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July 1, 2009

Corn is "King" Among U.S. Producers

Fundamentals

Apparently U.S. grain producers were resilient in their determination to plant Corn this season, despite the cool wet weather seen in parts of the Midwest this spring, as the USDA forecasts the second largest Corn acreage since just after World War II. Tuesday morning's highly anticipated USDA June acreage and quarterly stocks report gave grain traders and analysts quite a surprise, with government forecasters estimating this year's Corn plantings at 87.035 million acres. This was up over 2 million acres from the March estimate and nearly 3 million acres above average analyst estimates. If true, this would be the second largest Corn acreage in over 60 years. Adding to this seemingly bearish news for Corn traders, the USDA also forecast that U.S. Corn stocks totaled 4.266 billion bushels as of June 1st, up nearly 250 million bushels from this time last year. The biggest surprise was the amount of Corn planted in Illinois, the second largest Corn producing state next to Iowa. The USDA predicted Illinois farmers planted 12.3 million acres of Corn, up 0.2 million acres from last year, despite a delayed start due to wet weather. On Monday afternoon, the weekly crop progress report had the U.S. Corn crop rated 72% good/excellent, up 2% from the previous week and 11% above last year. If growing conditions remain ideal this Summer, many traders believe the USDA may increase its yield estimates, and a near record U.S. Corn crop is certainly not out of the question. The acreage given to Corn production was taken from Soybeans, which desperately needed the additional acreage, as old-crop U.S. Soybean carryout totals are expected to be extremely tight this season.

Trading Ideas

Given the diverging fundamentals between Corn and Soybeans this season, especially for old crop futures, some traders may wish to explore inter-commodity spreads as possible trading opportunities. An example of this-type trade would be buying August Soybeans and selling September Corn at a 1:2 ratio (buying 1 Aug. Soybean contract and selling 2 Sept. Corn contracts). The goal would be for the price ratio to widen. Traders should be aware of the risks involved with this type spread and also recognize that this trade may not necessarily be less risky than an outright long or short position in the given commodity, as it is possible that one side of the position could trade higher and the other side lower at the same time

Technicals

Looking at the daily chart for December Corn, we notice traders were in a selling mood after the USDA report propelled Corn futures down the 30-cent limit all the way out through the July 2010 contract. The July 09 futures (which have no limits) fell nearly 40 cents lower in early trade. Momentum was already weak for December Corn, especially once the minor uptrend from the December 5th lows was broken last week. Prices are now well below both the 20 and 10-day moving averages, and it appears that the 20-day MA wants to cross below the 110-day MA -- which is a bearish signal. However, the 14-day RSI has moved into oversold territory, but with large speculative accounts holding a fairly large net-long Corn position (according to the most recent Commitment of Traders report), it may take further long liquidation before an upward price correction will occur. The next support point for December Corn appears at 349.25, with resistance at last week's highs of 411.25.

Mike Zarembski, Senior Commodity Analyst

July 2, 2009

Light, Sweet Crude Starts Quarter on Sour Note

Fundamentals

Crude Oil futures are lower this morning on a stronger US dollar and weakness in equity futures. The price of Oil has been centering in on the $70 a barrel mark for the past month, unable to find an intermediate direction. Investment demand, political instability in Iran and Nigeria, and tightening supplies have all been giving the market support, but economic factors have reigned-in rallies. Investors have begun to question the meteoric rise in prices since the first quarter of the year, as investors have become skeptical of a US economic recovery. It is difficult to see the price of Oil maintaining its upward momentum simply based on the supply, as demand has been lackluster for the most part. Consumers have shown their displeasure with rising fuel prices at the pump, showing that Gasoline consumption is far more elastic in the current economic climate than previously thought.

Yesterday's EIA inventory data disappointed the bull camp by showing a much smaller drawdown in inventory levels than Tuesday's API report had suggested. Inventory levels continue to drop and currently stand at 350.2 million barrels. This figure is still above seasonal norms, which fall between 305-345 million barrels for this time of the year. The Oil supply situation has gone from being very oversupplied to being very well supplied. Gasoline inventories have been moving in the opposite direction in recent weeks, rising 9.6 million barrels for the month. This suggests that the increased Gasoline production by refiners has been trimming down Crude Oil inventories, but consumer demand has failed to keep pace. If this pattern continues, it could weigh on Crude Oil prices.

Economic data has not been as rosy as in previous months. Yesterday's ADP job number showed a larger contraction in the labor market than previously thought, which sets the table for a possibly disappointing non-farm payroll report today. This hints at a jobless recovery that could adversely impact petroleum demand. Mortgage applications and construction spending have fallen-off as well, which may impact consumer spending. Housing market data suggests that we may not see a sharp recovery, but rather, stabilization in housing prices. With the recovery in housing stalling, consumer confidence has fallen sharply this month. Crude Oil bulls may find solace in Chinese economic data, which shows manufacturing and industrial production recovering. This, however, may not be enough to prevent a pullback in prices.

Trading Ideas

Some traders wishing to take advantage of weakening fundamentals and technicals may possibly want to consider entering into a bearish option strategy, such as a bear put spread. An example of such a strategy would be buying an August 67 put (CLQ967P) and selling an August 65 put (CLQ965P) for a debit of 0.70, or $700. The strategy would risk the initial investment for a maximum profit of 1.30, or $1,300, if the August contract closes below 65.00 at expiration.

