Fundamentals

Since peaking in late 2008, bond futures have fallen sharply, as investors in U.S. debt are starting to have serious concerns about the massive deficit spending the U.S. government is undertaking to help jump-start the economy. This has led to heightened inflation concerns and has caused traders to flee the U.S. Dollar for "safer havens" in the Australian and Canadian Dollars -- and even the Euro. The weak Dollar has caused commodity prices to rise, especially gold, and more recently crude oil. Bond investors hate inflation, as the fixed returns they receive from holding Government debt is worth less due to rising inflation. This concern has also been voiced by foreign holders of U.S. debt, most recently by the South Korean National Pension Service, which announced that it will reduce its holdings in U.S. Government Bonds, switching to a more diversified portfolio of foreign government debt. Back in March, Chinese Premier Wen Jiabao said he was looking to the U.S. Government for assurances that its nearly $768 billion investment would be protected. If this were not enough to shake investors out of the debt market, the sharp rebound in equities combined with the improving consumer confidence reading of late would certainly give credence for switching investment funds back into equities and out of treasuries, where returns since the start of the year have been less than stellar. Not even direct Fed purchase of treasuries has stopped yields from rising. Last week's Commitment of Traders report shows both large and small speculative accounts are holding net-short positions in Bond futures, but the large non-commercials have begun to cut back on the size of their positions. However, should Bond prices continue to fall, we would not be surprised to see the short positions increase as trend following traders jump back on the bearish Bond bandwagon in earnest.

Trading Ideas

Daily charts seem to suggest that Bond futures may be a bit oversold at the current time, so some long- term Bond bears may potentially wish to wait for a bit of a correction before looking to the futures options market for possible trading opportunities. Those looking for a big move to the downside may wish to investigate put backed spreads in Bond options. An example of such a trade would be selling a September Bond 116 put and buying 2 September 114 puts. The short option helps to offset the cost of the two long options, but still allows for large potential gains if Bond prices fall sharply below the 114 strike of the long options. The maximum loss on this trade would occur if the September Bonds closed at 114-00 (the long option strike) at option expiration in August, as the long options would be worthless, but the short option would only lose its current time premium.

Technicals

Today we will look at a new feature on the optionsXpress FleXCharts - Continuation charts for the Treasury Bond futures. This long-term chart captures the front month futures prices going back several years. Today's chart shows the lead month Bond futures going back three years. Here we notice prices moving out of a just over a year-long consolidation pattern in mid-November 2008. From there, Bonds began their historic rally, sending prices above 140-00 for the first time. From that peak, prices have fallen over 20 points and have now moved back into the middle of the earlier mentioned trading range. Notice that prices accelerated their down-side decline once the 200-period moving average was penetrated in late April of this year. The 14-period RSI has also reached oversold territory with a current reading of 28.41. Longer-term charts can give a trader a larger perspective of the overall market that can be missed in shorter-term charts. Even short-term traders should consider looking at these charts to see where current prices fall in the larger-term trend of a particular market. Support for September Bonds is seen at the recent lows of 114-15, with resistance found at the May 15th highs of 122-11.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Overnight Platinum prices have pulled back slightly, mainly due to a stronger US dollar. The US currency has fallen sharply over the past month, which is a strong indication that inflation could take a sharp turn higher. Precious metals have been one of the better performing sectors lately, due to the weakness in the greenback, which has made bonds and notes unattractive investments. The GM bankruptcy filing is a negative influence for Platinum prices, as it could lead to lower automobile production. Traders will now question what influence the current administration will have on the automotive giant. If the President chooses to push his green agenda on the carmaker by tightening emission standards, it could be seen as mildly bullish for the prices of Platinum and Palladium, both of which are used as catalysts in catalytic converters. The auto industry must see an improvement in the labor market and banking in order to see a large-scale recovery in sales. Consumers worried about whether they will remain employed are putting off buying vehicles, and those looking to purchase a vehicle have found difficulty getting financing. For this reason, the price of Platinum could move to parity with or trade under the price of Gold once again in the short to mid-term, especially if economic indicators sour. Longer term, however, the price outlook for Platinum is bullish for a number of reasons. First and foremost, the US government has been printing money at a rate never before seen, leading some to believe the nation will face inflation that will easily surpass levels seen in the 1970's. Also, auto sales will eventually pick up as the economy rights itself. Even if GM were to fail down the road, another carmaker will step in and fill the void created. Platinum is the scarcest of the precious metals, with Russia and South Africa accounting for 95 percent of global production. Any supply disruptions could cause prices to skyrocket, as we saw last year when South African mines were hit with rolling blackouts. Finally, if the price of Gold were to move higher, which is a likely scenario given the inflationary outlook, other precious metals will likely go along for the ride.

Trading Ideas

Traders not currently in the Platinum market may choose to remain on the sidelines until a short or medium-term trend develops. Longs may wish to consider using the strong gains over the prior two days as a reason to exit or lighten-up their position. Long-sighted traders may possibly look to purchase July Platinum on pullbacks to $1,150, with a stop at $1,075 and a profit objective at $1,450.

Technicals

Technically, the July Platinum chart looks as though it could be setting-up for a possible test of April highs at 1252. At this moment, it does not appear as though the market has enough momentum to push through this relative high. The 14-day RSI is currently overbought, suggesting the market may pull back. Also, the 20-day momentum indicator is lagging behind both price and RSI, suggesting near-term weakness. Platinum must hold the $1,100 level to maintain its upward momentum or risk dropping below the $1,000 mark.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Coffee traders received another morning jolt, as frost fears have surfaced in the southern Brazilian growing region. This comes on top of other potentially bullish fundamentals, such as a smaller than expected crop in Columbia, a weak U.S. Dollar vs. the Brazilian Real, and lower estimates for the 2009-10 Coffee harvest in Brazil. These factors have contributed to Coffee futures reaching highs not seen since September of last year. Traders and analysts were expecting a poor crop out of Columbia, a major coffee exporter, but the extent of the drop has surprised the trade, with April 2009 production falling to a mere 345,000 bags. This has caused cash premiums to rise, as current inventories remain very tight. In Brazil, the rising Real vs. the U.S. Dollar has kept origin selling light, as producers are holding inventories looking for higher prices in the coming months. Brazil is the largest producer of Arabica Coffee, and market and growing conditions there are widely watched by traders looking for the direction of the Coffee futures market. Brazilian Coffee production for the 2009-10 marketing year is forecast at 43.5 million bags, down 15% from last year, as the Coffee trees are in the downside of their biennial cycle. This lower production estimate has heightened any concerns about weather conditions, so it should come as no surprise that traders responded bullishly to the recent potential frost threat. Coffee has historically been a very volatile market, and any potentially serious weather concerns could move prices sharply. One just has to look back at historical charts to see large price spikes higher, with prices moving over the $3 per pound level at the extremes. Though it is way too early to predict whether Coffee prices could hit anywhere near these extreme levels this year, it should give one a reason to pause before trading on the short side going into the South American winter.

