« February 2009 | Main | April 2009 »

March 2009 Archives

March 2, 2009

Goodbye 7,000?

Fundamentals

Dow futures have fallen below 7,000 in overnight trading on unrest in Eastern Europe and more dismal news from the banking sector. HSBC, Europe's largest bank, plans to generate more capital by making an additional equity offering at a discount to existing shareholders. In addition to reporting a huge drop in earnings, the bank also slashed its dividend and plans to shut down its US banking branches, but retaining its credit card business. American insurer AIG has also asked for an additional $30 billion in aid from the government and is expected to report a quarterly loss of $60 billion today. Following Citigroup's deal with the government last week, the news adds the uncertainty surrounding the banking and financial sectors. There seems to be no end in sight, despite the government's best efforts and, in hindsight, the banking bailout seems to be a disastrous proposition undertaken by the Bush administration and continued under President Obama. It now looks as though the American taxpayer will be on the hook for upwards of a trillion dollars if the experiment fails. Letting the free market do what it does and letting the banking sector take its lumps may have been the best course of action. Many regional banks are, in fact, healthy, but the heavyweights have garnered the media attention, leading the public to believe all banks are in dire straits. Investors have stayed away from the troubled derivatives that got the banks into hot water like the plague, causing further devaluations. Not all of these assets are worthless - in fact most would probably be valued much higher had the government not added to the panic. There is a good portion of the toxic debt that is truly toxic, but many of the pass-through certificates on prime mortgages have been devalued to a point that defies reason. Savvy investors may be waiting in the wings for a good bank/bad bank plan to be undertaken so they can pick-up some of these distressed assets at bargain basement prices.

The sage has spoken. Warren Buffet, in his annual letter to investors, indicated that he sees the US economy "in shambles" through 2009. The legendary investor has not stated anything that the public has not already heard a thousand times, but what is troubling is that he does not see an end in sight to the current crisis. Mr. Buffet is known to pepper in good news with the bad, but there was no good news in this year's letter. Manufacturing stocks have also taken a hit this morning ahead of the ISM Index report, which is expected to show further declines in manufacturing sentiment. January construction spending is also due out later this morning and is expected to show further weakness.

Technicals

Technically, the March Mini Dow chart continues to lose ground after taking out November lows a week and a half ago. The market looked as though it was close to confirming a short term reversal last week, which did not pan out. The next area of significant support for the cash Dow does not come in until the 5,800 level. The only positives that technicians can take from the current situation are that the market is oversold and that momentum is outpacing RSI to the upside.


Rob Kurzatkowski, Senior Commodity Analyst

March 4, 2009

The China Syndrome

Fundamentals

Copper has been shining over recent sessions, despite floundering equity prices and negative construction data. Traders have largely discounted US housing and construction data in recent months, instead focusing almost exclusively on China. The outlook for the Chinese economy has turned much more positive in recent weeks, as evidenced by the Reserve Bank of Australia's decision to keep interest rates unchanged. The two countries have a very close trade relationship, with Australia acting as a key provider of raw materials that China uses. If the central bank did not believe that Chinese growth would turn back up, it would have likely taken more aggressive action by slashing rates, consistent with the consensus opinion. Premier Wen Jiaboa is expected to unveil a new stimulus package today, which is expected to aid the economic recovery. LME warehouse stocks of Copper, which climbed to nearly 550,000 tons recently, have fallen in recent sessions, indicating that demand finally may be picking up. Additionally, over 55,000 tons have been earmarked for delivery. It is too early to tell if the de-stocking at the LME is a real indication that demand is picking up or if the movement is the result of arbitrage and is being moved to Shanghai due to the higher price of the metal in China. While LME inventories remain high, Shanghai inventories are slightly below 29,000 tons, which is well below the average of nearly 50,000 tons over the past 5 years. If there is evidence that inventories are simply being shifted between the two exchanges to replenish inventories in Shanghai, it could be a letdown for bulls. The large speculative short position in the metal has certainly influenced trading since the beginning of the year. It has been a game of chicken between bears, who have been hesitant to add to their position, and bulls, who have been fearful of accumulating positions should the bears begin aggressively selling again. Meanwhile, shorter-term traders have taken advantage of the range-bound market, knowing that some shorts will be covering in the 1.40-1.45 range and possibly re-establishing positions between 1.60 and 1.65.

Technicals

The May Copper chart shows the market continuing to consolidate between 1.40 and 1.65. Prices are approaching the upper end of the channel, with traders closely watching how the market behaves. If prices are unable to break out above 1.65, the market is likely to remain range-bound. Momentum has remained flat, hugging the zero line the entire time the market has been consolidating. At the same time, the RSI indicator has been moving in lockstep with prices. When the market is finally able to break out of this tight range, one or both of these indicators may tip-off the move by diverging from prices or each other.

Rob Kurzatkowski, Senior Commodity Analyst

March 5, 2009

"Corny" Headline

Fundamentals

Now that the calendar has turned to March and Spring is (hopefully) right around the corner, it is time to turn our attention back to the land and focus on the planting intentions for the 2009-10 Corn crop. The USDA last week in its annual Agricultural Outlook Forum, estimated that U.S. producers will plant 86 million acres of Corn this year, which is about the same as last year. However, production from these acres is expected to increase, with yield estimates up just over 3 bushels per acre from last season to 156.9 bu/a. If projections are accurate, the U.S. Corn growers would produce 12.365 billion bushels of Corn, or the second largest crop since records have been kept. Although the potential size of the Corn crop seems large, many analysts are looking for even more acres to be planted now that fertilizer prices have come down sharply from last year, which can put a large dent into production costs. On the demand side of the equation, the USDA expects Corn usage to increase to 12.450 billion bushels this year, up 500 million bushels from 2008. Corn usage for ethanol production is expected to increase to 4.1 billion bushels according to the USDA, despite sharply lower Oil prices and lackluster gasoline demand. The wild card for this season, outside of the weather, could be the strength of the U.S. Dollar and its effects on U.S. Corn exports. A weaker Dollar makes U.S. Corn exports more attractive to buyers, and higher exports would be necessary to offset the loss of demand from U.S. Livestock producers who curtailed their herds due to high feed costs last year. However, the greenback is currently in an uptrend, with the Dollar Index futures hovering at 4-month highs. Should this strength continue in 2009, the current export projection may need to be lowered as the season progresses.

So what strategies should traders look into to prepare themselves for the upcoming growing season? Given the potential for volatile trading conditions as the season progresses, many traders look to buy options on Corn futures outright as the risk is limited to the premium paid for the option. However, one needs to be careful which month options they wish to buy. The "new" crop, which is the crop that will be planted this season, begins with the December 2009 contract. Fundamentals such as weather and crop conditions can affect prices for new crop futures. Contracts earlier than December are considered the "old" crop futures, which can represent the carry-over from the previous crop year. Some fundamentals that can affect old crop futures include export demand, current stock-to-usage ratios, and domestic feed demand. It is possible that new crop futures prices can behave quite differently than old crop futures, with prices in one crop year being higher and the other lower not uncommon.