Technicals

Turning to the chart, the August Crude Oil contract continues to show consolidation near the 70.00 mark. The chart suggests that the market may be susceptible to selling pressure on closes below the 67.00 mark, which would confirm a double-top formation on the daily chart. If the pattern is confirmed, the next solid area of support falls between 58.00 and 60.00. After centering on the 20-day moving average, prices have closed below the average for two consecutive sessions, suggesting that a near-term high may be in place. The momentum indicator has crossed below the zero line in overnight trading. If this holds up, it would be the first time the indicator has given a negative reading in two months, which can be seen as bearish.

Rob Kurzatkowski, Senior Commodity Analyst

July 7, 2009

Corn Calamity

Fundamentals

Corn futures continue to tumble on ideal growing conditions and large crop size. Last week's USDA report showed that planted acreage is at the second highest level since 1946. There was some concern that the crop yields could be affected by late plantings this spring, even in the event that planted acres were larger than expected. Those concerns have been washed away by a steady mix of rain and sun at a time when the crop was most vulnerable. Ethanol production numbers have also put pressure on Corn prices, with the EIA reporting April production falling about 40 million bushels below USDA estimates. May and June figures may show increased production due to favorable margins resulting from higher Crude Oil prices. Crude Oil prices, however, have come under pressure recently, dropping more than $9 from recent highs, which may slow ethanol production. Motor fuel demand has remained lackluster at best, suggesting ethanol usage may remain flat. Declining open interest suggests heavy fund and speculative selling, which could put further pressure on the market. The December contract has broken its December lows in overnight trading and it will be interesting to see what the day session brings.

Trading Ideas

The extremely bearish fundamental and technical outlooks for the Corn market could suggest that some traders may possibly wish to be short the market. The extremely oversold conditions and volatility of the commodity markets may prompt other traders to forego the futures market in favor of options. An example of an options trade some traders may wish to consider would be to purchase a September Corn 320 put for a premium of 9.000, or $450, with an exit price target of 25.000, or $1250.

Technicals

The continuous Corn chart shows prices breaking down below April lows of 360.50 and testing February lows of 348.00. The new crop December contract has broken its respective lows, but old crop futures have maintained these levels. If the market is unable to hold 348, the next significant support level comes in at the 300 market, which is both technical and psychological support. To avert a catastrophic breakdown leading to multi-year lows, the front month September contract must remain above the 300 mark. The daily September chart shows the slow stochastics in the low single digits and the RSI at 11.20, indicating extremely oversold conditions, which could support prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

Oil's Well That Ends Well

Fundamentals

How quickly can market sentiment turn? Just ask those involved in the Crude Oil and Gasoline futures markets where just three weeks ago prices were making yearly highs, as talk of potentially escalating inflation on the horizon as well as the "green shoots" of an economic recovery later this year led to a strong interest in all things commodities by speculators. Few commodity markets are as large and as liquid as the energy market, which makes it a favorite target of large noncommercial traders like hedge funds. Now however, energy bears are finally getting their due, as Oil and Gasoline futures have fallen to 5-week lows, gapping lower on the daily charts, as traders are beginning to have some doubts as to the speed of any economic recovery. A moderate rebound in the U.S. Dollar and sagging world stock markets during the past week have both certainly helped energy bears 'positions. The Gasoline market was the strongest member of the complex, especially when U.S. refinery rates were in the low 80-percent range. However refinery rates have recovered recently, and last week's surprisingly large 2.33 million barrel stocks increase combined with lower U.S. demand certainly took any bullish thoughts from traders' minds. This week's EIA report is expected to show another increase in Gasoline stocks, with current estimates calling for an additional 1.1 million barrel increase. Not even continued unrest in Nigeria appears to be helping Crude prices, despite The Movement for the Emancipation of the Niger Delta rebels (MEND) claims of attacking another major oil company's pipeline in this important oil exporting country. Traders should heed the oil market saying that "A market that does not react bullishly to "bullish" news is not bullish!"

Trading Ideas

Gasoline futures remain in a backwarded market (nearby futures prices are higher than more deferred contracts)up to November 2009, but given the recent increases in Gasoline stocks and no signs of U.S. consumers ramping-up demand, some traders may wish to investigate bear spreads in Gasoline futures. An example of such a trade would be buying November Gasoline and selling September Gasoline. As of this writing, September Gasoline is trading at a 0.0960 premium to the November contract, and traders choosing to initiate a bear spread would want to see the premium narrow -- or even see September trade at a discount to the November futures.

Technicals

Turning to the daily chart for September RBOB Gasoline, we notice how sharply prices have fallen once the market closed below the widely watched 20-day moving average. Yesterday's gap lower may signal further long liquidation selling is ahead, despite prices closing off the day's lows. Gasoline bears have two tempting technical targets in their sights -- the uptrend line from the February lows, as well as the 100-day moving average. Both these targets are still 10 to 15-cents away, but a larger than expected rise in Gasoline stocks in this week's EIA report could provide the spark for a test of this key support area. The 14-day RSI looks weak, but has yet to reach oversold territory, as the current reading remains just above the 30 area. The next support area is seen around 1.6460, with resistance found near the 1.7700 area.

