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April 2009 Archives

April 1, 2009

How High Can Notes Go?

Fundamentals

The 10-Year T-Note futures have are on the rebound after flirting with the 123 level last month, but questions remain about the upside potential of the market. Unless there is a huge fundamental shift, it is difficult to see longer duration notes and bonds trade at such low yield, given the high supply. The government figures to add heavily its debt supply by issuing over $2.5 trillion worth of debt by the end of this year. Even with the Fed's treasury buying program in place, the market may have a difficult time digesting all of the government loans. If the equity markets can mount sustained rallies and economists can begin to see the light at the end of the tunnel for this downturn, demand may begin drying up much faster than the Fed can act. Not only would domestic investors with renewed appetite for risk shed their safe haven assets for instruments offering higher returns, but foreign investors may begin to hit the exits as well. The US Dollar has acted as a safe haven for foreign investors during the economic downturn and it seemed as though the greenback kept strengthening with every dismal economic report. Much of this inflow to Dollars was via the treasury market, making T-Notes and US Bonds especially vulnerable if foreign investors repatriate funds. The economy is far from being out of the water and this bounce in the stock market may be a mirage, but traders have to ask themselves how low yields can go. Even if the stock market goes into another tailspin, the upside potential for treasuries is limited due to the very low yields.

Traders skeptical of a move in the June T-Notes beyond recent highs near the 125 mark, but unsure as to the direction of the market may choosing to employ a bear call spread by selling the May 125 call and buying the May 127 call for a credit of 0-30. This trade has a maximum profit potential of $468.75, the initial credit, and a maximum risk of $1,531.25 if the price of the June T-Notes rises above 127 on the April 24th expiration date. The breakeven point at expiration would be 125-15.

Technicals

The June 10-Year chart shows the market rebounding from support at 122-285 in the first test of this support area. The bounce has been somewhat lackluster, as prices have moved higher unenthusiastically. The chart appears to be forming a pennant, suggesting a downward bias if the pattern is validated. Momentum and RSI have remained relatively flat, despite the upward price movement, which could be seen as negative in the near term. It is rare to see both of these indicators diverging from price action at the same time, suggesting a downward move could be strong. The 50-day moving average is closing in on a downward crossover with the 100-day average. A downward crossover would be a bearish longer term signal, which could suggest that the long-term uptrend may be nearing an end.

Rob Kurzatkowski, Senior Commodity Analyst


April 2, 2009

Oil remains range bound, but for how long?

Fundamentals

Oil futures traders have had to switch gears the past few months, as the wild price swings seen in most of 2008 have drastically subsided during the first quarter of 2009, as conflicting fundamentals are keeping prices range bound. The current recessionary environment we are in has curtailed domestic and international Oil demand. U.S. Crude Oil inventories are at their highest levels since 1993, and 13 percent higher than the five year average. Demand from outside the U.S. has also fallen sharply, as both the European and Japanese economies have been hit hard, if not harder by the current global recession. Yesterday's EIA Weekly energy stocks report showed U.S. Crude Inventories rose by just over 2.8 million barrels last week, as refinery operating rates fell by 0.3% to 81.7%. These generally bearish fundamentals are countered by announced production cuts out of OPEC of 4.2 million barrels per day, with member compliance running between 70 and 80 percent. The mass amounts of economic stimulus being brought forward by world governments have spurred a minor "flight to commodities" by some investors fearing soaring inflation once the stimulus works its way through the economy and as an economic rebound occurs. The U.S. added another 1.7 million barrels to the strategic petroleum reserve last week, on top of the 1.8 million barrels added the week before. Supplies in Cushing, Oklahoma, the delivery point for the NYMEX Crude Oil contract, fell by an additional 800,000 barrels after last week's surprising draw of 2.2 million barrels. Until actual increases in demand for Oil begin to surface or the economic situation takes a major turn for the worse, it appears that both Oil bulls and bears will find it difficult to swing price momentum their way, and the current range bound trade may continue for awhile longer.

Traders who believe Crude Oil prices will remain range bound may choose to consider selling strangles in Crude Oil options. A short strangle is the sale of a call option and the sale of a put option at different strike prices, but for the same contract month. The high for May Crude in 2009 was 58.31 and the low was 39.42. An example of this trade is selling a May Crude 59.00 call at 0.25 and a May 39.00 put at 0.33 for a total credit of 0.58 or $580 per contract, with May Oil at 48.33 as of this writing. The trade would be profitable (before commissions) if May Oil futures remain below 59.58 and above 38.42 at expiration on April 16th, with the maximum gain being the premium received minus any commissions and fees. Traders selling strangles are looking for volatility to fall, and time decay will aid this trade. Traders must remember that selling strangles can be quite risky, as there is a potential for unlimited losses if prices were to move sharply beyond the strikes of the short options. Good risk management is essential for all traders and especially for those utilizing short option strategies.

Technicals

Looking at the daily chart for May Crude, we notice the nearly 4-month long trading range Oil has been in since late December 2008. Prices are not currently right in the middle of this nearly $20 range, as neither bulls nor bears seem to be able to keep control for long. Prices have recently fallen below the 20-day moving average, and the 14-day RSI has fallen below the 50 level, which may give the near-term edge to the bears. Support remains at the contract lows of $39.42 in the May futures, with resistance found at the January highs of $58.31.

Mike Zarembski, Senior Commodity Analyst

April 3, 2009

G-20 Sparks Oil Bulls, But Will the Excitement Last?

Fundamentals

The unity among the world's leaders at the G-20 conference has set a positive tone for the Crude Oil market. Traders are optimistic that the $1 trillion in emergency aid pledged will help emerging economies that were hit particularly hard during the downturn. The increase in money supply also figures to open the door to a more inflationary environment. Economic data has been much stronger recently, highlighted this week by a stronger ISM index, higher factory orders and construction spending, and an unexpected rise in pending home sales. While all of these indicators are stronger than analyst projections, they still reflect recessionary conditions and the economy still has great hurdles to jump before a large scale recovery is seen. Nonetheless, it is hard to fault traders for being optimistic after receiving a constant stream of dismal data for over a year. Fundamentally, Crude Oil continues to have a bearish slant, as inventories keep piling up in the face of weak demand, both from industry and the consumer. What we are seeing now is traders jockeying for position, not wanting to miss the bus if the economy does recover. Oil bulls expect OPEC to be late opening the spigots once the world economy does get back on track, which may create supply shortfalls in the future. Time will tell if these traders were premature in their assessment. The demand side of the equation is a huge unknown for traders. The unemployment rate tends to lag behind other economic indicators, and we may find ourselves in a situation where data shows a recovery, but unemployment remains high, stifling energy demand. Today's Non-Farm Payroll data from the government is expected to show the economy losing 650,000 jobs in March and the unemployment rate climbing to 8.5 percent. Given the dismal report by ADP earlier this week, it would not be surprising to see a loss of 685,000 jobs and an unemployment rate of 8.6 percent. Better than expected figures could cause the market to continue rallying into the weekend, while a larger than expected drop in jobs could cause prices to reverse course and sell-off.

