For April 7th - April 11th 2008

By: Matthew Bradbard

With the 1st quarter behind us, we now look forward to what the remainder of the year has to offer. There is no doubt that there will be plenty of ups and downs. For now, we would recommend trading very defensively and not getting married to any positions. Be very swift to act cutting losses and taking profits, as it appears the commodity markets are uneasy. Over the weekend I reviewed a pamphlet I recently received from a perspective client entitled “How Young Millionaires Trade Commodities” that outlines 50 basic rules that apply to disciplined commodities trading. I try, as a trader/broker, to always use sound risk management and to eliminate greed and fear from my trading decisions, and that was the general premise of this leaflet. The caveat here is this was written in 1978 by Commodities Magazine and virtually everything still applies. My point here is, even in a changing market environment do not try to re-invent the wheel. What has worked over the years will continue to work in the future. I will be posting the 50 principles on my website this week in the Special Reports section so take a look it will be well worth the visit.

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 U.S. Department of Energy said that underground supplies of natural gas were down 29 billion cubic feet last week to 1.248 trillion cubic feet. Supplies are now down 20% from a year ago, but up slightly from the five-year average. June natural gas closed down 53 cents at $9.42, the lowest in two weeks and just below the 40 day moving average. Technical indicators and momentum support a move lower with next support at $9.20. We are looking for an entry to get clients long but wish to be on the sidelines for now.

Without a well capitalized account, a good way to lose money in commodities lately is trying to pick a direction in oil. Over the last 10 trading sessions the average daily trading range has been $3.49 or $3,490/contract. Even with an inventory report showing a 7.4 million barrel increase in supplies, oil managed to push higher by the end of the week back above the $105 level. It appears a W formation is in the making that should take oil back to its record high. On a breach of that level we would expect $115 shortly thereafter. June Crude oil is up 12 and down 7 of the last 19 years. April’s trend has followed March’s 16 of the last 19 years. I wonder if that means we will experience volatility with little direction this month like we did last month. April trends are usually reversed in May; 14 of the last 19 years.   We will most likely not be involved with clients but we still feel that on pullbacks, buying RBOB against heating oil is a viable trade for well capitalized accounts. In terms of an outright play on RBOB one could play the breakout as June has yet to trade above $2.7700, when it does you should see a quick 10-15 cent advance. If you do take this trade, recognize you will be swimming in deep water with sharks and take a profit on any signs of weakness.

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The USDA estimated last week's beef production at 482.0 million pounds, up 6.9% from a year ago.  There might be a touch more on the downside as we see it, but both weekly and daily charts on June live cattle are starting to look like a buy. Support lies at 88.70 with resistance at 90.50. May feeder cattle appear to be basing out and weighing the risk to reward, a long position is warranted with a tight stop below recent lows as recent years have seen an up-tick in April. On a reversal, it appears there could be a $2-3 potential reward for every $1 at risk putting a stop just below 99 with a target to 106/107.

Pork production was estimated at 464.9 million pounds, up 11.8% from a year ago. June hogs jumped off oversold levels and made their way back to the consolidation levels from the previous week, with unconfirmed talk that some producers may be raising hogs without ractopamine so that they can sell pork to China. Ractopamine is a feed additive that is commonly used in the U.S., but banned in China.  On a trade above 73.00 on June look for continued follow through. Pork bellies moved almost 10% off their low last week now trading above the 9 day moving average with more to come but regular readers know we are rarely interested because of the lack of liquidity in this market.

