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May 2009 Archives

May 1, 2009

Saccharine Zeal

Fundamentals

Sugar prices reached new seven-month highs yesterday, driven by stronger equity prices and a weaker US dollar. Although India's crop estimate was raised to 14.8 million tons from 14.5 million tons for this year, production is well off of last year's pace of 26.5 million tons. Next year's crop is expected to show a sizable increase over this year, yet India is expected to import Sugar once again next year. Traders may be skeptical of next year's demand, given the fact that prices have risen due to finite supply and not demand. If Indian supplies had been anywhere remotely close to last year's levels, we may be writing about prices being at 8.00-9.00 at this moment, given the low global demand. Brazil has been the beneficiary of India's woes, becoming the chief exporter of the sweetener. Brazilian output may rise to a record this year, as plantings increase by nearly 20 percent. The economy in Brazil has been battered by the global economic slowdown and resulting weakness in demand for commodities both at home and abroad. This has prompted farmers to step-up production to fill in the vacuum created by the small Indian crops and capitalize on the weaker Brazilian real by stepping up dollar-based exports of Sugar. If producers divert their capacity toward exports of the sweetener to take advantage of a weaker domestic currency, it would come at the expense of ethanol, possibly causing tight supplies of the cane-based fuel down the road, as domestic ethanol demand has remained stout. Even with the positive near-term fundamentals, downside risks remain. Sugar has benefited from stronger equity prices, a rebound in the price of Crude Oil and a weaker Dollar. If these outside markets reverse course, it could put heavy downward pressure on the price of the sweetener. Because credit has remained tight, mills have been ramping-up production early in the crush season to generate cash, which could lead to a sharp increase in supplies in the very near-term and cause the mills to sell at less than ideal prices.

Trading Idea

Both the technical and fundamental outlooks for the Sugar market appear to be bullish, but with an air of caution. Some traders may choose to employ a relatively inexpensive trading strategy with a reward to risk ratio of at least 2:1. An example of one such trade would be a bull call spread, buying 1 July 15 call and selling 1 July 16 call for a debit of 0.30, or $336. The trader would risk the initial investment for a potential maximum profit of $784 if the July Sugar contract closes above 16.00 on the June 15th expiration date.

Technicals

Just as the July Sugar contract looked like it was in the midst of forming a triple top pattern on the daily chart, prices broke out above near-term highs last Friday. Now that prices have broken through resistance around 14.00, the next areas of resistance could come at the 14.73 highs from last May and September highs of 14.94. Despite the positive outlook on the daily chart, both momentum and RSI are beginning to diverge from prices, suggesting the market may face selling pressure in the near-term. At the very least, prices could come back to test newly established support at the 14.00 mark.

Rob Kurzatkowski, Senior Commodity Analyst

May 4, 2009

Bond Market Breakdown?

Fundamentals

It seems traders are no longer giving much love to Bond futures lately, as prices have fallen below the bottom of the multi-month-long consolidation pattern in the June contract. The resurgence in the equities market has a lot to do with the bond sell-off, as some of the "flight to quality" money that pushed long-term rates to multi-decade lows has moved out of treasuries and back into stocks because there are some signs that the worst of the recession might be behind us. Another negative affecting bond prices is the huge supply coming to market. This week $71 billion in treasuries are being auctioned off following the $101 billion sold last week. Bond bulls were also disappointed that the Fed did not increase the size of the buyback program from $300 billion it expects to purchase within the next 6 months. That being said, the Fed will not want to see interest rates move up too quickly, as any economic recovery is still in its early stages. This furthers the possibility of additional Fed intervention in the debt markets. This week also brings the highly anticipated monthly Non-Farm Payrolls report for April, with current estimates calling for job losses near 630,000 last month. Should we see a larger than expected decline in payrolls, traders may being to move back into the Treasury markets, especially if equities react poorly to Friday's figures.

Trading Ideas

Traders who believe that bond prices may have become a bit oversold and are overdue for a rebound may want to investigate the purchase of Bond futures call options. An example would be buying the July 122 calls. With the September Bond futures trading at 121-00, the 122 calls could be purchased for 2-19/64, or about $2300 before commissions. The premium paid is the maximum risk, and the trade will be profitable if the September Bond futures are trading above 122 plus the premium amount of the

Technicals

Looking at the daily chart for June Bond futures, we notice traders sent Bond prices through previous support of the Feb 27th low of 123-04 just after the FOMC announcement. This sharp move set off a flurry of sell stops just below this level. Prices have now fallen below both the 20 and 100-day moving averages, which has sent a negative tone for both long and short-term traders. The 14-day RSI is weak, but has not yet reached oversold levels with a current reading of 34.91. 120-00 looks to be the next support point for June Bonds, with resistance found at the recent highs of 125-23.

Mike Zarembski, Senior Commodity Analyst


May 5, 2009

Loonie Awakening

Fundamentals

Canadian Dollar futures are higher once again his morning, boosted by rising crude oil and equity prices. Traders have been exiting their risk averse positions in recent weeks, such as being long the US dollar, on the strength in equity prices and renewed optimism that the global downturn may reverse course sooner rather than later. Yesterday's pending home sales and construction spending were both much better than expected, which can be seen as good news for banks, as it could mean an upswing in loan demand may be on the horizon. The stress test results that are slated to be released on Thursday may have a huge bearing on how the currency markets behave. If the results are positive, the unwinding of risk averse trades may continue, which could benefit the Loonie. Strengthening commodity prices are also a major force behind the recent upswing in the Canadian Dollar. Canada is the chief exporter of Crude Oil to the US, so traders will be keenly watching the price of this commodity, in particular, as prices hit 5-month highs yesterday. The fate of the US auto industry will also be on the minds of traders. If the Chrysler-Fiat partnership is successful, the employment situation in Canada may improve. The same can be said for Ford and GM. On the flip side, if the Big 3 continue to flounder, the unemployment situation in Canada remains a negative force working against the Canadian Dollar. The swine flu outbreak needs to be closely watched. It looks as though the virus has been contained for the most part, but a sharp increase in cases could have a negative impact on the North American economy and could work against the Loonie.