Mike Zarembski, Senior Commodity Analyst

July 8, 2009

Safety Net

Fundamentals

The greenback is not the only currency that has benefited from recent turmoil in the equity and commodity markets. The Japanese Yen has risen to six-week highs versus the Euro and Dollar, as investors pull their funds out of riskier asset classes. Recent economic data suggests that traders may have been overly optimistic about an economic recovery in the US, causing declines in not only equity prices, but also commodities. The G8 summit, which begins today, is expected to be a dollar-bashing festival. The BRIC countries - Brazil, Russia, India and China - have all recently suggested that the global economy may be better suited having a world trade currency, rather than relying on the USD. If Western European leaders offer similar assessments, risk-averse traders may favor purchasing the Yen over the greenback. There is now talk of a new stimulus package in the US, which would increase already high government spending and could lead to a collapse in the Dollar. At this point, it does not look as though there is even close to enough support for such a measure, but the Dollar could decline if more Democrats get behind such a plan.

The recent surge in Chinese lending has made traders fearful of the creation of asset bubbles. The government has tried to compensate for slumping exports by flooding the domestic economy with Yuan. This situation is eerily similar to the situation in the US after the boom in the late 90's and the Nasdaq bubble bursting. The Fed created a low interest rate environment, leading to the eventual housing market bubble and the current banking and economic crisis. Investors may tread lightly when investing in riskier asset classes because of the possibility that a Chinese banking crisis could lead to further woes for the global economy. This could be seen as supportive for both the greenback and the Yen.

While outside markets have supported the Yen, the Japanese economy has not. Machinery orders dropped by 3 % in the month of May, versus estimates of a 2% rise. Japan's current account surplus fell 34.3 % versus the same period last year, indicating weak demand for Japanese goods. This report is actually both a positive and negative for the Yen. The data does show that the downturn to the domestic economy may last longer than expected, which would be negative for the Yen. The report can also be seen as a barometer of economic health for the globe, showing that consumption in other nations has shrunken, favoring the Yen as a safe haven investment. Japanese companies have had a difficult time getting loans from banks, which may result in the Bank of Japan extending its emergency lending program, which could adversely impact the Yen.

Trading Ideas

Some traders may wish to take a wait-and-see approach with regards to the September Yen contract. While the fundamental outlook may favor a long position, there has been no technical confirmation to support that stance. In the long run, the Yen may move higher, but the timing may not be right. Consequently, some traders may choose to wait for several closes above the 1.0625 level before entering into a long position, and then perhaps work a relatively close stop at 1.0450. Stops may then possibly be adjusted higher if and when the market closes above 1.0850. Some holders of long positions may perhaps want to look at 1.1000 as a possible exit point.

Technicals

Turning to the chart, the September Yen contract is once again testing levels above 1.06. The last two times the contract has traded this high, in mid-March and late-May, the market was unable to hold these highs. Traders will keep a keen eye on how prices behave at these levels. Several closes above 1.0624 could signal a breakout from the sideways range the currency has been in since March. If the market is unable to build on recent gains, the Yen may continue to trade range-bound for the foreseeable future. The 14-day RSI is approaching overbought levels, which could inhibit further rallies. The %D line on the slow stochastics has crossed over into overbought territory, but the %K line remains below. A crossover above the 80 % mark would be seen as bearish.

Rob Kurzatkowski, Senior Commodity Analyst

July 9, 2009

Not So "Golden" Anymore?

Fundamentals

Gold bulls cannot be too happy with the way the "yellow metal" has acted the past few weeks, with the most active August contract slumping to two-month lows yesterday. I guess the old saying "misery loves company" kind of applies here, as the entire commodity complex has slumped of late -- especially the energies and the grains. Traders' glasses have apparently become half empty, as talk of renewed deflationary concerns has crept back into the spotlight on signs that the speed of any economic recovery has slowed. In addition, traders fear that physical Gold demand out of India, the world's largest Gold consumer, will decline after the Indian government doubled the import taxes on both Gold and Silver this week. This tax on top of relatively high precious metals prices could really hurt demand going forward, which could lower the support point in the cash market. Speculative accounts are still heavily long Gold futures here in the U.S., but there have been some signs of long liquidation -- especially by large non-commercial accounts. The most recent Commitment of Traders report shows large non-commercial traders holding 169-735 net long Gold contracts as of June 30th, down 1221 contracts from the previous week. Ironically, small speculators increased their net long position by 5,576 contracts the same week, which may signal potential long liquidation by these "weak" heads should major psychological support at $900.00 give way. If there is a bright spot for Gold bulls, it might be renewed buying by nervous investors if the current stock market sell-off gains momentum, but even that may be short-lived if margin calls from other markets force traders to liquidate their Gold positions to meet these demands.

Trading Ideas

Gold futures seem to be at a critical point, with the potential for further long liquidation if support fails or new buying by flight to quality investors on any signs of a stock market correction. Some traders who believe Gold prices will become more volatile during the next several weeks may wish to look into purchasing Gold option strangles. A long strangle position consists of buying an out of the money call and an out of the money put at different strike prices in the same contract month. An example of this trade using options on Gold futures would be buying the December 930 calls and the December 880 puts. With December Gold trading at 908.00 as of this writing, the strangle could be bought for about 82.00, or $8,200 per strangle. Given the high initial cost of this trade, some traders may not necessarily wish to hold the trade to expiration in November, but potentially consider exiting the trade if Gold makes a large move, if volatility increases quickly, or if Gold prices stall in the next few weeks.