Technicals

Looking at the daily chart for the December 2009 futures, we notice that since the beginning of 2009, prices have been caught in a downtrend, falling nearly $1 since early January. The market has made a 78.6% correction from the contract lows made in December to the recent highs of early January, and this key area must hold or a test of the lows just below $3.50 is likely. Prices have failed to close above the 20-day moving average since mid January, which shows that bears were in firm control of the market. We are approaching this key MA again, and should we manage a daily, or better yet a weekly close above this indicator, we should look for a bout of short-covering buying to emerge. The recent lows of 3.75 1/2 remain support for December Corn, with resistance found at the February 26 highs of $4.11 ¾.

Mike Zarembski, Senior Commodity Analyst

March 6, 2009

Jobs Report Weighs on Dollar

Fundamentals

The Dollar is sharply lower against the majors this morning, ahead of the non-farm payroll data from the government. The consensus opinion suggests the economy lost 650,000 jobs in February, but it would not at all be surprising to see the figure come in closer to 700,000. The unemployment rate is expected to rise to 7.9 percent. The US economy's slide has not yet shown signs of reaching a bottom and it is conceivable that the unemployment rate could reach 9.5 or even 10 percent before the economy finally does bottom out. Given the doom and gloom surrounding the state of the US financial sector and economy, it is somewhat astounding that the greenback remains near multi-year highs first reached in November. The Dollar's strengths have been the weakness of other nations and its status as the world "reserve currency." It speaks volumes about how back conditions are in Europe and Asia at the present moment. Japanese economic data has been much worse than expected, with the economy shrinking at an annualized rate of almost 13 percent last quarter. Several key commodities, including Copper and Crude Oil, have shown signs of life recently and that does not bode well for the Eurozone and Japan, who do not produce either raw material. Given the fact that Japan would like to see their currency continue to drop in value, the Dollar Index may continue to climb, despite the adverse economic climate. The question that remains is whether or not the currency will be able to hold up if the face of rising debt.

Technicals

The March Dollar Index remains in an uptrend on the daily chart. The fact that the market pulled back after making a new contract high close yesterday has to be somewhat discouraging for the bull camp. Prices may come back down to test the uptrend line. If the market is unable to hold the trendline, prices could fall back to the mid-to-low .8000's. The bull camp would get a huge boost from new contract highs north of the .9000 level, which can be seen as both technical and psychological resistance. Momentum remains flat despite the sell-off this morning, which can be seen as somewhat positive.

Rob Kurzatkowski, Senior Commodity Analyst

March 9, 2009

Stalemate

Fundamentals

It appears that both bullish and bearish Treasury bond traders are beginning to dig in for a protracted battle to see which side will prevail in determining the next move in Bond yields. As is typically the case, both sides make compelling arguments to back their positions. Bond bulls will argue that there are no signs of an immediate turnaround in the U.S. economy, with Friday’s non-farm payrolls report confirming another 651,000 jobs lost in February and that the unemployment rate has soared to 8.1%. If one was to factor in involuntary part-time workers or those employed on a temporary basis, the rate would be even higher! Bond bulls also note the possibility of the Fed. purchasing treasuries should rates begin to climb. This idea was backed-up by the announcement from the Bank of England that it would purchase both government and corporate debt. Also supportive is the perceived “safety of funds” in U.S. Government debt, with many investors flocking to U.S. treasuries in times of economic or political turmoil. On the other side of the coin, Bond bears will counter that the massive size of the U.S. stimulus package and the rising costs of government “bailouts” has to come at a price, and that price is the increasing amount of debt the treasury has to sell to fund the costs of these programs. This week alone the Treasury will auction off $34 billion of 3-year notes, $18 billion of 10-year notes, and $11 billion of 30-year bonds. At what point will investors start to demand a higher yield to keep taking on U.S. debt issuances, especially with no clear signs that The U.S. Government’s spending spree will slow down anytime soon? Even a rebound in the economy may prove to be bearish for Bonds, as investors start to dump treasuries in favor of stocks once again, when share prices begin to recover and equities are not the pariah they seem to be today.

Technicals

A quick look at the charts seems to suggest we have entered a period of consolidation since late January. I have included Fibonacci points on the chart starting at the recent lows made in late October of last year to the contract highs of January. Notice bond prices retraced back into the zone between the 50% and the 61.8% retracement area. This can be viewed as a critical support point for Bond futures if the rally continues. A failure of support near the 124-11 area in March bonds or 123-04 in the June contract could signal the January highs may have been an important top in the market and bears look likely to finally gain the upper hand. Traders unsure regarding which side will win the battle for Treasury prices may look towards the options market and investigate the possible purchase of straddles or strangles in anticipation of a large directional move once the consolidation phase is over.

Mike Zarembski, Senior Commodity Analyst

March 10, 2009

Loonie Letdown

Fundamentals

The Canadian Dollar has rebounded from 4 ½ year lows against the US Dollar this morning, as traders flock to currencies with higher interest rates. The Canadian economy continues to falter due to the slowdown in the US, its largest trade partner. Weak petroleum demand and low prices in the US have been an area of concern for our neighbors to the north. The sad state of the US auto industry, which produces many cars driven in the States and Canada, is also weighing heavily on the labor market. Employers are slashing jobs at a quicker pace than previously expected due to the slowdown in both raw material exports and autos. Friday's employment data is expected to show the Canadian unemployment rate climbing to 7.4 percent, the highest level in exactly 5 years. The domino effect has also spilled over to the housing market, with housing starts falling 12 percent in February, the lowest level in over 8 years. Outside forces have also pushed the loonie lower. It seems as though every sharp global stock market sell-off causes investors to flock to what are perceived as "safe haven" currencies in the form of the US Dollar and Japanese Yen, at the expense of commodity currencies, like the Canadian and Australian Dollars.

It is not all doom and gloom for the Canadian economy, though. Relative to the US, the unemployment rate has held up fairly well. Also, the financial and banking sectors have been largely isolated from the mess that the US and Europe are facing at the present moment, which could result in domestic credit markets being restored well ahead much of the West. The US stimulus package could revive demand for raw materials in the US that has been sorely needed. More importantly, the actions of central banks around the globe could spark very high inflation, a scenario that would likely be very supportive of the Canadian Dollar. This may be a far-sighted view at this point, though, as heavy consumption of raw materials is usually the driving force behind inflationary conditions.

