For September 1st– September 5th 2008

By: Matthew Bradbard

With the summer behind us and most traders getting back to work, we should see the volumes start to pick back up in all sectors. This is music to our ears because the erratic movements and increased volatility should die down and allow more defined trends to form in commodities. This week should be interesting as we see the market digest 2 possibly 3 hurricanes , a monthly jobs number, 3 central bank meetings and some position squaring ahead of a much anticipated OPEC meeting. There are very few opportunities that we see that don’t have an abundant amount of risk, so you may want to wait on the sidelines until a higher probability opportunity arises. Although we don’t wish to discuss politics, history will be made in some fashion whether it is the first African–American president or the first woman vice…time will tell.

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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October Crude oil managed to gain 77 cents last week, closing at $115.46, which was about the median of the trading range. To date it appears that there was a lot of fuss about Gustav, but it was a classic case of buy the rumor and sell the fact since little to no damage was done. Oil violently sold off Monday to start the week nearing the 200 day moving average. We haven’t traded below that level since August of last year and this week it will be key to see if that level holds. If $109.96 was to give way, we could see the $100 level in a hurry so we would stay away for now. The inverse relationship to the dollar continues to play out and the next catalyst should be what course OPEC takes on September 9th.

October heating oil was higher by 2.69 cents last week to close at $3.1919 just below the 9 day moving average. For now prices will look for guidance from oil, but it appears the path of least resistance is down with next support at $3.05 followed by a gap at $2.97 from early April. RBOB gained 6.72 cents last week, but lost its luster Monday as prices retreated almost 10 cents to find support at the 200 day moving average just above $2.73. The technicals support a breach of that level and we could see a fall back to $2.50 or levels we have not seen since Q1. We would stand aside for now and let the dust settle before looking for either a long or short entry.

Natural gas was up 3 cents last week, but that was not the story as extreme volatility beat many traders up.  The trading range last week for 1-10,000 MM btu contract was $10,900, so unless you have staying power don’t even think of treading into these waters. Gustav looks like a false alarm and traders that got long for that sole reason got taken to the wood shed. If you are looking to establish longs for next month, current prices serve as an extraordinary long entry. We have positioned long with mini-futures and also a long futures and short call option play, looking for prices to find some traction in the immediate future. Both daily and weekly charts are extremely over sold and being that we are still in hurricane season we are long and looking to add on confirmation of a bottom. For now, we would recommend a light long until the market proves you right. An additional note is that natural gas futures are currently trading at the steepest discount to crude oil in the past 18 years. This means that either crude is too high, natural gas is too low or perhaps both.

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After the close Friday, the USDA estimated the week's beef production at 528.1 million pounds, down 4.3% from a year ago. October live cattle were 215 ticks lower on the week, but managed to hold the 103.50 level which has served as support previously in mid-July and May as well as  resistance back in  late February early March. With things looking oversold on the board and with cash sales stabilizing, we are expecting buying to emerge around this level. We are recommending light longs looking to add on signs of a market turn. October feeder cattle lost 125 ticks last week as prices broke below the 200 day moving average early last week. We found support at the 61.8% Fibonacci retracement level, but we would like to see further evidence that last week’s lows will hold before getting too excited.

Pork production was estimated at 430.4 million pounds, up 3.8% from a year ago. October lean hogs were 533 ticks lower, gaping lower not once but twice, to close down 7% on the week. We have started to get long via October options looking to capitalize on a strong seasonal tendency and will look for a long futures entry on confirmation that the selling has ended. October lean hogs have rallied 16 of the last 25 years in September. The best Septembers follow August weakness; for which we just fell 7 cents. Following down Augusts we have advanced 10 of the last 12 years to move higher in the month of September for an average move of 6 cents. Past performance is not indicative of future results.

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Stocks: The Dow has been lower for the last 3 weeks ending last week down 85 points or 0.7% to 11544.  The S&P retreated for the second week falling 9 points or 0.7% to 1283.  The NASDAQ fell 47 points or 2.0% to 2368.  September has historically been a bad month for equities so we would caution investors to remain defensive. Sometimes the best offense is a good defense. The VIX is building in expectations of a choppy September as a move to the mid 20’s is expected. Resistance comes in on the Dow at 11725 with support under at 11380. On the S&P 1300 should hold on a closing basis and support comes in at 1275.