Given the extreme volatility of the market and its fickle nature, bullish traders may want to confirm an upside breakout above the 56 level, along with an upward crossover of the 50 and 100-day moving averages before taking action. Some traders may want to consider entering a bull call spread, buying the June Crude 60 call and selling the June 65 call at a debit of 1.60. The trader risks the initial investment of $1,600 for a maximum profit potential of $3,400 if the underlying contract closes above $65.00 on the May 15th expiration date. More cautious traders may want to consider selling the spread early for a 3.20 credit, which would translate to a profit of $1,600, before commissions.

Technicals

The June Crude Oil chart shows the market mired in a sideways channel, unable to find a longer-term direction. Yesterday's sharp move higher can in part be attributed to technical factors, as the market came down to the short-term uptrend line and formed a bullish hammer. Technicals set the positive tone for the rally, while the fundamental news added fuel to the fire. The 56.00 level is the next resistance for the June contract. If the market is unable to breach this price level, June Crude risks forming a double top on the daily chart. The 50.00 level shows stout support, but if this level is violated to the downside, it could be seen as catastrophic for the bull camp. Not only would it be a violation of chart support, but this would also confirm a double top and violate psychological support. Momentum has remained fairly flat, despite yesterday's sharp rally, indicating the market may not be ready to cross the 56.00 mark.

Rob Kurzatkowski, Senior Commodity Analyst

April 6, 2009

Will Gold Continue to be Worth its Weight?

Fundamentals

After an impressive $300 plus rally since the end of October, Gold futures have taken a breather, falling into a consolidation phase as traders attempt to determine the direction of its next move. Just like the Oil market I spoke of the past Thursday, both Gold bulls and bears have fairly convincing arguments that their positions are correct. Those favoring a bullish position in Gold are nearly always concerned about inflation, and the massive world-wide stimulus packages being floated out into the market to help combat the global recession we now face certainly provides potential fuel for rocketing inflation once the economy recovers. Talk by both Russia and China about the need to form a new international "super currency basket" to move away from the U.S. Dollar as the world's reserve currency has also sparked interest in Gold as this "basket" would be created with a diversified group of the major world currencies as well as Gold. Of course, Gold's role as a "store of safety" especially during turbulent economic times, will always find a bid from cautious investors looking for diversification from equities and bonds. Those traders who like the red side of their trading cards, the" perennial bears" in Gold point out the comments from the recent G20 meeting last week in London, requesting the International Monetary Fund to begin to sell some of its vast Gold holdings, which total about 103.4 million ounces as of February 2009, to help fund monetary aid to lower income countries. The IMF is believed to be the third largest holder of Gold, and any planned sales could send a negative signal to the market. Gold imports by India, the world's largest buyers of Gold, have been flat, with demand falling as buyers await lower prices. The recent modest recovery in equity prices have some investors believing the worst may be over or nearly over for the economy and are moving some funds out of more "safe haven" investments like Gold and back into the stock market.

Though it is still too soon to tell which side will gain the upper hand in the Gold market, there are some options strategies that traders may wish to investigate if they believe a large move is in store for Gold futures once the consolidation phase ends but are unsure as to the direction of the move. Buying Gold option strangles is one such strategy. A long strangle consist of buying a call option and buying a put option in the same commodity and contract month but at different strike prices. A large move in the underlying futures and an increase in implied volatility will help this position and time decay will work against this position. June Gold is currently trading right around the $900 level as of this writing and an example of a long strangle trade would be buying the June Gold 940 call and buying the June Gold 860 put. The total cost of this trade, as of this writing is $5,130 per contract and will be profitable at expiration if June Gold is trading above $991.30 or below $808.70. The maximum risk is the total amount paid for the position. Due to the relatively large cost of the position, many traders would exit the position before expiration if a sharp move and increase in volatility occurs quickly or there is less than 2 weeks before expiration to avoid the increasing affects of time decay on the position.

Technicals

Looking at the daily chart for June Gold, we notice the market making lower highs and higher lows the past two months. The moving averages are mixed with the 20-day moving average turning bearish but the longer term 100 day MA still favoring the bulls. Momentum as measured by the 14-day RSI has turned neutral to bearish with a current reading of 42.30. Support is seen at the January 29th lows of 877.40, with resistance found at the March 20th highs of $970.00. Traders should watch for a close above resistance or below support on higher than average volume as a potential signal to the direction of the next major move in the market.

Mike Zarembski, Senior Commodity Analyst

April 7, 2009

Traders May Sour on Sugar

Fundamentals

Sugar prices are lower for the third consecutive session, dragged down by lower energy prices and demand uncertainty. Indian supply and demand have been a driving force behind the rally that started in December, but traders are uncertain that current conditions will continue. While India is expected to see its output shrink by almost 11 million tons compared to last year, Brazil is expecting a record crop, which could offset the Indian shortfall. The combination of an expected recovery in Indian production in the upcoming crop year and an early start to the Brazilian harvest may indicate that the current deficit may make way for a surplus in the 2009/2010 crop. While India has stepped up imports to make up for their shortfall, there have been a high number of mills shutting down, indicating Indian imports may soon fall back to normal levels. Brazilian ethanol demand has been lackluster at best, and relatively cheap gasoline prices have lessened the appeal of ethanol as an alternative fuel. The fact that Crude Oil prices have fallen back over the past few sessions certainly doesn't help. The Commitment of Traders report shows overbought conditions in the Sugar contract, indicating that funds and specs may have overextended themselves on the long side and may give traders an incentive to take profits sooner rather than later.

Both the fundamentals and technicals seem to be favoring the bear camp at this point, but it is not an overwhelming bias. Traders may choose to tread lightly and enter a bear put spread instead of shorting the future, limiting profit potential, but also risk. Bears may choose to buy a July Sugar 12.50 put and sell the July 12.00 put for a debit of 0.20, or $224. The maximum profit of 0.30, or $336, would be reached if the underlying July futures contract finished below 12.00 on the June 15th expiration date.

Technicals

The July Sugar chart shows the sharp upward trend that started in December may be flattening or turning lower. The futures contract closed below the 100-day moving average yesterday and appears poised to close through the average again today, barring a sharp turnaround. Prices are testing support at the 12.82 level for the second consecutive session. If this support is broken, traders may opt to take profits and stops could be triggered. The next area of substantial chart support does not come in until the 12.00 area. Momentum is showing bullish divergence from RSI, suggesting prices could stabilize near current levels.

Rob Kurzatkowski, Senior Commodity Analyst

April 8, 2009

Will Cotton Continuation Pattern Continue?