Technicals


The June Canadian Dollar chart shows prices hanging around support nears 0.7730. Prices were able to bounce back late yesterday to come back to support instead of confirming a breakout. This could be supportive of prices moving forward if the market is able to gain traction here. A downside breakout could sent prices spiraling toward the mid-0.65's, based on the measure of the wedge formation that has been building on the weekly chart. There is minor chart support near 0.7500, but major support does not come into the picture until the 0.7000 level.


Rob Kurzatkowski, Senior Commodity Analyst

March 11, 2009

Bulls Looking Spiffy If Oil Can Go Over 50

Fundamentals

The saying "every dog has its day" is quite apropos for the Crude Oil market, which has demonstrated a bit of a price recovery the past 3 weeks despite the slump in equity prices. This divergence between Oil and equity prices is mostly due to the supply side of the Oil equation, with U.S. Oil stocks beginning to fall, especially in Cushing, Oklahoma, the delivery point for the NYMEX Crude futures contract. OPEC has cut production levels to try to stem the sharp price declines in Oil prices due to the continued world economic slump, with estimates that Cartel members are generally adhering to their quotas, with between 80 and 85 percent compliance. This weekend is will bring about the next OPEC meeting in Vienna, with some analysts looking for as much as an additional 1 million barrels per day production cut being announced. However, there is also an opinion that Saudi Arabia will push for stronger compliance to the existing 4.2 million barrel per day cut before any additional cuts are put on the table. Nigeria's oil output continues to be disrupted by political strife, as attacks by militants on oil pipelines and infrastructure are estimated to have cut the country's production by about 25%. So while the supply picture has turned a bit more bullish, there is still little evidence that the demand picture has improved. That certainly is that case for the U.S and Europe, with continued job losses and declining industrial usage suppressing fuel demand. The EIA has lowered its estimate for U.S. oil usage in the 2nd quarter of 2009 by 4.2% vs. year ago levels. The news out of China for Oil demand is mixed, with auto sales rising 25% in February and the EIA forecasting a 2.3% increase in Oil use for the 2nd quarter of this year. However, overall consumer prices in China fell for the first time in nearly 7 years, falling 1.6% in February vs. last year, which brings about the concern that deflation may also appear in the world's most populous country.

Technicals

Looking at the daily chart for May Crude Oil, we notice prices finally being able to hold above the widely watched 20-day moving average. However, Tuesday's close near the lows of the session may make weak longs a bit nervous. Large speculators continue to hold a net-long position in Crude Oil according to the most recent Commitment of Traders report. As of March 3rd , large non-commercial traders were holding a net-long position of 77,718 contracts. However, this was down 19,579 contracts from the previous week, as weak longs booked profits on the initial rally off contact lows made in mid-February. We are currently in the middle of the roll-over from the April to May futures for the United States Oil Fund (USO), which in the past has caused quite of bit of volatility in the nearby spreads. This month's roll-over seems quite tame, as improving supply fundamentals has tightened the April/May spread and lessened the desirability of bear spreading by speculators ahead of the rollover. Besides psychological resistance at the $50 level in the May futures, resistance is found near the 50.45 to 50.50 area. Support is seen at the March 3rd lows of 41.75.

Mike Zarembski, Senior Commodity Analyst

March 12, 2009

Losing Its Appeal?

Fundamentals

Gold futures have fallen over a hundred dollars since peaking at over $1,000 an ounce three weeks ago, and traders have begun to wonder if the precious metal has lost its appeal as a safe haven. One driving force behind the sell-off has been the overwhelmingly bullish sentiment among smaller speculators, which is generally viewed as a bearish indicator, much like an overbought reading on the RSI. Additionally, inflationary pressures have not been there to support prices like they were in May of last year when Gold first traded above the $1,000 ounce mark. The Commitment of Traders report continues to show a large speculative long position, suggesting traders may be fearful of getting stuck in long positions in the event that some of these longs decide to liquidate positions. Investment in the SPDR Gold Trust (GLD) remains very strong, setting a new record of 1,038.17 metric tons. Positive news from the financial sector also has weighed heavily on prices in recent sessions, although traders must question whether the entire banking sector will return to profitability. Citigroup may have posted an $8 billion profit, but they received $45 billion in bailout funds. With that type of inefficiency, the bank should become a branch of the federal government! How will banks that did not receive a substantial government infusion fare? That is the million dollar question, so to speak, with the unbridled enthusiasm likely to quickly dissipate if other banks don't follow suit. There are still more question marks rather than answers regarding the economy, which could benefit Gold prices.

Technicals

Turning to the chart, April Gold has come down to the trendline formed by November, December, and January lows. It is imperative that the trendline remain intact for the market to maintain its upward momentum. Prices have also bounced back from support in the 890 area. A violation of this support level could signal the end of the uptrend in Gold prices, and the market risks falling back into the lower 800's. On the upside, prices would likely have to cross through the 945.00 level to regain positive momentum. The market quickly snapped back yesterday after closing below the 50-day moving average on Tuesday, which can be seen as somewhat positive. The momentum indicator continues to nosedive, despite the April Gold contract trading higher for the second session, which could be troubling for bulls. The indicator has crossed below the zero line and is showing bearish divergence from prices, which can both be viewed as negative.

Rob Kurzatkowski, Senior Commodity Analyst

March 13, 2009

Will Traders Assume Additional Acres For Legumes?

Fundamentals

Soybean futures traders got a mixed message from Wednesday's release of the USDA Crop Production and Supply/Demand Report. Those with a bullish slant towards beans noted the USDA lowered its estimate for U.S. Soybean ending stocks this year to 185 million bushels. This was down 25 million bushels from last month's estimate, as U.S. export estimates were increased. This was supported by higher than expected U.S. Soybean weekly exports reported yesterday, with net sales up 26% from the 4-week average. Bean bears would counter that the USDA raised world Soybean ending stocks with lower Soybean Crush estimates from China, thus helping to raise inventory levels. China's recent heavy buying of Soybeans may be coming to an end, as there are reports that a senior Chinese official said that the country is done buying grain from last year's harvest. Now that winter is nearing an end, traders will turn their attention to the widely anticipated USDA Prospective Plantings report to be released on March 31st . At the USDA Outlook forum in late February, Soybean acreage was expected to total 77.0 million acres, up 1.3 million acres from last year, as swing producers switch to planting Beans from Cotton and Wheat. . However, there is some talk that acreage dedicated to Soybean production could be even higher. If true, next year's Soybean carry-out totals could more than double. If this scenario is correct, Soybean traders may look toward the old crop/new crop spreads for possible trading opportunities. If a trader believes that old crop Soybean supplies will remain tight this year but will increase sharply next year, a possible trade would be buying the July 2009 Soybeans (old crop) and selling November 2009 (new crop) Soybeans. Traders putting on this spread would want to see the price differential between July Soybeans and November Soybeans widen. As of this writing, July Soybeans are trading at $8.66 per bushel and November Soybeans are trading at $8.26 per bushel -- a $0.40 July premium to November. Traders should be aware that Old Crop/ New Crop spreads can become quite volatile, especially once the growing season is well under way and weather conditions become a factor.

