April 27th– May 1st 2009

By: Matthew Bradbard

“Supply & Demand in Commodities”

It is viewed by many that a modest increase in commodity prices is a sign that demand is coming back to the market. We need to point out demand is only one side of the equation, the other being supply. We do agree that once prices stabilize we could see further upside, as the global economy starts to digest the recent stimulus, which should lead to inflation down the road. The 2 main questions are how long and windy will that road be and how much inflation will we have? Over the years, one of the main aspects within commodities that has intrigued me is the economics, supply and demand govern the price as opposed to an executive sleeping with his assistant, a missed earnings report or a short seller with an agenda. Yes, just like any market, commodities can be manipulated but to a bigger degree these markets make sense. A hurricane, flood or drought will affect supplies and therefore price. A significant population expansion, a growing middle class with an appetite for better things; i.e. more demand should fuel a commodities bull market for years. It is our viewpoint that we are in the 4th or 5th inning and just taking a rest before the next leg up begins.

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 crude oil supplies were up 3.9 million, supplies of gasoline were up 800,000 barrels while heating oil supplies were down 100,000 barrels. June crude oil ended down 71 cents but $4.83 off Tuesday’s lows. These lows were within pennies of the 61.8% Fibonacci retracement level so we could see a bounce from here. Support comes in at 50.25 followed by 48.50 with resistance at 53.25 followed by 54.50. A close over $56 is needed to signal a move back over $60. June heating oil was lower by 5.81 cents last week. Support is seen at 1.3150 with resistance at the 9 day moving average at 1.3915 followed by 1.45. June RBOB was lower by 4.99 cents. 1.36/1.38 should serve as support as the last 2 visits to these levels in the last 4 weeks have held. Resistance comes in between 1.47/1.49. Continue to use setbacks to purchase 20 cent July and August call spreads.

The US Department of Energy said underground supplies of natural gas were up 46 billion cubic feet last week to 1.741 trillion cubic feet. Supplies are now up 36% from a year ago and up 23% from the five-year average. June natural gas dropped 45 cents to a new contract low losing 12%, trading lower all 5 sessions. We advised clients to buy back the top legs in their June call spreads hoping to see a rally in the next 2/3 weeks. We still own a small long position June mini-futures. The pain is usually the greatest right before a market turns and we are getting close to throwing in the towel so a bottom is probably around the corner. There is absolute no support seen on the charts, as far as resistance, first at the 9 day moving average at 3.67 followed by the 3.85/4.00 level which had previous served as support.

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June live cattle were lower by 1.40 closing below the 9 day moving average. Support comes in at 82.40 followed by 82.00. Resistance is seen between 83.80 and 84.00. We expect more downside and would not rule out a move to 81.25 this week. August feeder cattle were lower by 1.175, closing down after 3 positive weeks. Resistance is seen between 1.0125 and 1.0175, support at the 9 day moving average at 100.24 followed by 99.00 and then 98.25.

June lean hogs were lower by 1.55 as the pork complex much like beef prices were under pressure. On the next rally we may trade out of the remaining June calls for clients as we are seeing better opportunities in other complexes. Support is seen between 71/71.20 and resistance comes in at 72.70.

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Stocks: Stocks ended the week much better than they stated, clawing back to end modestly lower. The Dow finished the week 55 points or less than 1% lower at 8076 for its first loss in 7 weeks. The S&P traded on both sides of positive and negative but finished the week 3 points lower at 866. For the month of April the S&P is up nearly 9% and on track for its best 2 month run since 75’. The NASDAQ was able to keep its streak alive, ending higher for the seventh consecutive week adding 21 points to 1694. Earnings were largely ignored as were the stress tests, as the market disregarded these tests feeling the gov’t is once again letting banks off the hook. With the results still 1 week away don’t hold your breath for any earth shattering results. The dilemma is that the recent rally was led by financials and with banks on the guillotine we feel it’s unlikely the financials will remain the leaders. We remain cautiously optimistic but if forced to pick a direction we would say down. That is not to say an attempt at 900+ on the S&P is unlikely, we will just be spectators not speculators. Remember the adage “Sell in May and go away.” 