Trading Ideas

Given the bullish technical and fundamental forecast for the Canadian Dollar, some traders may wish to consider entering a bullish strategy. One such strategy could be to buy the Canadian Dollar future at 0.8550 or lower. To hedge this position, traders could then place a collar on the position by selling an 0.8850 call and buying an 0.8300 for even money. If the price of the June futures closes above 0.8850 on expiration, the maximum profit potential of 300 points, or $3,000, would have been realized. Conversely, if prices were to fall back below the 0.8300 mark on the June 5th expiration date, the maximum risk on the trade is 250 points, or $2,500.

Technicals

The June Canadian Dollar chart looks as though the market may be poised to break out of its sideways trading range, after closing above resistance at the 0.8474 mark. For the market to get into bull mode, prices may need to advance beyond the November high close of 0.8672. If the market is able to find footing above 0.8672, the Canadian Dollar could advance to the low to mid-0.9000's. Despite the solid advances in recent sessions, the RSI and momentum indicators have lagged the price movement of the futures. This could be an indication that the trend is weakening or poised for a reversal, so traders may choose to tread lightly.

Rob Kurzatkowski, Senior Commodity Analyst

May 6, 2009

Too much of a good thing?

Fundamentals

The old adage "rain makes grain" is of no solace to Corn producers east of the Mississippi, where an extremely wet spring has severely delayed Corn plantings in the key Corn producing states of Illinois and Indiana. Yesterday's weekly USDA's crop progress report showed that 33% of the U.S. Corn crop has been planted, which is up 11% from last week, but still well below the 10 year average of 47%. Planting progress in Illinois, the second largest Corn producing state, was running well behind the 5-year average of 66%, with only 5% planted as of last week. Indiana was not much better, with 5% of the Corn crop planted vs. the 5-year average of 47%. However, west of the Mississippi, producers are off to an excellent start this year, with Iowa, the largest Corn producing state, reporting 60% of the Corn crop has been planted. Progress was also above average in the major Corn producing states of Nebraska and Minnesota. Although producers are well behind getting in this year's Corn crop, there is still time to catch up the next couple of weeks if the weather cooperates. The potential for less than optimal yields tends to increase after May 15th, however, as a late developing crop could run into difficulties later in the growing season when frost and freeze concerns come into play. However, if rains continue to interfere with corn plantings, some producers may be forced to switch to alternate crops like Soybeans, forcing lower estimates for U.S. Corn production this season.

Trading Ideas

Delayed Corn plantings are deemed bullish for new-crop Corn futures, while ample Corn carryover has traders rather bearish for old-crop Corn futures. These conflicting fundamentals could provide trading opportunities in intra-commodity Corn spreads. An example of such a trade is buying the new crop December Corn futures and selling the old crop July Corn futures. As of this writing, December Corn is trading at a 20 cent premium to July Corn. Traders initiating this bear spread would want the see the price differential between December and July Corn widen. Traders should remember that old crop/new crop/ spreads can be volatile and may not be less risky than an outright futures position. It is also possible for one month to be trading higher and the other lower at the same time.

Technicals

Looking at the daily chart for July Corn, we notice prices forming a wedge pattern as the market consolidates after last year's sharp price decline from all-time highs. Near-term we remain above both the 20 and 100-day moving averages, which are both moderately bullish indicators. The 14-day RSI has turned more neutral, with a current reading of 57.65. The next major resistance point is seen at the January 6th high of 429.00, with support found at the April 20th low of 360.50.

Mike Zarembski, Senior Commodity Analyst

May 7, 2009

Market Unstressed

Fundamentals

Stock index futures are higher ahead of the Fed's release of bank stress test data. The cat has been out of the bag, as some information has been leaked by inside sources, and the indication is that Citigroup, Wells Fargo and Bank of America will require additional capital. It is no surprise that these banks would need more funding to continue operations, as they have all increased their leverage by acquiring other banks. The market, though, is focusing on the positive aspects of these early indications, which suggest that Goldman Sachs, JPMorgan Chase and Bank of New York will not need capital infusions to maintain operations. Treasury Secretary Geithner offered further reassurance by stating that the banking system is now in a position to weather the storm. In other market news, the ADP Employer Services report showed the job market in the US contracting by 491,000 jobs in the month of April, which is much lower that the forecast of 645,000 and the prior month's figure of 742,000. This could be seen as an early indication that the labor market may finally be bottoming out. If tomorrow's non-farm payroll data from the government comes in better than expected, it could offer reinforcement. Mortgage applications were up a seasonally adjusted rate of 2 percent for the week, while refinancing applications were up 1.2 percent. This comes on the heels of much better than expected construction spending and pending home sales data early this week and supports the view that housing may have hit a bottom, or, at the very least, be near a bottom. Barring a sharp jump in initial claims or negative stress test results, the market could build on the early gains in index futures.

Trading Ideas

Given the positive economic developments and minor technical breakthrough, some traders may wish to enter a conservative bullish options strategy. An example of one such strategy could be a bull call spread, buying the June E-mini S&P 975 call and selling a 1000 call for a debit of 7.50, or $375. The risk would be the initial investment, and the maximum profit potential 17.50 points, or $875, if the June contract closes above the 1000 mark on the June 19th expiration date.

Technicals

The June E-mini S&P has turned positive this week, after consolidating for the two prior weeks. Prices may test the January high close of 930.50 today, which can be seen as minor resistance. If the market is unable to close above the 930.50 market, prices could come back down to test newly established support at 866.75. The next area of solid resistance beyond 930.50 would come in just above the 1,000 mark. If the E-mini is able to close above this threshold, it would not only be positive technically, but it would be a huge psychological boost for traders.

Rob Kurzatkowski, Senior Commodity Analyst

May 8, 2009

Let's hope the "Green Shoots" of a recovery do not get mowed down!