Technicals

Looking at the daily chart for November Soybeans, we notice the downtrend remains in force since the contract highs were made last July. However the market has entered a consolidation phase and prices are hovering just below the 20-day moving average. With prices moving within a tighter trading range, traders should be on the lookout for a price breakout out of the triangle formation. If the breakout occurs on higher than average volume, the validity of the breakout improves. Support is seen at the recent lows of $7.84 in the November contract, with resistance found near the $8.72 area.


Mike Zarembski, Senior Commodity Analyst

March 16, 2009

Walking the Tightrope?

Fundamentals

OPEC member states voted against cutting production quotas for the fourth consecutive meeting, as the cartel tries to avoid acting as a roadblock for the global economy. Oil bulls may want to step back and reevaluate their position after the meeting. Prices have edged closer and closer to the $50 a barrel mark recently on shrinking global surpluses, a sign that existing production cuts are beginning to work. Many traders were banking on the cartel cutting production once again and overshooting the mark, in that supplies would tighten at a quicker pace than OPEC had intended. While petroleum demand has been especially price sensitive since the beginning of the downturn, the world still needs the commodity to function in the worst of times. China has been extremely busy in recent weeks securing access to base metals and petroleum, suggesting the world's most populous nation expects to be back on track economically sooner rather than later. The inaction on OPEC's part may have been the best and wisest decision given the circumstances. In the short-term, traders may view the decision as bearish, and prices could give back some of the gains made over the past month. After the knee-jerk reaction, however, prices could stabilize and trade range-bound, which would avoid any undue stress on the global economy and result in OPEC receiving as fair a price as they can for the time being.

Crude Oil has been stabilizing in recent weeks for a number of reasons. Inventory data released over the past month has shown a significant slowdown in the rush to storage after the Cushing, OK delivery point for the NYMEX contract neared capacity. The fact that so many traders caught on to the gimme trade may have spooked some traders. Also, the United States Oil Fund (USO) changed their roll procedure, opting to roll positions over a week instead of one or two days, making it more difficult for traders to take advantage of the roll. This has caused the contango to narrow significantly. The resolve of shorts has been tested after prices failed to set new contract lows, not only in Crude Oil, but other very economically sensitive commodities such as Copper. Shorts have headed for the exits, but whether it is for good or not remains to be seen. Some of the traders that were short and decided to cover could be waiting in the wings for a fresh opportunity to become short the market once again. Traders will also be keeping a close eye on equity prices to gauge direction.

Technicals

The April Crude Oil contract continues to trade sideways, unable to gain a longer term direction, which can be seen as good news for those bullish over the long haul. Short-term traders may view the chart as somewhat bearish, after prices had twice flirted with the 49.00 level only to fall back. The chart looks as though it may be on the verge of forming a small M top, which suggests that the market may be looking to test mid-February lows. The failure of prices to hold the two recent closes above the 50-day moving average suggests the market is not yet ready to change direction, leaving a downside bias. Prices came down to test the 20-day moving average and have held the average in overnight trading. Failure to hold the average would suggest that a near-term high may be in place.

Rob Kurzatkowski, Senior Commodity Analyst

March 17, 2009

Coffee Prices Starting to Perk-Up?

Fundamentals

Coffee traders had some excitement last week, as the most active May futures made a new contract low early in the week, followed by a stunning nearly 9-cent move on Thursday. Like most commodities in 2009, Coffee prices have been weak, primarily due to the slowdown in the world economy. However, if one were to look in a vacuum, Coffee fundamentals appear fairly friendly, with some estimates calling for a production deficit in the 2009/10 growing season. Brazil, the world's leading coffee producer, is expected to produce approximately 37.9 million bags this season, which is down sharply from the 46 million bags produced in the 2008-09 season. Arabica Coffee production is cyclical, as the coffee bushes tend to produce a smaller crop every other year. Current cash market prices in Columbia are well above the ICE futures prices, as tight current supplies have forced buyers to pay a premium to obtain high grade supplies. Despite these seemingly positive fundamentals, large non-commercial traders continue to hold a net-short position in Coffee, according to the most recent Commitment of Traders report. As of March 10th , large non-commercial traders were net short 3,872 contracts, a decrease of 524 contracts from the previous week. However, this data does not include the activity during the sharp rally in Coffee prices on 3/12, and next week's data may show further short-covering by large speculative traders. Those who have traded Coffee futures in the past know that the market can turn quite volatile, especially during the summer months, when the South American winter is at its peak. Freezing temperatures can cause considerable damage to Coffee bushes, and in many years, traders build in a weather premium into futures prices going into May.

Given the potential for volatile trade, many Coffee traders like to purchase options to help define their position risk. However, Coffee options tend to be rather expensive, as option sellers want to receive a greater premium to compensate for high volatility in the Coffee market. One strategy used by some traders is to buy Coffee bull spreads. This strategy involves buying a lower strike call and selling a higher strike call in the same contract month. The calls sold help to lessen the total amount of option premium paid in exchange for limiting the potential upside of the trade. For example, a September Coffee 130 call had a settlement price of 9.59, or nearly $3,600, with September Coffee trading at 115.60. A trader bullish Coffee through the South American winter could purchase a September 130 call and sell a September 160 call for about 4.50 points, or about $1700. The trader would receive the maximum gain of 25.50 points if September Coffee was trading above 160.00 at the time of the option expiration in August. If Coffee prices were to fall below 130.00 at option expiration, the trader would lose the entire premium paid.

Technicals

Looking at the daily chart for May Coffee, we notice prices hovering just above the widely watched 20-day moving average. Many short-term momentum traders look for a daily, or even a weekly close above this MA as a potential buy signal. The 14-day RSI has moved to a more neutral reading of 48.70. One should also notice that the 14-day RSI failed to make a new low reading when the contract lows were made last week. This may have set the stage for Thursday's sharp price spike. The next price resistance for May Coffee is seen at the 2/26 highs of 114.95, with support seen around the 105.00 area.