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Stocks:  The Bush administration outlined plans for the most far-reaching overhaul of the financial regulation system since the Great Depression. Changes include reorganizing the Federal Reserve, streamlining bank supervision, and consolidating some governmental agencies for starters. Now it is too early to say if I am in favor, but what I do take away from this, is that if we are taking such drastic action we may have a serious problem, and I don’t think the market has fully priced in the troubles to come. Even in the face of this stocks put in an impressive showing. The S&P 500 had its best week in 2 months and its second weekly gain in the last three. The S&P finished 55 points higher on the week, up 4.2% at 1370. You have a potential bullish flag and pennant formation that supports a move up to 1400 in June, which has not been reached since the beginning of February. The Dow climbed 393 points on the week or 3.2% to 12,609. We would not expect a move much higher than 12,800 if we can even reach that level, a level not seen since mid- January. The NASDAQ added 110 points to 2371, this almost 5% rally was the best weekly gain since August 06. This was a good week but let’s remember we just ended a miserable 1st quarter; the S&P lost 14.1%, the Dow 9.9% and the NASDAQ shed 10.2%.

We cannot stress enough how vital it is to hedge your portfolios and protect against further selling. Think of it as insurance on one of your largest assets. We have refrained from recommending intraday trading on equity futures, as we would equate that to gambling, but will continue to recommend hedges for all stock investors. Call to inquire how you can protect your stock portfolio with index futures and options.

Bonds:  The U.S. Labor Department said that the unemployment rate jumped from 4.8% to 5.1% in March, the highest in over two years with a loss of 80,000 in non-farm payrolls, weaker than expected. Treasuries were well bid ahead of the employment report, they found more strength following the release with June bonds gaining just over 2 points off the mid-week lows as the 100 day moving average acted as support aiding in a recovery back above 119. Notes similarly found support just above the 40 day moving average and advanced about 1 point from their mid-week lows of 117’04 ending the week at 118’10. 

The recent news raised the odds of a reduction in the fed-funds target at the fed meeting starting April 29th and essentially confirmed the economy is in a recession or at least a contraction in Bernanke’s words.  Odds of the FOMC cutting its target to 1.75% from 2.25% rose to 72% by Friday jumping from just a 46% likelihood earlier in the week. The Fed’s recent creativity seems to be helping the credit market but we do not see any such quick fix for the overall economy. As long as the market expects a reduction in rates it appears money will flow into debt and traders can continue to buy pullbacks expecting higher pricing. 

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On top of multiple central bank meetings this week we also have a G-7 meeting on Friday that will focus on the instability of the world financial markets, slowing economies and I’m sure the US dollar’s weakness.

Canada reported that the unemployment rate increased from 5.8% to 6.0% in March with a net gain of 14,600 jobs, weaker than expected. The June Canadian dollar was about 1 1/3 cents higher on the week and as we have voiced in previous weeks, trading the .9700 to 1.0200 trading range continues to be effective as the Loonie has stayed within that range for the better part of 5 months. We would continue to look for outside influence form metals and energies.

Australia's Bureau of Statistics said that retail sales were down .1% in February, weaker than expected. The June Australian dollar was up .62 at 91.31, the highest close in two weeks. We would expect on a move above previous week’s highs of 91.56 the Aussie to challenge those highs around 93.50.  If you are looking to a currency to buy, we favor this one, as the interest rates spread should widen at month’s end and seasonal strength exists. For Australia, April not only begins the last quarter of the fiscal year, but also the onset of autumn. The Australian dollar has tended to weaken into the first days of April but then to surge at least into mid April if not all the way into early/mid May. Past performance is not indicative of future results.

The Japanese fiscal year begins on April 1. After a week or so of residual weakness from the end of the prior year, the yen has usually recovered at least into mid/late April if not into early/mid May. The Bank of Japan is widely expected to keep rates on hold at 0.50% on Wednesday. Without a change in rates the next move in the yen will largely depend on the immediate direction of equities which we are getting mixed signals on. Support exists just below last week’s low around .9720 with resistance at .9900 on the June contract. We favor a move back to par but for a futures play we will wait for a confirmation before guiding clients long. Buying the June 1.0000 call for approximately $1750 seems like a respectable proposal.