Trading Ideas

Given the potentially volatile nature of the Coffee market, some traders may want to look at the Coffee futures options market for potential trading ideas. Since Coffee options are relatively expensive, a trader with a bullish slant may possibly wish to explore Coffee bull call spreads. An example of such a trade would be buying a September Coffee 160 call and selling a September 200 Call. With September Coffee trading at 143.70, the spread could be bought for about 5.50, or $2062.50 per contract, plus commissions. This would be the maximum risk on the trade, with potential profit of $15,000, minus the premium paid if September Coffee is trading above 200.00 at the option expiration in August. A more aggressive trader may potentially wish to sell a put below the major support area around the 115.00 level. This will increase the downside risk to the trade, but the premium received will help to offset the cost of the bull call spread.

Technicals

Looking at the daily chart for September Coffee, we notice prices moving sharply higher at the start of May and accelerating to the upside once we had a weekly close above the widely-watched 20-day moving average. Volume has also increased lately, but some of the increase is due to traders rolling their positions over from the July contract. The most recent Commitment of Traders report shows large speculators added an additional 4,560 net long contracts, to stand at 30,474 contracts as of May 26th. However, this position is still well below record levels seen last year and still provides some room for additional long positions to be added without the market becoming too overbought. The 14-day RSI is well into overbought territory, with a current reading of over 80. This may signal that a price correction is overdue, especially if weak longs exit the market on any minor pullback. 150.00 is the next psychological resistance point for September Coffee, with major support seen near the 115.00 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Cocoa futures have picked up steam in recent sessions, driven by a weaker dollar and optimism that improving economic conditions could result in increased demand. After the International Cocoa Organization cut their expected deficit for the 2008-2009 growing season to 84,000 tonnes from 193,000 tonnes, sentiment turned extremely bearish. In fact, sentiment may have turned too bearish to the point where it actually became a bullish indicator. Industry buyers have seized the buying opportunity that was created after prices fell-off sharply from April highs and remained at relatively cheap levels. There has also been some moderate spec buying due to inflation concerns. Other physical commodities have appreciated in value much more quickly than Cocoa, leading to spillover buying. The weaker US dollar has aided the rise in prices on two fronts. First, a weaker greenback is a sign that inflation may begin to speed-up, making physical commodities attractive to investors who wish to avoid the equity market. Secondly, a weak dollar and strong British pound creates an arbitrage opportunity between the London and New York Cocoa markets. The recent run-up in Cocoa prices, coupled with sharp moves in the currency markets, does make the market vulnerable to profit-taking pressure. Profit takers in both markets could cause prices to pull back in the near-term. The bullish economic sentiment is also rather fragile, as evidenced by the extreme volatility in the equity market. A string of negative economic data would likely put significant pressure on the Cocoa market.

Trading Ideas

The combined fundamental and technical picture for Cocoa seems to favor a neutral/positive outlook. The market is largely moving on outside market forces, rather than its own fundamentals, and the charts lack direction, which suggests that it may be wise for traders to take a cautious approach to this market. Traders who wish to be long the market may want to wait until the market posts several closes above near-term resistance at 2823, with stops near 2750. The 3000 mark could prove to be too great a psychological and technical barrier for the market to cross without fresh bullish fundamental developments. For this reason, traders possibly could choose to exit a long trade or tighten stops if and when prices approach 3000.

Technicals

September Cocoa remains range-bound on the daily chart, despite the recent rise in prices. Overbought conditions on the RSI, coupled with the market running into resistance at 2770, suggests a negative short-term outlook. Prices could come back to minor support around the 2600 level in the near-term. Failure to hold this support level suggests that prices may stay range-bound between 2300 and 2800. In order to break out of the sideways channel that has been in place since December, prices would have to close above 2832. Closes above 2900 could bring about a test of highs of 3385 made in July.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Other than a wild last 20 minutes this past Friday, S&P futures have been relatively calm the past few weeks, especially when compared to the volatility we saw towards the end of 2008 and the first part of this year. This is quite evident when looking at a chart of the S&P volatility index, or VIX, which has hovered just above and below the 30 level recently, near 9-month lows. Signs that the worst of the economic crisis are now behind us and a better than expected earnings season have been responsible for the approximately 38% rally in the S&P 500 since its lows were made back on March 9th. Economic reports have sent a mixed message regarding hope for an economic recovery, but yesterday's reports were definitely viewed as positive for the economy, as weekly jobless claims fell by 4,000 to 621,000 last week. The bigger news, however, was the decline in continuing claims, which was the first decline in 17 weeks. Also supportive was the surprisingly large gain in business productivity, rising a revised 1.6% annual rate in the first quarter. This improved productivity helped corporate profits rise by 3.4% in the first quarter. However, this gain came at the cost of lower employment, with companies cutting jobs and extracting more out of remaining workers. This now sets the stage for this morning's release of non-farm payroll figures for May, with current estimates looking for a decline of about 520,000 jobs last month, with the unemployment rate expected to jump to 9.2%, which if true, would be the highest unemployment rate in nearly 25 years! Though the stock market seems to be in a positive mood, there may be some storm clouds on the horizon, as Treasury yields have soared, despite purchases from the Fed. Debt investors are becoming nervous about the massive amount of debt the U.S. is running up, with stimulus packages and bailouts expected to propel the debt to GDP ratio to levels not seen since just after World War II. At some point, all this debt will force rates higher, as borrowers will want to receive higher compensation to absorb all this debt, which will, in turn, drive the cost of borrowing higher for other entities such as corporations, home buyers and state and local municipal bodies. These higher costs can slow down any economic recovery which would have defeated the whole purpose of the government 'stimulus "in the first place! If so, the rampant gains in the stock indices we have seen lately could come to an abrupt end.

Trading Ideas

Given the nearly 40% rise and relatively low volatility levels, traders expecting either a major correction or a continuation of the uptrend in the S&P futures may possibly wish to investigate the purchase of E-mini strangles in anticipation of volatility increasing or a big move in the futures. With the June contract expiring in less than two weeks, traders may wish to look at options against the September futures for trading ideas. An example of a long strangle trade would be buying the July 960 call and buying the July 900 put. With the Sept. E-mini S&P trading at 931.50, this strangle could be bought for 45.50 points, or $2275 per strangle, plus commissions. This debit is the maximum loss on the trade, and the trade is profitable if the September futures are trading above 1005.50 or below 854.50 at expiration in July. However, many traders would close out the position before expiration if the futures make a big move or if volatility increases sharply to help minimize the effects of time decay on the position.