Mike Zarembski, Senior Commodity Analyst

March 18, 2009

Yen Wallows

Fundamentals

The Japanese Yen finds itself unable to gain any sort of upward traction against the major currencies, as the stock market rally has diminished safe haven demand. Japanese policymakers could not be happier. The strong currency has hurt the economy in Japan by quashing export demand at a time when the global economy is already fragile. The BOJ has taken steps to discourage domestic investors from repatriating funds back into Yen by aggressively purchasing government debt, forcing investors to look for higher yielding assets. The Fed is expected to aggressively pursue monetary expansion by stepping up the purchases of toxic debt. This could benefit the battered Euro, Pound and Australian Dollar, as well as emerging market currencies, at the expense of the US Dollar and the Yen. Overall, it looks as though trader sentiment has shifted toward risk taking recently, as evidenced by the recent upswing in equity prices and lackluster price action in government bond trading. Whether or not the shift toward riskier, higher yielding assets will continue remains to be seen. The stock market could very well be seeing a "dead cat bounce" driven by short-covering and bottom-picking by smaller investors. If the rally in equities does indeed fizzle out, the Yen could stand to benefit; but it seems as though the upside potential is limited by the fact that the Japanese government could intervene further to bring down the value of the currency.

Neutral to bearish traders may look to capitalize on the lethargy in the Yen by putting on a bear call credit spread, selling a May Yen 1.07 call and buying a May Yen 1.10 call for a credit of 50 points per spread. This would bring in a credit of $625 per spread, with a maximum risk potential of $3,125. Traders that choose to employ this strategy would be neutral or bearish, but fairly certain the recent downtrend in the Yen will not reverse course. The more bearish trader may wish to enter a ratio debit spread by buying a June Yen 1.00 put and selling two June Yen 0.96 puts for a total debit of 40 points. The trader risks the initial investment of $500, with a maximum profit potential of $4,000 if the Yen settles at 0.9600 at expiration. The Yen would have to make an explosive move lower for this trade to reach its maximum potential, so the trader may not necessarily be looking for the maximum profit, but rather, wish to reduce the cost of the 1.00 put by selling the two 0.96 puts.

Technicals

Turning to the chart, the Yen sell-off seems to have stagnated above the 1.01 level. The chart bias seems to favor the downside, as the June contract has been unable to push above the 1.0350 level. The 18-day moving average has acted as resistance over the last week or so. If prices are able to close above the average, it may favor a near-term positive bias for the Yen. Solid closes below 1.01 would signal a downside breakout and continuation of the downtrend. For the trend to signal a reversal, the Yen would likely have to close above the 1.0610 level. Momentum is showing bullish divergence from both price and RSI, suggesting a short term positive bias.

Rob Kurzatkowski, Senior Commodity Analyst

March 19, 2009

S&P futures go for lucky 7!

Fundamentals

The old saying "All good things must come to an end" certainly has not applied to the S&P futures market lately, as the bounce off recent lows has lasted seven consecutive days. The announcement from the FOMC meeting added to the recent bullish recovery, as the Federal Reserve announced it will buy up to 300 billion in longer term Treasuries as well as bolster programs to help lower mortgage rates. Now the questions will turn to whether the recent rally attempt is nothing more than a "dead cat bounce" in a major bear market, or a sign that an economic recovery is within view, possibly later this year. Although valid arguments can be made to support both sides, with bulls noting the surprise rise in U.S. housing starts last month as a sign that the worst may be over for the U.S. housing market, which in turn would be a big boost for economic revival -- and bears countering continued weak readings of U.S. industrial production and almost daily announcements of corporate layoffs showing that a recovery is still down the road. One thing that is apparent is that the sharp volatility that the stock market has experienced in the final quarter of 2008 has begun to level off, though at generally elevated levels compared to the past several years. A chart of the CBOE volatility index or VIX shows volatility levels moving into an increasing narrow triangle formation since the end of last year. Although the S&P 500 made new lows during this time frame, the wild daily price swings have generally been absent. The average daily volume in the SPDR S&P 500 (SPY) has shown an overall decline during this time, but has been noticeably weak -- except for yesterday, during the rally of the past several days.

With the market seemingly at a near-term crossroads and volatility near the low end of the recent range, a trader looking for a big move in the S&P futures or a sharp increase in volatility may want to look at the purchase of E-mini S&P futures options straddles. An example would be buying the May E-mini S&P 775 straddle currently trading around 95 points ($4750 per contract). These options currently have 57 days to expiration and to be profitable at expiration would require the June E-mini futures to be trading above 870 or below 680. However, many buyers of straddles are looking for a sharp rise in implied volatility to occur within the first couple of weeks after the trade is placed to limit the effects of time decay on the position.

Technicals

Today we are going to take a look at a daily chart of the VIX index mentioned in my earlier commentary. Notice the symmetrical triangle formation that formed the past several months after volatility rose to historic levels starting in October. This recent period of "calm" came despite the S&P futures falling to multi-year lows. It is interesting to see that only 1 year ago, volatility was trading around 25 or below! If the recent rally in the S&P's were to continue, the odds of the VIX falling below the recent lows of 37.34 are likely. However, should this rally turn out to be nothing more than a bear market rally, we could see the VIX try to test resistance at the upper part of the triangle formation near the 52 level.

Mike Zarembski, Senior Commodity Analyst

March 20, 2009

Hocus Pocus

Fundamentals

Like a magician, the Fed made over one trillion dollars magically appear out of nowhere, stoking fears that deflationary pressures will give way to sharp inflation. The central bank has been relatively quiet in recent weeks leading up to the policy statements, and the market expected the Fed to increase purchases of bad assets from banks. The scope of the long-term treasury and mortgage purchase plan, though, shocked virtually every market observer, causing a spike in equities, bonds and commodities. At the same time, the Dollar Index dropped sharply over the past two sessions due to the sharp upswing in money supply. This sets the groundwork for inflationary pressure to creep back into the market. Commodities may once again become an attractive place for investors to divert their funds because of the uncertainty in equities and minuscule bond yields. Given the sharp devaluation of Copper in the second half of last year, the yellow metal may be in a better position to gain than other commodities. Like the US, China has been aggressively trying to stimulate its economy, potentially setting up for a sharp upswing in purchasing after months of declining demand. The purchase of long-term treasuries by the Fed is aimed at pushing down yields to force businesses to invest in new projects instead of aggressively saving. Also, the central bank hopes to stimulate the housing market by pushing mortgage rates lower. Both of these factors could spark a revival in domestic demand. The combination of physical buying and sharp decreases in mine production has brought inventory levels on the LME below 500,000 metric tons, after peaking at nearly 550,000 metric tons.

Copper prices seem to be coming back to more realistic levels, after falling to nearly $1.25 earlier this year. Given the recent technical breakout above the $1.70 mark and strong fundamentals, it appears as though prices may continue to move higher. The Copper futures contract is extremely volatile, often moving 500 or more points intra-day, which can be difficult for many traders to stomach. This volatility also causes options to be on the pricey side, which is why a bull call spread may be in order for traders wishing to take the long side of the market. Traders believing that Copper will move above the $2 mark by the July options expiration date may want to enter a bull call spread, buying the July 1.90 call and selling the July 2.00 call for a premium of 350 points or lower. The cost of the trade is $875, with a maximum profit potential of $1625.