Technicals

Looking at the daily chart for August Gold, we notice the uptrend line formed from the April lows was violated in late June, and this line has acted as strong resistance for any rallies since that time. Prices are now below both the 20 and 100-day moving averages, which puts both short and long-term bears in control. The 14-day RSI is weak, but has not yet moved into oversold territory, as the current reading is still over 30. Other than psychological support at 900.00, the next support point appears at 882.00, with resistance seen at the 110-day moving average, currently near the 930.50 area.

Mike Zarembski, Senior Commodity Analyst

July 10, 2009

Bean Prices Crush Demand

Fundamentals

Soybean Meal prices may have gone up too much too quickly, which may eventually lower demand. Yesterday's export sales number showed net sales down 67% for the week at 18,400 metric tons, and net exports down 63% at 80,900 metric tons. China has indicated that it may continue to add to its strategic stockpile of Soybeans, which may eventually lead to more Beans being crushed domestically, limiting demand for Meal and Bean Oil imports. Old crop stocks do remain relatively tight, but weather conditions for new crop Beans remain ideal, signaling the possibility of better yields, which could offset some of the fears created by lower acreage. Tightening basis between the cash and futures markets could be a sign that demand from processers may also be waning due to rising prices. Soybeans are a couple of weeks away from the most critical part of the development stage, so any inclement shift in weather could be seen as supportive for prices. The stabilization in the USD in recent weeks may plague export demand and reign-in speculation in commodity markets. Downside potential in Beans and products may be limited by relatively tight supplies.

Trading Ideas

Some traders may wish to take advantage of the bearish shift in fundamentals and technicals by entering into a bear put spread. An example of such a position that some traders may wish to consider would be buying an August 330 put (SMQ9330P) and selling an August 310 put (SMQ9310P) for a debit of 3.50, or $350. The risk is the initial investment for a potential maximum profit of $1,650 if the August contract closes below 310.00 on the July 24th expiration date.

Technicals

The August Soymeal chart shows the market confirming a double-top formation on Wednesday. The measure of the pattern suggests that prices may come down to test support near the 300 mark. Wednesday's close was also below the 50-day moving average, which can be seen as bearish. The 20-day MA is also converging with the 50-day MA. A crossover of the two averages could be seen as bearish in the intermediate future. Prices were initially able to hold support at the 325 support level. A close below 325 and the 100-day MA in the vicinity could speed-up selling pressure. Failure to break support could be seen as a win for the bull camp and could lead to sideways trading or a retest of recent highs.

Rob Kurzatkowski, Senior Commodity Analyst

July 13, 2009

Bulls Currently Showing No Love for Wheat Futures

Fundamentals

Wheat futures are the “forgotten” grain contract of late, as traders focus their attention on Corn and Soybeans as we enter the heart of the growing season in the U.S. However, those who have been following the Wheat market have witnessed a classic bear market. Since the beginning of June, December Wheat futures have fallen nearly $2 per bushel, as the Winter Wheat harvest has moved forward and U.S. crop estimates have increased. On Friday, the USDA released its July Crop Production and Supply/Demand reports, which both showed an increase in Wheat production and carryout totals. The USDA estimates U.S. Wheat production at 2.112 billion bushels, up nearly 100 million bushels from the June report and just above average analyst estimates. The USDA also raised 2009-10 U.S. carryout totals to 706 million bushels, which is up 59 million bushels. However, world Wheat ending stocks estimates were lowered to 181.3 million tons, as world usage was increased. Dry weather in Argentina has curtailed the Wheat crop there, with estimates falling to 9.5 million tons, down 1.5 million tons from last month’s estimates. Australia, on the other hand, is gearing-up for what some analysts believe may be record wheat production, as heavy rainfall so far appears to have broken the severe drought conditions in this major Wheat exporting nation. The recent sell-off in Wheat prices has made U.S. Wheat more competitive in the world market, and should the U.S. Dollar begin to weaken further, it would not be a surprise to see U.S. exports jump in the 3rd and 4th quarters of 2009. If true, then we may be seeing the seasonal lows in Wheat futures occurring in the very near future.

Trading Ideas

Given that winter Wheat futures typically make their seasonal lows just after the harvest and the potential for a near record Corn crop this season, some traders may wish to investigate Wheat/Corn Spreads. An example of such a spread trade would be buying December Chicago Wheat and Selling December Corn. As of this writing, December Wheat is trading at a $2.11 premium to December Corn. Those choosing to hold this spread would want to see the price differential widen. Because you cannot place a “stop order” directly on this spread, traders would need to monitor the position closely, as this spread could become potentially volatile as the Corn growing season progresses.

Technicals

Looking at the daily chart for December Wheat, we notice the market has begun to move sideways after the relentless 6-week sell-off which began in early June. The 14-day RSI continues to remain in oversold territory, but off the worst levels seen this week. Prices still remain well-below both the 20 and 100-day moving averages, which favors the bear camp, but there has been an increase in volume on up-days this past week. The Commitment of Traders report shows commercials increasing their long position in Wheat futures as of June 30th. Large speculative accounts are holding a small net-long position, with small speculators starting to cut-back on their net-short positions. Should Wheat prices show signs of a bottom, we could see a heavy bout of buying by these small speculators as their buy stops get triggered. Support for December Wheat is seen at last Tuesday’s lows of 538.00, with resistance found at the 20-day moving average near the 578.00 area.