Fundamentals

Speculative traders have been trying to pick a bottom in the Cotton futures market lately, with renewed buying interest sending prices near two-month highs. The USDA in its March 31st Prospective Plantings report estimates U.S. producers will plant 8.81 million acres of Cotton in 2009. If true, this will be 7% lower than 2008 totals and the lowest Cotton acreage in over 25 years. The weekly crop progress report released on Monday afternoon has 4% of this year's Cotton crop in the ground vs. 7% this time last year. Even though it appears that U.S. Cotton production will decline this year, it will take a continuation of improved export business in order to support prices. Cotton stocks in China and India are ample, which may discourage additional fresh buying -- especially if the recent strength in the U.S. Dollar continues, which would make U.S. Cotton more expensive to foreign buyers. There are also reports that the Chinese government will not be issuing additional import quotas to its domestic buyers this month due to large government stockpiles. Commercial and speculative traders are on opposite sides of the market, as the recent rally has caused speculative traders to decrease their short positions, while commercials are taking advantage of the recent price rise to establish additional short positions. Next up for not only Cotton but grain traders as well is the USDA crop production/supply demand report to be released on Thursday morning. Cotton traders will focus on any revisions to U.S. export totals, with some expectations for a slight rise in exports due to solid business earlier this season.

Although Cotton prices have recovered from recent lows, they still are mired in a nearly 4-month long consolidation pattern, with the contract lows in the July contract of 41.21 acting as strong support and the January highs of 53.10 as resistance. With prices currently hovering near the middle of this range and the potential for increased volatility once the growing season begins in earnest, traders looking for a breakout from the trading range and an increase in volatility may wish to investigate a long straddle position. As you may already know, a long straddle position consists of the purchase of a call option and a put option at the same strike price in the same contract month. With the current price of July Cotton at 48.05 as of this writing, a trader may wish to consider the July 48 straddle, which would cost around 635 points or $3175 per contract, exclusive of commissions and fees. Given this scenario, the maximum loss would be the premium paid, and the position would profit if July Cotton is trading above 54.35 or below 41.65 at expiration in June. Given that time decay works against a long straddle position, many traders might look to exit the position at least a couple weeks before expiration, before time decay dramatically begins to affect the position.

Technicals

Looking at the daily chart for July Cotton, we notice prices moving above the 20-day moving average. Momentum, as measured by the 14-day RSI, is reading a relatively strong 62.14, signaling Cotton bulls currently have the upper hand. The upward price spike on March 31st occurred on sharply higher than average volume, which may signal fresh buying has entered the market. Trading volume since then has subsided somewhat, as traders square their positions ahead of the USDA report on Thursday.

Mike Zarembski, Senior Commodity Analyst

April 9, 2009

Market Bounce Boosts Aussie

Fundamentals

The bounce that equity prices have seen recently has been a key driving force behind the resurgence in the Australian Dollar. The Dollar Index has moved inversely to equity prices - falling with every rally, as investors renew their appetite for risk, and rising when investor confidence is shaken. It is too early to tell if the rally that began in the first half of March will be able to sustain itself, but economic data has shown improvements in construction, residential real estate and industrials. Commodity prices have also seen stabilization over the same timeframe, especially base metals, a key Australian export. Even if equity prices fall back, commodity prices may remain firm, possibly paving the way for further gains in the Aussie. Central banks have thrown astronomical amounts of money at the financial and economic mess, which could cause inflation to really begin to pick-up steam again. A high inflation scenario would benefit currencies from commodity exporting nations such as Australia, New Zealand, Canada and Brazil. If China is able to right the ship, it would give the Australian economy a huge boost, as the two nations are important trade partners. China has been busy lately trying to secure their supplies of raw materials, which includes trying to buy mines and acquire mining companies. Australian legislators are more than happy to listen to proposals, as domestic mining activity has dropped and new Chinese mines could fill the employment vacuum created by the slowdown. Traders were thrown a curveball when the Australian unemployment rate jumped to 5.7 percent, exceeding the consensus estimate of 5.4 percent. Much like the US, Australia is mired in a housing slowdown and unemployment may continue to climb if raw material demand remains lackluster.
Given the volatile nature of the financial markets, traders may be reluctant to take on unprotected futures positions. Traders that are bullish on the Australian Dollar might give some thought to putting on a long future with a collar, by potentially buying the June future at 0.7100, and then possibly selling a May 0.725 call and buying a May 0.695 put at even money. This would potentially provide the trader a 1:1 risk reward ratio, as profit and loss are both capped out at 150 points, or $1,500. Maximum profit would be reached if the June contract closes above 0.725 at expiration, while maximum loss would be reached if the June contract closes below 0.695 on the May 8th expiration date.


Technicals

The June Australian Dollar chart shows prices consolidating after taking out resistance at 0.7000. Prices have come down to test the 0.7000 level and have bounced back, indicating that this level could now be considered near-term support. For the market to gain further upside momentum, prices would have to cross through resistance at 0.7174. The 50-day moving average is very close to crossing through the 100-day, which can be seen as bullish longer term. The strength of this signal may be questioned by traders, as there is not the wide divergence that traders like to see prior to a crossover. The RSI remains just below overbought levels, suggesting rallies may be limited by selling pressure.

Rob Kurzatkowski, Senior Commodity Analyst

April 13, 2009

Petroleum Puzzle

Fundamentals

Crude Oil finds itself in a precarious position because market observers expect the commodity to appreciate substantially over the long run, but near-term fundamentals cannot justify higher prices due to over-supply. The move higher from lows in February has been driven by traders vying for position in hopes that the recent improvement in economic indicators is not an aberration. While there are many unknowns facing the market, what traders do know is that the longer prices linger around the $50 mark or lower, the more explosive the increase in prices is expected to be down the road due to lower investment. Veteran fund manager Jim Rogers has made public comments indicating that he favors Crude Oil over Gold as an investment because he sees the IMF selling some of its holdings of the precious metal. The IMF is one of the largest holders of Gold and has pledged a good deal of aid in recent months, backing up Mr. Rogers' assessment. Eventually, the various stimulus packages enacted by governments around the world are going to increase inflationary pressure, which increases Crude Oil's appeal. Gold prices leveled off early in the second quarter of 2008, while Crude Oil prices continued to rally. Traders opted to hedge inflation directly by purchasing the commodity driving inflation rather than buying Gold, which increases in value as a result of inflation. When the economy gets back on track, this theme may repeat itself. Before we get too far ahead of ourselves, the current oversupply of Crude Oil may stymie rallies. The International Energy Agency (IEA) reaffirmed its position that Crude Oil demand will continue to falter through this year. The agency decreased its 2009 demand forecast once again and now expects global demand to fall to 83.4 million barrels a day, a decline of 2.4 million barrels a day versus 2008. In the US, the Energy Information Administration (EIA) reported that inventories are at their highest levels since the first year of the Clinton administration. The two forces pulling at the Crude Oil market make it difficult to gauge the direction of the market.

