lesser of two evils. The September Euro currency lost 142 ticks on the week, but was able to hold above support at 1.5600. We still favor the short side and will be selling rallies for clients, but expect a quiet week with trading between 1.5750 and 1.5500.

The British Bankers' Association said that mortgage approvals were down 67% in June from a year ago, the lowest level in at least ten years. Last week the cable lost 80 ticks to close at 1.9820 just above the 20 day moving average. As we have been touting of late we would expect the recent highs just above 2.00 to serve as solid resistance and for a grind lower in prices over the next few weeks. We will be selling rallies for clients in this currency as well.

Japanese exports declined for the first time in about five years, further evidence that economies around the world are being affected by the recent financial turmoil. The yen has made its way back to recent lows and is starting to look attractive for a long entry. One can try to probe with futures using stops below the low in late June of .9251 in September. We have started to shop September call options for clients.

The September Swiss franc lost 136 ticks last week and is currently in the middle of the trading range from the last 2 months. The Swiss franc remains on our no interest list as we feel prices once again could go either way. If positioned short from recent recommendations, stay short and trail a stop; our initial target of .9760 was attained and our next target is .9600 which should be reached this week on further selling.

The dollar index made some head way last week as September advanced 65 ticks closing above the 20 day moving average but just below recent resistance at 73.075. Look for consumer confidence and non-farm payrolls to be the catalyst to move the dollar this week. We also still see a relationship between oil and the dollar so look for a potential bounce from over sold levels in crude to influence as well. Support comes in at 72.89 with resistance just above last week’s high at 73.25 followed by 73.60. We are aggressive sellers between 73.50 and 74.00, thinking that any strength in the dollar will be short lived all things considered. Remember to monitor dollar movement not so much as to trade, but for help with other markets.

____________________________________________________________________

Corn: Weekly export sales showed 324 t.m.t. of corn was sold last week. The break of over $2 /bushel has importers patiently waiting for lower prices. I expect to see higher prices into the August 12th crop report and with a little help the low from last week at $5.62 1/2 should hold. The December 08’ contract has not closed below the 200 day moving average since this contract has been on the board and on the break last week we got within 7 cents of this level. The current market swings are largely dictated by fund liquidation, bargain hunters, and the weather. We are getting clients that were not previously positioned in corn long via options and futures, we still have some clients holding from higher levels still anticipating prices to eventually get back to $7.47 to fill the gap from previous weeks. On August 12th, the USDA will release its final numbers on how many corn acres were planted. Their last estimate was June 30th and was supposed to be the final planted acres number of the year, but with horrific weather, late plantings, reseedings and flooding the most recent report was incomplete. Regardless of what the report says, the fear is that the report could show a 1 to 3 million acre reduction in corn acres. With the last USDA crop report putting ending stocks at 833 m.b. a further reduction could cut ending stocks sharply again setting in motion a price rationing rally. Assuming last week’s low holds, we first need to see a close above $6 and then we should see more buying come in. Whether it is a short covering bounce or a resumption of the uptrend our targets are $6.50, $6.80, $7.08 and then ultimately $7.47. Support comes in at $5.85 followed by $5.62 ½.

Beans: Weekly export sales showed 183 t.m.t. of old crop beans were sold last week. New crop sales of beans were 552 t.mt.. Old crop sales were bearish, but new crop sales were bullish. In terms of buying the break in beans support comes in at the 100 day moving average which failed to break last week on 3 attempts at $13.55 in November. The August 12th planted acreage report is expected to show a 1 or 2 m.a. decrease in planted acres due to June floods. Ending stocks are pegged a dangerously low 140 m.b. a further reduction in planted acres could have the USDA cutting ending stocks to 20-60 m.b. If $13.55 was to give way next support comes in at $13.39 and although we are not as friendly to beans as we are to corn, traders should have some long exposure into the August 12th repot weather it be in soy meal or soybeans. When debating whether a long entry is worthy of your money remember bean’s yields are determined in August during the pod setting stage so the crop is yet to be made. A hotter and drier August and a August 12th crop report acreage reduction and new contract highs could be made, which from today’s prices is $2.40 away on November. 

