For January 26th– January 30th 2009

By: Matthew Bradbard

“A tradable rally or a reversal?”

It is apparent, with the US dollar looking toppish and Treasuries trading lower, that investors seem willing to take some risk. I don’t expect to see the same amount of leverage nor do I expect to see such violent moves, but after a 50-70% reduction in prices in a variety of commodities there are some real bargains. Livestock has yet to bottom but both cows and pigs should be on your radar. Energies are still probing for a bottom, however we had some suggestions in RBOB, natural gas, and crude within the last few weeks. Agriculture is bouncing on weather concerns in S.America. The softs have been one of the best performing sectors ytd. I hate to say I told you so, but look at recent commentaries and blogs. We also have some currencies plays that are just getting underway, see currency section below. Gold and silver should be in every portfolio, all things considered, whether it is via equities, ETF’s, physical, or futures and options. Bottom line, whether it is a turnaround commodity wide we are getting at least a tradable bounce in multiple commodities and we suggest you take advantage of it.

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 6.1 million barrels last week, supplies of gasoline were up 6.5 million barrels while heating oil supplies were down 1.4 million barrels. March crude oil gained $5.08 or 12.4% last week. The market shrugged off the bearish inventory report and the spread is starting to weaken between the front and forward contracts; both signs that a bottom may be forming. Looking at the weekly chart we see a bullish engulfing candle. Last week’s high was $47 and the 40 day moving average is $47.03, on a move about that level look for $50-52 to serve as the next resistance. Support is eyed between $40/40.50. March heating oil lost 3.49 cents although did manage to rally 12 cents off its weekly low. Support comes in between 1.30/1.32 with resistance at 1.4850 followed by 1.5350. March RBOB lost 2.58 cents, but like heating oil, rallied closing 10 cents off its lows. Last week’s loss ended a 3 week positive streak and although we think a bottom is near we would only suggest wading in. Support comes in at 1.10 with resistance at 1.25. On a trade near 1.00 we would look to buy call spreads and potentially sell puts under the market to help finance the trade. If the math is right, traders could purchase 15 cent at the money calls while selling puts 20% below the market and still collect a credit. Contact us for more precise pricing.

The US Department of Energy said that underground supplies of natural gas were down 176 billion cubic feet last week to 2.560 trillion cubic feet. Supplies are now down slightly from last year, but 1.23% above the 5-yr average. However with industrial usage absent, the perception is the market is over supplied. March natural gas fell 26 cents to a new contract low. Prices have been down for the last 3 weeks and 13 of the last 14 sessions. The last time prices have been at these levels was the fall of 06’. In the last 7 months prices have fallen 69% compared to oil at its recent lows down 77%. There is no solid support on the charts, but prices may get low enough to entice users to lock in low prices or investors to buy whom are shopping for value. There is no real resistance on the upside until $5.30 in March. Keep this on your radar but wait for confirmation of a bottom.

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After the close Friday, the USDA said that there were 11.234 million head of cattle on feed as of January 1st, down 7.1% from a year ago and less than expected. December placements were down 3% and marketings were up 2% from a year ago. Additionally, the USDA estimated the week's beef production at 494.1 million pounds, up .4% from a year ago. The report was viewed as friendly, however cattle will presumably take guidance from the stock market to start the week. The USDA also said that "higher slaughter levels will almost certainly lead to a reduced US cow inventory and will affect beef production through 2010-11." The semi-annual inventory report is due out on January 30th. April live cattle were down .85 last week, trading at their lowest level in 7 weeks. Support is seen at 84.00 with resistance at 86.50 followed by 87.50. April feeder cattle lost 1.575 cents with an early week breakdown but prices held up to close the week, failing to make new lows. Support is seen at 92.00 with resistance at the 9 day moving average at 94.70. Update on the recent spread recommendation: long August live cattle and short April feeder cattle, we are up approximately $400 per (profit in feeder cattle and loss in live cattle). Depending on Monday’s action we may book the profit in feeder cattle and hold onto the live cattle looking to trade out of those positions at higher levels. If one wanted to stay with the spread we think it could trade up to -550, your entry should have been -950. 

Last week the USDA reported there were 549 million pounds of frozen pork in storage on December 31st, up 20% from a year ago and more than expected. There were also 51.7 million pounds of frozen bellies in storage, down 6% from a year ago and less than expected. The USDA estimated pork production at 455.4 million pounds, down 2.8% from a year ago. Stretched consumer budgets will likely constrain increases in pork and hog prices this year, despite reductions in production predicted by the December 1 Quarterly Hogs and Pigs report. April hogs were down 1.20 closing lower the last 3 weeks, losing 9.6% in that time to new contract lows. We are down, but remain in April calls with customers looking for prices to come back, but we advised clients to cut loses on their June futures on a trade below 76.50 and wait for confirmation of a bottom.

