For November 3rd– November 7th 2008

By: Matthew Bradbard

Remember to vote as this week a new US president will be elected.

Looking at the calendar October is behind us, but the remarkable volatility in the majority of asset classes may continue for the next few months. The good news is that whenever prices move as dramatically as we have just seen, it generally signals that emotion or fear is carrying more weight than the actual logic in the marketplace. This typically means that tremendous opportunities present themselves and for those investors that are able to recognize them can take advantage of irrationally low prices. If commodity markets start to trade on their own fundamentals once again we should start to see select commodities bounce back.

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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After 4 consecutive losing weeks December crude oil was higher last week just better than $3. Prices traded as low as $61.30, but by week’s end were closer to $68/barrel. Support comes in at $62 with resistance between $69.50 and $70. We will mostly be looking at the dollar for direction, but on a trade through resistance we could see a quick trade back to $80, so stay on your toes.

December heating oil closed back above $2 after gaining 10.62 cents last week. Much like crude oil, heating oil had a positive showing after 4 losing weeks. Support exists at last week’s low of 1.9089 with resistance coming in at the previous consolidation level and the 20 day moving average at 2.1944.  December RBOB was 4.60 cents higher last week, but prices still remain below $1.50/ gallon. Assuming last week’s low holds at 1.3838 we could see a bounce of as much as 20-30 cents if we get a move higher in the energy complex. For now we would caution any trading in the distillates and see no viable reason to have exposure long or short.

The U.S. Department of Energy said that underground supplies of natural gas were up 46 billion cubic feet last week to 3.393 trillion cubic feet. Supplies are now down 3% from a year ago and up 3% from the five-year average. December natural gas closed up 38 cents on the week as we expect prices to make their way towards $7.20 this week. Over the next few weeks we are still expecting a push to $8 and would advise all December positions to be liquidated being there is only 21 days left in the options. Although we have issued no formal recommendations, if getting long one may want to institute some sort of hedge against a further depreciation in prices.

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After the close Friday, the USDA estimated the week's beef production at 503.1 million pounds, down 3.5% from a year ago. December cattle closed up 4.30 at 92.70 on the week to register a positive week after 9 consecutive losers. This was a 5% move and could be the beginning of an attempt to fill multiple gaps formed on the price slide in recent weeks. 90.00 should act as support as we expect to see a floor established and prices make their way to 97.50 in coming weeks. January feeder cattle also gained on the week picking up 4.75 to end at 98.05. On a close back above 100 the bottom should be in place at 93.00 and that would also put prices back above the down trend line from the beginning of August.  

Last week Canada reported that there were 12.8 million hogs in inventory on October 1st, down 10.9% from a year ago. They also said that 16% of hog producers have left the industry in the past twelve months. The USDA estimated pork production at 479.0 million pounds, up 1.8% from a year ago. December hogs were down 3.60 or 6% lower on the week to make a new contract low closing the week at 54.80. We are now approaching the lowest level we have seen in 08’ which is only 1 cent lower. Lean hogs are generally supported by strong holiday demand, but that remains to be seen so we would recommend staying on the sidelines until we get evidence of buying.

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Stocks: October has come to a close, but the damage has been done; the Dow lost 1525 points or 14%, its worst monthly drop ever. The S&P 500 also suffered its worst ever monthly drop of 197 points for a 17% decline. The NASDAQ fell 371 points or 18%. Last week the picture was a little brighter; the Dow ended up 946 points or 11.3% to 9325. It was the biggest one week point gain ever and its best percentage gain since 1974. The S&P jumped 92 points to 969 or 10.5%. The NASDAQ had its best week since April of 01’ rallying 169 points to 1721. As we forecasted last week a significant rally, the market delivered. We would expect to see this continue, but equities may face an immediate test depending on how ugly the NFP number is this Friday. 

Bonds: The Fed cut rates last week by 50 basis point to take rates to 1.0%; levels not seen since June of 04’ saying the pace of economic activity “appears to have slowed markedly,” even as inflation is seen moderating. The last 3 weeks have been two sided in the debt market as 30-yr bonds have moved both higher and lower between 113/117. For now support comes in at the mid 112 level, if that level is broken look for a trade down to 111. If that level does serve as support we could see a trade back to 115. Every day last week was lower for 10-yr notes as prices dropped just over 2 basis points and appear to be making their way towards 111’20.  We are not comfortable either long or short; generally when rates go down prices go up, but the conundrum here is that scared money is moving in and out of treasuries so currently there is no defined trend. 

