For September 15th– September 19th 2008

By: Matthew Bradbard

Extreme volatility is an understatement in this environment. We have been suggesting paring back your position size and when taking a trade step in lightly. We would continue to caution investors into getting too committed on any trades in this environment. When the government takes over the 2 largest lenders, when a 158 year old financial institution is on the brink of insolvency, and when gasoline spikes to $5.50, this isn’t the setting to be a hero. The key is to keep your powder dry so when a genuine opportunity presents itself, where the risk/reward dynamic makes sense, you have capital to trade. With just a few missteps your capital can disappear, so be patient.

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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November Crude oil was $7.12 lower last week and closed at a 5 month low. On Wednesday OPEC oil ministers agreed to trim overall output by more than 500,000 barrels a day in a compromise meant to avoid new turmoil in crude markets while seeking to bolster falling prices. Direction this week should be governed by the dollar and if any damage perceived to be done by Ike. What makes this week different is oil will begin trading at 10 AM est. on Sunday so we will have a good feel on how oil will react to Ike by Sunday mid-afternoon. As this writing, oil is trading lower and we see support on November between $95-97 with resistance coming in between $105-107. There will be a time to get long, but for now we suggest the sidelines.

Last week November heating oil closed 7.66 cents lower to end the week at $2.9511. The trend remains down for now, but we would expect a turnaround in the near future. Support comes in at $2.85 with first resistance at the psychological level of $3 followed by $3.15.  Heating oil is consumed most heavily during the cold of winter, but distributors must accumulate or at least price inventory well before. They do so during the so called shoulder months when neither gasoline nor heating consumption is at its peak. The end of September has often seen the climactic run into October. November RBOB was 6.29 cents lower on the week finding mild support at $2.53 after filling a gap from early April. We could get a bounce from oversold levels depending on the wrath of Ike. Remember it isn’t just actual damage done by the hurricane, but the fact that if production is shut down for extended periods of time expect draw downs on inventory.

Natural gas prices have been contained within a 50 cent trading range for the last 8 sessions. We view this as a coiled spring and the longer we see sideways action the more explosive the move will be once the market picks a direction. Being that we have clients positioned long we assume the breakout will be to the upside.  We need to see a close above $8.10 in November to confirm a move higher is under way.  We continue to accumulate $10 December calls for approximately $2,000 for clients looking for the futures to make their way back to $10 and liquidate for $5,000-10,000 per option before commission.

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The USDA's estimate of 08’ beef production remained at 26.69 billion pounds, but the price estimate of 08’ choice steers was increased from 94 to 95 cents per pound. After the close Friday, the USDA estimated the week's beef production at 513.7 million pounds, up 1.4% from a year ago. October live cattle were down 80 ticks last week and registered its sixth losing week in a row. Support for now should be last week’s low at 101.35. The cattle market is trying to find a low enough level to entice exports for buyers to step back in. We feel that we are getting close and when the turn around happens we should find prices back at 106-108 relatively quickly in October. If in fact the dollar starts to move lower once again this should help. October feeder cattle were 1.78 cents lower last week and just like live cattle we have now moved lower six weeks in a row. Selling was rejected on Thursday and Friday with support at last week’s low at 107.50. We are not yet convinced we are done moving south, but when we turn we should see prices back to 111-113. 

The USDA's estimate of 08’ pork production was reduced from 23.6 to 23.5 billion pounds and the price estimate of 08’ barrows and gilts was increased from 48.5 to 49.5 cents per pound. Pork production was estimated at 450.2 million pounds, up 1.5% from a year ago. We still own October calls for clients which are under water after hogs gave up 3.50 cents last week. On a positive note we did fill a gap from April 2nd and volume has started to pick up on the board. We need to see a trade above 70.40 this week and for cash to start improving to think we have a chance on the trade. Going into Monday we have 29 days on our options and if we are able to fill the upside gaps over the next 2 weeks we still will profit on the trade.  When we entered the trade our target was a move back to the 40 day moving average; currently at .72.85 and that remains the goal.