In its nine years of existence as a futures contract, the Euro-currency has rallied from mid April into early May in eight of those nine years. Are we sensing a pattern here?  We would suggest waiting till’ the middle of the month as jumping in right now would appear the Euro could push either way 200-300 points. For now the Euro should find support around 155 and resistance just above 157. The ECB is seen holding rates steady at 4.0% on Thursday. 

The British pound currently has no clear direction but we would advise selling rallies as we expect lower pricing. 1.9950 should serve as resistance with 1.9640 serving as 1st support. The Bank of England is expected to cut rates ¼ to 5.0% on Thursday and this should likely lead to a move through 1st support and closer to 1.9400. Because it is not clear-cut we feel the market has not fully priced in this reduction in rates. As opposed to getting short prior to the meeting, we may have sell stops below the market for our clients on the number. If a trader wanted to be exposed ahead of the meeting but did not want to be exposed to the inherent risk in futures, we would suggest buying the 1.95 June puts for $1000.

The Swiss franc could go either way from here so we will not recommend a play, although, we favor a quick move to .9600. We have been unable to determine a direction in recent sessions and we would wait for a breakout of the recent range to signify the next direction; a trade above 1.0000 signifies a move higher while a move below .9780 confirms a lower move. 

Not yet a believer that the worst is over for the dollar, I am not advising longs in the US dollar but it is entirely possible to see a bounce from these levels. In the June dollar index prices seem to be supported around 72, for any upward momentum to exist we first must get above the triple-top from last week at 73.16. On a successful assault of that, we could see 73.50 followed by 74 without a lot of trouble, but until the Federal Reserve is done reducing rates we don’t see a bottom or any noteworthy advance. As traders we may need to shift our focus not just on when US rates stop going down, but when other central backs lower as the important thing to recognize is how current interest rate spreads widen or narrow.

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Corn:   Weekly export sales showed 704 t.m.t. of corn was sold last week, up 11% from the week prior.   Now that the USDA has reported on farmer intentions the trade will be focused on changing weather patterns. The eastern US is wet and getting wetter. If this pattern continues, farmers will not be able to plant on a timely basis. The later the corn goes in the ground the less likely we will get a higher yield. Corn planted acres in 08’ is expected to be 86.01 million acres, 7.5 m.a. below last year, even though demand for corn is not expected to decline. This will leave little room for error in the growing season. If we plant 86 m.a. with last year's 151 bushels per acre yield, our current 2008 ending stocks of 1.4 billion bushels will drop below 300 m.b. with the current demand pace. December new crop finds first support at $6 then 5.90. Although we favor higher prices in the medium and long term we are expecting an immediate 25-40 cent correction from overbought levels before the next significant leg up. Old crop July corn failed to make a new high in overnight trading Sunday night, 616 serves as resistance while a pullback to 5.75 is expected. April is a weak month for July corn; 16 of the last 19 years it has weakened.  If a trader wants to be long we suggest holding put protection.

 Beans:   Weekly export sales showed 184 t.m.t. of beans were sold last week, only ½ as much as the previous week. Farmers in Argentina announced last week that they will suspend their strike for 30 days in an effort to work out a deal with the government. The strike was formed after the government raised its export tax on agricultural goods on March 11th. The export tax on soybeans was increased from 35% to 45%.  Again with the acreage report at our backs the market will focus largely on weather and if corn or beans are going in the ground. According to the USDA we will be planting 18% more bean acres than last year. If weather is perfect from June 15th to August 20th, and we have the average 5 year yield, ending stocks could climb from 140 m.b. this year to 350 m.b. in 2009. That is 200 m.b. under the ending stocks in 2007. With demand for high protein vegetable oil crops rising, assuring record US and world usage, any loss in yields and we could have a problem. New crop looks to gain on old crop but we would not suggest getting too long unless the weather starts to cooperate more. As long as it remains wet, less corn and more beans will be planted. We go into Wednesday's USDA crop report expecting the recent uptrend to continue with next resistance on November at 12.60 followed by 13.10.