Fundamentals

Spring is in the air, and traders and analysts are finding so called "green shoots", or signs of a recovery from the economic malaise we have been in. Just this week, we have seen a positive stock market reaction to the "leaked" results of the government's "stress tests" on 19 major U.S. banks, even though many will need to raise further equity. Wednesday's APD employment report came in well below expectations, with "only "a decline of 491,000 private sector jobs in April. This has set the stage for many analysts to lower their estimates for today's Non-farm payrolls report. Before the ADP announcement, traders were looking for April's NFP to come in around a 610,000 loss last month. Now some more optimistic pundits are looking for a number closer to 450,000 to 500,000. If true, this would be well below the 663,000 jobs lost in March. However, the unemployment rate is still expected to climb to near 9%. Even if the unemployment rate rises, some traders will look beyond these figures, as employment is a lagging indicator, and an improvement in economic activity usually takes place months before payrolls start to show signs of improvement. Weekly jobless claims fell once again, down 34,000 to 601,000, which was the 4th drop in 5 weeks, although continuing claims rose to a record high of 6.3 million, which shows that finding a new job remains difficult. Even the stock market has been sprouting new growt, with most of the major indices up for the year. Volume has been rather light on this rally, however, which may be a sign that much of the recent gains has been due to short-covering and not as much fresh buying. This could signal that the up move is nothing more than a bear market rally and a potential "trap" for those coming to the bull's party late.

Trading Ideas

Those traders who believe the recent-run-up in equity prices is due for a correction may choose to investigate bearish futures option strategies in the stock index futures markets. The NASDAQ 100 futures have run up nearly 400 points since the middle of March with hardly any correction. One possible bearish option strategy that could be employed is to buy the June E-mini NASDAQ 100 1390 puts and sell the June 1290 puts. With the futures trading at 1391.50 as of this writing, the spread could be bought for 35.00, or $700. The premium paid is the maximum loss on the trade, with the maximum profit $2000, minus the premium paid.

Technicals

Looking at the daily chart for June E-mini NASDAQ 100, we notice that prices continue to hold just above the uptrend line formed from the March 9th contract lows. Prices are above both the 20 and 100-day moving averages, all of which favors the bull camp. However, most ominous for the bulls is the sharp drop in the 14-day RSI yesterday, after the June contract made recent highs of 1437.75. The market then reversed, which may be a sign of some profit-taking by weak bulls before the NFP report or the start of a correction in the recent up-move. Resistance is now found at yesterday's highs of 1437.75, with support at the 20-day moving average currently at 1360.00.

Mike Zarembski, Senior Commodity Analyst

May 11, 2009

Oilseed Optimism

Fundamentals

Soybean futures are lower this morning, erasing Friday's gains on weaker equity prices and a stronger US dollar. The Bean market has made solid gains since early March, in hopes that the global economy will be picking up. Housing data, which can be seen as a leading indicator, has been on the upswing, as has employment data. Last week's ADP, initial claims, and non-farm payrolls reports were much better than anticipated, leading some to believe that the economy may have bottomed out. On the fundamental front, exports of old crop Beans have been extremely strong, which could leave tight supplies of the oilseed before this year's crop harvest begins in late August. As a result, old crop futures have continued to post much larger gains than new crop futures in recent weeks. This trend may persist after the USDA releases its supply and demand report tomorrow, which is expected to show the 2008/2009 crop year carry-over estimate dropping to 130 million bushels, down sharply from the 165 million bushels carry-over estimate in the April report. This is also well below the 2007/2008 carry-over of 205 million bushels. Traders will also get to mull over next week's crop estimate for Argentina, which is expected to show a smaller crop size than previously anticipated, but there is uncertainty as to the size of the downward revision. The H1N1 flu could remain a bearish force for grain prices in the near-term, as feed use could suffer due to China and Russia banning the imports of US pork. Further bans could be seen as negative for feed grains.

Trading Ideas

Given the bullish old crop fundamentals and positive technicals, some traders may wish to consider entering into a bullish option strategy. One such strategy could be a bull call spread, buying the July 1150 call and selling the July 1200 call, for a debit of 18 cents. This trade would risk the initial investment of $900, with the possibility of a profit of 32 cents, or $1,600, if the July Soybean contract was to close above the $12 mark on the June 26th expiration date.

Technicals

The July Soybean chart remains bullish, after breaking through resistance at 1058.50. Prices could come down to test the newly established support at this area in coming sessions on profit-taking. If prices are able to hold these levels, the next area of resistance comes in at 1175. Advances beyond 1175 could be seen as bullish longer term and an indication that prices have bottomed out. Failure to hold advances could be a sign that Bean prices will continue to trade in a sideways channel for the foreseeable future.

Rob Kurzatkowski, Senior Commodity Analyst

May 12, 2009

Bears Getting Squeezed in O.J. Futures

Fundamentals

Orange Juice futures have quietly slipped into the bullish radar screen, as the most-active July contract has moved to nearly 6-month highs. Some signs of improved demand have emerged, as lower retail prices have led to increased consumption the past several weeks. Also supportive was lower orange imports, as depressed FCOJ prices earlier this year helped to lower orange demand from Brazil. Now traders will turn their attention to the actual size of the 2008-09 Florida orange crop, as the USDA will release its monthly crop production at 7:30 am Chicago time today. Last month, the USDA lowered its estimate by 400,000 boxes to 157.6 million 90-pound boxes, versus 170.2 million boxes last season, as continued dry weather in the Florida "Orange Belt" hurt production. This month analysts are looking for a continued decline in production, with estimates ranging from unchanged to as much as a 2-million box decline on continued drought conditions. Juice yields are expected to remain steady at 1.64 gallons per box. The recent rally has drawn the attention of some speculators, as the most recent Commitment of Traders report shows speculative accounts holding a net-long position of 10,577 contracts as of May 5th. This is up 1725 contracts for the week, with a majority of the long position being held by "large" non-commercial traders. Though the final crop estimate will not be released until July unless weather conditions start to improve, it appears that orange production will continue to decline this season, with drought, disease and decreased acreage continuing to hamper the Florida crop.

Trading Ideas

Though prices have rallied 30 cents since the mid-February lows, prices are still well below the levels seen last season. Traders who believe that FCOJ futures still have some room to the upside may wish to explore bullish call spreads in OJ options. An example of such a trade is buying a September OJ 100 call and selling a September 130 call. With September OJ futures trading at 96.45, this spread could be bought for around 6.00 points, or $900 per spread. The cost of the spread would be the maximum loss on the trade, with a potential profit of 30.00 points, or $4500, minus the premium paid, if September OJ futures are trading above 130.00 at expiration in August.