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Stocks: Never a dull moment as stock traders must be nervous to take cigarette and bathroom breaks with this volatility. The Dow gained 201 points last week to finish 1.8% higher; the S&P just managed its first gain in four weeks by adding 9 points to finish 0.8% higher at 1252. The NASDAQ also managed a slight gain after being down the three previous weeks; gaining 5 points or 0.2% at 2261. We don’t expect much up activity unless the Fed gets extremely creative, but this market has surprised us before.  Consumer confidence is at a 16 year low, the housing market has yet to find a bottom, and we expect there to be a problem with auto loans and credit cards very soon. On a positive note, oh wait negative note, oil prices are below $100??  The only positive we see is there are record amounts of money on the sidelines and depending on where that money finds a home, that will be the next sector to move higher. Resistance on the Dow is at 11580 followed by 11700 with support at 11325 followed by 11200. The S&P should find resistance at 1270 followed by 1300 with strong support between 1200 and 1210. Stay defensive!

Bonds: Treasuries started to move lower as we had forecasted at the end of last week and appear like they may reach our targets of 115’16 in December 30-yr bonds and 114’00 on 10-yr notes; we were just a week too early.  Interest rate futures contracts are pricing in expectations that the Fed could cut rates to 1.75% before the end of the year. Economists don’t think the Fed will act this week keeping rates at 2.0%, but perhaps some inventive rhetoric or a new tool being implemented from Bernanke’s toolbox.  I’m not too comfortable going short futures yet, but we have been pricing out December puts in both bonds and notes for clients. With a violent sell off in stocks, expect new highs in the debt market.

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The December yen was down 1 tick on the week and cannot make up its mind on direction. Volatility was present as we had a 254 tick range on the week. Stand aside for now looking to get long from lower levels. We will look to buy the December 9450 calls again buying on any dip. The yen should move higher in the future as investors move out of higher yielding currencies and back to the low yielding Japanese currency that funded those bets. We expect the BOJ to keep rates at 0.5%.

The EU slashed its economic growth forecast last week for 08’saying several European economies will slip into a recession. The seasonal trade we had mentioned last week, buying the December Euro on September 10th, looks to be off to a good start.  It was aided by the September roll with the last trading day September 15th dollar weakness and the fact that the move lower may have simply been too much too quick as we have alluded to in recent weeks. On the week, the Euro was down 81 ticks but on Friday we were up 201 ticks and unless we see a reversal in the dollar or the Fed does something stupid, which is entirely possible, we should bounce to 1.45 in December in the coming days to weeks. Trail stop and if you’re adding to your initial position, don’t let a winning trade turn into a loser.

The December Swiss franc was 97 ticks lower last week, but it appears we will get a bounce from oversold levels.  Look for last week’s low of .8765 too hold and a bounce to .9000 - .9100 to happen in the coming sessions. 

The December Australian dollar closed down only 11 ticks last week at .8128, helped by the drop in the unemployment rate to 4.1%. It may be too early to call a reversal, but it looks like we may at least get a healthy bounce out of here. Both the daily and weekly charts indicate that after a 19% drop in less than 2 months we are overdue for a minimum a rebound. We had 3 positive days in a row last week, which has not happened since mid-August. Look for .7900 - .7950 to serve as support as we could get a move to anywhere from .8250- .8500, depending on the movement in other commodities and activity in the carry trade.

The Loonie was 2 ticks higher on the week, but the real story was that after printing a new contract low, the Canadian dollar screamed higher and closed 192 ticks off the low last week. We should see a trade back to .9600 if we get some cooperation from outside markets, i.e. metals and energies. We could see some resistance come in at .9465.

The cable had the first positive week in 8 weeks as prices in the British pound were 205 ticks higher on the week aided by a strong showing Friday when prices were up 347 ticks or 2.0%. We have been extremely oversold and much like the Euro, the roll and dollar weakness contributed. On a trade above 1.8000 look for prices to find their way back to 1.8400 on the December contract.