Mike Zarembski, Senior Commodity Analyst

July 14, 2009

Losing Its Luster

Fundamentals

Silver prices have been hampered by the threat of a delayed global recovery on two fronts. As a precious metal, the prospect of lower than expected inflation in the near term has weighed heavily on the group of commodities due to lower investment demand. Investors have instead chosen treasuries as the safe haven vehicle of choice in the near future because of the general bearishness in commodities of late. Slow conditions in manufacturing of electronics products have also made Silver unappealing as an industrial metal. The fall in base metal prices of late has accelerated the slide in Silver prices, which have fallen more sharply than that of Gold. India has doubled it import duties on Gold and Silver in an effort to encourage recycling of the metals domestically. Indian demand for precious metals may fall by up to 25 percent for 2009. Import demand may drop by 45 to 50 percent according to some local market observers.

While the inflation, industrial and jewelry demand outlooks for Silver remain bearish in the near-term, investor sentiment in the US has not waned to this point. The iShares Silver Trust has not shown any material decline in holdings from all-time highs, indicating that investors may remain bullish over the long haul. Silver is generally seen has having more upside potential than Gold in the long run due to the overall tightness of the market. The weakness in equity and commodity prices has pressured the metal in recent weeks, due to the lowered inflation forecast. Gold and Silver prices may eventually detach themselves from the overall commodity markets if the economic pessimism of late turns to panic. In the long run, precious metals may prove to be a wiser investment for defensive traders than government debt due to the rampant printing of money by the US Treasury. The question is when that will happen. Current indications suggest it make be later rather than sooner.

Trading Ideas

The technical outlook and near-term fundamentals for Silver can both be seen as bearish, suggesting traders may wish to be short the market. However, longer term fundamentals suggest a positive bias for the market. For this reason, traders may opt to take a more conservative approach and enter a bear put spread with limited risk. One such spread entail buying the September 1250 put (SIU912.5P) and selling the September 1200 put (SIU912P) for a debit of 0.20, or $1,000. The trade risks the initial invest for a maximum profit of 0.30, or $1,500 if the September contract closes below 12.00 on the expiration date. Traders could also opt to exit the trade at 0.40 prior to expiration for a potentail profit of 0.20, or $1,000.

Technicals

The September Silver chart remains bearish near-term after breaking minor support near the 13.00 mark. Prices have also fallen below the 68.2 retracement level from April lows, suggesting prices may be coming down to test support at 12.00. Longer term, Silver has broken the uptrend line formed by the November and April lows. This suggests that prices may begin to form a new downtrend or trade sideways for the foreseeable future.
The 20-day SMA recently closed below the 50-day average and is closing in on the 100-day, both of which can be seen as bearish.

Rob Kurzatkowski, Senior Commodity Analyst

July 15, 2009

No Rest for Bond Traders This Week

Fundamentals

Since reaching lows in June not seen since the 4th quarter of 2007, Bond futures prices have staged a nice rally, gaining nearly 10 points in just over one month's time. However, there are some signs that the recent rally may have run its course. Just yesterday, two widely anticipated government reports were released -- June retail sales and June producer price index -- that were both deemed bearish for Treasury prices. Retail sales increased by a better than expected 0.6% in June, led largely by purchases of gasoline and autos. Excluding the sale of autos, retail sales rose by a much smaller 0.3%. U.S. producer prices rose a stronger than expected 1.8% last month, which is well above the pre-report estimate of a 1.0% rise. The so-called "core" index, which excludes food and energy prices for those who are able to live without these items, rose by 0.5% -- well above the unchanged reading expected by economists. The price gains were widespread, with increases seen in gasoline, furniture, and food prices. This report helped ease the fears of price deflation, which does not help bond prices. Monday's strong stock market rally at the start of the 3rd quarter corporate earnings season sent bond prices lower, as traders are seeing some signs of hope for better than expected results -- especially from the banking sector. Although it appears that the bond bears might begin to exert themselves again, we must remember that the Fed is not finished with its purchases of government debt, with a total of four repurchases scheduled in the next two weeks. This action could support bond prices in the near-term, especially if corporate earnings begin to disappoint. Next up for treasury traders will be this morning's release of consumer prices for June, with the current consensus calling for rise of 0.6% for the headline figure and a 0.1% for the "core" reading. We also have readings on U.S. capacity utilization and industrial production for June, as well as jobless claims and housing starts out later in the week. These reports should keep treasury traders busy -- at least those not on vacation -- no matter how the reports come out.

Trading Ideas

Those traders looking for a correction in bond prices may possibly wish to consider bearish put spreads as a potential trading strategy. An example of this trade would be buying the September 119 puts and selling the September 116 puts. With the September Bonds trading at 119-06, the spread could be purchased for about 1-00, or $1,000 per spread before commissions. The premium paid is the maximum risk on the trade, with a potential profit of $3,000 minus the premium paid if September bonds are trading below 116-00 at the option expiration in August.

Technicals

Looking at the daily chart for September Bond futures, we notice the market making a near perfect 50% Fibonacci retracement from the March 19th highs to the June 11th lows. Prices are holding just above the 20-day moving average, and a close below this widely watched technical indicator could trigger additional selling by short-term momentum traders. Also of note was the failure of bond prices to move above the 100-day moving average. The 14-day RSI has turned neutral, with a current reading of 52.50. Last week's high of 121-115 remains resistance for the September contract, with support found at the 20-day MA, which is currently near 118-04.