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Stocks: Barack Obama was sworn in as the 44th President of the United States, taking office at a time when the US economy is in its worst shape since World War II. Earnings are off to a miserable start, but should that come as a surprise in this environment? The market is anticipating further stimulus by the new administration, but is still adjusting to a new outlook. As Barron’s put it over the weekend, many traders view Obama as a wildcard. The Dow lost just over 200 points ending the week at 8078. The S&P surrendered 18 points to close at 832. The NASDAQ fell 52 points to 1477. By the end of this week the direction will be determined by the FOMC meeting, but we are expecting equities to find their way to higher ground with the Dow moving towards 8300 with 7850 holding as support. The S&P should find solid footing at 800 as we anticipate a rally to 880-900 in coming weeks. 

Bonds:  March 30-yr bonds lost over 5 basis points last week and are back at levels not seen since the first week of December. The yields increased last week and closed on Friday at 3.33%. The next leg lower should take prices to 126’10. We see resistance at 131’24 followed by 134’00. The March 10-yr note lost just fewer than 2 basis points with the yield closing on Friday at 2.62%.  Last week’s low at the 50 day moving average at 123’08 will most likely not hold on a further assault. The next leg lower should take prices to 121’16. Resistance is seen between 125’16 and 126’00. The NOB spread (short ush9/long tyh9) continues to work. This spread picked up 3 basis points or $3000 last week and has moved $8000 since the first of the year. March 09’ Euro-dollars were 17 ½ points lower last week and on further downside this week we will be looking to trade out of the 98.75 puts. We paid 12 ½ points and have a target of between 20-25 points. We are also recommending going short the Euro-dollar in March 10’. We don’t expect any change in rates this week but rather some creativity on special lending programs and perhaps clarification on how to bring down mortgage rates.

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The UK's said that real GDP was down 1.5% in Q4, weaker than expected and the first official recession since 1991.The pound dropped 10.56 cents to a new contract low losing 7% last week as the British economy looks to be in serious trouble. Further interest rate reductions are expected over the next few months. With the Prime Minister launching a second rescue package for troubled banks and talks of nationalization, investors were dumping their UK assets. Although we expect lower pricing in the medium term - short term we are expecting a rebound, albeit a dead cat bounce, to 1.4250. We advised client’s to buy March 150 calls for 100 ($625) points looking to exit between 175-200 ($1150) this week.

The Euro was 3.53 cents lower last week and is now trading back at levels not seen since mid-December.  It appears the path of least resistance is lower as we expect to see a trade down to 1.24/1.26 in the coming weeks. Between now and then look for resistance at 1.3150/1.32 and support at 1.2725/1.2650. 

The Swissie gave up 3.17 cents or 3.5% last week closing at a 5 week low. Resistance comes in at .8750 followed by the 9 day moving average at .8828. Support comes in between .8400 and .8500 but we cannot rule out a trade to the contract lows at this point, just under .8200.

The Aussie lost 2.01 cents and has now closed lower for the last 3 weeks. Support is seen at .6325 with resistance at .6610 followed by .6760. We have had 3 bullish suggestions for clients over the last week that are still applicable; buy the 65/70 March call spread, buy the 68 outright and short the 65 call while simultaneously getting long the futures.

The BOC cut its interest rate from 1.50% to a record low 1.00% in an effort to avoid negative growth this year. The currency still traded 62 ticks higher on the week largely led by gains in energies and metals.  Prices traded at a new contract low and were rejected, showing signs of a reversal ending the week, back above the 9 day moving average. Support is at .8000 and resistance is at .8200 followed by .8325. 

The Kiwi gave up 2.00 cents last week and has lost 9.5% over the last 2 weeks. There is a RBNZ meeting this week where they will likely trim rates 50-100 basis points. Last Wednesday a new contract low was made on the March contract but prices held. We would suggest going long futures with a stop-loss below .5100 looking for a trade up to .6000 in the coming months. Prices may meet some resistance at .5475 on their way up. 

The Japanese yen gained 2.61 cents last week but at its high’s may have formed a double top just under 115.00. That level was reached last week as well as the 3rd week in December and prices were not able to push higher. With talk of intervention, it may be a challenge for the yen to push to higher ground, unless we see actual monetary intervention as opposed to verbal intervention. If the risk aversion trade continues on a trade thru 115.00 we would probably see 120.00. The last 3 days of trading last week saw prices retreat from their highs, closing on average 1.74 cents off. Support is seen at 1.1100 and resistance between 1.1380 and 1.1400. 

The dollar index gained 1.91 cents last week and has been higher now for the last 4 weeks. It appears the recent move may be running out of gas with the violent sell-off on Friday, prices closing 122 ticks of their highs. Play the breakout if prices close above 87.25 or below 85.75. We favor the downside although will wait for Monday to make a final determination. On a move lower if we form an island top, that would be extremely bearish.

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Corn: March corn mustered a 1 ½ cents move higher, however was unable to break out of the 30 cent range that has restricted prices for the last 4 weeks. A possible trade idea is to short May futures near $4 while simultaneously buying 3 May 4.60 calls. Look to lift the short futures between 3.74 and 3.88 on a setback and hold the options for a move higher in the next few months. The real story of late has been the weather out of S.America. Rain is in the forecast for Argentina, but I question, will be enough to help the crops? Currently, the drought in Argentina is said to be the worst since 1961. Corn production is off 24% and soybeans 11% to date from a year ago. The next 3 weeks will decide the final production numbers as key yield time passes. Resistance is seen at 4.07 on March with support between 3.70/3.75. 