Wheat:  Weekly export sales showed 267 t.m.t. of wheat was sold last week off 30% from the week prior though in line with expectations. The planting intentions report showed a 1.3 m.a. increase in spring wheat acres to be planted this May and all winter wheat varieties up 1.8 m.a. These are small increases considering we have current inventories at 60 year lows and world stocks at 40 year lows. With perfect weather world wide, ending stocks will increase. However, with bins empty here, for every two bushels harvested, one will go to near term needs and the second to storage for the next growing season. Conditions are less than perfect but hopefully with some help from Mother Nature we will not have to experience price rationing again. Technically speaking, from an oversold level you could see higher pricing, but we still aren’t too comfortable getting too heavily weighted in wheat as we still expect extreme volatility and sporadic movement and would rather be trading in other markets. As opposed to playing an outright long or short, we favor being long KCBT wheat against CBOT wheat. Shopping for a clearer entry in July for clients thinking this spread has another 30-50 of upside in it. 

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With the release of the planting intentions report, the USDA estimated US cotton plantings at 9.39 million acres. This came within trade expectations of 9.2 to 9.5 million acres. Last year's plantings were at 10.85 million acres. Perhaps not as bullish as one would like, yet we still feel December cotton prices are moving higher. We will continue to advise clients to add length as close to 77 cents in the futures and are accumulating 10 cent bull call spreads for 3 cents or $1500 intending on selling them for 6-7 cents or $3000-3500 in coming months.

Cocoa has traded a tight range over the past two weeks, with no clear price trend. We need a catalyst to signal the next short-term direction in the market. Since shaving around 20% off its value in March in volatile trading, cocoa has struggled to attract traders back to the market. We are comfortable advising a buy as long as we do not see continued selling. July is oversold and dancing around the 100 day moving average, with an emergence of new buyers we should see cocoa resume its upside action with even a move back to the 50% Fibonacci retracement level assuming the recent H/L holds you are looking at a $3110 move.

Recent action is sugar is reminiscent of the movement back in Sept-Nov as we try to determine the next direction. Similar to cocoa, we are bouncing around the 100 day moving average trading between 11.80 and 12.80 on July though technical indicators are starting to signify a low is close if not already in. We are advising a light entry long futures or the accumulation of October calls looking to add in length on a confirmation of the up move.

FCOJ prices are cheap but we have no exposure currently for our clients and for now do not have any interest. There is a seasonal sell on July FCOJ that has worked 14 of the last 15 years for an average profit of $572 from 4/6-4/27. Past performance is not indicative of future results.

Coffee could see a technical recovery but a large Brazilian crop potentially limits upside.  Daily stochastic and MACD support a move higher but first we must get through the recent consolidation level.  A move to 140/144 is likely on May in coming weeks.

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Gold in our opinion will be a lot higher than current levels months down the road, but has it corrected enough to merit a long play from these levels?  In the last 3 weeks prices have lost over 10% and we are advising some exposure for our client’s long June gold, but we would not get married to this position and we would not suggest too much size as prices could move another 10% lower without any longer term chart damage. We expect to see prices back and forth between $880 and $950 for a short time before any sizeable move occurs, essentiality the market is taking a breath before its next move.

Silver appears to be moving higher after bouncing off $16.50 last week we have made our way back above $18 in July. We are now over the 9 day moving average but would like to see a trade above the 20 day and 40 day for confirmation which are both at $18.60. Traders can buy pullbacks with stops below recent lows or we have been buying $2 bull call spreads in July and December for clients looking to pay approximately $2500 and sell for $5500-7000 on a move back to the recent highs. A settlement above %18.76 should confirm a challenge of at least $21 in July.

If a portion of your portfolio is not already in gold or silver we highly suggest you diversify into these metals as we expect to see much higher prices in coming months due to inflationary concerns.

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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.