For May 25th– May 29th 2009

By: Matthew Bradbard

When in Commodities, Do what China does

If China is increasing protein in their diets and buying more soybeans, then maybe you should be long soybeans. If China is stockpiling copper to have an ample supply for building an infrastructure, then maybe you should be long copper. If rumors circulate that China is diversifying their reserves from US dollars by buying precious metals, then maybe precious metals should be in your portfolio. China has become a major energy user so there is a logical potential for energies to bid higher for years to come. The moral of the story here is to view what China does as to what the smart money is doing and maybe investors should follow their lead.

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

____________________________________________________________________

July crude oil advanced $3.85 to trade at 6 month highs. Resistance is seen between 62.25 and 62.50 with support at 60.00 followed by 57.50. July heating oil gained 10.71 cents last week but has been unable to trade above 1.57 after multiple attempts. The last time prices were above those levels was mid-January. On a move thru 1.57 look for an additional 7-10 cents. Support is eyed between 1.50/1.51. Prices could retrace 10-15 cents with no long-term chart damage. The Memorial Day holiday marks the beginning of the summer driving season. July RBOB gained 13.27 cents last week to trade to its highest level in 09’. Resistance is at 1.8150/1.8300, support is seen at 1.75 followed by 1.70. On setbacks we’ll be entertaining 20 cent call spreads in August. OPEC will meet on May 28th and so far, the consensus seems to be that they will not change production levels.

July natural gas fell 58 cents last week, down 14%. In the first 2 weeks of May prices advanced over $1 and now in the last 2 weeks prices have reversed and we are back to where prices were 4 weeks ago. Support is seen at the contract low at 3.40. Once a low is determined, start scaling into mini futures but until then we have an option play. Sell the $3 or $3.25 August puts while simultaneously buying the September $8 calls. As of Friday’s close, for virtually no debit one could sell 1 August $3.25 put and purchase 8 September $8 calls.
___________________________________________________________________

The USDA said there were 10.822 million head of cattle on feed as of May 1st, down 2.8% from a year ago. Placements in April were up 4% from a year ago while marketings were down 7%. The USDA also said that poor economic conditions worldwide and a strong dollar are hurting beef demand, but that the likelihood of fewer cows in 10’ suggests potentially fewer calves and tighter feed cattle supplies in 10’-11’. August live cattle were higher by 65 ticks last week but the choppy trade continues. A trade above 84.50 or below 82.00 is needed to determine the next direction. August feeder cattle were higher by 23 ticks but we feel a setback is forthcoming. Resistance is seen at 102.50 with support at 100.50. Our short term target is 99.00 in coming weeks.

The USDA said there were 614.7 million pounds of frozen pork in storage on April 30th, down 7% from a year ago. Frozen bellies in storage totaled 79.3 million pounds, down 21% from a year ago. July lean hogs closed lower 73 ticks last week. Support comes in at 66.40 with resistance at 68.60. The USDA said that lean hog prices are expected to recover as consumer confidence rebounds from the H1N1 outbreak. Once prices bottom we’ll be advising longs in July futures. For now we own June 72 calls for clients and are losing money, on a swift rally to 69 cents we should get a slight profit.
____________________________________________________________________

Stocks:  Last week the Dow, S&P and NASDAQ all registered slight gains but we have not changed our view that a 10-15% correction is in the very near future. This week being a shortened trading week and light on volume may be an opportune time for the shorts to begin the move lower. The recent dollar drop signals that investors are willing to put risk back in their portfolio and being that prices have advanced 35% more or less, the Johnny came late investor, may have entered at an interim top. On a setback in the Dow we are looking for a move to 7750 then 7250 and for the S&P 830 then 765. A move above 8500 and 915 respectively would most likely mean that traders have bought themselves more time before we get the unavoidable correction.

Bonds:  S&P lowered its outlook for the UK economy, saying that government debt may increase to 100% of GDP in the next few years and lose its AAA credit rating. US Treasury Secretary Geithner tried to ease investors' concerns, saying that he is committed to bringing down the budget deficit over time so that the US's high credit rating is preserved but based on market movement, not everyone is a believer. The trend remains down in treasuries as June 30-yr bonds were lower by 3’16.5 points to trade at their lowest level in 09’. Support is seen at 118’10 followed by 117’20, mild resistance comes in at 120’16 followed by more significant at 122’00. June 10-yr notes were lower by 2’08.5 points, also to new 09’ lows. Resistance is seen at 120’10 while support comes in at 118’00. After 12 consecutive positive days March 10’ Euro-dollars finally ran out of gas. Resistance is seen at the contract high at 99.095 while support is seen at the 20 day moving average at 98.81. We suggest your current short position to be 25-40% of the ultimate position you want to own. For every $10k you should be short 3 to 4 contracts; $750K-$1M in leverage.

According to the minutes from the RBA they expect Australia's economy to outperform most others in 09’ and 10’ which may have contributed to the 325 tick advance last week in their currency. It appears prices may be overextended but much of that will depend on the dollar.  Resistance is seen between .7875 and .7900 with support at .7700.

The Euro was higher by just over 5 cents last week trading to its highest level in 09’. Last week’s high at 1.4048 should serve as resistance with support at 1.39 followed by 1.3725. I guess I will follow one of our CTA’s next Euro trade as he has caught most of this move higher; contact us for their track record.

The June Swissie gained just over 3 cents last week gaining ground all 5 sessions. Resistance is between .9275 and .9300 with support at .9125. We could see a trade down to .9000 and could hold the shorter-term trend line.