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We have warned of dramatic price moves in recent weeks; last week was typical with a 950 point trading range in the Euro. Prices finished 1 ½ cents higher on the week, but currently seem to have little direction. Resistance is at 1.3300 with support at the double bottom from last week at 1.2325. Expect to see a 50 basis point reduction in rates at the ECB meeting this week, taking rates to 3.25%. Futures have fully priced in 50 basis points with low odds of a 75 point reduction.

The Swissie gained 82 ticks last week, much of that coming early in the week. Last week we were able to play a quick bullish option play and we may make another attempt this week if current support holds.  For now support comes in at .8500 to .8550. We expect over the next few weeks for money to flow into the Swiss currency, this flight to quality play should take the December contract back to .9050.

The Aussie gained 4.72 cents last week as money came back into the commodity currencies and with the recent correction prices may have over shot to the downside. Support comes in at .6500 with resistance at .6925. Our next target is .7200 and even with further rate cuts we would expect this price manageable in the next few weeks.

The Bank of Japan reduced its interest rate from .50% to .30% in an effort to help its economy. This move is meant to send a message to the currency market that the BOJ wants to prevent a rapid appreciation in the yen. G-7 officials issued a statement expressing concern that the Japanese yen has gone too high and could have adverse economic implications. That seems to be their way of hinting that they are about to intervene by selling yen, but for now all it has been is talk. The December yen fell 5.70 cents last week as the risk aversion trade still exists. Support exists at the trend line dating back to mid-August and the 61.8% Fibonacci retracement level at .9815. We would be looking to re-establish longs around that level.

The Canadian dollar reversed last week and was able to trade 4.71 cents higher, closing higher 4 out of the 5 trading days last week, only missing the last day by 2 ticks. If energy and metal prices are able to stabilize or perhaps even trade higher, look for the Loonie to make its way back to .8700. Support comes in at the 9 day moving average at .8035.

The Cable was 2.82 cents higher last week bouncing from oversold levels. Current resistance is 1.6525 and support comes in between 1.5500 and 1.5700. The BOE will most likely cut rates by 50 basis points this week and eventually we are looking for a trade down to 1.5000. On any rallies shorter term look for an entry to purchase put options.

Last week the Fed cut rates 50 basis points to take rates to 1.0%; the lowest level since June of 04’. We expect to see a further reduction at their next meeting in December. We are witnessing indecision with the US dollar although the current activity is starting to show signs of a top. Last week’s trading range was virtually 5 cents with prices down 56 ticks on the week. On the month of October prices were 9 cents higher, gaining 12%. Last week’s low was the 38.2% Fibonacci retracement level almost to the tick. We would need to see a breach of that level to expect lower prices. We see support at 83.75 and resistance at 88.50. We are looking for a move to 81.00 between now and the end of the year.

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Corn: December corn was 21 ½ cents higher last week and looking at the weekly chart a bullish engulfing candle is evident, which should be supportive. Corn has encountered selling between $4.25/4.30 for the last 3 weeks and in order to see higher prices we will need to pierce that level. $3.80 remains as support as we would expect to see some bullish posturing into the crop report as shorts may want to exit and new longs may start to establish a position. Last week’s surprise revision by the USDA on the October crop reported lowering production by 167 m.b. to 12.033 and ending stocks by 66 m.b. to 1.088 b.b could be the catalyst that helps set a low in the corn market. We expect the USDA to give further cuts as harvest talk has been trickling in with substandard results. Grains have yet to separate from outside market’s influence to trade on their own fundamentals, so continue to monitor outside markets. We are anticipating a move back to $5 by year’s end and have been advising clients to get long May via bull call spreads or outright calls. An interesting play that was advised by a newsletter we subscribe to, was to buy 3 May calls while simultaneously going short the futures. The idea is that on a pullback in the short run a trader could cover their short that would help finance the calls for an eventual move higher.