Technicals

Looking at the daily chart for the June E-mini S&P futures, we notice prices trying to hold just above the recent consolidation around the 930.00 area. This is also just above the 200-day moving average, which is viewed by many technical traders as the determinant as to whether a market is bullish or bearish. Though bulls are currently winning the battle for control, the 14-day RSI is displaying a bearish divergence, as this indicator has failed to make a new high reading at the recent highs. Volume at the highs has also been less than stellar, which could signal that fresh buying has not emerged on the breakout. 950.00 remains resistance for the June contract, with support found at the bottom of the consolidation near the 875.00 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Australian Dollar futures are lower for the second consecutive session, after Friday's non-farm payroll data showed the US economy losing fewer jobs than expected. If the pattern of stronger employment and housing reports continues, it raises the prospect of the Federal Reserve raising interest rates by the end of the year to rein-in inflation. The stronger than expected non-farm payroll data may continue to support the greenback in the near-term, as it gives foreign exchange traders a reason to take profits on short US Dollar positions. There is also some concern that the value of the currency has appreciated too quickly since March, rising from the mid 0.6000's to the low 0.8000's. This, though, can be seen as a healthy correction and a positive for the market over the long haul. Parabolic markets are signs of a bubble, so long-term Aussie bulls actually welcome the pullback. While the US data can be seen as a negative force for the Aussie in the near-term, the prospects of high inflation could benefit the currency, as Australia is a commodity exporting nation. Prices of base metals, Gold, Cotton and Wheat have all posted solid gains in recent weeks, giving the Aussie solid support. Australia's GDP has been much more positive than other industrialized nations due to the fact that China's industrial sector seems to be reviving more quickly than initially anticipated. Interest rate parity will likely also play a major role in the Aussie's valuation going forward. The Reserve Bank of Australia did not act as aggressively as other central banks, leaving its interest high relatively and making an Aussie/Yen carry trade attractive.

Trading Ideas

Given the bullish long-term fundamentals and bearish near-term technicals, some bullish traders might be looking for the September Aussie to pull back to the 0.7675 level so they may enter the long side of the market. Instead of using stops and limit targets, some traders may possibly choose to enter into a collar trader, which would essentially offer similar protection, but could prevent a trader from getting whipsawed on a temporary spike below critical support. After entering into the long futures positions, traders may wish to sell an August 0.81 call and buy an August 0.74 put at even money or better. The maximum profit on the trade is $4,250 if the futures close above 0.8100 on the August 7 expiration date, while the maximum loss would be approximately $2,750 if the futures close below 0.7400.

Technicals

The recent correction has not done any significant chart damage. Looking at the continuous chart for the Aussie, the technically overbought conditions on the RSI likely triggered some of the selling pressure. Prices have not yet confirmed a flatter uptrend line or support at 0.7675, suggesting prices may come back to test this level. Failure to hold support here suggests prices could come back to test the 38.2 percent Fibonacci retracement at 0.7498. Prices have pulled back to the 20-day moving average in early trading. Closes below the average suggest that a near-term high may be in place.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

The bullish stampede into Gold has run into a bit of resistance lately, as the U.S. Dollar has staged a recovery from its lows, and a much better than expected U.S. non-farm payrolls figure on Friday has taken a bit of the luster out of the yellow metal. Just a few days ago, many analysts and traders were looking for Gold to reach the psychologically important $1,000 per ounce level, as inflationary fears were running rampant with investors were fleeing the U.S. Dollar and moving into commodities (especially Gold). The extent of the speculative interest in Gold futures of late can be seen in the most recent Commitment of Traders report released this past Friday. As of June 2nd, large non-commercial traders were holding net-long postions of 204,883 contracts, up 14,959 contracts for the week. Small speculative accounts are also net long Gold holding 40,556 contracts according to the COT report. This large and growing long position set the stage for a potential price correction, to shake out weak longs and those who entered the bull trend late in the game. This time the catalyst was the resurgent Dollar -- especially last week, with the surprising drop of "only" 345,000 jobs in May, which sparked a major sell-off in the short-term interest rate markets, as talk of possible interest rate hikes entered traders conversations for the first time in many months. This helped to dampen some of the rampant inflation concerns that helped to drive Gold prices sharply higher this year. Though "Gold Bugs" will argue that the current correction is actually healthy for the bull market because weak longs are weeded out, there are some concerns that Gold's current failure as prices approach $1,000 may signal strong reluctance by traders and investors from paying four-digit prices for Gold. This can be seen in the Gold jewelry demand from India, one of the largest consumers of Gold, as consumers there are awaiting lower prices to ramp-up their purchases. Although it is still too early to call a top in the Gold market, the large long speculative interest will need fresh bullish news to attract new buyers into Gold, or else much lower prices will be needed to drive "bargain hunters" back into the precious metals sector.

Trading Ideas

Traders who expect a potential rally in Gold prices this summer but believe a correction is overdue could potentially use both futures and futures options to position themselves in the market. An example of a potential trade is selling 1 August Gold futures and buying 3 August Gold 1000 calls. With August Gold trading at $950.80 as of this writing, the August 1000 calls could be purchased for about $1900 each, plus commissions. This trade hopes to take advantage of any temporary correction in Gold prices by having a short futures position, but it also has upside potential should prices become more volatile or move sharply higher by virtue of owning multiple long call options. The risk in this trade occurs if prices become less volatile (option time decay works against this position) or if Gold prices move only moderately higher by the option expiration in late July.

Technicals

Looking at the daily chart for August Gold, we notice a potential double-top formation, as the recent rally that took August Gold as high as 992.10 failed to match the February highs of 1008.90. Notice that prices are now hovering near the widely watched 20-day moving average. A close below this moving average could signal fresh selling by short-term momentum traders. The 1-day RSI has swiftly moved from overbought conditions to a more neutral reading of 52.10. The recent highs of 992.10 are now the next resistance point for August Gold, with support found at the uptrend line currently at 923.60.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Bond yields have jumped in recent weeks due to an increasing supply of Treasury debt and strength in US equity prices. The increased supply of US debt instruments suggests that yields will have to climb to attract investors. China is rumored to have shifted its holdings of US treasuries from long dated Notes and Bonds to shorter-term T-Bills, which could have aided the steepening of the yield curve. Today's 10-Year Note auction has put pressure on Note and Bond prices in the early going, which is common ahead of auctions. Yields on the 10-Year have climbed to 3.88 percent. Equity prices have remained strong, diminishing trader demand for treasuries. The sharp upturn in commodity prices in recent weeks hurts Bond prices on two fronts. First, traders seeking safe haven investments are flocking to physical commodities, such as precious metals, at the expense of treasuries. Secondly, higher commodity prices suggest inflation is increasing at a higher pace than previously expected, making Bonds unappealing as investments. The prospect of rising inflation also suggests that the Fed may be forced to raise interest rates later this year. The corporate bond market has shown significant improvement in recent months, with new issues of corporate debt increasing at a steady pace. Investors have shown an increased appetite for higher yielding corporate debt over treasuries. Also, issuers of new debt short the treasury market ahead of new issues to hedge yields. All of the previously mentioned factors have significantly pressured the price of the 30-Year Bonds, but traders have to be asking themselves if this pattern can continue. It is difficult to see the trend reversing course in the foreseeable future unless there is a major shift in fundamentals, such as a sharp sell-off in equities or a material regression in economic indicators. Another outside market force that could affect interest rates would be the mortgage market. Low interest rates have created a refinancing boom, which has aided the recovery in the banking sector. Higher interest rates could adversely affect the mortgage market and stall the fledgling recovery in the housing market. There are signs that higher interest rates have already made an impact on the mortgage market, with the Mortgage Bankers Association showing mortgage applications dropping 7.2 percent for the week.