Technicals

Looking at a 60-minute chart for July Orange Juice, we notice the market breaking out to the upside on May 4th. Since that time, the July contract has gained nearly 10 cents. Prices were hovering near the 20-period moving average late last week, until the next price surge upward this morning. Some of this fresh buying may be tied to short-covering by some commercial traders who are net short the market ahead of tomorrow's USDA report. Momentum is in favor of the bulls, with the 14-period RSI reading 65.23. Near-term support is seen near 91.40, with major resistance at 100.00.

Mike Zarembski, Senior Commodity Analyst

May 13, 2009

Are Notes Next?

Fundamentals

T-Note futures are slightly lower this morning ahead of this morning's retail sales report, which is expected to show retail sales for the month of April unchanged from March's figure. The figure is expected to show a modest increase of 0.2 percent when excluding auto sales. If the report turns out as expected, it could further boost demand for equities and commodities at the expense of treasuries. There has been much guarded optimism of late surrounding the housing and labor markets, which have shown signs of bottoming. Up to this point, retail sales have not shown an indication that the worst is over. Spending by the American consumer has helped to lift the global economy out of recession before and there is now hope that consumers may, at the very least, help stabilize conditions. There are still pressing issues that could prevent a turnaround, such as relatively tight credit markets and high unemployment, which would reduce the buying power of consumers. It seems as though the seeds of a bottom have been planted, according to former Fed Chairman Greenspan, but the questions is whether they will grow or shrivel up and die. The resilience shown by the equity markets of late coupled with reductions in the Fed's buying of treasuries have painted a negative picture for treasuries. The actions taken by the government to stabilize the economy will inevitably result in inflation down the road, further lessening the appeal of fixed income products that tend to under-perform in inflationary times. We have already seen a breakdown in 30-Year Bond prices, suggesting 10-Year T-Notes may follow suit.

Trading Ideas

Given the strength of the equity markets and bearish fundamentals, traders may wish to be short the June 10-Year Note on a solid close below the 120-085 mark. To protect the position, traders may want to place a stop at the 121-20 level, which would risk somewhere in the neighborhood of $1,600. Traders that are short could look to exit the the position at a target of 117-00, which puts the possible reward in the range of $3,000. An alternative to to stop/target limit strategy would be to place a reverse collar, buying the June 122 call and selling the 117 put for a debit of 10 ticks, or $161.25. The risk would be roughly $2,000 in this scenario, with the profit target remaining in the $3,000 range. One consideration with the reverse collar is that the market would have to move very sharply in a short period of time, as the options contracts expire May 22nd.

Technicals

The June 10-Year Note chart shows prices remaining above the March relative low of 120-085. Prices bounced after forming a spinning top candlestick around this level, but the June contract remains vulnerable. The bounce may also be attributed to the oversold conditions on the 14-day RSI. A downward breakout below 120-085 could send prices tumbling into the mid teens, while holding support suggests that the market could remain trapped in a range between 121 and 124. The 20-day moving average has acted as resistance for the past month and prices are closing in on the average once again. A close above the average could suggest that a near-term low is in place and can be seen as bullish short-term.

Rob Kurzatkowski, Senior Commodity Analyst

May 14, 2009

Do the fundamentals justify $60 Oil?

Fundamentals

Crude Oil futures have mimicked the equity markets lately, with the June futures rallying over $25 per barrel from the February lows. Though markets are generally forward-looking and there are some signs that an economic recovery may occur later in the year, do the current fundamentals justify the price surge? On the demand side, there are really no clear signs that Oil demand is increasing here in the U.S., with Oil stocks near 18 year highs. Worldwide, the Energy Information Agency (EIA) is forecasting world oil usage in 2009 down an additional 420,000 barrels per day (B/D) from its April forecast to 82.68 million B/D. OPEC has also lowered its forecast for Oil demand by an additional 200,000 B/D, with Oil demand now expected to fall by 1.6 million B/D in 2009. The supply situation is a bit friendlier, as OPEC has curtailed production in 2009, although "oil hawks" Iran and Venezuela have increased production in April. Refinery rates in the U.S. continue to hover in the low 80% range, which can be viewed as bullish for "products" such as gasoline and diesel, but overall bearish for Oil, as lower refining production lowers the demand for Oil. There has been one notable buyer of Oil this year, and that is the U.S. Government, as current policy is to fill up the strategic petroleum reserve. Once this is completed, this will take another major buyer out of the market, which will decrease demand. There is talk that China may pick-up the load from the U.S. in its own pursuit to develop increased reserves as well. A weaker U.S. Dollar is normally viewed as a bullish factor for commodities in general, and a good portion of the run-up in Oil prices may be tied to this factor and not specific fundamentals for Oil in particular. Just yesterday, in the weekly EIA energy stocks report, we had what appeared on the surface to be a very bullish inventory report for Crude Oil, with stocks falling by 4.7 million barrels last week, which is well below the 1.2 million barrel rise most analysts expected. However, what would normally cause a sharp run-up in Oil prices at $40 per barrel was not as well-received by traders, with Oil near $60 per barrel -- especially with a larger than expected decline in refinery rates last week. This market action definitely gives merit to an old trading adage that "markets that will not rally on bullish news may no longer be bullish!"

Trade Ideas

Traders believing that the rally in Oil prices is due for a correction may wish to explore bear put spreads in Oil futures options. An example of this type of trade would be buying a July 59 put and selling a July 52 put. With the July Oil futures trading at 59.80, the spread could be purchased for approximately 230 points, or $2300, before commissions. The premium paid is the maximum loss on the trade, with a maximum profit of 700 points, or $7000, minus the premium paid, if July Oil is trading below $52 at expiration in June.

Technicals

Turning to the daily chart for July Crude, we notice prices hovering near their highest levels of 2009, with Oil bulls firmly in control for the past two weeks. Prices are now well above both the 20 and 100-day moving averages, and momentum, as shown by the 14-day RSI, remains strong with a current reading of 63.79. However, it appears that we are nearing overbought levels, and a moderate correction is not out of the question. The next resistance level for July Oil is seen near the $64.50 area, with support seen at the 20-day moving average near the 54.90 area.

Mike Zarembski Senior Commodity Analyst.

May 15, 2009

Is Copper Poised for a Meltdown?