Beans: January soybeans gained 50 ½ cents and on the week, you can see a higher high and higher low which is friendly. Support comes in at $8.85/8.90 with resistance at the $10 level. On a close above $10.10 prices penetrate the downtrend we have been in since mid-July. Much like corn we expect some bullish posturing ahead of the USDA report and on the next leg up we anticipate prices to make their way to $11.50. The crop revision by the USDA lowered production to 2.938b.b. down 45m.b. from the October 10th report and cut ending stocks to 205m.b.vs.220m.b. In addition to just soybeans, we like the idea of buying soy meal on pullbacks. Soy meal consumption is greatest during the cold of winter. But it is also a non-storable commodity because it can turn rancid. Thus, even as consumption soars, the market tends to pay up to ensure enough supply until next harvest.

Wheat: KCBOT wheat gained 22 cents last week to close at $5.73 in December. $5.50 should serve as support with $6 acting as resistance. CBOT wheat closed 10 ¾ cents higher on the week at $536 ¼.  $5.15 should act as support with $5.65 as resistance. As we have been advising the last 3 weeks we have no interest in directional outright plays, but spreading KCBOT against CBOT still looks favorable. We would be shopping for an entry as close to 33 cents as possible still looking for a trade back to a 50 cent premium for KCBOT. 

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December cocoa gained $103 last week before running into some resistance at the 20 day moving average. We have no trade recommendation as prices in cocoa could go either way; prices should stay contained between 1950 and 2250 for the time being.
 
According to Dow Jones Newswires, F.O. Licht is estimating the world sugar consumption will still be up 1.8% in 08-09 and will outpace production by 472,300 tons. This would be a change as the previous 2 years we had a world surplus. March sugar was 127 ticks higher last week or 12%. We have been and will continue to advise clients to have long exposure in sugar via futures and options. We have given various strategies in recent weeks and if you want specific ideas do not hesitate to contact us. Whether it is through futures or options we will persist on having a bullish bias looking for a re-test of 13.50/14 cents in the coming weeks in March 09’.

Last week January fcoj was 3.20 cents lower. For the last 4 weeks we have stayed contained within a 10 cent trading range between 80/90 cents. Although prices may make an attempt at the contract low, 5 cents lower, as long as that level holds we would expect to see a trade up to $1.00 in the coming weeks. We are currently positioned long 115 and 130 calls in March with clients to take advantage of that.

Cotton’s path continues lower as December lost an additional 1.80 cents last week to trade down to its lowest level since February 05’. As we said last week and will reiterate, we would advise stepping to the sidelines in cotton, even with prices below the cost of production we could see prices move even lower. I speak to a cotton broker with 30 years experience almost on a daily basis and as he says the cotton market is “broken” so until cotton makes more sense look for trades elsewhere.

Coffee prices tend to perk up as the market builds in a drought premium. Buying March coffee on October 30th and selling on November 13th has been profitable 12 of the last 15 years for an average profit of $1665 per contract. Past performance is not indicative of future results. In addition to having light exposure in March outright calls, we have also recommended to our clients a fence strategy; selling the 95 puts and buying the 125 calls for approximately 4 cents ($1,500) with a target of 8 cents ($3,000).  Resistance comes in at 1.17 in December with support at 1.09. Our expectation is to see the December contract make its way to 1.20/1.22 in the coming weeks.

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The trading range on December silver was $2.25, but prices only finished 37 cents higher on the week. Looking at the weekly chart last week we had a bullish engulfing candle which should lead to higher pricing in the weeks to come. We are still buying dips for clients with mini-futures and have been accumulating the $5 bull call spreads in December 09’ that we have advised over the last 2 weeks. We have already started to see this options strategy pick up value and would recommend traders comfortable with this strategy to accumulate these positions immediately as we do expect prices to be moving higher in the very near future. We are looking for a trade back to the 50 day moving average at $11.57 in the next few weeks. 
December gold was $16.90 lower last week and prices have traded lower for the third week in a row.  Over the last 8 sessions gold has been contained within a $100 trading range between $680-780/ounce.  We would not recommend any exposure and expect to be able to get long from lower levels. In the short run we would look for a violation of the $680 or $780 level to determine the next leg in gold; we favor a downside move.
Although we rarely trade palladium because of the lack of open interest and volume, but looking at all the charts, if the $165 low from 3 weeks ago can hold it appears over the next few months we could be looking towards higher palladium prices. The bad news is that there are no options so one would need to trade futures and at current pricing there is $3500 of risk. We will be looking for a potential lower entry and could see prices getting back to $280/300 by year’s end.  

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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.