Trading Ideas

Seeing that the market is reaching a critical support level, some bearish traders may wish to wait for confirmation in the form of a solid close below 111-27 before entering the short side of the market. Traders that are neutral to bearish, however, may possibly choose to explore entering a bear call spread. An example of one such spread would be selling a Sep Bond 121 call (USU9121C) and buying a Sep Bond 123 call (USU9123C) for a credit of 0-32, or $500. The maximum risk on the trade is approximately $1,500.

Technicals

Looking at the continuation chart, Bonds are coming up to several key support levels. Prices have already tested the October low close of 113-015 in early trade and have held the level to this point. The June low close at 111-27 is critical, as solid closes below this level could signal additional selling pressure, as longs would likely get squeezed out of the market. Holding this close, however, may be a sign that the market may correct or enter a period of consolidation. On average, volume on down days has exceeded that of up days, suggesting the downward trend is not letting up. The RSI indicator is now at oversold levels, which is of major technical significance. Typically, this can be seen as a somewhat supportive indication for the market, as it could signal traders may take profits. On major breakouts, however, the RSI indicator behaves inversely. If key support is broken on oversold conditions, it could be seen as a particularly strong bearish signal.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Analysts were on the mark with their pre-report estimates for the USDA June Crop Production and Supply/Demand report released Wednesday morning. One of the most anticipated parts of the report was the 2009-10 Corn ending stocks estimates, which the USDA pegged at 1.090 billion bushels, down from the 1.145 billion bushel estimate in the May report and just above average analysts estimates of 1.071 billion bushels. Less than ideal weather conditions had delayed Corn plantings east of the Mississippi River, which forced the USDA to lower average yield estimates by 2 bushels per acre to 153.4 bushels. The decline in the upcoming season's carryover figures was muted by a decrease in feed and residual demand of 100 million bushels. Ironically, the USDA did not lower its Corn acreage estimates, but that should change in the highly anticipated June 30th Grain stocks and planted acreage report. Another highlight was the carryover figures for old crop Soybeans, which will remain extremely tight this summer. The USDA lowered the 2008-09 Soybean carryout to 110 million bushels, down 20 million bushels from its May estimate and right in line with analysts' estimates. Higher U.S. bean exports combined with higher Soybean crush estimates accounted for the carryover decline. U.S Soybean exports have been strong due to strong Chinese buying, as well as less competition from Argentina, which has suffered from poor growing conditions this year. Soybean Meal demand has also been strong, which contributes to the higher crush prediction. Yesterday's figures should do little to alter the prevailing trends in the Corn and Soybean markets, with bull spreads continuing to widen in Soybeans and Soybean Meal. New crop Corn futures are hovering near yearly highs, aided by a weak U.S. Dollar driving investors into commodities as a hedge against inflation and signs of an economic recovery coming sooner rather than later. Long-time grain traders will know that USDA report days are notorious for producing "reversal" days, especially when speculative interest is heavy. There have been many days where it was not uncommon for the market to open limit-up after a bullish report, and then finish the day limit-down after speculators rushed to book their profits when protective stops were hit. Though it is still early in the growing season for this to happen, traders should be cautious later in the summer as USDA report days draw near.

Trading Ideas

Since March, the July/November Soybean spread has widened by over $1.40 per bushel, as extremely tight old crop stocks and possibly record Soybean plantings have forced old crop beans to move to a large premium to new crop beans to help ration demand ahead of this year's harvest. Given no current signs that the near-term tightness will abate soon, some traders may wish to consider buying old crop Soybeans (July or August )and selling new crop soybeans (November) on any price correction in the spread, which is currently around $1.77 July over November premium. There appears to be major chart support around a $1.20 July premium over November, with more minor support in the $1.45 July premium over November. Traders should remember that these old crop/ new crop spreads can be quite volatile and may not be less risky than an outright long or short position. It is quite possible for one side of the spread to be trading higher and the other side lower in the same trading session.

Technicals

Looking at the daily chart for July Soybeans, we notice the market has moved nearly straight up since the recent lows were made in mid-March amidst the steep sell-off in the equities market. Since that time, July Soybeans have climbed about $3.00 per bushel, as the market tries to ration supplies of old crop beans. It's no surprise that prices are well above both the 20 and 200-day moving averages. The 14-day RSI is in overbought territory with a current reading of 72.42. Given the recent correlation between the weak US Dollar and higher equity and commodity prices, any major rally in the greenback or equities sell-off could spill over into the Soybean market, which could spark a major sell-off as speculators get stopped out of existing long positions. The next resistance point for July Soybeans appears at the 1300.00 area, with near-term support seen near the 1177.00 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Soybean meal futures continue to push higher, driven by unusually strong Chinese demand. The rising price of Soybean imports has driven up the cost of crushing the oilseed to the point where it is simply not profitable. This has caused Chinese imports of Soybean Meal to surge, as it is cheaper to import the finished product. The fact that the US dollar has pulled back substantially in recent weeks has also contributed to the jump in imports. Export sales for the week were above the median estimate of 115,000 metric tonnes, coming in at 120,020 MT. This week's USDA report did not offer any surprises and reinforced the fact that 2008/2009 ending stocks of old crop Beans are extremely tight. Wednesday's USDA report confirmed traders' suspicions, coming in at the expected 110 million bushel ending stocks figure. Ending stocks are now pegged at 110 million bushels, which would be the lowest carryout since 1977. The tight supply situation has caused some farmers to be reluctant to sell crops. Crush margins in the US, unlike China, are very attractive. This could be a negative force for Meal prices, as we may see more crushing in the US, increasing Bean product supplies. China also has Bean stocks available to process, which could counterbalance farmer stinginess. The exchange rate of the greenback will continue to play a pivotal role in the Soy market. The recent drop in the Dollar's exchange rate has been fairly dramatic, leading some to believe that the greenback may strengthen in the near- term on profit-taking by forex traders. This could adversely affect grain exports in the near future. The longer term outlook remains bearish, suggesting importers could reduce purchases in anticipation of further declines. This does not change the bullish price outlook for old crop Meal, but could pressure prices in the immediate future. Traders may also view the market as somewhat overheated after the sharp run-up, which may trigger profit-taking.

Trading Ideas

The sharp rise in prices may make traders somewhat hesitant to enter the long side of the market at this time. Given the extreme volatility, short-term traders looking for a pullback in prices may possibly choose to enter the options market instead. Traders may look to purchase a July Soymeal 420 put (SMN9420P) for a price of 9.35, or $935. Some traders may decide to exit the contract at a price target of 20.00, or $2,000. The entire purchase amount is risked with this transaction, so some traders may decide to exit the trade if the underlying contract closes above 450 to cut losses.