Finally the dollar is moving lower, it has been a one sided trade for weeks now that we didn’t agree with as we have voiced in recent commentaries. It is too early to call it a victory, but after a 12% appreciation from mid-July we should see prices back off as long as last week’s high at 80.90 serves as resistance.  With a Fed meeting this week, look for any indication of what the next move in rates will be. We are expecting to see a 38.2% Fibonacci retracement that would lead prices back to 77.50 on December. The MACD and stochastics support a dollar break and if in fact that is the near term direction, commodities should find some footing.  The 1.5% break on Friday could just be the beginning of another leg lower on a potentially sentiment shift with the Fed, time will tell.

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Corn: The USDA reduced 08-09 ending stocks for corn from 1.133 to 1.018 billion bu. The USDA reported a crop size of 12.072 billion bu. vs.12.28 last month. The yield came in at 152.3 b.p.a. vs. last month at 155. This was interpreted as bullish as prices closed 30 cents or the limit higher Friday with December 08’ gaining 4 ¼ cents on the week. There is a remote chance of one more leg down in corn before an October harvest rally begins, but based on the recent activity we can assume the low is in place and although we may get some back and fill we would be a buyer on dips. Although we are currently trading the December 08’, if traders wish to buy the December 09’ and sit on it for an extended period looking for new highs, it’s not a terrible strategy. The last two years saw good harvest rallies and with corn ending stocks down for the third consecutive year and corn $2.50 below the summer high, there is considerable room for some upside. Exporters, users, and feeders will be aggressive buyers of corn at harvest to insure they hold inventory at fair value in case planting or growing problems arise into 09’.  Use last week’s lows as support and look on the ensuing leg higher resistance at $6.30 followed by $6.65.

Beans: The USDA reported a crop size of 2.934 billion bu. vs. 2.973 last month, a yield of 40.0 b.p.a. vs. 40.5 last month and 08-09 ending stocks at 135 million bu. which was inline with last month. We are finding good support around the $11.75 level and the longer prices stay above $12 the more convinced I get that the harvest lows are in and we are moving higher from here. I expect to see prices rally during the October harvest as commercial users buy inventory at over $4.00 under the recent highs as a hedge against a problem with planting or growing next year. If Friday was any indication of skittishness in beans September futures soared $2.74 on their last trading day; a daily record amid fears that stockpiles of beans may run out before this harvest begins. Near term support on November remains at last week’s lows between $11.60 and $11.70 with $12.30 followed by $13.00 as upside resistance. We are friendly to December soy meal, November soy beans and if last week’s lows hold in December soy oil these levels may serve as a good level to probe longs with stops just below.

Wheat: December CBOT wheat was down 35 ¾ cents last week closing at $7.19 1/4. Support on December wheat first comes in at the psychological level of $7 and then at 6.75 with major resistance at 7.90; where a gap is from September 2nd.  December KCBOT was down 37 ½ cents last week to close at 7.59 ½. These levels in wheat represent the lowest levels since Thanksgiving of 07’. Cash remains at a sharp discount to futures which is generally bearish when inventory is high. We would stand aside for now, but do expect things to turn higher very soon. It may take an influence from outside markets or perhaps large export numbers or bullish supply news. Australia the world's sixth-largest wheat exporter, may harvest less of the grain than previously forecast because of dry weather.

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Depending on how you approached December cocoa last week traders may have made a few quick bucks or still be positioned long. If you look at last week’s commentary we recommended a buy below 2550 with stops below 2515, we got within 1 tick of being stopped out with last week’s low at 2516 and last week’s high at 2608. Corruption scandals, strikes, and power struggles that have rocked the Ivory Coast's cocoa sector, and the upcoming elections could continue to rattle market. Analysts expect the world's biggest cocoa grower, which has kept on producing big harvests despite a brief 2002/2003 civil war and long running political crisis, will still get its beans to market despite the turmoil. Dollar weakness should help cocoa prices move higher in the short term, but we will be looking for a potential short entry as prices generally fade this time of year.