Aggressive Crude Oil traders that are neutral on market direction may choose to put on a short strangle position by selling the May 47 puts and the May 55 calls for a premium of 1.00, or $1,000 per spread. These options expire on April 16th , leaving only three days until expiration. Nonetheless, it is a fairly risky trade, since Crude Oil can make sizable moves, so traders considering this trade may also want to buy a May 46 put and May 56 call for a debit of 0.45, or $450, as insurance. Buying the insurance will reduce the profit potential of the short strangle, but will also reduce the maximum loss potential of the trade to $550. Without the long strangle as coverage, be forewarned that the trade has unlimited loss potential.

Technicals

The May Crude Oil chart shows prices consolidating after breaking prior resistance at 48.09. Prices have been trading in a sideways range between 47.50 and 54.50 for the past few weeks, indicating indecision among traders. Prices are hovering near the 100-day moving average, but have not been able to deviate from the average. The 50-day average has acted as support the last two times the market tested this downside level. The 50 and 100-day averages are coming close to converging, and an upward crossover could come soon. An upward crossover could be seen as bullish over the long-term and an indication that the market has reached a slow, grinding bottom.

Rob Kurzatkowski, Senior Commodity Analyst

April 14, 2009

Will This Classic Bear Market Ever Run Out of Gas?

Fundamentals

One of the most relentless bear markets of the past several months has been the Natural Gas futures market, with nearby futures prices falling to lows yesterday not seen in over six years. A relatively tame winter combined with a sharp drop in industrial demand has caused Natural Gas storage volume to soar, with supplies currently 22.7% above the 5-year average. The beginning of April is usually considered beginning of the storage injection period, and last week's EIA storage report confirmed this with a stocks build of 20 billion cubic feet (bcf), which was 7 bcf above pre-report estimates. Commercial users (such as factories and power plants) account for an estimated 30 percent of Natural Gas usage, and the weak economic climate has definitely taken its toll on commercial usage, with the Energy Department estimating that commercial demand would fall by 6% in 2009 - which if true, would not help to eleviate the current burdensome supplies in the U.S. Low gas prices have affected gas producers as well, with the number of gas rigs drilling for Natural Gas dropping below 800, or less than ½ the number in production at its peak last fall. Though the current fundamentals look to favor the bear camp, any signs of renewed industrial demand could catch the market by surprise and eat into the current surplus. Weather conditions could also change the supply/demand balance, especially if warmer than normal temperatures arrive this summer, which would increase the cooling demand as power plants use more Natural Gas to supply electricity for air conditioning needs. Later, as summer approaches, traders will turn their focus to the weather radars, as the start of Atlantic Hurricane season begins on June 1st and runs through November 30th . It is not uncommon for market participants to begin pricing a "weather premium" into Natural Gas prices to compensate for a disruption in the Gulf of Mexico should a storm system interrupt production. Natural Gas futures are notorious for sharp or even violent price moves, especially if production is taken offline due to a severe storm.

Given the high historic volatility in Natural Gas futures, it should come as no surprise to experienced futures options traders that options on Natural Gas futures are usually very expensive, especially going out into the fall and winter months. Traders expecting a potential recovery in Natural Gas prices later this year may wish to investigate bull call spreads in Natural Gas options. The advantages of a bull call spread are the lower costs over an outright long option position, with the short leg of this spread offsetting some of the cost of the long leg. The down side to this spread is capping of potential gains to the short strike price of the spread. An example of a bull call spread would be buying the November Natural Gas 6 calls and selling the November Natural Gas 9 calls. As of this writing, with the NGX9 futures trading at 4.820, the spread could be bought for approximately $3,200, which would also be the maximum loss on the trade should November Natural Gas prices remain below 6.000 at the option expiration in late October. The maximum potential gain is $30,000 minus the premium paid for the spread, which could possibly be realized if November Natural Gas is trading above $9.000 at option expiration.

Technicals

Looking at the daily chart for November Natural Gas, we notice the extent that this bear market has run since the highs were made last July. Prices remain well below the 100-day moving average but are holding just below the 20-day moving average, which is popular with many short-term momentum traders. The 14-day is well off its low readings, setting up a potential bullish divergence, as this momentum indicator has failed to make a new low reading as prices fell to contract lows. Support is seen at 4.500, with resistance found at the recent highs of 5.485.

Mike Zarembski, Senior Commodity Analyst

April 15, 2009

Sound as a Pound?

Fundamentals

The British Pound has steadily climbed since making lows in mid-March, fueled by the stock market rally. The rise in equity prices has sparked a repatriation of funds to the UK, as investors look for investment opportunities at home, instead of parking funds in US Dollars. Forex traders have also become bullish on the Pound versus the Euro. The Eurozone faces very similar economic challenges to the UK and there has been a great deal of in-fighting between the countries that make up the union, which could delay government response to the crisis. Fundamentally, Britain has shown some signs of stabilization in the housing market and in manufacturing, whereas Continental Europe appears to be on the downswing. Yields on UK debt remain attractive when compared to similar treasuries in the US, which could bring in foreign investment. There are still plenty of challenges facing the UK banking system and, much like the US, the government has spent billions instituting rescue packages for banks. This may cause traders to be skittish and jump ship at the first signs of trouble. The month-long rally in the global equities market has been impressive and has somewhat eased investors' worst fears. However, if the rally reverses course, the Pound and other major currencies may fall out of favor, as investors once again flock to the relative safety of the Dollar.

Given a more positive analyst sentiment and bullish chart developments, traders may opt to go long the British Pound. The skittish and volatile nature of the currency markets may favor entering a bull call spread instead of trading the outright futures. Traders bullish the Pound may want to consider purchasing the May 1.51 call and selling the May 1.53 call for a debit of 80 points, or $500. The maximum profit potential is 120 points, or $750, if the June contract closes above 1.5300 on the May 8th expiration date.

Technicals


Technically, the outlook for the June British Pound has turned much more positive in recent weeks. Yesterday's close above the February 9th relative high close of 1.4896 can be viewed as a bullish development. If the market is able to establish support at this level, the next significant resistance level may be 1.5461. The 50-day and 100-day moving averages are converging, suggesting the two averages could cross over to the upside in the near-term, which would offer further confirmation to the bullish crossover of the 20-day and 50-day averages last week. The RSI indicator is nearing overbought levels, suggesting upward price movement may be subdued.


Rob Kurzatkowski, Senior Commodity Analyst

April 16, 2009

Could Weak Oil Lead to Higher Gasoline Prices?