Technicals

Turning to the continuous Soybean Meal chart, prices may be on the verge of testing all-time highs made last summer. This high would be seen as major resistance, which if broken, puts the market into uncharted territory. Conditions remain overbought, which does not appear to have slowed down advances. The fact that prices have advanced so quickly, with very little pausing, may have some bulls somewhat skittish. This suggests that the market could correct sharply or enter an extended period of consolidation.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Unlike its energy complex brethren, Natural Gas futures are not seeing any benefits from a commodity market rally tied to a weak U.S. Dollar and the belief that the worst of the nearly two-year long recession is behind us. The Natural Gas futures appear to be one of the few markets trading strictly on its bearish fundamentals, with weak industrial demand and cooler than normal temperatures in the Midwest contributing to soaring gas supplies in the U.S. The most recent EIA gas storage report showed gas in storage totaled 2.443 trillion cubic feet (tcf) as of June 5th. This total is a whopping 30.3% increase to levels in storage last year, and nearly 22% ahead of the 5-year average. Last week's injection of gas into storage totaled 106 billion cubic feet, which is slightly less than average analysts' forecasts of a 110 bcf injection. This caused a bout of short-covering buying on Thursday and sent prices above the $4.00 level briefly.

That enthusiasm faded quickly at the end of the week, however, as fresh buying failed to materialize, with traders continuing to focus on weak current demand and rather strong current production levels. New sources of Natural Gas are being found, which is increasing the levels of proven reserves much more quickly than that of oil. This factor alone may be contributing to the price ratio between Natural Gas and Crude Oil widening to levels few expected. If there is one bullish factor in the great gas bear market, it is the significant decline in active U.S. gas rigs, with the current number now standing at 700, which is over half the number of rigs in operation last year. This could cause a sharp rally in prices should gas demand suddenly increase or if there is any significant shut down due to storm activity in the Gulf of Mexico in the upcoming hurricane season.

Trading Ideas

Trying to pick a bottom in the Natural Gas futures market has been very difficult, even for those with a long-term perspective, due to the wide contango the market is currently in. For those who don't know, a contango market is one where the near-term futures contracts trade at a discount to the more deferred months. The downside to this is that those traders holding long positions and then rolling out those positions to a more distant month have to pay a higher price in the deferred months. So if cash price remains steady, the futures will slowly erode down to meet the cash market as the contract moves towards delivery.

The futures options markets offer potential trade opportunities for those who may be looking for a bottom in Natural Gas futures. One such strategy would be to sell naked out-of-the-money puts in Natural Gas futures. August Natural Gas has good chart support around the 3.50 area, so a trader may wish to consider selling puts below this support point. An example of such a trade would be selling the August 3.00 puts outright. With the August futures trading at 4.061, the 3.00 puts could be sold for 0.073, or $730 each, not including commissions. The trade will be profitable if August gas is trading above 2.927 at expiration in July. The risk to this trade is if Natural Gas trades below 2.927. In that scenario, losses would total $1000 per contract for each dime the August contract trades below the 3.00 strike price, minus the premium paid.

Technicals

Looking at the daily chart for August Natural Gas, we notice the market beginning to form a symmetrical triangle formation. This is considered a consolidation pattern, with the market making lower highs but higher lows. Note that prices are trapped between the 20 and 100-day moving averages, and gas bulls would want to see the 20-day MA cross above the 100-day MA to confirm a possible change in trend. The 14-day RSI has turned neutral, with a current reading of 50.28. The last Commitment of Traders report shows large non-commercial traders (large speculators, hedge funds, etc) are still largely net-short the Natural Gas market, but they have cut back on that position significantly, as many traders do not wish to be short Natural Gas going into the Atlantic hurricane season. One just has to look at a Natural Gas chart from 2005 to see why this is the case. Support for August Natural Gas is seen at the contract lows of 3.520, with resistance found at the 100-day moving average currently around the 4.360 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

A large jump in Shanghai inventory levels has given Copper traders a reason to step back and reassess the fundamental outlook for the metal. The 60,647 metric ton level is the highest Shanghai has seen in well over a year, which has left traders wondering if Chinese imports are going to keep up the rapid pace they have seen in recent months. The data also suggests that the destocking of LME has simply been the result of the metal being moved from London to Shanghai. We are entering a traditionally slow period of Chinese Copper consumption, suggesting inventory levels could continue to increase in coming weeks. This has taken the wind out of the sails of Copper bulls, who have pushed the price of the red metal higher on strong Chinese imports and industrial production. Supplies are still much lower than they were earlier this year, when LME inventories eclipsed the 550,000 metric ton level. On the economic front, G8 members have begun to explore the possibility of cutting back stimulus spending, which can be seen as negative for the price of the metal for two reasons: First, traders are getting a sense that the move could be premature, as economies around the globe are still mired in the economic downturn. Secondly, this could dim the outlook for inflation. Traders tend to focus on the US money supply and how a falling greenback can be a driver of inflation, since most commodities trade in dollars. What traders may have lost sight of is how other nations have pumped money into their economies. Economic tightening by European nations could result in stalled growth and cool inflationary pressures. The Copper and Crude Oil markets may have gotten a bit ahead of themselves in recent months on inflationary fears. Inflation, ultimately, is not driven by money supply, although it is an important component in the equation. It is driven by demand and the US and other industrialized nations still have to make huge strides to right the ship. The fundamental outlook for Copper has not turned bearish, but, rather, it is not quite as bullish as traders had previously thought. It has been a quiet overnight session, as things have cooled off in Shanghai after yesterday's limit down day. Any inclement news, however, may trigger more profit taking.

Trading Ideas

Given the near term bearish technicals and fundamental news, traders on the long side of the market could explore the possibility of lightening up or exiting the market. Traders not currently in the market may be better suited remaining on the sideline at this point until there is a clearer intermediate outlook.

Technicals

Turning to the chart, the July Copper contract shows a reversal pattern. This can be seen as a short term negative signal, though not a textbook key reversal orpossible trend reversal pattern. Prices are approaching the 20-day moving average. A close below the average could confirm a near term high and offer further validation of the reversal on the candlestick chart. The sharp sell-offs over the past two sessions have not done major chart damage to this point. Before reversing, the July contract reached the profit target line, which runs parallel to the bottom of the wedge formation. Traders should be mindful of the extension of this lower line, as it is the stop line and could trigger further selling.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

There certainly have been few "green shoots" for the pork industry this year, as sluggish demand and weak exports have send hog prices tumbling. Just yesterday, Smithfield Foods, the world's largest pork processor and hog producer, announced it would cut its U.S. hog heard by an additional 3% due to an oversupply of hogs this year. The recently announced cuts in production will bring Smithfield's total cuts to 13% so far this year. Weak packer profit margins has kept bids low for market ready hogs of late but herd liquidations continue to bring more hogs to market in despite lackluster demand. Hog slaughters came in at 410,000 head yesterday, up 11,000 from this time last year. If there is a bright spot in this bear dominated market it was the uptick in port-cutout values on Monday, with prices jumping by $0.86 to stand at $56.85. However, the CME 2-day average Lean Hog Index value continues to tumble, falling by an additional $0.03 to stand at $57.14. Despite the over $2 decline in the Lean Hog index the past 7 sessions, nearby futures continue to trade at a premium to the Lean Hog index, with may spur more speculative selling as traders look for the premium to narrow amidst weak cash market demand.

Trading Ideas

While current pork demand remains weak, signs that U.S. Hog producers may be serious in reducing the size of the herd, may spur higher Hog prices later in the year. Traders looking for a rebound in Lean Hog futures prices may wish to look at bearish Hog futures spreads for possible trade opportunities. An example of a trade is selling July Hogs and buying December Hogs. Currently July Hogs are trading at a 0.75 premium to the December contract and traders would want to see the December contract gain on or even move above the July contract. One should remember that spread trading may not be less risky than holding an outright futures position and it is possible for one contract month to be trading higher and the other lower at the same time.

