For July 6th– July 10th 2009

By: Matthew Bradbard

Commodities: A Pause or a Reversal?

With half of 2009 behind us investors may be wondering if they have enough exposure to commodities in their portfolios. Several commodities gained value in the first 6 months of the year on expectations for a global economic recovery and on worries of inflation. There are many uncertainties that remain unanswered, if, how strong, and the sustainability of this recovery. It may be smart to cover some of your commodity longs or scale back your exposure as it appears that in the immediate future we could see some give back. We’re convinced this will not be a reversal but yet just a pause in a bull market with many more years of life.

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 DOE reported crude oil supplies were down 3.7 million barrels, supplies of gasoline were up 2.3 million barrels while heating oil supplies were up 2.8 million barrels. August crude oil was lower by $3.62 closing lower for the third consecutive week; the first time this has happened since February. Resistance is seen at $70, support comes in at the 50 day moving average at $64.56 followed by the 50% Fibonacci retracement level at $61.90. August heating oil traded lower by 11.21 cents closing below the 50 day moving average for the first time since 4/30. Resistance comes in at 1.72/1.73 and support at 1.60/1.61. The daily chart is oversold but the weekly chart is still overbought, stand aside for now. August RBOB lost 12.13 cents last week also closing below the 50 day moving average. Resistance is seen at 1.80 and support at 1.70 followed by 1.64. The heart of the summer driving season has done little to prices being fewer travelers are on the road. Assuming a 50% retracement from where the run higher started back the first of the year prices could still come off an additional 30 cents. At this point we have no interest.

The DOE reported that underground supplies of natural gas were up 70 billion cubic feet at 2.721 trillion cubic feet. Supplies are now up 29% from a year ago. August natural gas dropped 45 cents taking prices to their lowest price in nine weeks. Prices are approaching the bottom of the range we’ve been in for the last 4 months between $3.60 and $4.90. Support is seen at the contract low at 3.52 with resistance at 3.75 followed by 4.00; the 50 day moving average. We’re still advising clients to accumulate October $1 call spreads.

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August live cattle closed up 2.075, the highest close in almost five months, helped by improving economic conditions and reduced numbers of available cattle. Support comes in at 84.00 with resistance at last week’s high just above 86.00. Trade idea: long December live cattle/ short October live cattle at -50. Currently December is under but we’re expecting it to move to a premium to October. August feeder cattle were higher by 4.50. Support comes in at 102.40 followed by 101.40 with resistance at last week’s high just above 104.0. If you are currently long we would recommend moving to the sidelines.

August lean hogs closed up 3.25 on the week as prices have advanced 7% off their contract lows in just 5 sessions. Support is seen at 59.00 with resistance at 62.00. For clients the only exposure we have is short futures and long (2) August 62 calls. The delta is currently 47% but as prices become more intrinsic they will gain more in their options than lose in the futures. An alternative play would be to just buy October 60 cent calls for $1200.

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Stocks: For stocks to move out of their recent range and have any chance of higher ground the economic growth must catch up to the markets’ expectations, which we think is doubtful. Last week the Dow slipped for a third consecutive week losing 158 points, just less than 2% to 8281. The S&P 500 fell 22 points or 2.5% to 896. The NASDAQ gave up 42 points or 2.3% to 1797. As the second quarter concludes the latest rally seems to have run out of gas. Reflected in the lack of volume investors aren’t convinced a new bull was born. As long as prices stay below the 50 day moving averages we expect further downside; in the Dow at 8380 and the S&P 500 at 904. Setting the tone this week what comes out of the G-8 on economic policy, interest rates, the dollar remaining as the reserve currency, inflation vs. deflation and further credit developments.

Bonds: The NFP # put the unemployment at 9.5% in June with a loss of 467,000 jobs, a larger loss than expected. September 30-yr bonds were higher by 20 ticks last week trading to their highest level since 5/22. We may still see 120’00 but trail stops on longs as prices have become overbought. Resistance comes in at 120’16 with support at 118’00. September 10-yr notes were higher by 17.5 ticks last week. Support is seen at 116’00 with resistance at 117’16. March 10’ Euro-dollars gained 10 ticks last week. Exhaustion was seen late last week and being prices are within 15 ticks of their contract highs we love the risk/reward dynamic getting short at these levels. Continue to scale into short futures and buy puts in the March 10’ contract.

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The ECB met and kept its interest rate unchanged at 1.0%. The Euro lost 33 ticks last week closing once again above 1.40. For now the 20 day moving average appears to be the line in the sand as prices have failed to close below that level after multiple attempts. On a breach of the 20 day moving average at 1.3990 expect a trade down to 1.38/1.3825. Resistance is seen at 1.4150.

The Aussie was lower by 111 ticks closing just under the 20 day moving average. The RBA is scheduled to meet this week and is expected to leave rates alone at 3.0%. Support is seen at.7825 followed by .7750 with resistance at .8050.

The Swissie was virtually unchanged gaining 2 ticks last week as sideways action continues now for the fourth week. The activity was anything but boring with last week’s trading range almost 3 ½ cents, with intervention still looming. Support comes in at .9140, resistance at .9270 followed by .9320.
 