Bonds: Although the GDP came in better than expected, we would digest this with a grain of salt and have about as much confidence in this reading as the government’s inflation expectations.  The chart says it’s ok to be short and as we have voiced for the previous 2 weeks, you could have gotten short from elevated levels. If you are, trail a stop because although we may get a move lower in the short term, the big picture still points to higher levels. Central banks around the world are holding record amounts of US government debt and that looks to be the trend in the current setting. Look for a trade down to 115 in September notes and a target of the low 116’s in bonds.  If we get a nasty sell off in the equities and/or commodities look for money to flow into treasuries so again trail a stop.

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Statistics Canada said that real GDP was up .1% in June and up .7% from a year ago, weaker than expected. The September Canadian dollar dropped 1.43 cents to 93.97 last week and prices look to challenge the lows from 2 weeks ago at .9300 this week. The Bank of Canada has set the stage to cut interest rates this fall and with energies and metals selling off we expect prices to continue south for the time being.

Eurostat reported that the unemployment rate for the Euro area was unchanged at 7.3% in July. Consumer prices were estimated to have risen 3.8% in August from a year ago, down from a 4.0% gain in July. The September euro fell 137 ticks to $1.4631. On a trade below 1.4550 look for 1.4350 in coming weeks. Although the trend remains down, we don’t have the stomach and would suggest waiting for a rally to sell. We expect rates to remain constant at the ECB meeting this week.

Japan reported that consumer prices were up 2.3% in July from a year ago, up from a 2.0% gain in June. Also, industrial production was up .9% in July, stronger than expected. The September yen closed up 133 ticks at .9202. Both the daily and weekly charts on the yen look like a buy and we are currently long the 9450 December calls for clients.

A recent survey showed that economists expect a cut in the central bank's interest rate this week; which may already be priced in with the recent sell off. We still favor a long entry, but will be on the sidelines waiting for a bottom to form as opposed to catching this falling knife. The .8200 level should serve as solid support if challenged in September.

The September Swiss franc has chopped sideways for the last 3 weeks with a slightly bearish bias losing another 35 ticks last week.  As long as prices remain below the 20 day moving average at .9185 the trend remains down.

August represented the weakest month for the British pound since 92’ as prices were lower 18 out of 21 sessions losing over 16 cents on the month closing at 2 year lows. We expect rates to remain constant at the Bank of England meeting this week.  The trend remains down although the market is starting to look tired. One would think we are over due for a bounce even though it may be a dead cat bounce after a precipitous fall of 11%. There is little to no support so who knows where the selling will dry up with weakness in the housing market and fears of a recession becoming more real.

The dollar continues to astonish me as prices again were higher last week gaining 85 ticks, trading at its highest level since Christmas of last year. We will see as summer comes to an end and traders get back to work if this trend continues. There are many that say the dollar has turned, but we are yet to jump on that bandwagon. We will look for guidance from comments out of the ECB, BoE meeting this week and the FOMC in the middle of the month for further clarification. For now the market has priced in that the Fed will need to raise rates and we aren’t certain of that at the moment. Look for resistance to emerge around 78.50 and if we see a violent move north in oil for any reason look for the dollar to retreat.

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Corn: The last 2 times December 08’ corn ran into the $6.25 level we have retreated. We should find support between $5.30/5.50 on the current pullback and we still expect one more attempt at $7 before the crop is out of the ground. Look for improved demand late September as early harvest should have end users buying inventory from new crop. We will be a buyer on this break for clients, but we cannot be overly optimistic if outside markets like oil and the dollar due not cooperate. If the next leg up fails to break through $6.25 we may need to reassess.