Technicals

Looking at the daily chart for July Hogs we notice prices hovering near their lows of 2009, falling nearly $15 per hundredweight since January. Prices remain well below both the widely watched 20 and 100-day moving averages and momentum remains weak. The 14-day RSI remains in oversold territory with a current reading of 28.04 though off lows made last week. Contract lows of 57.875 made on June 10th remain as support for the July contract with resistance seen at the gap lows on June 2nd at 62.15.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Crude Oil futures are higher in overnight trading after falling for three consecutive sessions. Prices have pulled back after many market observers had begun to question whether the recent inflation concerns have been overblown. The economy is still in the early stages of an economic recovery, suggesting the price of Oil may have risen too quickly. The sharp spike in prices may inhibit economic growth and actually be a negative force for traders bullish Crude over the long term. The PPI and CPI data released this week have shown inflation being very tame, further bolstering the viewpoint that inflation fears may have been overblown.

Yesterday's EIA inventory report gave traders plenty to mull over. On the surface, the report would be seen as friendly for oil prices, but a deeper look into the numbers may tell a different story. Refinery runs were virtually unchanged after slightly higher imports for the week, yet inventories of Crude Oil dropped much more than traders had expected. This brings about the question - where did the Oil go? The data suggests that more petroleum may have been moved into floating storage. This could be a sign that some market participants may believe that the contango, which has narrowed substantially in recent weeks, may once again begin to widen. The build in gasoline inventories suggests that the petroleum market may be a bit more elastic than traders had previously thought. The build could be a sign that drivers are going to cut back usage in the face of rising prices.

Trading Ideas

Where prices go from here is up for debate. Some of the factors that have pushed prices lower for the past three sessions may be temporary, such as the stronger US dollar. Forex traders have taken profits in short USD positions, but there is little fundamental support out there for the dollar at this time. The administration has shown no signs of reining in spending, which can be seen as negative for the dollar. The lingering doubts over the economic recovery could result in less risk-taking by traders, which could adversely affect the equity and commodity markets. Current fundamentals do not support the current price levels, but, as history has shown, markets can remain irrational far longer than rational traders can remain solvent.

Technicals

Turning to the August Crude Oil chart, we see a hanging man candlestick on Friday, followed by a bearish doji on Tuesday. These candlesticks point to a negative short-term bias. The pullback, however, has failed to do any major chart damage. The August contract has maintained near-term chart and psychological support at the 70.00 mark. If this support level is broken, prices could drift into the low 60.00's. Prices could encounter significant resistance at the 76.75 level, which is the 38.2 percent Fibonacci retracement from the 147.27 high set last July. Momentum is showing a very slight bullish divergence with the RSI indicator, suggesting a possible reversal of the recent slide.
Given the overpriced conditions, traders may wish to explore entering into a bearish position. This bearish bias is driven by fundamentals and is not supported by technicals. For those wishing to be short Oil, Tthe high volatility of the futures contract and expensive option premiums may could potentially make entering a bear put spread a prudent strategy for those wishing to be short Oil. Bearish traders may wish tcould potentially o purchase an August 67.50 (CLQ967.5P) put and sell an August 65.00 (CLQ965P) put for a premium of 0.60. The initial investment of $600 is risked and the maximum profit is $1,900 if the August futures contract closes below 65.00 on the July 16th expiration date.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Traders are gearing up for what could be a volatile week for the equity markets, dominated by the Fed meeting on Wednesday and Treasury auctions of $104 billion worth of two, five and seven-year notes. The Fed's policy statement will be of particular interest, given the improved economic indicators over the past several months. The improvement of these conditions may cause the Fed to reign in some of its more aggressive policies, such as the treasury buyback program and quantitative easing. The buyback program offered support for treasuries when it was announced in March, but the program has done little to reign in interest rates in recent weeks. The inability of the Fed to keep interest rates at bay could be seen as a negative for both the equity and fixed income markets. The turnaround in banking stocks has largely been driven by lower interest rates, which has led to a boom in refinancings and offered some stability to housing. Higher interest rates could derail this recovery. The T-Note auctions this week will give traders greater clarity regarding interest rates. If the auctions are unsuccessful or cause interest rates to jump, equity prices could pull back on fears that higher interest rates would damage the fledgling recovery. Crude Oil prices have fallen back in recent sessions, which has been supportive of equity prices. Prices may have moved up too quickly, which like rising interest rates and high unemployment, could be seen as a force that could stifle economic growth.

Trading Ideas

The fundamental and technical outlooks for the equity market show plenty of indecision among traders, but this does not mean that traders should necessarily remain on the sidelines. Some traders may choose to take advantage of lower volatility and resulting lower option premiums by entering a long strangle, possibly buying the August 1500 call (NQQ91500C) and the August 1400 put (NQQ91400P) for a combined premium of 80 points. A possible point to exit the trade would be at 150 points, prior to expiration.

Technicals

After trading relatively flat for the early part of the month, the September E-mini Nasdaq pulled back to its trendline. The uptrend is still intact, but the chart is showing some signs that prices may pull back. After dropping from recent highs above 1500, prices moved sideways for much of last week, indicating prices could weaken further. Friday's close below the 20-day moving average suggests that a near-term high may be in place. The September contract has held support near 1434.00 to this point. Failure to hold this level could result in the market testing support at 1400 or, possibly, 1350. The 1350 level can be seen as the most significant of these support levels, as a close below 1350 would likely result in a long-term reversal.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Volatility has returned to the Cotton futures market of late, as traders turn their focus to weather forecasts early in the growing season. Cotton prices had fallen to 8-week lows as unexpected rainfall occurred over the West Texas growing region last weekend, which did wonders to improve growing conditions there. This decline comes after an over 15 cent rally in December Cotton from its March lows as a weaker U.S. Dollar and better-than-expected export business had speculators in a buying mood. Going forward, traders will continue to focus on the weather especially in Texas, as any signs that hot dry weather will return to this key growing region could impact Cotton yields and force analysts to lower U.S. cotton production. The USDA has already lowered its estimate for 2009-10 world Cotton carryover to 56.54 million metric tons (mmt), down from 61.16 mmt for the 2008-09 marketing year. Besides the weather, the wildcard for Cotton will be Chinese demand next season. So far this year, Chinese Cotton exports have been brisk, but there are questions on whether this is due to a general restocking of commodities in general or due to increased usage. If the former, then Chinese buying may diminish later this year and current upwardly revised export totals may be too high. This could cause new crop Cotton prices to fall, especially if U.S. production rebounds.