Wheat: Weekly export sales showed 610 t.m.t. of wheat was sold last week.  Look for demand to remain good through the finish of the spring wheat harvest in August. Wheat has little news of its own and remains largely in a followers roll to corn. If weather turns bullish for corn it is bullish for spring wheat and the reverse holds as well. We like being lightly long September CBOT and KCBOT but if forced to choose between the 2, buy KCBOT. Look for last week’s low to hold at $8.08 ¼ and we have a target of $8.75 followed by $9. As far as CBOT wheat goes also look for last week’s low at $7.75 to hold and prices to track up to $8.57 followed by $8.83. A less aggressive play then outright getting long is to buy KCBOT and sell CBOT against it. The spread is currently at 22 ½ cents premium to KCBOT and we expect to see this gain 30-50 cents in the coming weeks, we would suggest risking approximately 20 cents on the trade.

____________________________________________________________________

Hurricane Dolly hit land 35 miles northeast of Brownsville, Texas as a category two storm bringing heavy rain and winds of 100 mph or more. December cotton closed up 1.46 at 74.50 on the week with concerns that Dolly may damage some of the Texas cotton crop with heavy rain. We are above the 20 day moving average and on the upper end of the recent trading range, the test this week will be if we can trade through resistance at 75.00 or will we make it back to the lower end of the trading range. We are currently positioned long December via 10 cent call spreads and futures for clients looking for prices to track higher. From a technical point of view, we feel that the market is in the process of putting in a bottom, from which it is probably going to launch some attempts at higher levels in the not to distant future.

Last week the USDA said that there were 1.515 billion pounds of frozen orange juice concentrate in inventory on June 30th, up 67% from a year ago. November orange juice closed down 14 cents on the week at $116.45. We were able to get some clients out before the break at even money while others are holding onto November bull call spreads looking for a rebound in coming weeks. We will most likely re-establish longs if the lows are challenged and hold. For now support comes in at the contract on November at $111.10. We would like to see 2 consecutive settlements above the 50 day moving average at $121.30 before establishing any significant size.

Sugar prices in March 09’ were down 14 ticks on the week but the selling has slowed and we could see a bounce from here. Sources suggest concern over the crop going to quickly to flower. Early flowering implies that the plant will utilize sucrose for reproduction and reduces the content available when the cane is crushed, thus lowering production potential. We are currently trading around the 100 day moving average about ½ cent above last week’s low and support. We are buying clients March call options and will start to accumulate futures again on a confirmation of an interim bottom.

Cocoa prices decided to move upward after finding technical support around 2750 on September. On the week prices advanced $14, but we may have a key reversal as we closed $79 off the lows and may have a double bottom. There is also news of a strike pending in the Ivory Coast. Such news is often friendly towards cocoa values and it seems that things have been unusually quiet there for some time now. Both stochastic and MACD support a bounce and if the dollar turns south again it could support a move back to 2900 and potentially 3000.

Coffee was down slightly on the week, but buying emerged at $1.34 and moving forward it looks like we will get a bounce back to the recent consolidation area around $1.42/1.44 in September. Aggressive traders could play from the long side with a stop just below last week’s low of $1.3395, from current prices you have 2.5:1 risk to reward ratio. Additional into August coffee is generally supported in anticipation of crop risk.

____________________________________________________________________

Gold investors may focus on crude oil this week for direction. Continued pressure on crude oil would be negative for gold. OPEC is producing more crude oil as promised and oil imports to the US, Japan and South Korea, three of the five biggest oil importers, are declining. Thus, the oil market has turned its focus more to fundamentals, which are bearish and point to further declining prices. August gold last week gave back just over $30 closing at $926.80. Our clients have traded back to the support level from 3 weeks ago and for now the line in the sand is $915. On further liquidation we could see price back at $900 and potentially even lower. We prefer the sidelines until we determine a direction in the dollar and oil. Buying dips with a longer time horizon is fine by us, but we may get a lower entry price if we wait on the sidelines for a few sessions. We will want to be positioned long via futures or options on a resumption of the uptrend which would be confirmed if we can get a move back above $965 on good volume in August.  Problems in the financial sector and inflation concerns should continue to support.

September silver was down 84 cents on the week but the 200 day moving average just below $17 looks to be formidable support as we have not traded below this level since October 07’. The 100 day moving average failed to support last week and now acts as resistance at $17.80. We have lightly started to get long for clients buying December futures looking to get filled between $17.20 and $17.40 and hold for a move higher in the coming months. Once a bottom is in place we will also be playing the September contract, but if we were to break down further we may not have enough time to recover, which is why we chose December for our first entry. Additionally when the market confirms a bottom we will again price out $1and $2 call spread in December.

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.