For July 13th– July 17th 2009

By: Matthew Bradbard

Risk Aversion by Commodity Speculators

Speculators may be running for the exit doors on talks of more government involvement in the futures market, but I feel their exit may be premature seeing that the government is just talking at this point. Since the government has not screwed things up enough they are now discussing more stringent controls in the commodities markets. I welcome regulation when it works and the theory of instituting position limits sounds good, however the likelihood of volatility decreasing on that action is debatable. Contrary to popular opinion it is the speculator that plays a vital role in providing liquidity in the marketplace and without their involvement price distortions may in fact increase. Is it completely impracticable to think that changes in supply & demand could have a more significant impact on pricing? Perhaps the fact that commodities are becoming a more mainstream asset class, recent estimates show that $25 billion has poured into commodities in the first half of 09’.

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

____________________________________________________________________

The DOE reported crude oil supplies were down 2.9 million barrels, supplies of gasoline were up 1.9 million barrels and heating oil supplies were up 2.0 million barrels. August oil traded lower by $5.65 losing ground 7 out of the last 8 sessions, the longest losing streak since December. Support comes in at the 100 day moving average at 58.82 followed by 56.00. Resistance is at 62.00 followed by the 50 day moving average at 65.15. Currently we have no exposure with clients. August RBOB was lower by 10.25 cents. A potential triple bottom has formed between 1.6250 and 1.63 but stronger support is seen at 1.55/1.56. Being prices are extremely oversold we may see a bounce, resistance is first seen at 1.72 followed by 1.77. August heating oil lost 16.94 trading lower the last 8 consecutive sessions. Prices at the end of the week started to show some resolve closing almost 4 cents off their lows. Support at 1.50 resistance at 1.60.

The DOE reported underground supplies of natural gas were up 75 billion cubic feet last week to 2.796 trillion cubic feet. Supplies are now up 27% from a year ago. August natural gas was down 24 cents to a new contract low. We’ve been buying clients October $1 call spreads now for the last 3 to 4 weeks and are down but not out. If we do not see a reversal within the next 7/10 days we may start buying November instead of October. Last week’s low at 3.34 should support with resistance at 3.60 followed by 3.80.

__________________________________________________________________

The USDA expects beef production to be down 1% in 10’ keeping their estimate of choice steers unchanged at 90.5 cents per pound. August live cattle were lower by 1.40 losing ground 5 out of the last 6 sessions. Support is seen at the 20 day moving average at 83.00 with resistance at 84.45/84.60. Trade idea: from a livestock CTA that we trade with, that is up 27% ytd, we have positioned client’s short October live cattle in an 86/81 put spread; contact us for pricing and objective. August feeder cattle were lower by 70 ticks last week. Support comes in at 101.50 with resistance at 104.00. Food for thought, prices look overbought and typically when corn moves higher feeders move lower, though we have no exposure with clients.

The USDA estimated pork production will be down 1% in 10’ and they expect the price of barrows and gilts to average 48 cents per pound (65 cents lean). August lean hogs were higher by 2.40 last week trading up almost 4%. This was the first close above the 20 day moving average in 3 months. We remain short futures and long (2) August calls for clients which is a bullish strategy. If you need an explanation on why, contact us. Support is seen at 61.50/62.00 resistance at 65.75.

Being that production is projected to be down in both cattle and hogs if and when demand returns to the market we should see a bull market that has legs.

____________________________________________________________________

Stocks: The quote of the week, “We misread how bad the economy was, but we are now only about 120 days into the recovery package.”  Joe Biden. Equity markets were lower last week as we predicted. The September Dow futures lost for the fourth week running, giving up 145 points to close just below 8100. The S&P 500 lost 17.75 points virtually 2% to break the neckline and close below support from mid-May.  We continue to favor short positions and suggest investors that refuse to lighten up in their equity portfolios to institute hedges. The problem continues to be that positive news is lacking and traders may soon take shelter until something constructive happens in any asset class. With second quarter earnings this week remain agile.

Bonds: September 30-yr bonds gained 1’27 points last week trading to a 7 week high. Volatility has picked with wider trading ranges last week which generally happens at markets tops or bottoms. We would advise taking off all longs and expect a shift lower from here. Resistance comes in at 121’16 with support at 119’10. September 10-yr notes also gained last week, picking up 1’26.5 points. Like bonds, we expect yields to rise and prices to retreat. Resistance comes in at 119’10 with support at 117’10. Get short March 10’ Euro-dollars via futures or options. We expect last week’s high to serve as an interim top. You can buy an at-the-money put with over 8 months time currently for $600.

____________________________________________________________________

The Euro was lower by 11 ticks closing just under the 20 day moving average. These were the first back to back losing weeks since April. Support comes in between 1.3825/1.3850 with resistance at 1.4075.

The BoE met and kept its interest rate unchanged at 0.50%, but surprised many saying they would not expand their program of quantitative easing. The Cable closed lower by 98 ticks last week. We forecasted a down move and were right but didn’t take any action with clients. Resistance is seen at the 20 day moving average at 1.6371 with support at last week’s low just less than 1.6000.

The September Canadian dollar finished down 9 ticks trading at the lowest level in seven weeks pressured by a drop in energies and metals. Last week’s low at .8530 should support with resistance at .8680. On a close above the 20 day moving average at .8685 a resumption of the uptrend is expected. We’ve not seen a close above this level since 6/12.

The RBA met and kept interest rates unchanged at 3.0%. The Aussie was down 177 ticks as it looks like a downtrend has begun. Resistance comes in at the 20 day moving average just above .7900 with support at .7650 followed by .7500.