Technicals

The July Copper chart shows a breakout above the 1.70 level last week, adding further confirmation to the initial breakout above the 1.60 level. Prices closed on the downtrend line formed by the July, August and October highs, suggesting that an overall trend reversal may be in the works. The 50-day moving average is nearing and upward crossover of the 100-day average. If and when such a moving average crossover is confirmed, this can be seen as confirmation that the prior downtrend may be giving way to a new uptrend. The previous resistance area at 1.70 can now be seen as support, while the July contract may see minor resistance at 1.8890. The market is nearing overbought levels on the RSI indicator, suggesting prices may come down to test newly established support or move sluggishly higher. Further technical breakouts while in overbought conditions, however, can be seen as extremely bullish. While the RSI is typically used by traders to gauge overbought and oversold conditions, history tells us that bull rallies confirmed on overbought readings tend to be especially strong.

Rob Kurzatkowski, Senior Commodity Analyst


March 23, 2009

Is the Cure More Harmful Than the Illness?

Fundamentals

Traders and investors are brushing off their old "Economics 101" text books to study-up on the term "Quantitative Easing" that has been the buzzword moving about from Central Bank to Central bank this year. A general definition of quantitative easing is the creation of a quantity of new money through open market operations by a country's central bank in order to increase the money supply. In more layman's terms it is the printing of new money to purchase government securities which has the effect of injecting the newly printed currency into the private banking system. This action is intended to help stimulate economic growth, with banks hopefully lending these newly created funds. However, the creation of money seemingly out of nowhere has the potential to lead to rising inflation down the line, as the effects of this monetary stimulus moves its way through the economy. The Federal Reserve is the third of the major Central banks to embrace quantitative easing as a means to keep interest rates low and spur lending, along with the Bank of Japan (BOJ) and the Bank of England (BOE). The most notable exception so far has been the European Central Bank (ECB), but many analysts believe it will be more a matter of "when", not "if" the ECB will embrace this potentially inflationary policy to help stimulate economic growth.

So where should traders look for potential opportunities to take advantage of this move towards "Quantitative Easing "? Given the potential for rising inflation and potentially higher commodity prices traders may want to look towards the so called "commodity dollar currencies" such as the Canadian and Australian Dollars. Rising commodity prices is usually deemed supportive for those countries that are net-exporters of commodities such as base metals or oil. Though both the Canadian and Australian Dollars have risen vs. the U.S. Dollar the past few days, they are still well below the levels seen last year when commodities were all the rage. Those traders who have followed the Canadian Dollar futures will know that the June futures contract has made several attempts to break below the 0.7650 area and as failed each time. Traders with a bullish slant towards the Canadian Dollar who believe the 0.7650 level will hold could write bullish put spreads on the Canadian Dollar. An example of a trade is selling the June 7650 put and buying the June 7450 put for a net credit of 30 points or $300 per contract, with the June futures trading at the current level of 0.8078. This trade will be profitable if the June futures contract is trading above 0.7620 by expiration, with a maximum profit of $300 if the futures are above the 0.7650 level at expiration. The maximum risk for this trade is $1700 if the June futures fall below 0.7450 at expiration.

Technicals

Turning to the daily chart for the June Canadian Dollar futures, we notice the sharp breakout after the recent Fed announcement towards quantitative easing. Prices also broke above the 20-day moving average, which many short-term momentum traders look to for a buy signal. The run above psychological resistance at 0.8000 also sparked a round of short-covering buying as buy-stops were hit. Momentum as measured by the 14-day RSI is reading a moderately positive 63.93. The next resistance point comes in at the trendline formed from the November 5th highs near the .8270 level. Support is seen at the contract lows made on March 9th at 0.7666.

Mike Zarembski, Senior Commodity Analyst

March 24, 2009

Free Money Fails to Excite Gold Bulls

Fundamentals

The sharp 10-day rally in equities has stolen some of Gold's thunder, as investors flock to the stock market. Whether or not these are the seeds for a longer term recovery in equities remains to be seen, but the government policy driving the market rally is setting the groundwork for higher inflation. The policy of throwing money at a problem is a risky gamble, and Gold may once again see a flight to quality effect if the Treasury Department's plan fails to stimulate lending. The treasury plans to buy up to $1 trillion of bad assets related to bad real estate gambles, which is roughly half of toxic assets held by banks. The sheer size of the plan is staggering and puts taxpayers on the hook for risky gambles driven by bad government policy. Not all investors have taken the bait and gone back into equities, as evidenced by the SPDR Gold Trust's physical Gold holdings climbing to a record 1,114.6 metric tons on Friday. The stabilization and rally in commodities such as Gold and Copper suggest that inflationary pressure may be making its way back into the picture, although the broad commodity market has yet to follow suit. The Dollar Index has been moving inversely to equity prices, which makes yesterday's rally in both equities and the greenback the exception rather than the norm. This is a confusing time for traders, as the price of Gold moves inversely with both equities and the US Dollar. At this point, it seems as though the pressure from stronger equity prices has had more of an impact on the precious metals than the movements of the currency markets. If the market is finally satisfied with the government's plan for the economy, traders' appetites for risk may continue to increase, dampening the appeal of Gold and precious metals.

Gold bulls may wish to take advantage of the recent sell-off in the metal. If equities keep rallying, there is a possibility that the metal may fall back to the 900 mark. Bulls may want to wait for prices to pull back to purchase a June 950/1000 bull call spread. The spread is currently trading near 20.00, so traders may be able to get the spread for 15.00 in the event that prices continue to decline. The spread risks the initial investment of $1,500 dollars for a maximum gain of 50.00 points, or $5,000, if the contract is trading above $1,000 at expiration. The more cautious approach would be to sell the spread if it reaches 30.00 prior to expiration.

Technicals

The June Gold chart shows a spinning top formed by Friday's price action, followed by a hanging man candle yesterday, suggesting a short-term negative bias. The recent weakness in prices has not caused any major chart damage to this point, and prices continue to trade above the major moving averages. Today's overnight price weakness, though, has brought prices down to the 18-day moving average. Failure to hold the average may suggest that a near-term high may be in place. Prices are once again flirting with the uptrend line and support at 930. If the June contract is unable to hold these levels, prices may consolidate between 890 and 930. Traders will focus on how the market behaves if and when prices come down to the 890 area, which could have a bearing on the long-term market trend. Failure to hold 890 could mean the market will trade in a wide, sideways range, while holding these levels favors the bull camp.

