For November 24th– November 28th 2008

By: Matthew Bradbard

Will this week’s shortened trading week mark a turnaround in Commodities?

Obama, Biden, Geithner, and Clinton they are all welcome changes with a new administration, but have things really improved yet? Our 2 main focuses are: when will oil bottom and when will the dollar top? That will be when most commodities should be bought, looking for, at minimum, a tradable bounce and potential reversal. Our bias is that all commodity accounts should have exposure long sugar and long silver. Contact us for exact details on the trades. We expect over the next 2 years to see 25 cent sugar and $25 silver; current prices are 12 cents/lb. and $10/ounce respectively. 

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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The US Department of Energy said that crude oil supplies were up 1.6 million barrels last week to 313.5 million barrels. The DOE also said that refinery use increased from 84.6% to 84.9% of capacity. January Crude oil ended down 7.17 and traded below $50/barrel for the first time since January 07’. We may get a bounce from oversold levels depending on what direction the US dollar decides to move this week. $58 serves as resistance. If given the opportunity, we may advise clients to explore longs below $45. The ongoing weakness is attributed to selling pressure from the worsening outlook for demand and growing tendency of investors to cling to cash. Goldman Sachs said that they were suspending their recommendations in the energy markets - a sign that the fundamental experts are spent. OPEC meets on November 29th to see if they have more tricks up their sleeves hoping to stabilize energy prices.

Supplies of gasoline were up 500,000 barrels while heating oil supplies were up 400,000 barrels. Over the past four weeks, gasoline demand was down 2.2% from a year ago while distillate demand was down 3.3% from a year ago. January heating oil lost 11.9 cents or 6.5% last week. As with Crude we may get a bounce from extremely over sold levels in heating oil. 1.6514, last week’s low will serve as support with resistance at 1.8000. Retail gas prices have been cut in half and in most areas around the country drivers can find prices below $2/gallon. January prices on the board were down 18.28 cents last week or 14.4%.  I never expected to see a trade below $1/gallon but we are getting close.1.0239, last week’s low should serve as support with resistance at 1.2700.  Since mid July prices are down 70% in RBOB compared to a 60% drop in heating oil and 67% in Crude. 

The US Department of Energy said that underground supplies of natural gas were up 16 billion cubic feet from last week's revised figures to 3.488 trillion cubic feet. Supplies are now down 1.4% from a year ago. January natural gas closed up 1 penny at $6.50. As long as the lows from the last 2 weeks hold just above $6.20 one may take a stab at a light long position looking for a bounce back over $7. The 50 day moving average comes in at 7.40 and with some help from outside markets we may get a trade to that level.

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After the close Friday, the USDA said that there were 10.972 million head of cattle on feed as of November 1st, down 6.8% from a year ago and less than expected. October placements were down 11% and marketings were down 3% from a year ago. The USDA estimated the week's beef production at 494.8 million pounds, up 6.8% from a year ago. February live cattle closed down 4.90 on the week at a new contract low. Support should come into play at last week’s low at 83.80 with resistance at 88/88.50.  January feeder cattle were 5.85 lower to a new contract low as well losing 6% on the week. Support comes in at the low from last week at 87.80 with resistance at 93.00. You could have a potential reversal off the lows with Thursday’s action, but at this point it is too early to say, we will look for confirmation this week. We have no significant commitments with clients, at this time we have a small position long January feeders which are currently underwater. 

The USDA estimated pork production at 477.2 million pounds, up 15.9% from a year ago. February hogs were 1.70 higher on the week. We are looking for a trade up to 70 in the coming weeks and at this point would recommend being a buyer on dips with stops below the contract low at 60.50. Based on how the options are moving, we would suggest being long futures and not options. We previously recommended buying April calls and will be trading out of these contracts in the next few weeks on a further advance because they are not moving appropriately in our eyes.

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Stocks: Even with a significant advance to end last week the Dow fell 5.3% to 8046. The S&P 500 dropped 8.4% to 800 after trading as low as 741.  The NASDAQ lost 8.7% to finish the week at 1384.  A landmark event last week was for the first time in half a century the dividend yield on a common stock; at 3.79% was higher than the yield on a 10-yr Treasury bill, 3.20%. This is further evidence, in our humble opinion, of the fear or lack of confidence that will continue to erode the price of equities. We are not out of the woods and although we may get a bounce off the most recent bailout of Citigroup, we suggest remaining defensive. Analysts continue to suggest a bottom but we are not convinced.