Mike Zarembski, Senior Commodity Analyst

July 16, 2009

Black Gold No More

Fundamentals

Crude Oil futures are lower this morning, wiping out a portion of yesterday's gains. The EIA reported a drop of 2.8 million barrels for the week, which was larger than the expected drop of 1.5 million barrels. This was tempered by an increase in gasoline inventories of 1.4 million barrels, versus the average estimate of a 900,000 barrel increase. The inventory data and the fact that refinery utilization has increased show that refiners are cracking more Crude Oil than expected, but petroleum demand from industry and consumer demand for gasoline both have remained lackluster. Yesterday's move was the largest increase in prices this month and can be attributed to short-covering and bullish traders clinging to any positive data that comes out. Empire manufacturing and industrial production also came out better than expected, and the stock market rallied sharply, which offered outside market support for Oil prices.

This morning traders came back to reality. There is a good change that CIT financial will not get a government bailout, which can be seen as positive for the USD on two fronts. Market observers who believe the beleaguered lender needs the government money to provide financing for small and mid-size businesses may be disheartened by the government's rejection, citing a weak financial system. Traders who are more optimistic about the health of the financial system have praised the move, as the government will not be printing even more money to save yet another lender. Foreclosure filings reached a record 1.5 million for the first half of the year, indicating that housing market woes are far from over. The high unemployment rate suggests that the rate of foreclosures may not level off, but rather increase. This does not bode well for petroleum consumption, as households may be looking to trim costs any way possible. This includes not only trimming gasoline consumption, but also other goods derived from petroleum.

Crude Oil inventory levels have tightened, dropping for six straight weeks, but this has given traders little to be enthusiastic about. One of the driving forces behind the declining stock levels has been the restocking of gasoline, as inventory levels fell below seasonal norms. If driver demand remains lackluster, refineries may scaleback production, which can reverse the tide of lower stockpile levels. There is still the question of offshore storage that seems to get missed by most news sources. Recent inventory reports hint at sizable offshore storage, which could mean we are more oversupplied than previously thought. This has neither been confirmed nor discounted at this point, so traders are probably better suited not to act on the suggestion, but to keep an eye on the situation instead.

Trading Ideas

Some traders may wish to take advantage of the weak fundamental and technical outlook by considering entering into a bearish strategy. Given the extreme volatility of the Crude Oil market, traders may perhaps opt to enter into a bear put spread with predefined risk. Since August options expire today, traders will be forced to enter into the September contract. Some traders may wish to consider purchasing a Sep Crude 60 put (CLU960P) and sell the Sep Crude 58 put (CLU958P) for a debit of 0.75, or $750. The maximum profit on this spread would be 1.25, or $1,250, if the September futures contract closes below $58 on expiration.

Technicals

Turning to the chart, the August Crude Oil contract appears to be forming a bearish flag on the daily chart after making the measured move of the double top. This suggests a downward near-term bias. The 100-day moving average has acted as support in recent sessions. Traders may want to keep a close eye on how prices behave near the average. Closes below this level would be seen as bearish in and of itself, and the fact that the lower boundary of the flag rests on the the average makes it all that much more important. A violation of this level could send prices tumbling into the low 50's, or possibly the 40's. The 20-day SMA is currently intersecting the 50 day SMA, which can be seen as a bearish development. Despite the bearish chart bias, there are several things on the chart that may be encouraging for the bull camp. To this point, the market has held above support near 58.00. Also, the candles within the bear flag suggest the possibility of a near-term reversal, but the market does need to build on yesterday's rally to confirm this.

Rob Kurzatkowski, Senior Commodity Analyst


July 17, 2009

No Summer Break for Stock Index Futures Traders!

Fundamentals

Stock Index futures have shaken off the summer doldrums in July, with both a steep sell-off and sharp recovery having occurred this month. July started off with a thud, as the unemployment picture in the U.S. remains murky, with and additional loss of 467,000 jobs in June. Since the "official" start of the current recession, the number of unemployed has increased by 7.2 million and the unemployment rate has climbed by 4.6% to stand at 9.5%, with calls for the rate to reach double digits within the next few months. The loss of jobs in June was greater than expected by traders and was responsible for a week-long correction in the S&P futures market of just over 60 points. However, things began to look up for stocks this week, as stronger than expected readings for both consumer and producer prices took some of the deflationary fears out of the market, and a stronger than expected reading in the Empire State Manufacturing Survey gave some hope to traders that economic activity was beginning to rebound. On top of this seemingly "good economic news" was the start of the earnings season, with better than expected results from Intel and Alcoa putting traders in a buying mood and sparking a rally that has S&P futures back above where they were at the start of the month. Today we have options expiration for equity options, as well as options on the stock index futures, so traders should expect a potentially volatile session as traders scurry to close out or hedge their options positions before the close of trading -- although given the prices swings we have seen so far this month, today's option expiration may seem calm by comparison.

Trading Ideas

With the CBOE Volatility Index (VIX) near the lows of 2009 and signs that volatility may begin to increase, some traders of stock index futures may wish to investigate the purchase of straddles in the E-mini S&P 500 futures. A long straddle trade involves the purchase of a call option and a put option at the same strike price and month. An example of this trade would be buying the August E-mini S&P 500 925 straddle. With the September E-mini S&P trading at 925.50, the straddle could be purchased for 56.00 points, or $2800 per straddle. The premium paid would be the maximum risk on the trade, and the trade would be profitable if the September E-mini S&P is trading above 981.00 or below 869.00 at expiration in August. However, given the negative effects of time decay on a long straddle position, some traders may wish to exit the position before expiration -- especially if volatility increases sharply or if there is little movement in prices and expiration is less than two weeks away.