Fundamentals

It certainly does not seem to matter where you look, the forecast for energy demand in 2009 is weak. OPEC has once again lowered its estimate for world oil demand by an additional 400,000 barrels per day (b/d) to 84.18 million b/d, vs. 85.55 million b/d in 2008. The International Energy Agency (IEA) announced last Friday that it expects an additional drop of 1 million b/d in Oil demand from its earlier estimate and believes demand could fall even more due to the global economic slump. The Energy Information Administration (EIA) predicts that U.S. Oil demand will be down 2.2% this year. This lack of demand has caused U.S. Oil supplies to rise sharply to levels not seen since the fall of 1990, as the weekly EIA energy stocks report had U.S. crude inventories rising by another 5.6 million barrels last week! Refineries have begun responding to the anemic demand for fuel by cutting refinery utilization sharply. Last week U.S. refineries were operating at 80.4%, down 1.4% from the previous week. Lower refining rates have affected U.S. Gasoline supplies, with the EIA reporting that U.S. gasoline supplies fell by 900,000 barrels last week, despite a moderate drop in consumer demand last week. Though the U.S. currently has ample gasoline supplies on hand, one of the biggest fears of many traders and analysts is what will happen if the economic recovery comes earlier than most expect. Will refineries be able to ramp-up production soon enough to meet any increase in demand? Will the U.S. be able to import enough gasoline from Europe to buffer domestic stocks? This issue could be critical to any economic recovery attempt, as a rapid rise in gasoline costs is the last thing a struggling economy needs when it's trying to get back on its feet.

Traders who believe we will see an economic recovery this year may wish to investigate the purchase of RBOB Gasoline call options. An example of this trade would be buying the December RBOB 1.50 calls or the 1.60 calls. With the December futures trading at 1.4230, the 1.50 calls could be bought for $8,820 and the 1.60 calls for $7,350. More conservative traders could look to lower the overall cost of the trade by selling a December 2.00 call against either of the long calls to create a bull call spread position. The maximum risk on these trades is the total premium paid.


Technicals


Looking at the daily chart for the June RBOB Gasoline contract, we notice prices forming what appears to be a symmetrical triangle pattern. This technical pattern is normally formed during a consolidation phase before the next trend emerges. Traders should be on the look-out for a price breakout from the consolidation, and if the breakout occurs on higher than average volume, the validity of the breakout is enhanced. The 14-day RSI is confirming the current neutral stance with a current reading of 53.82. The recent high formed on March 26th of 1.5626 remains major resistance for the June contract, with solid support found at the April 1st low of 1.3560.

Mike Zarembski, Senior Commodity Analyst

April 17, 2009

Which Way Will Bonds Go?

Fundamentals

US T-Bonds have been relatively quiet over the past month, overshadowed by the equity market rally. The tug of war between bulls and bears may continue for the foreseeable future. While equity prices have improved significantly, there is an air of caution due to a lack of trust among traders. Traders have seemingly gotten ahead of themselves after a series of relatively positive economic reports, compared to the dismal data over the past year. In a report to investors, bond manager Pimco expects a severe recession to persist through 2009 and, as a result, bond yields to remain extremely low. The world's larger bond fund manager also cautioned that the US consumer is in no position to bail out the world economy like it did in past downturns. Recent CPI and PPI reports continue to show extremely low inflationary readings and industrial production data in both the US and Europe suggest that deflationary concerns have not yet subsided. This gives government debt the upper hand versus Gold and precious metals as a "flight to quality" investment instrument. One cannot talk about T-Bond prices without mentioning the Fed's treasury buying program, which has kept the price of US debt at artificially high levels. The Fed has purchased over $50 billion worth of treasuries since the program began in late March. While the Fed expects to purchase over $300 billion worth of T-Bills, T-Notes and Bonds over the next six months, it is difficult to see the central bank doing much, if anything, beyond that. The government will continue to issue debt at a record pace - a pace that traders may not be able to digest. While the stock market has rallied over the past month, the exchange rate of the greenback has weakened. Even if the stock market was to turn lower, there is no guarantee that investors will once again seek the relative safety of the dollar. Instead, overseas investors may invest in government debt domestically, which could result in little change in Bond prices in the US. China had initially balked at the idea of buying more US debt when President Obama's stimulus bill was passed, but eventually Bejing softened its stance after some political maneuvering, at least publicly. China has been on a commodity buying spree of late, even as its economy tries to find a bottom, with the most notable purchases being in copper and other base metals. This could be a sign that Bejing is diversifying away from dollars, and the cost of buying commodities leaves less cash to buy US debt. They have been extremely vocal in their support of an alternative trade currency to the greenback, and the measures they have taken may be a somewhat covert way of accomplishing this without actually issuing a new global trade currency. Without Chinese investment in the US Bond market, the US government may find it difficult to find new investors with enough cash to fill the vacuum created. The aforementioned factors support the view that Bond prices may continue to move in a very tight range over the coming weeks and months.

Trade Idea: With both fundamentals and technicals giving a neutral bias to the market, traders may wish to employ a neutral trading strategy to benefit if the market continues to trade sideways. Neutral traders may choose to consider entering a short strangle position by selling a June 13l call and selling a June 122 put for a combined premium of 1-16, or $1,250 per spread. This strategy would call for the price of the June Bond to remain between 122 and 131 on the May 22nd expiration date. Since this strategy can be considered risky and leaves the trader unprotected in the event that Bonds break-out, traders may also choose to leg into a condor spread by buying a June 134 call and buying a June 119 put for a combined debit of 0-32, or $500. This would bring the total credit of the spread down to $750, but may also limit the trader to a maximum loss of 3 full points, or $3,000.

Technicals

The June Bond chart shows the market trading range-bound since the beginning of the year, unable to find a direction. The chart does show what appears to be a double top pattern confirmed at the beginning of the month, but traders have failed to react to the chart pattern to this point. Even if the pattern was to confirm, the downside objective measured by the double top could see the market come down to very stout support at 123. Prices continue to trade near the major moving averages, making the averages a somewhat useless tool technically. The oscillators remain neutral, with the momentum indicator hovering near the zero line and the RSI failing to deviate much from the 50 percent level.

Rob Kurzatkowski, Senior Commodity Analyst

April 20, 2009

It really is a small World After All!

Fundamentals

Experienced grain traders know that events outside of North America can have a significant impact on U.S. futures prices. A perfect example is what is now occurring in the Soybean complex. Tight supplies of vegetable oils worldwide have caused Malaysian Palm Oil futures prices to surge recently, as stockpiles fell to their lowest levels since July of 2007, according to a report by the Malaysian Palm Oil board released on April 10th . Palm Oil is considered a competitor to other vegetable oils such as Soybean Oil and Sunflower Oil, and fundamentals in one of these markets can influence prices in the others. In addition, Soybean stocks remain tight, as Argentina continues to see its production estimates lowered, and current U.S. ending stocks remain tight. Global Soybean production was once again lowered, with the USDA looking for the 2008-09 world Soybean production to fall to 218.76 million tons, down approximately 4 ½ million tons from its previous estimate. Demand for both Soybeans and Bean Oil remains solid, with China in the market for Soybeans and Bean Oil sales strong to both Europe and India -- with buyers in the latter speeding up purchases before an expected increase in import duties on vegetable oils by the Indian government. The bullish fundamentals have caused both Soybeans and Soybean Meal futures to trade in a backwardation. A backwardation market is one where the nearby futures trade at a premium to the more deferred months. This typically occurs in markets when near-term demand is high and supplies are tight. However, the Soybean Oil futures have not joined in the backwardation bandwagon, and prices in this market are still in a contango (nearby futures prices are lower than the more deferred months).