The Loonie virtually gained 4 cents last week being one of the best performers. Resistance is seen at .9000 followed by .9150 with support back at .8700. We would advise traders to exit their long options and to tighten up stops on futures. We will hold the July 83 cent puts that we originally put on as a hedge expecting a setback in coming weeks.

The pound gained 731 ticks last week to trade to levels not seen since November 08’. Resistance is seen at 1.61 while support is seen at 1.56. Traders were stopped out at a loss on shorts recommended from last week, approximately a $700 loss per contract.

The BOJ left rates alone at 0.10% last week. Japan reported that their GDP was down 3.5% in fiscal year 08’-09’; the worst performance since records began in 55’. The yen moved higher by 1 tick. Clients should take profits on all remaining longs and be positioned on the sidelines prepared to buy a break. Resistance is seen at 1.0650 while support is at 1.0375.

The Kiwi was higher by 337 ticks last week. Resistance is seen at .6240 with support at .6050. We would need to see a trade thru .5900 to confirm an interim top. Similar to the other commodity currency prices they may have gotten ahead of themselves.
The US dollar index gave up 278 ticks last week to trade to its lowest level in 09’. Thru May so far prices are down 6% with prices down 4 out of the last 5 sessions. The easy money has been made on shorts, but the trend remains down. We see no real support until 78.50 and see resistance at 81.50 followed by 82.00.

____________________________________________________________________

The USDA reported 62% of the corn was planted, down from the five-year average of 85%. July corn was higher by 17 cents though is exhibiting signs of a top as prices have consolidated for the last 2 weeks. Resistance is seen at 4.35 while support comes in between 4.17 and 4.20. We are nearing the end of the corn planting window so wet vs. dry weather will be the key. If farmers are able to get in the fields which is the scenario we believe, this should take prices below $4 where we will be advising long entries.

The USDA reported 25% of the soybean crop was planted, down from the five-year average of 44%. July soybeans were higher by 41 cents last week having traded higher now for the last 4 weeks.The June $11 calls that we sold for clients were turned into short futures positions as of Friday’s close, as opposed to taking a loss, we advised clients to keep their short July and buy November against it 1:1. This is a spread we’re already in for other clients and think we’ll be able to recoup the loss on the option in this play. Not only did prices in July start to trade down, closing over 25 cents off their highs but the spread came in 25 cents as well. Support is seen at 11.50 followed by 11.20. On a close below the 20 day moving average at 11.07 we could see a trade down to 10.60. On a move higher, resistance is at 11.90 though a potential test of $12 is not impractical.

The USDA reported 50% of the spring wheat was planted, down from the five-year average of 90%. July wheat jumped up 40 1/2 cents, the highest close in over three months, on concerns that planting is taking too long. On July CBOT wheat resistance is seen between 6.20 and 6.25 while support comes in between 5.93 and 5.97 followed by 5.75. July KCBOT wheat gained 29 ¾ cents last week to trade to its highest level since 1/12. Resistance is seen at 6.70 with support at 6.45. ____________________________________________________________________

The USDA reported 42% of the cotton was planted, down from the five-year average of 53%. July cotton rose just over 1 cent last week even after China said that it would begin making government cotton reserves available by the end of this month. Resistance comes in between 57.75 and 58 cents with support seen at 55.50. Prices have moved up 50% in the last 3 months, even a 40% correction of that move takes prices back to 53 cents.

July cocoa was higher by $73 last week and while it is tough to find bullish fundamental news, when the dollar gets pummeled cocoa generally trades higher, remember the inverse relationship between the two.  Support is seen at the 20 day moving average at 2375 followed by 2300. Resistance comes in between 2475 and 2500.

July sugar gained 75 ticks last week, supported by expectations for a world production deficit in 08’-09’ and higher gasoline prices. If the preliminary ending stocks estimates are true, they will be the lowest stocks to use ratio in 16 years. Resistance is seen at 16 cents while support comes in at the 20 day moving average at 15.14. On a break to 14/14.50 in July we will look to be a buyer. This could be doable on a setback in the energy sector. We still favor the idea of buying March 10’ calls.

July oj was down 1 cent as Florida has been experiencing some much needed rain. The .9400/.9500 cent level should serve as resistance while the 20 day moving average at .8960 should support. Prices have traded below the 20 day moving average but we have yet to see a close below since 5/1. We maintain a bearish bias but have no money in play.

The ICO is keeping its estimate of 08’-09’ world production unchanged at 127 million (60 kg) bags and its estimate of world consumption in 08’ also unchanged, at 128 million bags. July coffee jumped 7.45 cents last week, the highest trade in seven months. Prices have gained 14 of the last 16 sessions which we feel is an unsustainable pace. Last week’s high at 137.40 should act as resistance with support seen between 131 and 131/50. Prices could pullback 10 cent with no chart damage.

____________________________________________________________________

June gold gained $26 last week and has been higher 4 out of the last 5 weeks trading to its highest level since 3/20. Resistance is seen between 965 and 970 while support comes in at the 9 day moving average at 937 followed by the 20 day moving average at 919. Much of this recent gain was aided by the crumbling US dollar so closely monitor the dollar when maneuvering in gold. Being that prices are overbought we would advise tightening up stops on longs and putting in profit limits on bullish option plays. On bull call spreads that have 3+ months of time use a sharp correction to buy back the top leg and buy out right calls.

July silver gained 75 cents last week trading to its highest level since August 08’. What was resistance between 14.55/14.60 should become support. If that level was to give way we see the next level of support at 13.90. Resistance comes in at the psychological level of $15. Much like gold, the recent advance has taken prices to overbought levels so we would suggest tightening up stops. For longer term option spreads we would advise taking only partial profits as a move thru $15 could shortly after be followed by a print at $16. The gold “silver ratio stands at 65:1.

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.