Cotton prices have been moving lower since the beginning of September as December has given up just over a nickel in the futures. The USDA increased 08-09 ending stocks in cotton from 4.6 to 4.9 million bales. Despite the neutral to slightly bearish report, cotton prices moved higher due to oversold conditions and the weakness in the dollar. If the market has found a bottom, we could see prices retrace back to the trend line at 68.00 and ultimately thru that level and above 70 in the coming weeks. Recent drought conditions have destroyed 1.3 million acres of the 4.7 million cotton acres planted in Texas. Hurricane Ike dumped heavy rain on the Texas cotton fields which could cause further damage to the crop. There is no question that supplies have gotten smaller with the recent weather, but the demand or lack there of will need to pick up to turn prices significantly higher. We have advised clients on new purchases to split positions between December 08’ and March 09’.

March sugar was down 31 ticks on the week, but after a test of the 200 day moving average we had a solid showing to end the week with Friday prices gaining 45 points to close the week at 14.06. Charts are extremely oversold and this week we will most likely see a tug of war between weak energy prices and a falling dollar to see what influences sugar more. The USDA reduced 08-09 ending stocks in sugar from 767,000 to 505,000 tons. The sugar market typically declines into the beginning of sugar beet harvest, which must be complete before the first heavy frost. Anticipation of new supply tends to drive prices lower; but, after October futures expire on the last day of September, consumers must use March to hedge their needs in the New Year. Thus, prices tend to rise throughout the fourth quarter even as cane harvest continues. We will repeat the advice from last week as we still like accumulating 15, 16, 17 cent calls in March 09’ for clients.

The entire risk premium has been sucked out of orange juice as the recent hurricane activity has missed Florida’s citrus regions. We still like buying January out of the money calls for the “what if” scenario. In the last week prices have come off 15-20 cents depending on the month. You can now buy the January 120 calls for the same price we bought 160 calls just weeks ago. It is far from our favorite trade, but at a small premium traders can have some exposure on potential hurricanes threats and if funds re-emerge looking for value current fcoj prices are near the lowest level we have seen in 3 years.

December coffee prices were down 4 cents last week and we closed below 1.40 just as we had been forecasting for the last 2 weeks. Coffee remains on our no interest list until October or we see a trade down to 1.30, whatever scenario happens first. The trade we mentioned last week has already met over half of its objective so if you took our advice start to look for an exit; just less than 1.37 should be your target.

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December silver was $1.73 lower last week and closed below $11 for the first time since June 06’. The volume last week was almost 200,000 contracts which is double what we saw the previous 2 weeks. We would try to avoid picking an exact bottom, but we are comfortable getting long lightly with 30% of the ultimate size of the position you want to own with futures and we are still advising clients to buy $1.50 to 2.00 call spreads for March. If you bought these position say 2 weeks ago and they have lost significant value, what we would suggest is buying back the top leg. Treat the trade as 2 different transactions and although it may be viewed as throwing good money after bad we expect to see the price turn around and a sharp move higher, so we think it is feasible to make money on both legs. We still maintain that prices will move higher into year’s end and into 09’. There is no justification in our eyes that prices have been virtually cut in half in recent months. Furthermore, years from now buying silver at today’s price will be viewed as an excellent entry for traders with a medium to longer time horizon. We do not encourage short sighted traders or day trader’s to try to time this market because the lows may not be in!

December gold was $51.10 lower last week closing at $764.50 at about the same levels prices were last September on fund led selling. We closed $24.70 off the lows last week, for the time being we should see some support around the $750 level on December. Our assessment would change on a stronger dollar or a precipitous fall in oil as traders may further flee the gold market. As we have said in recent weeks we are suggesting no exposure in the gold market and if one wants to be involved in metals we prefer the silver market, see above. Gold will remain on our radar and there will be a time to get positioned long, but we think it is entirely possible to see a capitulation low potential trade attempt at $700-720 before a move higher begins. Until Fridays move higher gold had fallen 9 straight days which was its longest losing streak since 2000. Once again do not be a hero and try to pick a bottom!

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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.