The Loonie was lower by 67 ticks as weakness in commodities may have contributed. Last week’s low at .8576 should support while resistance is seen at .8760. Trade ideas: buy the September 89 call for approximately $1,000, buy the 85/90 call spreads for $1,900 or get long the futures with stops below .8560.

The Cable was lower by 87 ticks last week. Resistance remains at 1.6650 with support now at 1.6200. We’re expecting a down move but currently have no exposure with clients. The BoE meeting should bring no change in rates which are expected to stay at 0.50%.

The unemployment rate in Japan came out last week with the highest level in five years. Last week the yen was lower by 56 ticks, it’s first negative week in the last four weeks. Support comes in at the 20 day moving average at 1.0370 with resistance at 1.0525. If equities continue lower don’t rule out a trade over 1.06. Aggressive traders could purchase September 110 calls for $1,000 with an objective of $1,500.

The Kiwi was lower by 153 ticks with the short term trend clearly turning lower. Resistance is seen at .6370/6390 with support at .6200 followed by .6125.
 
The US dollar index gained 62 ticks last week closing just above the 20 day moving average. Support comes in at 79.80 resistance at 81.25. We’re expecting a trade up to 82.00 and although we may not trade the dollar most markets will be affected on that move.

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The USDA reported 87.03 million acres of corn were planted, much more than expected. 87.03 million acres would be the second largest planting since 1946. September corn closed down 44 ¾ cents on the week, the lowest close in nearly seven months with good growing weather in the Mid-west and the curveball from the USDA.  Support is seen at the contract low at 3.35 ¾ with resistance between 3.55/3.60. We have no exposure with clients as we were stopped out of their September and December corn last week at a loss. December $4 corn calls are on our radar, stay tuned.

The USDA reported 77.48 million acres of soybeans were planted, less than expected, but a new record high. November soybeans gained 21 cents last week but the real story was the reversal after the market digested the acreage report. Last week’s trading range was 85 ¾ cents so tread lightly. Support is currently seen at 9.80 with resistance at the 20 & 40 day moving average at 10.25.

The USDA reported 59.78 million acres of wheat were planted, slightly more than expected. September CBOT wheat was lower by 33 cents trading to the lowest level in 09’. Support comes in at last week’s low at 5.25 with resistance at 5.42 followed by 5.54. September KCBOT wheat was lower by 33 ¼ cents last week. Support is seen at 5.55 followed by 5.45 with resistance at 5.72/5.75.

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October sugar jumped up 31 ticks to a new contract high. We may be wrong but for now are convinced an interim top was made last week at 18.09. Being that prices are overbought and appear to be rolling over we have advised clients to step to the sidelines temporarily. A 50% retracement would take prices to 16.83, the 50 day moving average comes in at 16.27. We will be advising futures and options in March 10’ on a setback.

The USDA reported 9.05 million acres of cotton were planted, down 4% from a year ago, but more than the 8.81 million acres in the USDA's June report. Whatever spin one wants to put on this, it will be the smallest cotton crop since 1983 so if we do see a resumption of demand, prices would react bullishly. October cotton closed up 4.18 cents; the first close above the 50 day moving average in three weeks. Support comes in at 57.00 with resistance at 60.00 followed by 62.00.  A December 60/65 bull call spread is a buy for under $1,000.

September cocoa was lower by $66 last week. Support comes in at 2460, resistance at 2580. We’re still crunching numbers to see if a back spread selling September and buying December makes sense.

September orange juice was higher by 3.05 cents last week on a hook reversal with good volume. This was the first positive week in the last five. Support is seen at 77.25/78 with resistance at 82/82.50. The November $1 calls settled last Friday at $428/per, continue to add these to your commodity portfolio.

September coffee was lower by 1.20 cents last week failing to make its way above the 9 day moving average. Support comes in at 115/116 with resistance at 120.50/121.50. We currently own December 130/145 call spreads for our clients thinking the recent sell-off was overdone. The inventories of several producing countries are at dangerously low levels so it would not take much to get this market moving. Perhaps a frost scare or drought could be the catalyst?

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August gold traded lower by $8.20 last week to form an inside week. This is not the most bullish news and if the dollar was to continue its push upward we could see further consolidation. Being that prices are now below the 50 and 100 day moving average I would like to see consecutive closes back above those levels before getting considerable long exposure for clients. Support is first seen at 914/918 followed by 900 with resistance at 942/950. On 2 consecutive closes above 950 that should signal prices are on their way to 1000, which we do expect in Q3. Our favored play remains October $100 call spreads.

September silver lost 67.5 cents last week and has now closed lower for the fifth consecutive week losing 17% in that time frame. Last week’s low at 13.29 will offer mild support but on a breach of that level expect another $1 move south. Resistance comes in at the 100 day moving average at 13.65 followed by the 50 day moving average at 14.20. We will continue to accumulate $3 December call spreads for clients, however we would advise lightening up on futures until a bottom is confirmed.

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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.