For March 9th– March 13th 2009

By: Matthew Bradbard

“Less is More"

This is not about more taste or less filling but rather the more government involvement and medaling in the markets the less likely we will get a prompt recovery and return to a sustainable economy. What should be on your radar this week is the USDA report, and the approaching OPEC and FOMC meetings. If the stock market delivers a significant short covering rally, look for commodities to gain confidence. It isn’t so much that these markets will follow equities, but rather if we can get a rebound some reassurances may return that have been lacking since the new Administration took over. Citing an article from last week’s WSJ, current practices have been more of triage and life support as opposed to repair and recovery. Conceivably if circumstances were to change, further risk taking would return to the market as opposed to the blind ambition and hopes on improvement with little evidence.

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 DOE said crude oil supplies were down 700,000 barrels last week, supplies of gasoline were up 200,000 barrels while heating oil supplies were up 900,000 barrels. April crude oil was up $1.18 trading higher the last 3 weeks, currently $12 off the lows from just 4 weeks ago. Support is seen at the 20 day moving average at $42.30 with prices ending the week slightly above the 50 day moving average which comes in at $45.15. We could see prices make a run to the $50 level; prices have not been at those levels since 1/26. We are working a new system to trade front month crude oil options, preliminary analysis is extremely positive. We maintain our feeling that buying dips in oil for the next 60 days should be profitable thinking we are seeing a trend reversal. April heating oil was higher by 3.48 cents but stayed in the $1.13/1.30 trading range that has contained prices for the last 2 weeks. On a push higher in crude, prices could find their way to 1.35. We have no exposure with clients. April RBOB was lower by 2.48 cents after the prior week’s gain of 19 cents. Support is seen at the 50 day moving average at 1.2735 with resistance at 1.40. Prices have been unable to penetrate that level on multiple attempts over the last 3 months but if they do, RBOB should attract fresh buying. We’re advising clients to buy setbacks purchasing June 20 call spreads.

The US DOE said underground supplies of natural gas were 102 Bcf withdrawal from the previous week. Stocks were 270 Bcf higher than last year at this time and 218 Bcf above the 5-year average of 1,575 Bcf. Downward price pressure related to the domestic production outlook and the current economic downturn appeared to contain any price increases. April natural gas was lower by 32 cents or 7.5% to a new 6-yr low. We are still attempting to pick bottom long mini-futures with stops below the recent lows in addition to buying May $4.25/5.00 call spreads. Friday’s settlement was $1550.

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After the close Friday, the USDA estimated the week's beef production at 475 million pounds, down 5% from a year ago. April cattle closed down 3 cents at a new contract low weighed down by poor economic news. Resistance is seen at 84.00 with no support seen, the trend is clearly down. This time of year supply tends to outpace demand as we generally see a strong seasonal tendency for beef prices to decline starting on or about March 20 through the end of June. In the past 38 years ending in 07’ selling live cattle has worked 31 times for an average profit of $1340. Past performance is not indicative of future results. April feeder cattle were lower by 2.875 cents closing just off the week’s low. Resistance is seen at 93.30; the 20 day moving average with support eyed at 89.25. We have advised clients to re-enter the cattle spread we exited in recent weeks between -1000/-950 looking for the spread to narrow. (Long LCQ9/short FCJ9)

Pork production was estimated at 454.5 million pounds, up .2% from a year ago. April hogs were higher by 1.575 cents gaining over 400 points in the last 2 weeks. Resistance comes in at a triple top at 62.60 with support at 59.70. We have clients positioned long in April and June and will most likely be rolling the April futures and options into June in coming weeks. Look out for our special lean hog trade issued in the next 2 weeks. This trade has an extremely impressive track record and an attractive risk/reward set-up.