Trading Ideas

Given both bullish and bearish arguments for Cotton prices have merit and an entire growing season is ahead of us, traders may wish to explore trading strategies that are direction-neutral but will benefit from increased volatility. One such trading strategy is buying Cotton strangles. An example of such a trade is buying the December Cotton 60 calls and buying the December Cotton 50 puts. With December Cotton trading at 55.10 the strangle could be purchased for 6.15 points or $3075 per strangle, not including commissions. The premium paid is the maximum risk on the trade and the trade will be profitable if December Cotton is trading above 66.15 or below 43.85 at option expiration in November. However, many traders will look to exit the trade if volatility increases sharply well before expiration or Cotton makes a sharp directional move quickly to limit the effects of time decay on the position as expiration approaches.

Technicals

Looking at the daily chart for December Cotton, we notice what may be a flag formation forming. This formation is usually a consolidation pattern that tends to resolve itself in the direction of the current trend, which is up. Prices are just above the 100-day moving average but the market failed in its attempt to move above the 20-day MA last week. Prices have made a 50% Fibonacci retracement from the March lows to the May highs and found a bit of bargain hunting buyers near the lows on Monday. Volume has increased sharply in the December contract, as traders have begun rolling out of the July futures ahead of first notice day on June 24th. The most recent Commitment of Traders report shows both large and small speculators net-long Cotton futures but have curtailed the positions somewhat during the recent price correction. This leaves room for additional contracts to be added should prices break out of the current flag formation. Support for December is seen at 52.90, with resistance found at the recent highs of 61.69 made on June 12th.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

The Canadian Dollar has weakened against the greenback in recent sessions due to doubts about the global economic recovery. The World Bank's lowered growth expectations dealt commodity currencies a blow -- including the Canadian, Aussie and Kiwi Dollars. The Bank of Canada is concerned about the currency's rapid appreciation against the US Dollar, citing risks to economic growth. The government has welcomed the pullback in the Canadian Dollar in recent sessions, as it could stimulate demand for Canadian exports of Crude Oil and other raw commodities. A stronger greenback versus a weaker loonie can be seen as mutually beneficial, as a stronger USD would keep inflation in check and help stabilize the price of petroleum.

One factor that may make the Canadian Dollar less attractive than currencies form other commodity exporting nations is interest rates. The Aussie and Kiwi Dollars enjoy an interest rate advantage, at 3.0 and 2.5 percent, respectively, versus the BoC rate of 0.25 percent. While not staggering by any means, bargain-hunting traders could be inclined to favor the higher yielding currencies. The battered auto sector is another reason why traders may shun the Canadian Dollar. If economic data in the US does not show significant improvement, the Canadian auto industry could face further pressure and job losses may continue to mount. Further contraction in global equity markets is a distinct possibility, which could result in defensive buying of the USD.

A revival in commodity buying could make the long-term outlook for the loonie positive, despite the negative near-term pressure. Indications are that investment in commodities is far from peaking, but investors may take a break until the economic picture offers some clarity. Traders will be keeping a keen eye on the FOMC policy statement later on today. If the Fed offers a rosy assessment and hints at a prolonged low interest rate environment, traders may allocate a larger portion of their portfolios toward equities and commodities at the expense of treasuries. A more measured statement could be seen as negative for the Canadian Dollar, as traders may hit the panic button and flock toward the relative safely of the greenback.

Trading Ideas

Given the bearish shift in both technical and fundamental outlooks for the Canadian Dollar, traders may be inclined to test the short side of the market. Traders have been especially fickle over the past two weeks, suggesting that some traders may opt to enter a more conservative strategy. An example of one such strategy would be a bear put spread, buying the August 87 put (CDQ90.87P) and selling the August 85 put (CDQ90.85P) for a debit of 0.0075, or $750. The trade would risk the initial investment, with a maximum profit potential of $1,250 if the price of the September Canadian Dollar closes below 0.8500 on the August 7th expiration date.

Technicals

Turing to the chart, the September Canadian Dollar contract has had several technical setbacks. The chart confirmed a double-top formation last week, which if the measure of the pattern holds true, could result in prices coming back to test May 15th lows at 0.8485. Prices are now testing the 50-day moving average. A significant close below the average could result in further declines and may change the intermediate technical outlook. Oversold conditions on the RSI and stochastics could offer some near-term support for the currency and trigger short-covering. The market is currently resting near support at 0.8694, which may offer further short-term support.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

"Sweet"! That was the cry from Sugar bulls to start the week, as futures prices exploded to the upside and reached highs not seen since 2006, as trend-following traders continued to add to existing long positions. The lower than expected Sugar production out of India has been the main catalyst for higher prices this year, as the country is expected to be a major importer of Sugar, with some estimates as high as 1 million tons being purchased. Domestic Sugar prices in India have risen by almost 30%, despite efforts by the government to quell the price rise. The monsoon season in India has started slowly, sparking fears that Indian Sugar production may not rebound as much as earlier thought. Brazilian producers are the beneficiaries of higher world Sugar prices, and Sugar production has been well ahead of last year's totals. Even though Sugar prices are attractive to Brazilian producers, higher oil prices are also attracting a fair amount of cane production into Ethanol -- especially by more cash-strapped producers. There have been rumors floating around that a large commercial trader will stand for delivery against the July contract, which has sparked a round of short-covering buying ahead of the last trading day on June 30th. Spread trading has been very active, as traders move their positions over to the October futures. Although the Sugar bull market looks to be alive and well, many end-users outside of India have started to balk at paying the current high cash Sugar prices -- which could drastically cut demand. Also, should the U.S. Dollar begin to rebound, it could put pressure on the entire commodity complex, and markets with a large net-long speculative interest like Sugar could be especially vulnerable for a nasty sell-off as long liquidation occurs.

Trading Ideas

Even the strongest bull markets are subject to price corrections to shake out weak longs, and outright long futures positions are vulnerable to potential slippage on sell-stop orders -- especially as price moves become more volatile at higher prices. One way traders can limit the risk on entering a potentially volatile market is through the use of futures options. An example of a trade that will benefit from a large move in the underlying futures market or an increase in volatility is the purchase of strangles. In the case of Sugar futures, an example of this trade would be buying an October Sugar 18-cent call and buying an October Sugar 16.50 put. With October Sugar trading at 17.25 as of this writing, the straddle could be purchased for 1.91 points, or $2,139.20 plus commissions. The premium paid is the maximum risk on the position, and break-even occurs if October Sugar is trading above 19.91 or below 14.59 at expiration in September. However, most traders will exit the position early, especially if volatility increases sharply or the market makes a big one-direction move to help negate the effects of time decay on the long straddle position.

Technicals

Looking at the daily chart for October Sugar, we notice how violently prices surged this week after Monday's solid close, which signaled the end of the recent price correction. Prices are now well above both the 20 and 100-day moving averages, which is an encouraging sign for bullish trend-following traders. The major negative technical indicator is the bearish divergence in the 14-day RSI, which may give some traders pause from entering new long positions. 17.50 looks to be solid resistance for the October contract, with last week's lows of 16.02 acting as support.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

RBOB Gasoline futures are higher for a second consecutive session on stronger equity prices, a weaker USD and supply disruptions in Nigeria. Rebel group MEND claimed responsibility for attacking a major pipeline owned by Shell hours after being offered amnesty by the government. The supply disruption in Africa's largest Crude Oil producing nation caused a buying spurt on the NYMEX's petroleum complex. The Nigerian disruptions have supported prices in recent weeks, as violence in the Niger Delta has picked up significantly. The region produces light, sweet Crude Oil, which is coveted by refiners for its high yields of refined products. The move higher in equity prices offers further support for prices, as it could signal increased demand.