Fundamentals

Copper prices have been pressured over the past week on weaker equity prices and negative economic data. The poor showing in US retail sales was particularly bearish for Copper prices, as it could signal that economic activity could worsen before a recovery is seen. Despite upbeat housing and labor data, other areas of the economy -- such as manufacturing, banking and retailing -- have not yet shown a clear indication that a bottom has been reached. The overall Eurozone economy shrank at a rate of 2.5 percent in the first quarter of this year. German GDP fell by 3.8 percent for the first quarter, which is of particular concern to Copper traders, as the nation is the zone's largest economy and relies more heavily on manufacturing than other EU members. LME stocks of the metal continue to plummet, which can be seen as bullish for prices in and of itself. The concern among traders, however, is that China may be oversupplied at the moment, after importing heavily over the past few months, which could result in significantly scaled-back buying through the summer. US Copper imports rose in March due to a rebounding housing market, which can be seen as supportive of prices. As we move into the summer months, construction activity could hasten, requiring further imports of the base metal. The area of concern in regard to real estate is the commercial market, which has just begun to show cracks in recent months. If the commercial real estate market begins to tumble, it would not only hurt demand for Copper directly, but could also put the pressure back on banks and other financial institutions that have not yet recovered from the meltdown in housing. This could result in banks reverting to the tight lending standards seen last year, stymieing the recovery in housing and the overall economy.

Trading Ideas

Traders currently long the market, whether in a futures contract or bullish options strategy, may wish to consider exiting their positions on a solid close below the 1.90 level, as it could signal a reversal. More aggressive traders may possibly look to enter a short position in the July Copper futures contract on a close below 1.90. The downside objective of the short position could be 1.65, and it would probably be prudent to place a protective stop near the 2.05 mark. Copper futures are extremely volatile, so a futures position should only be taken-on if traders have sufficient capital to cover the relatively high margin requirements and absorb losses if the trade goes awry. Risk averse traders may perhaps be better suited entering a bearish options strategy instead.

Technicals

The July Copper chart has turned negative over the past week, as prices have pulled back sharply from relative highs. Failure to advance beyond mid-April highs sets up a possible double-top formation on the daily chart. The pattern would be validated on a close below 1.9165 and could send prices tumbling into the mid to low 1.60's. It is interesting to note that the RSI indicator has remained relatively flat during the recent slide, suggesting traders may not want to jump-the-gun and get on the short side of the market without validation of a double-top, as it could be a bear trap. Prices are quickly approaching the 50-day moving average. A close below the average could be seen as negative over the mid-term.

Rob Kurzatkowski, Senior Commodity Analyst

May 18, 2009

Can Soybean Surge Continue?

Fundamentals

the end of August. This is down from 205 million bushels seen last season, as robust demand, especially from China, has caused U.S. exports to surge. US Soybean exports last week totaled 754,900 metric tons, and Soybean Meal exports were a rather large 338,800 metric tons. Soybean crush figures for April were 134.115 million bushels according to the National Oilseed Processor Association (NOPA). Drought conditions in Argentina and Brazil have drastically cut production estimates for these leading Soybean exporters, which has brought additional business to the U.S. Of course, a slide in the U.S. Dollar the past several weeks has not hurt either. The Soybean rally has definitely caught the attention of large speculative traders, who have been adding to their long positions. The Commitment of Traders report for the week ending May 5th showed large non-commercial traders net long 105,181 contracts, up 19,888 for the week. These large traders also increased their long positions by 10,700 in Soybean Meal and 6,728 contracts in Soybean Oil. In fact, large non-commercial traders are net-long the entire grain complex with the exception of Oats as of May 5th. Bean bears will argue that the entire complex has become overbought and a correction is due, citing very wet condition in the eastern Corn Belt that may force producers to switch production from Corn to Soybeans if dry weather does not materialize soon. Additional acreage for Soybeans would be bearish, especially for new-crop futures starting in the November 2009 contract. In fact, this may already be factored into Soybean prices, as the old-crop July/new-crop November Soybean futures spread continues to widen, with the market already in a steep backwardation (nearby futures prices higher than deferred prices). Soybean Meal futures are also in a backwardation, which only helps further the bullish Bean complex argument. Traders should be aware that Soybean futures and all grain futures can become quite volatile going into the summer months, and wide price swings are not uncommon.

Trading Ideas

Given the potential for heightened volatility in the Soybean complex this year, more conservative traders may wish to explore option strategies in Soybean futures. An example of a bullish trade for old-crop Soybeans would be to buy 1 August Soybean 1100 call and sell 1 August 1300 call. With August Soybeans trading at 1100.00, this spread could be purchased for approximately 57 cents, or $2850 before commissions. The premium paid is the maximum loss on the trade, with a potential profit of $10,000 minus the premium paid if August Soybeans are trading above 1300.00 at expiration in July.

Technicals

Looking at the daily chart for July Soybeans, we notice prices have moved to their highest levels since late September of last year, as tight domestic stocks have caused a run-up in old crop prices to help ration demand. Even though we are at 8-month highs, we are still well below the highs made last July at the height of the commodity bull market. Ironically, Soybean fundamentals are actually, on the surface, more bullish this year than last. Prices are well above both the 20 and 100-day moving averages, and momentum is strong. The 14-day RSI has moved into overbought territory with a current reading of 72.65. Traders should watch the action of the U.S. Dollar, and any rise in the greenback may signal a bout of profit-taking selling by weak bulls which could send July Beans to a test of support near the 975.00 area. The next major resistance point is seen near the 1212.00 area.


Mike Zarembski, Senior Commodity Analyst

May 19, 2009

Treading Water

Fundamentals

Gold futures are higher this morning on strong investment demand and an upturn in jewelry demand. Some of the largest hedge fund managers, including John Paulson, have taken advantage of the relatively low price of the metal over the past month and a half to add to their holdings, with the mindset that the stock market rally that began in March may, in fact, be a sucker's rally. The reason for this opinion stems from the fact that the rally has been largely driven by banking stocks in the wake of a possible bottoming of the housing market, rather than productivity and improved economic outlook. Physical holdings of the SPDR Gold Trust remain at record levels, but investment has leveled off in recent weeks as a result of the stock market rally. Johnson Matthey, a chemical company that refines precious metals, stated that they see jewelry demand rebounding in 2009. The pullback in prices from February highs is cited as a reason for the improved jewelry outlook. Gold has been quiet for the most part due to the spotlight being focused on equities, energies and base metals. The price of the precious metal will, in all likelihood, continue to take its cue from outside markets -- such as the equity and foreign exchange markets -- unless there is a material increase in inflationary pressure. The movement of equity prices of late has been somewhat neutral for precious metal prices, as every decline in equities is greeted by a higher US dollar, counterbalancing what would normally be a bullish influence for Gold. Given the sizable long position in the metal, price risk remains to the downside, and patient traders may be waiting on the sidelines for a pullback.