Bonds: 30-yr bonds were 7 ½ basis points higher last week largely on fear. We have now seen a 12% advance over the last 3 weeks and until more confidence is established in global markets the path of least resistance remains up. We see support at 122-122’16. 10-yr notes also appreciated but to a lesser extent gaining just over 3 basis points last week to a new contract high. We see support at 117-117’10.  The higher the euro-dollar goes the more encouraged we are to buy puts and get short into 09’ That trade we feel is still months away as we expect rates to get cut again in December and potentially in January. 

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The Euro gave up 47 ticks last week as a rally to 128 failed. Buyers have come in around the 124 level as that has been the line in the sand for the last 5 weeks. If that level were to give way expect a trade to 120 relatively quickly. Looking at just the fundamentals that drive the Euro one would think of lower pricing, but being the US dollar is showing evidence of a decline we would be cautious. 124 should continue to serve as support with 127.50 acting as resistance.

The Swissie lost 176 ticks last week and until we get a close back over the 9 day moving average the path of least resistance is down. The Swissie has not closed over the 9 day moving average since October 30th.  .8350 looks like resistance with support at .8100. Once we see evidence of a bottom we are looking to get long expecting a move back to .8600-.8900, but for now we are on the sidelines.

The Aussie lost 247 ticks last week. In the last 2 weeks prices have given back almost the entire advance from the previous 2 weeks. Support comes in at the contract low at .5975 with resistance at .6500/.6525.  We favor a bounce and are pricing out numerous strategies.

The BOJ kept the interest rate at .30%, and said that they will consider adding funds to the economy to help improve liquidity. Also, Japan's Finance Minister let it be known that he may consider intervening to bring the yen down from "undesirable" levels. Last week the yen added 98 ticks. We hit our objectives and advised clients to trade out of their 3 cent call spreads that we had advised in previous weeks. We are on the sidelines looking to re-enter on a pullback and took off the December positions, not because we do not think that higher prices are in the future, but there was only 2 weeks of time left. Late last week the yen broke out of an ascending triangle and on a convincing close above 1.0620 we could see 1.10 in the coming weeks. Support for now is seen at 1.0365 followed by 1.0250. 

The Loonie gave up just over 3 cents last week and is approaching the contract lows.  One could get long the futures with a tight stop just below the lows from late October at .7686. We came close to challenging that level late last week and it looks like it should hold. We are getting mixed signals as metals are moving higher while energies are moving lower so tread lightly. If you do get long have an objective of .8000/.8100. 

The Pound gained 117 ticks last week but it closed nearly 500 points from the weekly high. The trade up to resistance mid week was rejected as weakness still persists. 1.5260 should serve as resistance with 1.46/1.4650 as support.

The US dollar was 50 ticks higher last week, but the wide trading ranges over the last 5 weeks make it a little more difficult to navigate and a 50 tick advance does not tell the whole story. The average weekly trading range for the last 5 weeks has been 387 points or $3,870. Although there is potential for a move to 90, we have a bearish bias and are looking for a move to 86.25. The first sign would be a close below the 9 day moving average at 87.68; which we have not seen since November 5th. Continue to monitor the dollar as most commodities will continue to exhibit an inverse relationship.

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Corn: March corn lost 38 cents last week and traded to a new contract low. Anyone short should be looking for an exit door or at a minimum be trailing stops to protect profits. You will generally see volume spike on or near trend reversals and over the last 2 weeks the volume has been 30% higher than previous weeks.  On top of that there is a seasonal tendency for March corn to trend higher into year’s end after finding a harvest bottom around this time. Past performance is not indicative of future results. 3.50 should support although we do not see that level with resistance at 3.85. 

Beans: January soybeans were 50 cents lower last week and have now broken below the recent $1 consolidation range that we have been in since mid-October. We see support at 8.35 although we cannot rule out a quick trade to 8.00 if the Crude oil market was to continue to fall apart though we do not expect this. If we were to get that lucky we would be a buyer with both hands for clients in both March and May. On a move higher look at the first resistance at 9.00 followed by 9.50.  At the current price we are advising clients to buy May outright calls and call spreads. 