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Stocks:  The Dow fell for the 4th straight week losing over 400 points to close 6.2% lower at 6627. The S&P suffered its worst slide since late November losing just over 50 points or 7% to 683. Will there be any significance to the reversal near the 666 level on Friday? The NASDAQ declined 84 points just better than 6% to close under 1300. The US Labor Department said the unemployment rate increased from 7.6% to 8.1% in February with a net loss of 651,000 jobs. It was the highest unemployment rate in 25 years. There is one thing about gov’t programs and plans to rebuild the economy, but for the President to advise a buy for long term investors I think he needs to re-consider what his role is. Stocks have been hammered lately losing ground 14of the last 19 sessions but we think most of the dire news is factored in and still anticipate a 10-15% rally immediately. To date, we have been wrong and have taken some heat on our long March ES positions. Fortunately we went in with our most aggressive clients and only in a small way. Needles to say we are down but do see a light at the end of the tunnel after Friday’s reversal. It is possible traders may need to roll the position into the next contract as LTD is 3/19 for March. Furthermore, we have expanded our time frame for options and advised clients to buy June 775 ES calls; Friday’s settlement was $1075. Felix Zulauf, as seen in Barron’s, supports our belief of an impending rally in stocks. “Sentiment is deeply pessimistic. The rate of change on (most) down days is declining, even as prices fall. And there’s lots of money around.” He, like us, suggests this to be a tradable rally not a long term buy and if the rally carries prices high enough it should be used as an exit door for those who are still overexposed in securities.

Bonds: June 30-yr bonds were 3’24 higher last week closing above the 20 day moving average for the first time since 1/21. Support is seen at 123’20 with resistance at 128’10; the top of the recent trading range. A 38.2% Fibonacci retracement would carry prices to 129’24, a 50% retracement to 131’26. The charts say rally, but once again if the stock market moves higher, money should flow from Treasuries into securities so we would stay cognizant of the flow of funds. June 10-yr notes were higher by 1’20.5 last week and continue to take the lead in direction from bonds just at a lesser scale. Support is seen at 120’00 with resistance at 122’28. Continue to sell rallies in March 10’ Euro-dollar; this phrase should start to sound familiar as we re-iterate it every week. I don’t feel this trade is getting enough attention from my current clientele and prospectives so read this report again: Interest rates keeping your head above zero.
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The ECB lowered rates by 50 basis points taking rates to 1.50% last week. The March Euro was higher by 46 ticks closing just below the 9 day moving average. Support remains at 1.2500 with resistance at 1.2750 followed by 1.2850. We are anticipating prices to make their way to higher ground, perhaps challenging the 38.2% Fibonacci retracement levels at 1.33 in coming weeks.

The RBA kept the interest rate unchanged at 3.25% stating that the economy has not been doing that bad lately. The March Australian moved higher by 12 ticks last week. Support is seen at .6275 with resistance at .6540 followed by .6630.  

The March Swissie was higher by 108 ticks last week. We recently exited longs at a loss but may look to re-position longs again depending on the action early this week. A potential play may be to get long futures while selling calls against the position. The pivot point to start the week is the 9 day moving average at .8560. Support is seen between .8450 and .8500 with resistance at .8750. On a move thru that level we expect .8900.

The BOC reduced interest rate from 1.0% to .50%, saying that it will keep the rate low until the economy recovers. The March Loonie ended the week 74 ticks lower. Prices have been able to bounce off current levels the last 3 times they were here; in October 10 cents in 1 week, in November within 4 days 5 cents, and then in December within 2 weeks prices advanced 7 cents. If .7700 can hold we expect .8200/.8400 in the next 7-10days. Past performance is not indicative of future results.

The March Japanese yen fell 25 ticks, the lowest trade in over four months. Down yet another week, but prices did manage to close 180 points off the weekly lows. With trades looking for par at the low, prices got within 32 ticks which should be close enough. Support is seen at 1.0150 followed by 1.0075 with resistance at 1.0325 followed by 1.0550. We are advising a light long position in June via 3 cent bull call spreads content with the risk/reward dynamic.

The BoE cut rates 50 basis points bringing rates to 0.50%, their lowest level since the bank’s founding in 1694. The March Pound was lower by 174 ticks last week with a lower low and a lower high on the weekly chart which indicates prices are still heading lower. Continue to sell rallies trailing your stop down. Resistance is seen at 1.4350 with support at 1.3950 followed by 1.3700.

The March Kiwi was higher by 65 ticks last week closing 2.5% off the lows. As long as prices stay above .4940 we should experience a bounce to .5175 and potentially .5275.

The March US dollar was higher by 15 ticks with a 180 point trading range so anything but a smooth ride. At the highs, prices got within 3 ticks of the contract high made in mid-November. On a trade above 89.74 look for an upside breakout. Support is seen at 88.40. At current levels we are overbought and favor a move to the 38.2% Fibonacci level at 85.50 in coming weeks.