Bonds: June 30-yr bonds were lower by just over 1 basis point with the lowest trade since 3/18. Support is seen at 123’00 with resistance at 126’00. The trend remains down but we could see a bounce being prices have come off 7 basis points just in the last 3 ½ weeks. June 10-yr notes were lower by 21.5 ticks last week, like bonds was the lowest price since 3/18. Support comes in between 120’16-120’23 with resistance between 122’05-122’16. The trend remains down but the pace of selling may slow now with the rate back above 3.0%. We are advising clients to continue accumulating shorts in March 10’ Euro-dollar positions. We are approximately in the middle of the trading range we have been in for the last 3 months. The Fed meets this week and we expect no change in policy, at most some jawboning on how to keep longer term rates low.

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The June Euro was higher by 2 cents last week bouncing early in the week from oversold levels. Support comes in at 1.3125 with resistance at 1.3350 followed by 1.3475. We have advised clients to cover all shorts but to stand aside on new entries..

The Aussie was lower by 6 ticks last week getting back between Tuesday and Friday, virtually the entire 3.6% decline from Mondays trading. Support comes in between .6950 and .7000 with resistance at .7275. We are working bids for clients between $850/900 for September 75/80 call spreads.

The Swissie was higher by 203 points , on a close above .8800 you would see more upside. Support comes in at the 50 day moving average at .8675 with resistance at .8850 followed by .8925.

Last week the BOC reduced its interest rate from .50% to .25%. Furthermore, they said they would maintain their benchmark overnight-lending rate for 14 months. The Loonie picked up 43 ticks last week closing 322 ticks off the weekly lows. It was a classic case of sell the rumor and buy the fact as prices rallied just after the rate reduction. On a further advance we will be looking to roll our client’s May positions out to September and look for an exit on the June positions on a trade above 84 cents. As of Monday morning the September 85 calls were bid at $1800.

The June yen was higher by 225 ticks and since prices bottomed on 4/6, prices have traded higher 10 out of 13 days. Prices closed over the 50 day moving average for the first time since 2/12. Support is seen between 1.0050/1.01 and resistance is seen between 1.04/1.0450. On a trade above 1.04 we would advise taking partial profits on recent longs. The BOJ is expected to leave rates alone at 0.10%.

The Pound gave up 113 ticks to trade lower 2 out of the last 3 weeks. Support is seen at the 50 day moving average at 1.44 with resistance at 1.48. There seems to be indecision as prices could go either way from here. We have a slightly bullish bias but only from outside market influence as there is very little to be bullish about with the Pound alone.

The Kiwi was higher by 25 ticks after starting the week lower, prices fought back to end in positive territory closing 229 ticks off the lows. Support comes in at .5500; the 38.2% Fibonacci retracement level with resistance at .5775 followed by .5850. The RBNZ is expected to reduce rates 50 basis points from 3.0% to 2.50%.

The US dollar was lower by 144 ticks last week as things fell apart, selling intensified with more concerns of quantitative easing. Resistance comes in at the 50 day moving average at 86.80 with support just below last week’s low 84.60 followed by 84.00. On a close below 83.60 look out below. The FOMC meeting this week may have an impact but most likely the down move we saw last week was the market pricing this in. Rates remain at 0.25%.

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July corn was higher by 2 ½ cents last week with the pivot point being the 50 day moving average at 3.89 ½. Support is seen at 3.77 followed by 3.70 with resistance between 3.95/4.00. Buyers have come in because weather reports are turning wet the next 7-10 days potentially slowing planting progress already behind schedule. Some forecasts see May looking as wet as March 08’ when flooding occurred. We are advising clients to be buyers near 3.65.

July soybeans were lower by 3 ¾ cents last week as prices are exhibiting signs of an interim top. The 10.50/10.60 area that served as resistance back in January looks to act as resistance once again. A 50% Fibonacci retracement would take prices back to 9.32, the 50 day moving average stands at 9.39. First support is seen between 10.07 and 10.10. We like the idea of put spreads in July, we recommended clients to sell $10 puts and buy 3 times as many $9 puts for 2-3 cents last week. On top of that for a futures play if prices do break as we anticipate play short July (old crop) against a long November (new crop). Get in the spread over -1.00 risking 15-20 cents looking for the spread to come in 25-40 cents. If soybeans don’t drop in the next 2 weeks we may opt to lighten up, not wanting to remain short into the next USDA crop report with traders looking for another drop in ending stocks. 