Rob Kurzatkowski, Senior Commodity Analyst

March 25, 2009

Are Oil Fundamentals Justifying the Price Rise?

Fundamentals

Apparently not only stocks have caught a bid of late, as Crude Oil prices have been in bullish hands throughout much of the month of March. But do the current fundamentals really justify the $10-plus rally since the start of the month? One consideration is that U.S. Oil stockpiles (excluding the SPR) are at their highest levels since the last week of June 2007 and approaching 16-year highs. World Oil consumption is expected to fall by 1.4 million barrels per day in 2009, according to the Energy Information Administration Short-term outlook released on March 10th . It appears that much of the gains in Oil futures can be tied to a renewed sense of optimism that an economic recovery may occur late in 2009, with the recent upswing in the equity markets helping to fuel this belief. The Fed announcement that it will embark on a policy of " quantitative easing" helped to flame inflation fears and to propel near-term Oil futures past the $50/barrel mark. In order to continue the rally, we will need to see hard evidence that both U.S. and world oil demand is actually improving. OPEC production cut-backs alone may not support $50-plus Oil prices, especially if demand continues to increase. In addition, it remains to be seen how long members of the Oil cartel will actually abide by their production quotas. The recent rally may entice a bit of "cheating" by members looking to offset some of the reduced revenue streams seen during the past several months. Wednesday's weekly release of U.S. Crude Inventories is expected to show a moderate increase of between 1 and 1.5 million barrels last week. A storage build much higher than the estimate could trigger a bout of selling by profit-takers, especially given the recent price run-up.

Traders who believe Oil prices may be due for a bearish price correction can look to buy just out of the money puts outright in May Crude Oil futures. However, these puts can be expensive, so a more conservative strategy would be buying a bearish put spread -- such as buying the May 52 put and selling the May 47 puts. As of this writing, the May 52 put could be bought for a premium of 3.25 ($3250), and the May 47 put could be sold for a premium of 1.38 ($1380). The total spread would cost about $1870, with a maximum gain of $3130 if May Crude Oil is at or below $47.00 by the option expiration on April 16th . The maximum loss is the premium paid.

Technicals

Looking at the daily chart for May Crude Oil, we notice prices accelerating to the upside once the May futures closed solidly above $50. A late session rally on Tuesday had buyers taking-out the recent highs of $54.05, despite a bit of a recovery in the U.S. Dollar. Since last Thursday's sharp rise in volume, recent activity has waned, which may signal that new buyers are starting to balk at these price levels. Momentum as measured by the 14-day RSI remains strong, with a current reading of 61.25. The January 5th high at $56.17 has become the next resistance point for May Crude, with support seen at the $50.60 level.

Mike Zarembski, Senior Commodity Analyst

March 26, 2009

Eurotrip

Fundamentals

The Euro is slightly higher this morning in very quiet trading. The currency surged yesterday on comments made by Treasury Secretary Geithner indicating the US may be open to having a global reserve currency. The Euro gave back a good portion of these gains after the comment was rescinded. It appears that Mr. Geithner has not yet realized that his comments can send the markets into flux, especially if said comments can be viewed as negative for the greenback or the equity markets. Turning to the larger picture, it appears that Eurozone leaders will err on the side of an eventual economic recovery in regards to interest rate easing and stimulus spending. The bank continues to remain cautious of inflationary pressure caused by aggressive interest rate cutting. This is because Western Europe is extremely sensitive to rising costs, more-so than the US and developing nations. The US and Europe seem to be heading in different directions in this regard, with the US being fast and loose with government spending and Europe being quite conservative. Economic data suggests that both would be better suited taking the exact opposite approach. The global economic meltdown started in the US and the economy here has already suffered blows equivalent to a 10 round heavyweight boxing match, while the EU is still in the sixth round. Data also suggests that the EU economy will lag behind the rest of the world when a global recovery eventually comes. How currency traders react to the recent developments is still up in the air. The Euro has positive interest parity with the greenback, and the Yen and the massive Fed bond and toxic debt purchase plans certainly favor a weaker US Dollar. Also, if the equity markets continue to rally, it is a clear sign that investors are willing to take risks once again. This can be viewed as negative for the Dollar, as overseas investors parking their money in the world's reserve currency may repatriate funds. On the flip side of the stronger Euro argument is the economic weakness of the Eurozone itself. There have been a handful of positive economic reports in the US, suggesting at the very least that the slowdown could be bottoming. The Eurozone lacks similar data. Also, infighting between "Old Europe" and "New Europe" can be seen as counter-productive and negative for the Europe.

Given the general confusion as to the direction of the currency markets, traders may be looking to play both sides of the fence. Traders believing that the Euro will move sharply, but who are uncertain which direction that will be, may wish to employ a long strangle trade, buying the May 1.30 put and buying the May 1.40 call for a debit of 0.0300, or $3,750. If held until expiration, the June Euro would have to close above 1.43 or below 1.27 for traders to begin to profit from the spread, excluding commissions. Given the cost of the spread, traders may wish to close the put side on solid closes above 1.3730 to salvage some of the value of this option, while letting the call side run. Conversely, the call may be closed on solid closes below the 1.3300 level for the same reason.

Technicals

The June Euro chart is a land of confusion. The chart appears to be in the midst of forming a bull flag formation, but a closer look at the candlesticks comprising the flag suggests a possible reversal may be in the works. Monday's price action forms a spinning top pattern with a long upper and lower wick, followed by a down day on Tuesday. The market was sharply lower yesterday before the Geithner snafu, suggesting traders were in bear mode before the surprising comments. The June contract also finished 89 points below intra-day highs. Prices have also hit a wall at the 1.3730 area, which is a relative high close from January and can be seen as resistance. A close above this level would not only signal a breakout above resistance, but confirm the bullish flag formation. The 50-day and 100-day moving averages are touching and may cross over, suggesting the long term trend may favor the bulls.

Rob Kurzatkowski, Senior Commodity Analyst

March 27, 2009

We Sell No Swine Before its Time!

Fundamentals

This is the slogan that Orson Wells may have uttered if he were the spokesman for the Pork industry instead of the Paul Masson Winery, but it is apropos given what is pork producers are doing these days. Last year's sharp run-up in Corn prices (one of the main components in feed for Hogs) forced many producers to liquidate their herds, including those normally kept for breeding. This led many analysts to estimate that pork supplies would be very tight in 2009. However, as commodity prices declined sharply, including Corn prices, due to the global economic slowdown, it appears that producers may not have liquidated the breeding herds to the extent originally thought. We will have our first look at what the USDA's National Agricultural Statistics Service believes has occurred when the first quarterly Hogs and Pigs report for 2009 is released at 2 pm Chicago time today. The estimate for all Hogs and Pigs as of March 1st, according to trade analysts, is between 96.1 and 98.5 percent of year ago levels. Estimates for Hogs kept for breeding purposes are between 97 and 98.5 percent.