Beans: March soybeans lost 9 ¼ cents, but much like corn have remained range bound; prices have been between 9.75 and 10.40 for the last 3 weeks. Prices could go either way from here, but we do expect a move out of this range this week or next. This will depend on action in outside markets and weather in S. America. Being Argentina is the world’s third biggest soybean grower and exporter, Brazil is the world’s second biggest only to the US who is number one, the dry weather has played a key role in pricing recently. If the drought continues through the end of February we would most likely see additional export business in the US which would help demand and prices. 

Wheat: March CBOT wheat gained 3 ¾ cents last week with a 16 cent trading range high to low. It appeared that early in the week we were getting the price breakdown we were looking for, but by week’s end prices were back in the middle of the recent range. Support comes in at 5.50 with resistance at 5.95 followed by 6.15.  KCBOT was 2 ½ cents higher on the week losing a little ground to CBOT. 5.80 should serve as support as 6.20 should act as resistance followed by 6.50. We have no outright longs or shorts for clients but still have exposure and are partial to the KCBOT/CBOT March spread; settlement Friday was 27 ¾, our target remain 45/50 cents with a stop close only at 15 cents.

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The United Nations reported that caterpillars were eating crops in northern Liberia and they may spread to the Ivory Coast. March cocoa jumped up $261 or 11% to the highest close in 3 weeks, closing back above the 200 day moving average. We took a loss on our client’s March options with only 2 weeks of time left.  On the weekly charts we see a bullish engulfing candle. For the last 6 weeks we have stayed within a trading range of 2340 to 2720 and until we get out of that range continue to sell near 2700 and buy near 2400. Look for direction this week from the dollar and the pound. 

Central Florida saw its coldest temperatures since 03’ last week, but oj traders don't seem too worried. The early assessment is that some damage was done, but the majority of the orange crop should be okay. We should get a better assessment of the damage to the groves this week so stay tuned. March orange juice finished up just 2.10 trading above the 40 day moving average but failing to close above it. The last 3 week attempts to trade above 80 were thwarted and without any damage from the recent cold weather I don’t know what will be the catalyst to get oj moving higher. Resistance is at 80.00 with support at 72.50 followed by 70.00. On a spike higher we will look to trade out of the remaining 90 cent calls we own. Our favorite position remains long the futures with at the money put protection.

According to Bloomberg news, India's Farm Minister lowered his estimate of the 08-09 sugar crop from 20 to 18 million tons. Furthermore, India may ease duties on raw imports because of declining production. These circumstances, in combination with bullish chart patterns, helped lift sugar 55 ticks last week. Prices have gained now the last 4 weeks moving 15% higher. 12.00 should serve as support in March with resistance at 13.10 followed by 13.30. We are recommending buying the October 15 & 17 cent calls or to get long May futures with put protection in March. 

March cotton gained 1.39 cents last week, trading higher and closing near resistance. We see solid resistance at 50.50/51.00 with support back at 46.50.  We have no long exposure for clients here and are still anticipating a pullback to get positioned.

According to Dow Jones Newswires, Brazil's coffee crop has been enjoying usual favorable weather conditions, so far. March coffee closed up 4.50 cents at the highest close in eleven weeks. Prices over the last 8 weeks have gained 17% from their lows. We see support at 1.1400 with resistance at 1.2000 followed by 1.2350. On a move up to 1.2350 we would look to roll out of our clients March positions and look out until July. 

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February gold picked up $51.70 last week gaining 6%. The week’s trading range was $80.20 or just over $8000 per contract so like most commodities the volatility remains widespread. We ended the week just below $900, but were able to trade above that level trading at a 15 week high. Flight to safety buying is apparent with investors. We like $100 call spreads in June, ideally looking to pay $2500-3500 per spread looking for a double. Early last week we recommended the $850/950 for $3300 and as of Friday’s settlement it was $4160. Taking the high and low from the last 13 months, prices should remain between $824 and $910. On a move out of that range look for prices to find their way to $700 or $1000. Last Tuesday, Inauguration day, we saw a new high in volume trading, almost 170,000 contracts with gold up $11. Does this say anything about the new Administration or was it just a coincidence? Gold may be the new currency of choice in these difficult times. According to Bloomberg news, SPDR Gold Trust, the world’s largest exchange-traded fund for gold is experiencing record volume.

March silver was 64 cents higher also gaining 6% last week. Prices traded above the recent resistance point at $11.65. We see next resistance at $12.45 followed by $12.90. The $15/20 December call spreads that we have been recommending since late October are now trading above $3000 per spread. We were buying these positions for approximately $1700 for clients and even from today we still have 300 days of time left. We will be looking to lighten up on a move to $4000 if silver starts looking heavy. We are also advising clients to move their March futures and options out to July. For new entries look at July $2 call spreads for $1750 and $3 spreads for $2500. The reason for moving from March to July is you now have 5 months instead of just 1 month and you can weather a pullback that could come at any point. As long as March stays above $10 on setbacks, we like being 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.