July CBOT wheat was higher by 9 ¼ cents last week bucking the trend from corn and beans. Support is seen at 5.25 followed by 5.15 with resistance at 5.50 followed by 5.60. We are advising clients to sell July $5 puts for 20 cents O/B. July KCBOT gained 16 ¼ cents last week. We see support at the 50 day moving average at 5.82 ¾ with resistance at 6.00 followed by 6.10.

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July cocoa picked up $58 last week recovering from the previous 2 week’s losses of $383. Support is seen at 2400 with resistance at 2500 followed by 2532, the 20 day moving average. On further weakness in the dollar we may see a short covering bounce being prices are oversold.

July sugar closed up 54 ticks, the highest close in 7 months, helped by higher gasoline prices and what appears to be fund buying. Support comes in between 13.70 and 13.80 with resistance at 14.25 followed by 14.60. We have advised clients to lighten up on longs or at a minimum tighten up stops. Additionally, our clients sold July calls against some of our October call positions.

The US Census Bureau said that cotton mill use increased from an annual rate of 3.09 to 3.14 million bales in March. July cotton closed up 2.10 cents at its highest level since late January. Resistance comes in between 53.50/54 with first support at 51.00 followed by 50.00. We would be a cautious buyer on breaks. We have considered selling July calls against a purchase of October calls; contact us for pricing.

July coffee prices reversed course mid-week with news that truck drivers in Colombia went on strike for lower fuel prices. July coffee ended the week higher by 5.90 cents. When prices failed to break support at 112.75 early last week we chose to cover the 140 calls for our clients by buying this leg back for a profit of $770 per position. We will now look to trade out of their 120 calls this week at 700 points O/B. Support comes in at 116.25 with resistance at 119.75 followed by 122.25. The lesson here is as the market is always evolving you sometimes need to adapt your trading strategy.

The USDA's Florida weather crop report said that due to the dry conditions, trees ranged from poor in groves with less maintenance and little irrigation to good in well-cared for groves. The report also said that drought intensity has reached severe to extreme in some areas. July orange juice ended down 3.50 cents, moving lower as we had forecast last week. Support is seen at the 20 day moving average at 82.90 with resistance at 86.90 followed by 88.25. We expect a move down to 77/79 where we may opt to get long.

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June gold was higher by $43.90 or 5% on the week, after 4 losing weeks the market reversed direction and took off. The triple bottom at $865 that we spoke about last week served as solid support and as long as prices stay above those levels we’ll remain long with clients. We were expecting an opportunity to get long from lower levels but that did not work out with a decisive move back above $900 on big volume. The market was likely influenced by comments out of China that their reserves of gold were reported to be much larger than previous estimates. Immediate support comes in at the psychological level at 900 followed by the 100 day moving average at 890.20. Resistance is seen at 919 followed by 937. Those not comfortable scaling into long futures we suggest purchasing $100 and $150 call spreads in August.

July silver was higher by $1.17 or 10% once again approaching the $13 level. Prices closed almost $2.20 off the weekly lows as a violent reversal took place. Support is seen between 12.50 and 12.60 with first resistance at 13.25 followed by 13.70. Prices managed to close back above the 200 day moving average for the first time since 3/27 which should indicate higher ground. We have been fairly consistent for the last few months and in terms of risk to reward silver remains our number 1 bullish recommendation. In the coming weeks 14.50 is achievable and on further dollar weakness and on another leg down in stocks we could see even higher pricing. We have numerous medium-term and longer-term bullish strategies, contact us for pricing.

The International Copper Study Group said they expect a world production surplus for copper of 345,000 tons in 09’ and 400,000 tons in 10’. They acknowledged that the world's economic crisis makes it harder to predict, but they expect world refined usage to be down at least 4% in 09’ and mine production to be up 4%. July copper finished down 16.7 cents, a further 15-25 cents is necessary to the downside before we will look to go long.

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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.