Trading Ideas

Given the bearish technicals and neutral fundamentals, some traders may opt to get into a conservative bearish strategy, such as buying a put option. Bearish traders might choose to purchase the July 890 put for 10.00, or $1.000, hoping for a pullback to the 850 level. The risk would be the initial investment for the possibility of 30.00, or a $3,000 return if the price of August Gold falls to 850.00 by the June 25th expiration date. Since this would require a sizable move over a relatively short timeframe, traders could close the position early if the premium on the option contract were to double in value to 20.00, or $2,000.

Technicals

The June Gold chart shows prices steadily climbing from April lows, but the slow, grinding move higher may be an indication of a downward bias. The daily chart shows what may be seen as a mundane indication of a near-bottom, but a look at the weekly chart shows a possible bearish pennant. This suggests that prices could pull back to the 50 percent retracement from October lows at 845.00. Also, momentum and RSI are both moving lower since the last week of April, despite the increase in prices over that same period of time. This could be an indication that prices are due for a rather sharp pullback.


Rob Kurzatkowski, Senior Commodity Analyst

May 20, 2009

Gasoline Bulls in the Driver's Seat Going into the Summer

Fundamentals

Gasoline futures continue to hover near their highest levels of 2009, as higher Oil prices and lower refinery operating rates have some traders looking at tighter supplies as summer approaches. Poor operating margins have provided little incentive for refiners to ramp-up production so far this year. In addition, weak domestic demand due to the continued economic slump has curtailed Gasoline imports -- especially from Europe. However, some analysts believe that the recent price rise has about run its course. Gasoline bears cite more refineries coming out of seasonal maintenance period, which should bring more production back online. Also, there is no sign that U.S. gasoline demand will improve greatly, as the Energy Information Administration announced that gasoline use had fallen by 1.2% during the 4-week period ending on May 8th. The Memorial Day holiday has been seen as the start of the peak summer driving season in the U.S., and there is much debate regarding whether gasoline demand will climb as consumers lean towards longer weekend driving vacations closer to home, or whether they will postpone vacations entirely. How this plays out could help determine the direction of Gasoline prices going into the 3rd quarter of 2009. Near-term, large speculators have voted in favor of higher gasoline prices, with the most recent Commitment of Traders report showing large non-commercial traders net-long 56,375 contracts as of May 12th. This was up just over 5,000 contracts for the week. However, should Gasoline futures prices begin to top, this long position could add further fuel to any sell-off when the long positions are liquidated. Gasoline inventories are expected to have declined last week, with analysts looking for a draw of 1.4 million barrels ahead of this morning's weekly EIA energy stocks report. This comes after a surprisingly large 4.1 million barrel draw the previous week.

Trading Ideas

RBOB Gasoline futures are currently trading in a backwardation (front month futures contract is trading at a higher price than more deferred contract months) out through the December 2009 contract. This is usually a sign that either near-term demand is strong or supplies are tight. Traders who believe that this will continue throughout the summer may wish to investigate bull spreads in RBOB Gasoline futures. An example of such a trade would be buying the July RBOB futures and selling the October RBOB futures. As of this writing, the July futures were trading at a 0.1542 cent premium to October. Traders with this trade on would want to see the spread widen. Traders should remember that spread trading may not be less risky than holding an outright futures position and that there is a possibility that one month could trade higher while the other month trades lower on the same day.

Technicals

Looking at the daily chart for July RBOB Gasoline, we notice prices holding well above both the 20 and 100-day moving averages. The 14-day RSI is hovering just above overbought territory with a current reading of 70.90. Though momentum is quite strong, there are some concerns that the market is becoming a bit parabolic, which could lead to a sharp sell-off if major liquidation selling comes into the market. The next resistance level is seen at 1.8000 for the July contract with support found at the recent lows of 1.6175.

Mike Zarembski, Senior Commodity Analyst

May 21, 2009

Rain, Rain Go Away

Fundamentals

Wheat futures have given back half of yesterday's gains on a stronger dollar and improved Australian crop outlook. Australia has seen good rains spread throughout the growing region since the start of the April-June winter crop planting season, which have lifted prospects. In the US, Wheat growers have also seen plenty of rain - in fact, too much rain. The heavy rains have interfered with seeding of the spring Wheat crop, with only 50 percent of the crop in the ground as of May 17th. This is well below the 5 year average of 90 percent. The rains have also created problems for the winter crop, as the downpours have caused an erosion of soil, killing some plants and opening the door for potential disease problems. Despite weakening demand for US Wheat, the price of the grain has risen my almost a dollar since mid-April. The move higher has been aided by a weaker US dollar and concern that inflation may soon be on the upswing again. Funds have had a sizable short position in Wheat, and inflation concerns have spooked some fund managers, causing them to lighten up on their positions, which has aided the rally. The fundamental outlook for Wheat can be seen as neutral to slightly bullish. The world crop outlook outside of the US has improved substantially, suggesting it may take additional crop damage in the US and further signs of inflation to sustain future rallies.

Trading Ideas

Both the fundamental outlook and technical picture remain somewhat neutral, with inklings of bullishness. The more conservative trader may choose to remain on the sidelines. However, the more aggressive trader worried about crop conditions and inflationary pressure may possibly wish to enter a bull call spread by buying the July Wheat 600 call and selling the July 650 call for a debit of 15 cents. The trader risks the initial investment of $750 for a potential profit of $1,750 if the July contract were to finish above 650 on the June 26th expiration date.