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May corn was lower by 4 ¼ cents last week closing at the 9 day moving average. In the near term, demand remains a positive force but outside markets still remain a negative force. If we get the stock market rally we have been expecting for the last few weeks, corn should bounce. Support is seen at 3.45 with resistance at 3.70. We bought July futures for our clients last week while simultaneously selling 3 July $4.50 calls per futures as a hedge. We would look to add to this position a on a move thru 3.70.  

May soybeans were lower by ½ cent last week as they started the week lower clawing back to close virtually unchanged. We expect buying interest ahead of the March 11th crop report and March 31st planting intention report. Much like corn, soybeans find outside market influence holding prices back.  What grains need is for crude to confirm its’ bottom and a bounce or at least stabilization in equities. Prices appear to be oversold on the charts and as long as 8.40 can hold, we see a bounce to resistance at 8.80 and potentially 9.10 in coming weeks. We may look for outright longs but for now have clients in a spread; long November 09’ short May 09’. This spread is a buy at -600 as we are looking for it to narrow with a target of -350/-300.

May CBOT wheat was higher by 9 cents last week and put in a positive week after 5 consecutive losing weeks. Support is seen at 5.12 with resistance at 5.36-5.40. We could see a move to 5.60 on this leg which is the 38.3% Fibonacci retracement level. May KCBOT wheat gained 16 ¼ cents last week which brings price back to the top of the trading range from past weeks. Support is seen at 5.52 with resistance at 5.80 followed by 5.98. We will again be pricing out the KCBOT/CBOT spread looking for a possible long entry in May or July.

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May sugar started last week with a 7% decline and over the week pared losses ending the week down 92 ticks. Current prices are on the trend line from December and will need to make a decision this week on immediate direction. On a move lower we would be a buyer near 12 cents in May futures. We continue to advise clients to build long exposure in October 15 and 17 cent calls. On a close above 13.30 in May expect the next leg up to resume.

The International Cocoa Organization said that they expect world production of cocoa to be down 5% in the current 08-09 season and to fall short of demand by 193,000 tons. This comes on top of a production deficit of 88,000 tons in the previous year. May cocoa closed down $93 closing lower for the last 4 consecutive weeks. 2200-2250 should support with resistance at 2350 followed by 2450. Selling cocoa on or about March 14th and holding to on or about April 16th has been profitable 28 of the last 36 years for an average profit of $650. Past performance is not indicative of future results.

May cotton was lower by 177 ticks last week closing lower for the 4th consecutive week. Prices are trading back at levels not seen since the first week of December. As we stated last week we would start lightly scaling into longs on a trade below 40 cents.

May fcoj was higher by 3.85 cents or 5.5% last week. Prices were able to trade above but not close above the 20 day moving average. The last time prices closed above the 20 day moving average was last September when prices were near $1.20. On a successful close above the 20 day m.a. this week, we would tentatively call a bottom. Last week serves as the 2nd consecutive positive week. We may yet be back in the saddle for our light long position in May futures for clients.

May coffee was lower by 4.15 cents last week but as long as the contract low at 1.05 made in December holds on a closing basis, we will remain long via options with clients. Depending on the clients account size and risk tolerance we’re positioned long in May and July. For new entries we would be buying July 20 cent calls spreads.

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May silver advanced 23 cents last week gaining back some ground from the prior week’s losses. Last week’s low at $12.43 was within a nickel of the 38.2% Fibonacci retracement level and may prove all we get for a correction. Regardless, we have yet to re-deploy money to longs for clients still thinking that we will get a chance between 11.50/12.00 in coming weeks to be a buyer. We are eager to get long as we are expecting much higher pricing but for now we are sitting on our hands. We have been pricing out $3-5 call spreads in July and December for clients and would entertain these positions before initiating long futures. Resistance comes in at 13.53; the 20 day moving average.

April gold picked up $2.40 last week and much like silver started the week lower only to do a complete u-turn closing $42.30 off the week’s lows. Prices did get within 40 cents of $900, which was the upper end of our buy target. The reversal happened so quickly we didn’t get longs positioned. Our window remains 860-900, if these levels are not attained this week we may need to change our strategy. If we ever get the 10-15% short covering rally we anticipate in equities the flight to quality money that is currently in gold should find its way to securities and get gold prices inside our buy window. We are currently pricing out $100 call spreads in June but have yet to commit funds. Stay tuned because traders do not want to miss the next long entry. We are working a new system to trade front month gold options, preliminary analysis is extremely positive.

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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.