The economic data released this week has been a mixed bag for traders. The sharp increase in durable goods orders was unexpected and extremely positive, as were the final GDP and existing home sales data. On the other hand, new home sales and initial claims are indicating that many analysts were premature in their assessment that the housing market will recover sooner rather than later. As long as the unemployment rate remains high, foreclosure rates figure to remain constant or increase. This could inhibit economic growth in the US, as home values are a barometer of wealth. Consumer spending habits are largely influenced by housing prices and we have seen that Gasoline demand has been far more elastic than previously thought.

As Gasoline demand has tumbled, supplies have increased, which can be seen as bearish for RBOB prices. The bullish demand outlook for commodities may have been premature and the sharp increases in petroleum prices may act as a barrier to an economic recovery. The RBOB contract may find support from the weak refining margins, which have fallen from $16.52 to $9.28 per barrel over the last ten days. This could result in refiners scaling back production until margins widen once again. The price of the Crude Oil contract has risen more sharply than the RBOB contract over the past month. Either the Crude Oil contract will have to fall back or the RBOB will have to rise to protect from supply imbalances. The question that is left for traders is which one of these markets will move to converge with the other?

Trading Ideas

The inconsistancy in both the fundamental and technical data suggests that traders may wish to take on a strategy that would play both sides of the fence, such as a long strangle. Traders may wish to buy the August 2.00 call (RBQ92C) and buy the August 1.80 put (RBQ91.8P) for a combined debit of 0.1200, or $5,040. If filled at the target price, break even points are 2.1200 on the upside and 1.6800 on the downside at expiration. Given the high cost of the trade and the sizable move that is required for the trade to become profitable, traders may choose to exit the put position while holding on to the call on a solid close above 1.9800. Likewise, traders may opt to exit the call while holding onto the put on a solid close below.1.8300.

Technicals

The August RBOB contract has traded below the 20 day moving average for the last week, suggesting a near term high may be in place. If the market is able to turn high and close above the average, it could be seen as bullish near term. Barring this happening, the technical outlook would remain bearish. The pattern on the daily chart has been difficult to read. On one hand, the two large down days on Friday and Monday have been followed by sideways trading, which can be seen as a bear flag. The three day candlestick pattern within the flag can be viewed as a near term bullish reversal. Likewise, the oscillators offer conflicting signals. Momentum has remained flat despite yesterday's up day, which can be seen as bearish. The slow stochastic indicator, however, has crossed over below the 20 percent line, which would be viewed as a bullish signal.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Both bullish and bearish Cocoa traders had something to cheer about the past six weeks as a nearly $600 per ton rally from the May lows was followed by a quick $400 per ton decline the past several sessions. The results of these large opposing price trends may be a more subdued Cocoa market the next few weeks as traders reassess market fundamentals. One of the biggest factors in the Cocoa market is the direction of the U.S. dollar especially against the British Pound. A stronger GBP/USD is normally a bullish factor for Cocoa prices and if one compares the September Cocoa Chart to the September British Pound Chart one will note that September Cocoa began its mid-May rally at the same time the September Pound broke out of its consolidation range to the upside. However once the Pound chart begin to move sideways, Cocoa prices fell. The recent sell-off has caused Cocoa butter prices to fall, making processors margins weak, which has hurt demand. However, there are some concerns that mid-crop Cocoa production in the Ivory Coast, the world's largest Cocoa producer, will come in smaller than expected, as heavy rains have delayed arrivals, which are down about 15% from this time last year. Last Thursday's price reversal to the upside after making 1-month lows may signal that a near-term bottom may be in place as lower prices drew fresh buying to the market.

Trading Ideas

Given the near term price reversal seen late last week and strong support found at the May low, traders expecting Cocoa prices to stabilize may wish to look at the Cocoa futures options market for possible trade ideas. Once such trade is selling out of the money Cocoa puts just below major support at the May 14th lows of 2289. An example of this trade is selling September Cocoa 2250 puts. With September Cocoa trading at 2515 as of this writing, the 2250 puts could be sold for around 28 points or $280 per contract plus commissions. The maximum gain is the premium received if September Cocoa is trading above 2250 at expiration in August, with the maximum risk if the futures go to zero. Given the downside risk to the trade, traders may wish to consider exiting the trade if the September futures break below support at 2289.

Technicals

Looking at the daily chart for September Cocoa, we notice the strong buying that occurred once prices attempted to test the 78.6% Fibonacci retracement level. The market is trying to remain above the 100-day moving average, which is used by many longer term traders as a key indicator to whether a market is in a bullish or bearish phase. The 14-day RSI is struggling to get above the 50 level and the trend remains lower. Traders should watch the action in the U.S. Dollar as any signs of strength by the greenback could pull Cocoa prices lower. Support is seen at 2289, with resistance found at the 20-day moving average currently near 2645.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Newton once said what goes up must come down. Coffee traders seem to be heeding this advice, sending prices higher at break-neck speed, only to have the market collapse onto itself in recent weeks. The initial supply fears were seen as severely overblown, leading to the massive exodus. Funds decreased their net long position by over 44 percent last week, followed by small speculators who shed over 77 percent of their position. In the cash market, producers rushed to sell, contributing to the tumble in futures prices by shrinking the cash to futures basis. While this can be seen as negative in the short-term, it does not change the fact that supplies are still very tight. The October to May production season saw the lowest harvest in more than twenty years at 6.53 million bags. The tight supply picture would suggest a positive fundamental bias, but the upside potential may be limited due to concerns that the main crop may be rather large in size and roasters may be tempted to substitute with other varieties of Coffee beans. The USD will likely play a part in the movement of Coffee. Given the fact that the Fed has not given any indication as to when it will reign-in its aggressive policies, while other central banks have at least hinted at the idea, this may be seen as Dollar bearish and bullish for Coffee.

Trading Ideas

Given the positive fundamentals, some traders may possibly want to enter into a bullish strategy. The somewhat limited upside potential and conflicting technical outlook may convince other traders to opt for a more conservative strategy. An example of one such strategy would be a bull call spread, buying the Sep 120 call (KCU9120C) and selling the Sep 125 call (KCU9125C) for a debit of 1.75, or $656.25. The trader risks the initial investment for a potential profit of $1,218.75. To minimize losses, traders may look to exit the spread on a solid close below 115.00 in the underlying Sep Coffee contract.

Technicals

Turning to the chart, it appears as though the September Coffee contract is attempting to build a base, with support near the 118.00 level. It remains to be seen whether the pattern holds up as a rounded bottom or if the market is in the process of consolidating before facing further declines. The crossover of the 20 and 50-day moving averages can be seen as negative in the short to mid-term. Like the chart, the oscillators have failed to give a clear picture. The slow stochastic crossover and oversold conditions on the RSI suggest a positive bias, but the momentum indicator is showing bearish divergence.

Rob Kurzatkowski, Senior Commodity Analyst