Technicals

The July Wheat chart shows the market remaining in a sideways channel between 500 and 600. Prices are currently testing relative highs from late January near the 600 mark. In order to show a breakout from the sideways channel, prices must rally beyond resistance at 600 and 645. Failure to close above 600 suggests the market will remain in its sideways channel. In the near-term, prices have pulled back to 570 only to rally, confirming near-term support at this level. Both Momentum and RSI are slightly negative, despite yesterday's up day, suggesting the possibility of near-term weakness.


Rob Kurzatkowski, Senior Commodity Analyst

May 26, 2009

Bears Getting Pounded!

Fundamentals

British Pound futures has been one of the beneficiaries of a weak U.S. Dollar the past several weeks, rising over 20 cents vs. the beleaguered greenback since the March lows were made at 1.3653. However, the bullish tread may be in jeopardy, as Standard & Poor's (S&P) has lowered its outlook on Great Britain to "negative" from "stable", citing rising government debt which is now approaching 100 percent of the country's gross domestic product! This has increased the chances that S&P will lower the country's credit rating from its current "AAA" status. If this were to occur, Britain would join Ireland, Spain, Portugal, and Greece, who all had their credit ratings cut this year. The increase in government debt came about as the recession hit the country hard, with housing prices falling rapidly as unemployment increased. The U.K. has also had to deal with the losses within its own banking industry, with S&P estimating that the British government will need to spend 100 billion to 145 billion Pounds to help shore-up bank balance sheets. If true, this could total as much as 10% of this year's gross domestic product (GDP). This news initially caught traders off guard and sparked an initial round of selling, with the June futures falling over 200 points minutes after the announcement. However, prices begin their recovery going into the New York opening, as U.S. continuous jobless claims rose to another record high. Part of the intraday Pound rebound vs. the U.S. Dollar could be tied to traders' fears that the massive increase in U.S. government spending may force the credit agencies to look at U.S. Government debt for a possible downgrade as well. This is something that just a few months ago was nearly unthinkable, but now adds another potentially bearish scenario for the already beleaguered Dollar.

Trading Ideas

Traders who believe the British Pound is due for a near-term correction but may continue to gain vs. the USD could possibly look to the British Pound futures options market for possible trade ideas. An example of one potential trade would be to buy 2 July Pound 160 calls and sell 2 165 calls. With the September Pound trading at 1.5715, the call spread part of the trade could be bought for 1.24 points or $1550. Those expecting a correction may wish to consider waiting for a further pullback in the Pound before trying to enter a trade such as this. The premium paid would be the maximum loss on the trade.

Technicals

Looking at the daily chart for the June British Pound, we notice the market continues to hover near overbought territory, with the 14-day RSI near the 70 level (readings over 70 are considered overbought). Prices are above the 20-day moving average and hovering right near the 200-day MA. A weekly close over the long-term MA would be considered a very bullish scenario. The next major resistance level for the June contract is at the 1.6000 area, with support seen at the 20-day MA near the 1.5100 area.

Mike Zarembski, Senior Commodity Analyst


Bulls Riding a Sugar Buzz

Fundamentals

There is no doubt that bulls are controlling the Sugar futures market lately, as the last month has seen a dramatic 2-cent rise per pound in the old crop contracts. So what are the reasons behind this large move higher? First, we must look to the resilient crude oil market, which continues to hold just above $60 per barrel despite predictions for lower demand this year. We must remember that Sugar cane is also considered a fuel, with cane ethanol production, especially out of Brazil, a major use for Sugar. Increased ethanol production will come at the expense of Sugar production, which will lead to lower Sugar output. The second factor is a weak U.S. Dollar, which tends to support higher commodity prices in general -- and Sugar is no exception. However, strong prices so far this year have led some analysts to increase their estimates for world Sugar production for the 2009/10 crop, as producers look to take advantage of high prices, especially more marginal suppliers. India, one of the world's leading Sugar consumers, is now looking at inventories to total 5 million tons at the start of the 2009-10 season, or nearly double earlier estimates, as imports are expected to now total 2.5 million tons. With the Brazilian harvest underway, the recent tightness in the world Sugar market may be coming to an end, and with signs that production will be increasing this upcoming season, so too may the bull market in Sugar.

Trading Ideas

Those traders looking for a correction in Sugar prices or those looking to protect existing long positions may possibly choose to look to the futures options market in Sugar for trading ideas. One such trade is buying put options on Sugar just below the current price. An example would be buying October Sugar 16 puts. With the October futures currently trading at 16.63, these puts could be bought for about 107 ticks, or 1198.40 per contract before commissions. The premium paid is the maximum risk on the trade.

Technicals

Looking at the daily chart for October Sugar, we notice the sharp run-up in prices once prices rose above the consolidation highs of 14.59. This led to a nearly 200-point rally the past month, as both large and small speculators jumped on the bullish Sugar band wagon. The past week alone, large non-commercial speculators added another 3,236 new net long positions, to bring their total to just under 200,000 contracts. Although prices are now well above both the 20 and 100-day moving averages, there is a bit of a bearish divergence forming in the 14-day RSI, which might be a signal that a correction is in the making. The next resistance point for October Sugar is seen at 17.00, with support found at last week's lows near 15.75.

Mike Zarembski, Senior Commodity Analyst

May 27, 2009

Red Metal Set for Another Run?

Fundamentals

Copper futures are up for the third consecutive session on an improved economic outlook and much better than expected consumer confidence numbers. The consumer confidence index jumped by over 14 points yesterday, a sign that a revival in consumer spending may be around the corner. A survey by the National Association of Business Economists showed almost three quarters of economists believe that the US recession will be over by the third quarter of the year. High unemployment, though, may result in a relatively modest recovery. Also, while the economists predicted a recovery in consumer spending, the rate at which spending will increase is expected to be lower than prior forecasts. China is in the midst of what appears to be a V shaped recovery, so any increase in consumer spending in the US would certainly aid economic growth there. The LME reported a drawdown in inventories for the 14th consecutive day. Traders have been cautiously optimistic that the drawdowns of LME inventories are due to an economic upswing in China and not stockpiling. Despite the bullish shift in sentiment, downside risks remain for the metal. The US housing market may very well have hit a bottom recently, but new housing starts could remain slow for the foreseeable future due to high unemployment. Also, we are about to enter the summer months, which have historically been a slow time for Copper demand in China. For Copper to remain bullish, economic data must remain upbeat in China and the US. A meltdown in commercial real estate in the US could also hurt the metal. If commercial real estate is able to avert a disaster, it could provide price support for the red metal.