Even though it appears that Hog supplies will not drop as sharply as earlier feared, supplies are still expected to be lower than a year ago. However, current demand for pork is weak, with Pork cut-out values down over $1 from the previous week. In addition, the April Lean Hog futures are trading at a hefty premium to the CME Lean Hog Index of over 400 points. Historically, demand tends to improve going into the earlier summer, which if true this season, and given the probability of a lower herd count, could lead to tighter supplies in the 3rd quarter. One way to play this market scenario would be to buy July Lean Hog futures and sell the April futures. This spread would work if the price differential between the July futures and the April futures widens. Currently the July futures are trading at a 1200 point premium to the April futures. Traders should be aware that trading spreads may not be less risky than outright futures positions and it is possible for one leg of the spread to be trading higher while the other leg trades lower.

Technicals


Looking at the daily chart for April Hogs, we notice prices stuck in a nearly 2-month long consolidation period. Prices have hovered on both sides of the 20-day moving average, as no clear trend has emerged. The 14-day RSI has fallen below 50, with a current reading of 44.85. Volume has fallen sharply the past few sessions, as traders have been squaring their positions ahead of the quarterly Hogs and Pigs report. In the past, price movement has become quite volatile the first couple of days following the release of the report, especially if the USDA's estimates vary from the pre-report consensus estimates. Resistance for April Hogs is seen at the highs of the recent consolidation at 64.00, with support found at the recent lows of 56.875.


Mike Zarembski, Senior Commodity Analyst

March 30, 2009

Cocoa Driving Traders Cuckoo

Fundamentals

Cocoa futures have been trading in a tight range since bouncing back from mid-month lows. The market bounced after the last FOMC meeting and the resulting lower US Dollar, but whether or not Cocoa will be able to build upon this upswing in prices is still up in the air. Traders have had to weigh diminishing demand and better growing weather for the upcoming crop year versus a smaller crop size and poor bean quality. The chocolate industry has finally been forced to deal with increased Cocoa costs over the past few years, and companies have only moderately increased prices over that period of time. Manufacturers are now seeing lower demand for the end product and have had to make adjustments by reducing portion size or the amount of Cocoa in blends. Cocoa is a commodity who's demand has been resilient during past economic downturns, but we are in unchartered territory after this decade's expansion into emerging markets, which may be especially price sensitive. On the flip side, worries over the size and health of the Ivory Coast crop continue to linger. These fears have been tempered by rising stocks in Europe, which has actually helped to ease prices. Steady rains could also help ease some of the supply side fears and may have a slightly negative impact on prices. The movement of the Dollar is the wild card, with traders unsure as to the direction of the greenback. There has been some detachment from the direct inverse relationship between the value of the US currency and Cocoa prices, but given the lack of consensus opinion as to the direction of the market, the movements of the forex market could play a larger role in trading going forward.

Technicals

The May Cocoa chart appears to paint a completely different picture than the fundamentals. After jumping sharply in the third week of March, prices have been consolidating in a tight range for the last week. This typically favors the upside. Momentum has shown strong bullish divergence from prices and the RSI, which can be seen as bullish. A look deeper into the consolidation, though, shows confusion among traders. The candlesticks have formed several spinning top and hanging man days, indicating indecisiveness. This can be seen as bearish and may cause traders to tread lightly. The 50-day moving average has acted as support recently, and a breach of the average could be seen as negative for Cocoa prices.

Rob Kurzatkowski, Senior Commodity Analyst

March 31, 2009

Rain Makes Grains, Except in the Plains?

Fundamentals

Wheat futures continue in the doldrums, hovering near the lows of 2009, as improved weather conditions in the Plains "Hard Red Winter Wheat Belt" and a continued weak world economic outlook are weighing on prices. The southern Plains HRW Wheat growing area in Texas and Oklahoma have been mired by drought conditions for most of the winter. The Texas Wheat crop was rated 57% poor to very poor as of this past Sunday, according to the National Agricultural Statistics Service. However, precipitation has finally arrived in this parched region, which has elevated some of the dryness concerns. However, it is still too early to tell if this moisture will be enough to dramatically improve crop conditions, and the possibility exists that a fair amount of the Texas and Oklahoma Wheat crop will be abandoned if yields are not sufficient to justify the expense of harvesting. Conditions in the Soft Red Winter Wheat growing areas in the Eastern Midwest are vastly better, with much of the crop rated as normal to above normal. Continued economic uncertainly has put a bid into the U.S. Dollar, which can hurt U.S. exports as a stronger Dollar makes U.S. Wheat more expensive for foreign buyers. Grain traders will be keenly focused on this morning's USDA Prospective Plantings report to be released at 7:30 am Chicago time. U.S. producers are expected to plant nearly 59 million acres to all Wheat types in the 2009-10 crop seasons, down just over 4 million acres from 2008. Last year's Wheat acreage was significantly higher due to record high Wheat prices in the 1st quarter of 2008.

There are three major Wheat varieties grown in the U.S. that have futures contracts listed. Hard Red Winter Wheat (normally used for bread making) traded on the Kansas City Board of Trade, Soft Red Winter Wheat (used in making cookies and cakes) traded on the CME Group, and Hard Red Spring Wheat (a higher protein Wheat) traded on the Minneapolis Grain Exchange. Given the significant differences in crop conditions between the U.S. Hard Red Winter Wheat and the Soft Red Winter Wheat crops, traders may wish to consider a spread trade of buying the new-crop July 2009 Kansas City Wheat and selling the new-crop July 2009 Chicago Wheat. The July Kansas City futures contract is currently trading at a 41 cent premium to the July Chicago Wheat contract, and a trader who chooses to initiate this spread would want to see the premium widen. Traders should remember that spread trading may not necessarily be less risky than holding an outright futures position, and there is a possibility that one contract could be trading higher and the other lower on any given trading session. Other factors such as weather conditions (especially during harvest), demand for a specific type of Wheat, and speculative activity can affect this spread.

Technicals

Looking at the daily chart for July K.C. Wheat, we notice a potential triangle formation developing. This technical formation occurs in a market making continually lower highs and higher lows. Traders usually await a breakout from this consolidation on higher than average volume to "confirm" the direction of the next move in prices. We are currently holding just above the lower trendline in this formation, but yesterday's volume was less than stellar (mostly due to position squaring prior to this morning's USDA report). Momentum as measured by the 14-day RSI favors the bears, with a current reading of 41.79. Major support for July K.C. Wheat is seen at the December 5th lows at $5.19, with major resistance seen at the recent highs made on January 6th at $6.90 ¾.

Mike Zarembski, Senior Commodity Analyst