Trading Ideas

Traders expecting near-term vegetable oil demand to remain strong and supplies to remain tight may wish to consider investigating bull spreads in Soybean Oil futures. One possible trade might be to buy July Bean Oil futures and sell August Bean Oil futures, or perhaps buying July Bean Oil and selling the new crop December Bean Oil futures. Traders who might choose to initiate bull spreads would want to see the nearby futures prices gain on the deferred months. Traders should remember that spread trades may not be less risky than an outright position, and it is possible for one month to be trading higher and the other lower (especially in old crop/new crop spreads).


Technicals

Looking at the daily chart for July Soybean Oil futures, we notice the nearly month-long bullish move has prices approaching their highest levels of 2009. Prices are well above both the 20 and 100-day moving averages, as prices accelerated to the up-side once the 20-day MA moved above the 100-day average. This is usually deemed a bullish signal by technicians, and traders responded accordingly. The 14-day RSI has moved into overbought territory with a current reading of 72.81. The January 7th highs of 38.19 should act as resistance for the July futures, with support seen at the recent lows made on March 30th of 32.05.

Mike Zarembski, Senior Commodity Analyst

April 21, 2009

Petroleum Puzzle

Fundamentals

Renewed economic and banking fears sent equity and commodity prices tumbling yesterday. The amount of bad debt at Bank of America soared, causing a mass exodus in banking shares and sparking fears that the recent positive developments in the banking sector were only temporary. The International Monetary Fund (IMF) is expected to lower its economic outlook for 2009 when it releases its new forecast tomorrow. The IMF expects to see a recovery in 2010 contingent upon governments adopting sound economic policies, including further cleansing of banks' balance sheets, better economic oversight and supporting emerging markets that have fallen under pressure. Crude Oil traders will be watching how the equity markets and US dollar behave in the coming days to determine the market's intermediate direction. If yesterday is any indication, the market may find itself succumbing to selling pressure if traders' appetite for risk abates. While the equity markets may not sell-off with the fervor seen late last year and early this year, stagnation of equity prices could be seen as a negative influence on energy prices. Lack of investment opportunities could result in the greenback strengthening, as traders hedge risk. The International Energy Agency (IEA) does not expect OPEC to trim production in its May meeting, despite a more than adequately supplied market. The agency also reiterated its view that petroleum demand will not increase until 2010. Like the equity markets, energies may have gotten ahead of themselves, trying to ignore the 800 pound gorilla in the room in the form of a 59-day supply of Crude Oil in storage.

Trading Ideas

Given the negative shift in bias, aggressive traders might choose to consider entering a bearish strategy. Given the violet price swings in Crude Oil futures, more conservative traders may possibly be better suited by potentially entering a debit option spread by buying the June 46 put and selling the June 44 put for a debit of 0.70, or $700 per spread. This trade risks the initial investment for the possibility of a $1,300 return if the price of the underlying June contract closes below $44 a barrel on the May 15th expiration date.

Technicals

The June Crude Oil chart shows the market moving out of its recent consolidation. Yesterday's sharp sell-off confirmed a downside breakout from a triangle pattern on the daily chart, suggesting prices could move back below the $45 mark or beyond. Yesterday also marked the first close below the 50-day moving average in over a month, and the first close below the 100-day moving average this month -- which both can be seen as negative developments. Prices closed below support at 48.75, and the next significant chart support area would be the 45.08 level. The 20-day momentum indicator has fallen below the zero line for the first time since March 12th , adding to the negative near-term bias.

Rob Kurzatkowski, Senior Commodity Analyst

April 22, 2009

Cane Consolidation Continues

Fundamentals

Sugar futures prices seem to be trapped in a large consolidation phase, similar to what has occurred with many other commodities, with neither bulls nor bears able to wrestle control of the market. Fundamental traders are looking to opposite sides of the globe to find potential market moving news. Starting in Brazil, analysts are expecting an ample 2009-2010 Sugar cane crop, with harvest expected to begin in May. There are some concerns that the amount of the Brazilian crop dedicated to the production of Ethanol will be less than expected, as weak energy demand and sharply lower Oil prices this year will make Sugar production more attractive to Sugar cane growers. Over in India, a less than robust 2008-09 harvest, due to difficult weather conditions and lower plantings, has caused India to be a major importer of Sugar this season. Supplies are so tight that the Indian government recently removed import tariffs on Sugar, and also started requiring Indian Sugar exporters to seek government approval before shipment, to assure adequate domestic supplies. These mixed fundamentals have caused Sugar prices to remain range-bound since late January, with traders unable to move prices out of their 1.35 cent trading range.

Trading Ideas

Traders who expect Sugar prices to remain range-bound may choose to explore the possibility of short strangles in July Sugar options. A short strangle is an option position where one sells a call option and a put option with different strike prices in the same contract month. An example of a short strangle trade is selling a July Sugar 14.5 cent call and selling a July Sugar 12 cent put. As of this writing, with July Sugar trading at 13.32, this strangle could be sold for 53 ticks or $593.60 per strangle (one tick in Sugar is worth $11.20). The maximum potential profit would be the premium received for selling this strangle and would occur if July Sugar is trading below 14.50 or above 12.00 at the option expiration on June 15th. The maximum risk on a short strangle, however, is technically unlimited, and traders should be aware of and comfortable with the risks associated with any short option strategy before they consider implementation.

Technicals

Looking at the daily chart for July Sugar, we notice a potential rounded-top formation, with a minor double top at 14.09. Although this would normally be viewed as a bearish indicator, the overall trend is positive, since the major lows were made back in October. Current price activity has the market trading just below the 20-day moving average, but above the 100-day MA, giving mixed signals for short-term vs. long-term traders. The 14-day RSI remains in neutral territory with a current reading of 48.03. Resistance in July Sugar is found at the recent highs of 14.09, with support seen 12.74.

Mike Zarembski, Senior Commodity Analyst


April 23, 2009

Burnished Base Metal

Fundamentals

Copper prices have pulled back from near-term highs over the $2.20 area on a firming US Dollar and pullback in equity prices. The weakness seen over the past week can also be attributed to profit-taking by longs after a rise of 75 cents since the beginning of March. The LME has seen inventory levels drop by nearly 50,000 metric tons since the beginning of the month, driven by Chinese buying. The question that traders have been asking themselves is whether Chinese growth is driving the buying or whether the industrial giant is using its massive currency reserves to restock. Given the lackluster Chinese GDP number released last week, there is a growing contingent of traders that believe that China has taken advantage of the global downturn to purchase materials at relatively low cost for future use, rather than seeing an increase in immediate use. This may also be a way for the nation to put its currency reserves to use and, at the same time, avoiding foreign exchange risk. In the US, housing data has been improving significantly. As we have discussed in the past, the residential housing market can be seen as a barometer of future economic activity. Just as the housing slump foretold of the troubles awaiting the banking sector and overall economy, stability in the housing market could be an indication that the economy is finally hitting bottom. While housing may be encouraging for Copper bulls, industrial production in both the US and Europe has been troubling. This is especially true for continental Europe, where industrial production has fallen off a cliff, reaching lows not seen since statistics for the region began being recorded in 1990. This, however, could be seen as limiting upside potential for Copper prices, rather than a statistic that can drive prices lower in and of itself. Copper prices will likely be taking their cue from the equity market for the foreseeable future, barring new market developments. Two reports that traders will be closely watching will be tomorrow's Durable Goods Orders and New Home Sales. Durable Goods Orders are expected to see a contraction of 1.5 percent according to analyst estimates. New Home Sales are forecast to rise to an annual pace of 340,000 from the 337,000 seen last month.