Trading Ideas

The fundamental and technical bias seems to favor the bull camp at this point, but traders may want to wait on the sidelines until a bullish breakout from the wedge formation is confirmed. Traders can reference the disastrous situation they would have been in had they jumped on the possible double top without waiting for confirmation. Aggressive traders may wish to enter a futures position on a breakout from the wedge formation, which would be triggered on a solid close above 2.16, with a profit target of 2.38. The stop can be initially placed at 2.10 and adjusted along the extension of the lower barrier of the wedge.

Technicals

The July Copper chart has, thus far, avoided the dreaded double top formation and the pattern has evolved into what appears to be a wedge. This suggests a bullish bias, as a wedge formation is typically viewed as a continuation pattern. The 50 day moving average has acted as support, just below the lower boundary of the wedge. A close below the 50-day average could be seen as a double negative for prices, as it would also make the wedge pattern invalid as a continuation pattern. Momentum has shown strong bullish divergence from the RSI, but not prices. This can be viewed as slightly bullish.

Rob Kurzatkowski, Senior Commodity Analyst

May 28, 2009

No Retreat for Wheat Prices

Fundamentals

Not to be outdone by its corn and soybean brethren, Wheat futures have moved solidly into the bullish camp, as a weak U.S. Dollar, less than ideal weather conditions, and fresh speculative buying have all factored into the price rise. The decline in the greenback is normally considered bullish for commodity prices -- especially grains -- as U.S. exports tend to increase to non-dollar buyers. This year, Mother Nature has not been kind to Wheat producers, as unusually wet weather has put planting behind schedule, particularly for Spring Wheat. In North Dakota, the largest Spring Wheat state, producers have planted only 69% of the crop so far, down sharply from the average near 94%. This has led some analysts to lower their forecast for Spring Wheat as growers switch to other crops such as Soybeans. Quality of the Winter Wheat crop slipped a bit last week, with the USDA reporting 45% of the crop in good to excellent condition, down 3% from the prior week, with Kansas and Nebraska reporting 7 and 8 percent declines respectively. With the Wheat harvest getting under way, producers need to see dryer weather forecasts in order to get into the fields. None of this has been lost on large speculators who are beginning to accumulate a net-long position in all Wheat classes. The most recent Commitment of Traders report showed large non-commercials adding a cumulative 3,465 net-long contracts for the week ending May 19th. This has raised the cumulative net-long position to 43,964 contracts, the largest position being in the Kansas City Hard Red Winter Wheat contracts. Ironically, small speculative accounts are net-short Wheat futures and may spark an additional rally should short-covering buying emerge just above the recent highs.

Trading Ideas

Those traders who believe that the Wheat rally still has some legs might possibly wish to consider option strategies to help take advantage of the current trend. An example of such a trade would be a bull call spread in the September Chicago Wheat futures consisting of buying a September 650 call and selling a 750 call. With September Wheat trading at 645 as of this writing, the spread could be purchased for 31 cents or $1550 per spread plus commissions. The premium paid is the maximum risk on this trade, with a potential profit of $5000 minus the premium paid if September Wheat is trading above 750.00 at expiration in August.

Technicals

Looking at the daily chart for September Wheat, we notice the rounded bottom pattern that formed throughout most of the month of April. Prices accelerated to the upside once the recent highs of 607.00 were taken out. The 20-day moving average has crossed above the 100-day MA last week, adding to the bullish momentum. The 14-day RSI is approaching overbought territory with a current reading of 69.21. The next resistance point for September Wheat is found at 660.00, with support seen at the recent lows made on May 19th at 590.50.

Mike Zarembski, Senior Commodity Analyst

May 29, 2009

Fiber Flop

Fundamentals

Cotton futures have pulled back in recent sessions, held back by lower demand from textile mills and an increase in short-term supplies. Mills have been reluctant to keep-up the pace of purchases in the face of tight supplies and rising prices. China sold 7 million bales of the fiber from its reserves, which amounts to about 2 months of domestic demand from mills. This could result in significantly lower demand for US imports in the near-term. The rally that had stalled out recently began in late March, as traders viewed the the commodity as undervalued. The rally then accelerated Cotton when traders became more bullish on the economic outlook, pushing prices up to the 61.67 level. This run-up in prices has hurt demand and turned the near-term fundamentals bearish. The long-term picture for the fiber, however, is expected to remain bullish. Inflationary pressure and an eventual recovery in economic conditions are expected to add outside support for the market. A sharp increase in metal and energy prices could spill over to other commodities, especially markets that may appear "cheap." US acreage is expected to shrink to 74 million acres for the 2009-2010 crop year from 76 million acres the previous year. Global demand is expected to rise to 107.1 million bales this marketing year, up from 105.06 million last year. In the near-term, Cotton may continue its choppy, sideways-to-lower trend on lack of fresh news and falling open interest. A clearer weather outlook for western and southern Texas could result in more orderly trading.

Trading Ideas

Given that prices are quickly approaching a significant support area at 52.73, traders may possibly want to hold off on entering the market with a short-term strategy. However, some long-sighted traders may perhaps wish to use the pullback in prices to enter a long-term bullish strategy, such as a bull call spread. An example of one such strategy would be to buy a December 70 call and sell a December 75 call for a debit of 0.50, or $250. The trader would risk the initial investment for a possible return of 4.50, or $2,250, if the December contract closes above 75.00 on the November 13th expiration date.

Technicals

Technically, the July Cotton chart has turned negative and would likely need to remain above support at 52.73 to avoid further selling pressure. The recent closes below the 20-day moving average suggest that a relative high of 61.67 may be in place. For the market to regain its upside momentum, prices would have to move above this relative high. The 14-day RSI has dropped sharply, outpacing prices to the downside. This could be viewed as a negative indicator and suggests that prices may continue to fall in the near-term. The 20-day momentum indicator is in danger of crossing into negative territory, further bolstering the negative short-term outlook.

Rob Kurzatkowski, Senior Commodity Analyst