Wheat: March CBOT lost 54 cents last week. Looking at the weekly charts in CBOT wheat we had a lower high and lower low last week so prices may not be done moving lower just yet. There is a potential to see a trade to $5 but prices below that level we feel would be unsustainable for an extended period of time. We are close to issuing an out right buy as we do expect to see a trade back over $6 in the future, but for now we are on the sidelines. March KCBOT lost 59 cents last week. We see support at 5.45 followed by 5.20 with resistance coming in at 5.85/5.90. We do expect to see a trade back to 6.50, but have yet to issue a buy recommendation. Looking at the KCBOT/CBOT March spread we would be a buyer between 26-29 cents premium to the KCBOT looking for 50-60 cents risking a close below 20 cents. 

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March cocoa closed up $59, helped by doubts about the size and quality of the upcoming cocoa harvest in the Ivory Coast and Ghana. We would be a buyer of March between 1940-2000. Resistance comes in at 2100 followed by 2170. At the current price we are approximately 9% from the contract lows (August 07’) and 58% from the contract highs (July 08’) we are more encouraged to be long than short.

The USDA said that world ending stocks of sugar will be down 4 million tons in 08-09 to 24% of annual use. Brazil's sugar production was up 1% in 08-09, but India's production was down 20%. March sugar ended down 32 ticks last week. A failed rally has sugar closing 107 ticks off the weekly high. We are continuing to accumulate May 14 calls for clients looking to hold for a move back above 13 in coming weeks. Other ideas would be March back spreads, long futures while simultaneously buying puts for protection opposed to a stop as we could see a trade to 10.75. Over the last 4 weeks we have seen trades up to 12.30 sold and to be convinced prices are moving higher we would need to see a close above those levels.

Temperatures were cooler last week in central Florida, but safely above freezing - a reminder that we are nearing the season of possible freeze warnings. January orange juice lost 6.80 cents last week.  We are advising clients to get long at 76 with buy stops at 81 and 86 looking to build longs if the recent lows hold. If getting long we would have our initial stops at 73.00; 240 points below the contract low.  Additionally, with options we like the March 115 calls for $325. 
 
Prices below 40 cents have been rejected the last 2 weeks in March cotton. Even with a rally off the lows last week prices still closed 82 ticks lower and cotton has now closed lower for the last 5 weeks. Some potential trade ideas would be to get long futures with a stop at 38.90 or to get short futures while simultaneously buying 3 March 50 cent calls for 175 points ($875 each). We would look to cover the futures at a 3-4 cent profit and hold onto the options for an eventual move to 50 in coming months. This strategy would be delta neutral so a move higher would be close to a wash.

March coffee was 4.70 lower last week as prices are trying to find a value zone. We see support at 110.10 with resistance at 115.00 followed by 118.25. Updating on current positions we advised clients to buy back the 95 puts we previously sold in a fence strategy last week. They now only own March 125 calls; instead of a cost of 4 cents they now own these at 6 cents. We would look for an exit on a trade back towards 122. 

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December gold advanced $51.80 last week or 7% to close above resistance at 791.80. Once prices traded over 770 stops were ran and what was resistance now becomes support. Most of the week’s movement was on Friday with a surge of $46. Resistance is now seen at 815 followed by 840.  730-740 should serve as support. We are suggesting buying on pullbacks in either February futures or February, April, June $100 call spreads; inquire for exact details. The World Gold Council said that world gold demand totaled 1,133 tons in the third quarter of 2008, up 18% from a year ago. Demand is only one side of the equation, but in the current environment to see more demand than last year is viewed as extremely encouraging. 

December silver was higher last week but only by 6 cents. Any trade below $9 is a buy; trying to pick an exact bottom in any market is a sucker’s game as we continue to buy futures and options for clients, we believe silver is forming a strong base that should support the next wave higher. Currently our favorite position commodity wide continues to be the $15/20 December 09’ call spreads. Last Thursday we got our best fill yet investing $1450 per position. Why we feel this is significant is prices were trading near 8.80 on the front month and when prices were lower trading at 8.50 we were getting fills at $1500. We will continue to accumulate these positions for clients looking for a move to 10.68; the 50 day moving average in coming sessions. Do not wait for a move to buy but rather buy and wait for the move. Although only a subtle difference in wording a huge difference on the trade.

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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.