Beans: Bean sales traditionally stagnate ahead of the new harvest in September as South America claims the lion’s share of business. In the last few weeks, rain has been light and with the crop going in late we may start to get whispers of an early frost that should support. With current pricing at the 200 day moving average for November beans, this week will be key to determine the near term direction. On a breach of $12.85 look for prices to come off finding support closer to $12. If our clients are able to hold, there is no reason we cannot see prices find their way back to $14 in the coming weeks. Until the market makes up its mind we would stand aside with a buy breaks mentality. As we voiced last week we like buying December soy meal on breaks as well. The most likely scenario is prices will be lower early in the week and we will finish higher on the week. Look for an entry closer to 330 or shop around for call options, we are partial to the December 400 calls.

Wheat: CBOT and KCBOT were down every day last week with CBOT losing just under a $1 closing at $8.01 ¼ and KCBOT losing 86 ½ cents closing at $8.39 ½. We are buyers and looking for the recent lows that has served as support in May and in August to hold. We would recommend staying long December KCBOT until we get a close below $8.10. On a resumption of the uptrend we would expect prices to find their way back above $9. December CBOT wheat has not closed below $7.65 in 08’ so as long as that does not happen we will remain friendly. $7.73 is the 61.8% Fibonacci retracement and if prices consolidate and move north from here we expect first resistance at $8.70 followed by $9.40.

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November orange juice was up 4.65 cents to $1.1215 as tropical storm Hannah makes its way toward Florida. While the exact path is still being debated, Hannah, the eighth named storm of the 2008 hurricane season, may curve toward the Central Florida coast over the next few days. It’s not always about damage, but the perception that we could get damage and the fact that we are still in hurricane season should keep a bid under fcoj. We own cheap January calls for clients and recommend you do the same.

After printing a new contract high early in the week March sugar retreated losing 104 ticks on the week. Ideally we are looking for a further pullback; 14.14 serves as the 50% Fibonacci retracement level and the 100 day moving average and looks like a good point to start getting long futures again. At that level we should also be able to acquire the 17 cent March 09’ calls for a good price.

December coffee closed up 2.55 cents at $1.4575 on the week as traders watch to see if coffee warehouses in New Orleans survive the coming storm. For now it appears resistance comes in just above 150 in December and as long as last week’s highs hold, traders can sell rallies looking for prices to make their way back below 140. With supply large and seasonal consumption yet to rise into winter in the Northern Hemisphere, prices have tended to remain weak for reasons of both supply and demand.

December cocoa was $59 higher last week to add to the previous 2 weeks advance of $273. Current resistance comes in at 2975 with support at 2840 with the week’s performance largely in the hands of what happens in the currency market. Technicals support a move lower as we expect to see prices down big giving back much of the gains from the 3 previous weeks.

December cotton was off 40 ticks last week closing at 69.78 caught between resistance at 71 and a triple bottom from previous sessions serving as support at 67.00. Volume had been meager while cotton still looks for direction from outside markets. We maintain our longs with customers but are curious to know what will be the catalyst to get prices moving higher. Possibly a large export number or some damage from the hurricanes could get this market moving?

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December gold traded $4.10 higher last week, but has been unable to muster a trade back above $850. As of this writing we sit $35 above the recent lows, but I cannot say with certainty that we will not revisit those lows before prices move higher again. To start this shortened week, it appears we are getting another commodity liquidation most likely led by a higher dollar and weaker oil, we will see how long that lasts. Over half the consumption of gold, on any given year, can be accounted for by the jewelry industry. Preparation for that generally begins in September, which means we ought to see demand from here through the end of the year pick up. Being that we are long silver with clients, we are still shopping for a better entry on December futures and options. We have first support on December at $790 with resistance at $825.

Silver has tended to decline into mid month as deliveries are made against September futures. But then the market has often enjoyed a surge into September, perhaps as harvest and wedding festivals begin in India, a large consumer of precious metals. We have clients positioned long mini-futures and December bull call spreads looking for prices to make their way back to $17 by December. In the short run we would like to see a close over the 20 day moving average and recent highs at $14.10 to confirm a bottom.  On a weekly chart you will see last week we had a higher high and higher low, what will this weeks chart tell 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.