Trading Ideas

Both technical and fundamental factors remain positive for the Copper market, but the recent rise in prices may reign-in rallies. Also, it is difficult to gauge the scope of a potential move higher. Traders that are bullish may wish to explore entering a bull put spread with strike prices below near-term support. A potential spread that some traders may wish to consider could be selling a July 1.75 put and buying a July 1.65 put, for a credit of 0.0250, or $625. If the price of the July contract remains above 1.75 on the June 25th expiration date, the trade would keep the initial credit. The trader would risk $1,875 if the price of the future closed below 1.65 at expiration.

Technicals

The recent weakness in prices has not done any significant chart damage. The July Copper contract has come down to test recently established support at the 2.0095 market several times over the past three sessions, only to rebound. This can be seen as a healthy pullback and a better scenario for traders than a parabolic rise. Also, the uptrend line that began in late February remains intact. If prices cannot hold support at 2.00, there is an untested support level at 1.8640 that could act as a deciding factor for the overall market trend. The selling pressure the market felt last week can also be attributed to technically overbought levels on the RSI. The RSI has now fallen back to neutral levels, suggesting prices may be set to move higher.

Rob Kurzatkowski, Senior Commodity Analyst

April 24, 2009

A Euro For Your Thoughts!

Fundamentals

Even this phrase is not as expensive as it appears, because the Euro Currency is down nearly 20% from its highs made last April, since the economic downturn has hit the Continent hard. The International Monetary Fund (IMF) predicts continued weakness for the Euro zone this year, currently forecasting an economic contraction of 4.2%, vs. a 2.8% decline in the U.S. This weakness should allow the European Central Bank to once again lower its benchmark interest rate by an additional 25 basis points to 1% next month. However, many economists and analysts believe that the ECB is not doing enough to help revive economic growth and have fallen behind efforts by other major economic powers, in lowering interest rates and engaging in more unconventional methods, such as "quantitative easing" to stimulate credit markets. However, not all the news is bad for the euro zone, with yesterday's release of the Purchasing Managers' Index (PMI) showing euro zone manufacturing rising by nearly 3 points to 36.7 in April, and the services Index rising by just over two points during that same period to 43.1. Although the increase in PMI was indeed viewed as positive, readings under 50 still mean contraction is occurring, albeit at a more modest rate than in March. The ultimate challenge facing the Euro is how to solve the various economic issues facing each of the 16 nations using the common currency. A solution to help out Germany and France may be the exact opposite of what is needed in Spain, Italy or Greece! It is this delicate issue regarding what course of action to take that will be the ultimate challenge for ECB officials in order to keep the Euro viable.

Trading Ideas

Traders expecting continued weakness in the Euro Currency could choose to explore the purchase of bear put spreads in Euro futures options. An example of this trade is buying a June 1.30 put and selling a June 1.25 put. With the Euro trading at 1.3060 as of this writing, the spread could be purchased for 156 ticks, or $1,950 per spread, before commissions. The cost of the spread is also the maximum risk, with a profit potential of $6,250, minus the actual cost of the spread if the June Euro futures is trading below 1.25 at expiration.

Technicals

Looking at the daily chart for the June Euro, we notice a moderate rally over the past few days, after prices fell to 1-month lows once near-term support at 1.3114 failed to hold last Friday. Notice that both the longer-term and shorter-term trends are bearish, with a major downtrend line formed from the 12/18/2008 highs. Prices are well below the 20-day moving average, but the 14-day RSI has turned more neutral with a current reading of 46.19. Near-term support is seen at yesterday's lows of 1.2878, with resistance found at the 20-day moving average currently at 1.3214.

Mike Zarembski, Senior Commodity Analyst

April 27, 2009

Swine Sell-off

Fundamentals

Corn futures were lower overnight, impacted by the outbreak of the swine flu in Mexico. If the disease continues to make its way across the border to the US, demand for pork could diminish, resulting in lower feed demand. If more cases of swine flu are reported, other nations may restrict their trade with the US, which could result in lower crop exports. This news comes at the worst possible time for Corn bulls. After slumping since the commodity bubble burst in July of last year, it seemed that the slow pace of plantings because of soggy weather finally gave bulls something to build on. Until the outbreak is contained, however, it seems as though traders will be keying on the potential harmful impact of the disease on the demand side, rather than focusing on supply side concerns. Aside from the slower pace of plantings, Corn fundamentals continue to favor the bear's camp. The carryout from last year was much larger than what traders had wanted to see, and demand is simply not there. The stronger US dollar has reigned-in export sales, and domestically, the economic slowdown has curtailed ethanol and industrial use of the grain. The driving season kicks off next month with the Memorial Day holiday, and it could have a huge influence on the direction of the Corn market. If fuel and, as a result, ethanol demand remain weak, it would not be surprising to see Corn prices trade in the low $3.00 range.

Trading Ideas

Given the neutral technicals and bearish technicals, some traders may want to consider trading a credit spread. Given the potential downside risk, traders may wish to stay on the call side by selling the July 420 calls and buying the July 440 calls for a credit of 7.50 cents, or $375 per spread. The maximum loss for this strategy is at $625.

Technicals

Technically, the Corn market has remained in a prototypical sideways market since the beginning of the year. One of the trademarks of a range-bound market is how prices behave relative to the RSI indicator. Prices come down after overbought levels are reached and increase on oversold conditions. The December Corn contract is currently oversold, and traders may make the assumption that prices will increase over the short-term. However, as grain traders well know, the market does not always behave the way it should technically, and fundamental news like the swine flu can make a huge impact on traders' mindsets.