Technicals

Looking at the daily chart for the September E-mini S&P 500 futures, we notice the minor downtrend that started in mid-June ended abruptly with the sharp rally we saw at the start of the week. Prices are now above both the 20 and 100-day moving averages, and momentum has turned stronger. It was unusual to see the VIX rise on Thursday's sharp gains, and this may be a signal that the VIX may have become oversold and stock volatility may begin to rise. The 14-day RSI has turned positive, with a current reading of 59.41. The June highs of 953.00 should be the next resistance point for the September futures, with last week's low of 865.25 acting as support.

Mike Zarembski, Senior Commodity Analyst

July 20, 2009

Will the Cocoa Rally Melt Away?

Fundamentals

Cocoa futures are building on Friday's gains in early trading, after data suggested that Cocoa demand had fallen less than expected. Cocoa grindings fell 6.8 percent in the second quarter of the year, versus a drop of 13% for the first quarter. The median estimate for the number was 11%. This can be seen as bullish, as traders had priced in a very meager improvement in demand. The better than expected numbers come on the heels of poor European, German and Malaysian grind numbers, so it will be interesting if this rally will have legs. Prior to the release of the grind number, Cocoa had begun to move higher on the idea that Ivory Coast production will be weaker than previously expected. At this point, the fears over the size of the Ivorian crop may not be warranted. The Ivory Coast government is rumored to have started spraying crops with pesticides, which would reduce the chance of black pod disease. Looking to the east, traders are concerned that the Indonesian crop may be impacted by the el Nino wind pattern. Like the Ivory Coast weather, this is only speculation at this point, with no hard data to support the concerns. The Cocoa market has received some outside market support in recent sessions, as Crude Oil prices have risen for four straight days. Commodity investment seems to take its cue from the petroleum sector, so further rallies in Oil could offer additional support.

Trading Ideas

Some traders may decide to take the cautious approach when dealing with the Cocoa market. Fundamentals have improved with the North American grindings data, but lingering doubts may detract further buying. Also, technically, the market may need to confirm a breakout before some buyers decide to enter the market. Due to these factors, some traders may opt to take the wait and see approach. If the nearby September contract is able to post several closes above the 2900 level, some traders may possibly wish to consider entering into the market with a long futures contract and a fairly conservative stop at 2775, and an upside objective of 3150. If and when prices test the 3000 market, some traders may wish to consider adjusting the stop 100 points higher to 2875.

Technicals

Turning to the chart, September Cocoa remains in the wide range between 2300-2900. Prices are in the upper end of the range, so traders will be keeping a close watch as to whether or not prices are able to signal a breakout if the market remains in a sideways range. The chart shows the market has made the measured moves from both the small double-bottom and bull flag that had recently developed. The RSI indicator and slow stochastics are both showing overbought
conditions, which could hamper rallies. The previous three times the RSI has shown overbought levels, prices fell back.

Rob Kurzatkowski, Senior Commodity Analyst


July 21, 2009

Are Large Speculators on the Atkins Diet?

Fundamentals

Speculators have been busy "beefing -up" their long positions in Live Cattle futures lately, as traders are ignoring current low cash prices for beef and turning their focus to potentially tighter supplies in the next few months. It will not take long to see what the government pegs U.S. Cattle supplies when the USDA releases its monthly Cattle of Feed (COF) report this Friday afternoon. Early estimates have both Cattle placements and on-feed supplies at their lowest levels since the late 1990's. Those holding long Cattle futures will need to see a "bullish" COF report, given the relatively large premium nearby futures are trading to the cash market. Even with the relatively large jump in Cash cattle prices on Friday, up $2.00 to $84.00, August futures are still trading at an over $2.00 premium to cash, which could spur some long liquidation selling should the COF report disappoint the "bulls". The most recent Commitment of Traders report released on Friday shows large non-commercial traders (hedge and commodity funds) adding an additional 13,425 net long positions during the week ending July 14th. Small speculators and commercial traders remain net-short Live Cattle futures, but they are beginning to lighten-up on their positions, given the multi-month highs Cattle futures have made. Cattle slaughter figures last week totaled 627,000 head, down nearly 10% from last year. With meat packer margins weak to negative, it may be difficult for cash cattle to catch up with futures prices, unless product demand begins to increase or Cattle supplies tighten considerably. We should have a better perspective on the supply situation after this Friday's report.

Trading Ideas

With Friday's Cattle on Feed report on the horizon and the mixed outlook for Futures and Cash Cattle prices, traders may pump-up the prices of Cattle options heading into Friday's report, as those with existing positions look for some "insurance" in the form of long Cattle option positions to help protect against a "surprise" in the COF report. However, with good support seen at the $82.00 area in the August contract and a 90 handle expected to draw additional hedge selling, some traders may wish to take advantage of any pre-report spike in volatility that may occur by looking into a short strangle position. A short strangle is comprised of a short call and a short put position at different strike prices in the same contract month. Trades holding these positions expect futures prices to remain within the boundaries of the strike prices, and time decay helps the position. An example of this position would be selling the August 90 call and selling the August 82 put. As of this writing, with August Cattle trading at 86.25, the strangle could be sold for about 0.40 points, or $160 per strangle before commissions. Given the risk associated with any short option position, traders will need to monitor the position carefully and may possibly wish to close out the position should the August futures move to the strike price of either the put or the call before expiration in August.