The Swissie gained 27 ticks last week closing higher 4 out of the last 5 weeks. Support is seen at .9100 with resistance at .9325/.9340. Indecisiveness remains so we have no trade ideas presently.

The yen gained 422 ticks last week trading to a 5 month high. Did anyone take our trade recommendation from last weeks’ commentary on the September 110 calls, if so you’re welcome! Support is seen at 1.0740 followed by 1.0650 with resistance at 1.0940.

The Kiwi lost 2 ticks last week, largely a non-event. Resistance is at the 20 day moving average at .6332 with support at .6170. Prices could go either way so stand aside for now.

The US dollar index gave up 18 ticks last week. We suggest trading the break out above resistance at 81.20 or below support at 79.70. Nothing notable came form the G-8 meeting last week on the dollar as the world’s reserve currency.

___________________________________________________________________

The USDA's 09-10 US ending stocks estimate for corn was increased from 1.09 to 1.55 billion bushels. September corn lost 13 ¾ cents last week as selling continued. Signs of life were exhibited Friday even after a new low was made, prices rallied to close nearly 10 cents of their intra-day lows. We are suggesting clients to buy December $4 calls, paying 10-12 cents last week anticipating a double in premium in the coming weeks. The risk/reward dynamic is favorable being all the news that has taken prices to recent depths is factored in, so any positive news and we could see a noteworthy rally. Support comes in at last week’s low in September at 3.18 ½ with resistance at 355/360.

The USDA's 09-10 US ending stocks estimate for soybeans was increased from 210 to 250 million bushels. August soybeans were lower by just shy of $1.00; representing a $5,000 move per contract. One must have intestinal fortitude to trade beans in this environment being the weekly trading range represents almost $7,500 per contract. Support comes in between 10.15/10.20 with resistance at 10.60 followed by 10.80. Those wanting to get long should look to November. A client pointed out that the fundamentals are more favorable to beans than corn which is accurate, but I prefer the chart in corn. Traders could gain long exposure by purchasing $11 calls for $1,250 or the $10/12 call spread for $1,500.

The USDA's 09-10 US ending stocks estimate for wheat was increased from 647 to 706 million bushels. September CBOT lost 10 ½ last week. Last week’s low at 5.12 ¼ should support with resistance seen at 5.30 followed by 5.40. The current chart is reminiscent of the orange juice chart weeks ago before the recent moved ensued. We expect a short covering bounce at minimum. September KCBOT lost 16 ½ cents last week though we did have 2 consecutive positive days which had not happened since late May. Support is seen between 5.40/5.43 with resistance at 5.62/5.65.

___________________________________________________________________

September cocoa traded higher by $175 last week filling a gap from 6/16. Resistance comes in at 2700, support at 2590. Trade idea: sell (2) September 2800 calls collecting approx. $1,250 while simultaneously buying (2) December 2800 calls for approx. $3,800. The cost on the trade would be roughly $2,500. On a move higher from here expect to make 30% of the futures move. On a sideways market or down market the September will go worthless and you will trade at a later date out of the December.

The USDA's 09-10 US ending stocks estimate for sugar was reduced from 459,000 to 359,000 tons. October sugar lost 19 ticks last week and though prices have backed off we do not think prices have come off enough to justify re-establishing longs for clients. Resistance is seen at the 9 day moving average at 17.45, support comes in at 16.90 followed by 16.50. We are looking to buy March 10’ calls but premiums are a bit rich now.

The USDA's 09-10 US ending stocks estimate for cotton was kept unchanged at 5.60 million bales. October cotton was higher by 1.30 cents gaining for the third week in a row trading to a 5 week high. Resistance comes in at 61.25/61.75, support at 57.00. We suggest buying on a break. If the global recovery comes into question prices could back off sharply so no rush.

September orange juice closed up 14.15 cents up 18% on the week to the highest level in over a month. We suggested clients to take 75% of their November $1 calls off at a double so they will have none of their money exposed and to gamble with the markets money. If prices continue to rise and approach $1 we will take off the remainder. Support is at 89.00 followed by 84.00 with resistance at 96.50.

According to Dow Jones, rain and colder temperatures are expected in Brazil's coffee regions, possibly disrupting the harvest. Last week September coffee ended lower by 3.50 cents to the lowest level in 4 months. We still do expect a move higher and will stay the course with clients holding December 15 cent call spreads. Support comes in at 112/112.50, resistance at the 9 day moving average at 117.45.

____________________________________________________________________

September silver lost 78 cents last week trading within 6 cents of the 200 day moving average. We advised clients to buy back the top leg of their previously purchased call spreads and we were also fresh buyers adding to their position on December $14/17 call spreads at $2,150. We feel that silver has overshot to the downside and expect a speedy recovery from oversold levels. Support should hold at the 200 day moving average at 12.45 being a 50% Fibonacci retracement is at 12.43.  Resistance is seen at 12.90 followed by 13.25.

August gold traded lower by $19.50 last week though we may have formed a triple bottom between 904/905. We will find out early this week if that level will hold or if the market will attempt a test of 900 being we are so close. If 900 were to give way expect a move to the 200 day moving average at 883. We feel this is unlikely unless stocks get hit hard or you see a significant rally on the dollar, in other words monitor outside markets. Resistance comes in at 925 followed by 945. On fresh purchases move the $100 call spreads out to December and if content with the time in October just buy $1000 calls for under $1,000. Friday’s settlement was $960, with a delta of 20% and over 2 months time this could work on a continuation of the up trend right away.

Back to Top

______________________________________________________________________
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.