Rob Kurzatkowski, Senior Commodity Analyst

April 28, 2009

Commodity price fallout from flu fears

Fundamentals

U.S. pork producers could be hard hit by public reaction to the outbreak of so called "Swine Flu" that originated in Mexico. Already, several countries including China have halted pork imports from countries where the flu strain has been found, including Mexico and some parts of the U.S. However, cooking Pork will kill the virus, so in theory, this should have no impact on pork consumption. Nevertheless, just like the Mad Cow scare that was prevalent several years ago, it is hard to prevent initial consumers' fears, and traders have turned sellers in Lean Hog futures, causing nearby futures to plunge the 3-cent limit. Although emotions can affect prices initially, longer-term factors such as weak economic conditions and smaller Hog herds will be a greater factor on Hog prices this year. Near-term, the most active June Hog futures continue to trade at a large premium to the CME 2-day Lean Hog index, which could spell further futures price weakness. Pork-cutout values may continue to trend lower, especially if consumers initially balk at buying pork until they can be re-assured that it is safe. Although Hog futures might initially be in the spotlight, other markets such as the Grains and Energies are also affected by this Flu outbreak, with potentially lower livestock feed demand hurting Corn and Soybean Meal prices and reduced travel curtailing jet fuel and gasoline demand.

Trading Idea

Given the potential for nearby Pork demand to fall sharply as swine flu fears filter their way through the media, some traders may wish to consider bear spreads in Lean Hog Futures. An example of one such trade is selling June Lean Hogs and buying August Lean Hogs. Traders would want to see the price differential between August and June Hogs widen. As of this writing, August Hogs were trading at a 0.95-cent premium to June. Traders should remember that spread trading may not necessarily be less risky than trading outright futures positions, and it is possible for one trading month to be trading higher and another trading lower at the same time.

Technicals

Looking at the daily chart for June Hogs, we notice both the near and long-term trends were already heading lower before the major media attention regarding 'Swine Flu" hit over the weekend. Monday's near limit down opening has left a major gap in the daily charts that will act as resistance for the June contract. Prices are now well below both the 20 day 100-day moving averages, and momentum as measured by the 14-day RSI has nearly reached oversold territory with a current reading of 30.78. 65.00 is the next support point for June hogs, with the Gap at 71.10 acting as resistance.

Mike Zarembski, Senior Commodity Analyst


April 29, 2009

Data Heavy Wednesday

Fundamentals

Stock futures are higher ahead of the GDP report this morning, which is expected to show the economy shrinking at a slower pace than the previous quarter. While the consensus estimate is a decline of 4.7 percent, the range of estimates varies widely. In addition to the GDP release, earnings season is in full swing and the FOMC will release their rate decision, which points to a volatile day of trading. Traders will listen closely to what the Fed has to say about the economy, as the central bank is not expected to change their current interest rate policy. The Fed will probably give a very neutral statement today, citing positive economic developments, while also hedging the optimism with risks facing the US, in order to not upset the markets. The GDP data will probably determine the market's direction for the day, and the FOMC statement will probably not change the market's direction unless they unveil a bombshell. Outside of today's economic data releases, the market will focus on the stress tests facing major banks. Despite better than expected earnings data from banks in recent weeks, there are indications that Citigroup and Bank of America will need additional cash infusions. Preliminary reports from the Fed indicate that 6 of the 19 largest US banks will need cash to remain solvent. The cash infusions from the government are expected to come via convertible preferred stock instead of government assistance, which presents the market with a unique predicament. On one hand, the political upheaval is lessened by taking an equity stake, but the flip side of the coin is that convertible preferred stock dilutes shareholder value. The swine flu fears may limit upward movement of the market until the outbreak is contained. The reports of the virus have spread to several states, indicating that worries may continue to linger.

Trading Ideas

Given the lack of direction of the market, neutral traders may choose to employ a strangle strategy by selling the May Mini Down 7400 put and selling the May 8400 call for a credit of 120 point, or $600. Since the potential loss of the strategy is unlimited, some traders may want to consider also buying a long strangle to hedge the risk of the trade and buy a May 7200 put and a May 8600 call for a debit of 50 points, or $250. This would limit the potential loss of the strategy to 200 points, minus the credit.

Technicals

The June Mini Dow futures chart shows the recent rally in equities stalling, suggesting the market may be entering a sideways channel. Failure of the market to solidly trade through the 8000 level has been disappointing for the bull camp, while the fact that the market continues to linger around 8000 and not break down is disappointing for the bear camp. Prices continue to trade around the 100-day moving average. Both momentum and RSI remain neutral.

April 30, 2009

Oil Market's Glass is Half-Full, At Least For Now

Fundamentals

A rally in the U.S. stock market can do wonders for Oil bulls, as the entire energy complex has held firm despite a moderately bearish EIA energy stocks report on Wednesday. The Weekly EIA report showed that U.S. Oil inventories swelled by an additional 4.1 million barrels last week, well above the 2.3 million barrel gain most analysts expected. This build does not even include the additional 1.3 million barrel rise in the Strategic Petroleum Reserve (SPR). In addition, the release of a weaker than expected initial first quarter U.S. GDP figure of a decline of 6.1% annual rate shows economic contraction continued through March. So what is keeping Oil prices steady despite lackluster demand? Well, Gasoline inventories fell by a larger than expected 4.7 million barrels last week , well above pre-report estimates of a more moderate 300,000 barrel decline, as U.S. refinery utilization fell to 82.7% last week, and Gasoline imports declined. Gasoline futures have been the strongest of the energy markets of late, as some traders look for potential supply tightness later this year -- especially if there are signs of an economic recovery in the third and fourth quarters of 2009. The recovery in the stock market from its mid-March lows is also supportive to the Oil complex, as traders expect the massive stimulus programs to eventually jump-start economic activity.

Trading Ideas


Despite today's gains, Crude Oil futures remain range bound, with prices holding near the center of a $10 price range the past few weeks. Those traders who are expecting an upside breakout of the recent trading range longer term may wish to investigate buying a calendar spread in Crude Oil options. One such potential trade would be buying a July Oil 55 call and selling a June Oil 55 call. As of this writing, with June Oil trading at 50.37 and July at 51.57, the spread could be purchased for around 1.90 points, or $1900 before commissions and fees. The June options expire in two weeks, while the July options expire on June 17th. Traders who might choose to employ this strategy would be looking for the spread to widen, taking advantage of the time decay in the June options, and would hope to benefit by a potential widening of the contango between the June and July futures, as the United States Oil fund begins its monthly rolling of long positions from June to July starting on May 5th. Risks to the trade are a sharp decline in Oil prices or a significant narrowing of the June/July spread, especially near-term. A major near-term supply disruption would also be detrimental to this position

Technicals

Looking at the daily chart for July Crude, we notice prices continuing to trade in an even narrower trading range over the past several weeks. This is confirmed by the 14-day RSI, which has moved to a very neutral reading of 46.57. Moving averages are mixed, with prices just above the widely watched 100-day moving average, but below the 20-day MA, which is a favorite indicator for shorter-term momentum traders. Those technical traders who watch Fibonacci retracement levels will note that the July futures are holding near the 50% retracement level from the Feb 18th contract lows to the April 6th highs. Near-term support for the July Oil contract is seen as April 21st lows of 49.07, with resistance seen at the 20-day moving average currently at 53.40.

Mike Zarembski, Senior Commodity Analyst