Technicals

Looking at the daily chart for August Live Cattle, we notice the latest leg in the uptrend formed by the June lows has accelerated once the 20-day moving average crossed above the 100-day moving average. This bullish signal was followed by a surge in speculative buying, especially by large speculative accounts that are more "technical" in their trading methods. However, we also notice a potential 'bearish divergence" forming in the 14-day RSI, when it failed to make a new high reading on Monday's multi-month highs of 86.625. The next resistance point for August Live Cattle is seen at 87.00, with support found at the July 10th lows of 82.95.

Mike Zarembski, Senior Commodity Analyst

July 22, 2009

Regulatory Reaction

Fundamentals

Wheat futures are lower this morning, due to better than expected growing conditions and the CFTC crackdown on speculators. Recent rains may increase the Australian crop size by 3 percent over prior estimates. Meanwhile, the cool summer and ample rains have improved crop conditions in the US and Canada. Rains have been steady and have not interfered with the winter Wheat harvest, which is 72 percent complete. Traders are closely watching the CFTC's actions regarding exceptions to position limits for certain index traders. Index traders have been blamed for the disconnect between futures and cash prices,, as well as increasing the overall volatility in the Wheat market. The lack of convergence in the futures/cash basis has made it difficult for farmers and end users to hedge their cash positions effectively. The lack of convergence has also been blamed for rising prices for foods such as cereals, breads and baked goods. The CFTC is in the awkward position of trying to limit the influence that index traders have on commodity prices, while also trying to make the market accessible for a broad spectrum of traders. The Commission is looking at doing away with the exemptions, which would be seen as a bearish force for the market. There is also the question of how much time will be alloted to comply with position limits. If funds are forced to comply with position limits rather quickly, prices could drop very sharply, and very quickly, because of the number on contracts being sold. Also, opportunistic traders may jump on the short side of the market to take advatage of a fund liquidation, which could add further downward pressure. Needless to say, whatever decision the CFTC comes up with will have a major impact on the market. It has already garnered more attention than any crop related news in recent weeks.

Trading Ideas

The immanent CFTC action or inaction could cause volatility to kick-up in the Wheat market, so traders may opt to take the cautious approach and stay on the sidelines. A long straddle or strangle would normally be considered by many traders to be the logical approach in such situations, but the high volatility and time premium on December options require substantial investment and an extremely large move to break even. Some traders with a short bias could opt to take a short position with a protective call and short put. An example of such a potential trade would be to sell a Dec future at the market and, at the same time, buy a Dec 580 call (WZ9580C) and sell a Dec 530 put (WZ9530P), for a debit of 5 cents, or $250. In this strategy, the call protects from losses beyond 580 , but gains are also capped off at 530 by the short put.

Technicals

Turning to the chart, the Dec Wheat contract has bounced back after testing lows made last December. Prices, however, have not been able to cross above near-term resistance near the 575 level. Failure to break resistance here could result in a retest of recent lows. If prices manage to fall below recent lows of 538, the market risks breaking out of the wide sideways range that it has been trading in this year and creating a new downtrend. Prices have been unable to hold the 20-day moving average after crossing over on Friday and Monday.

Rob Kurzatkowski, Senior Commodity Analyst

July 23, 2009

Bears Hosting a Pig Roast

Fundamentals

After an impressive 800-point rally in nearby Lean Hog futures during the past month, it appears that bearish traders have crashed the bulls' party, as strong speculative selling has hit the market. Traders had bid-up Hog prices lately, as strong packer profit margins and relatively tight supplies of market-ready Hogs gave support to the market. However, there have been some concerns that futures prices may have gotten a bit ahead of themselves, especially in the August contract, which has been trading at a stiff premium to the CME 2-Day Lean Hog Index. Lower pork cut-out prices on Monday made traders nervous that packers would begin to balk at current cash Hog prices, which if true, would put pressure on the nearby Hog futures -- especially given the hefty premium. This came to reality, as a bout of commodity fund selling hit the market on Tuesday and prices fell below near-term chart support levels. The August and October contracts were the hardest hit, as this is where the largest speculative presence has been. Large speculators have been adding to existing net-short positions, according to the most recent Commitment of Traders report, which shows large non-commercial traders added an additional 7,984 net-short contracts as of the week ending July 14th. Although it appears that the recent rally may be over, bulls still may have the final say -- especially if the pork export market begins to recover as the summer progresses, which would increase demand for Hogs at a time when Hog weights tend to decline due to hot weather.

Trading Ideas

Given the still hefty premium the August contract is trading at vs. cash Hog prices, some traders may possibly wish to investigate bear spreads in Lean Hog futures. An example of this trade would be selling August Hogs and buying December Hogs. As of this writing, August Hogs are trading at a 560 point premium to the December contract, and traders holding this bear spread would want to see the spread narrow. Traders should remember that spread trading may not be less risky than holding an outright 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 August Hogs, we notice the market trying to recover from Tuesday's steep sell-off. Prices are still holding above the 20-day moving average, and in fact, this short-term indicator provided a buying point for short-term traders during yesterday's declines. Volume has been dropping off the past several session, as the market was making its multi-week highs, which could be a sign that the rally was more about short-covering than the establishment of new positions. The 14-day RSI has turned neutral, with a current reading of 50.84. Support for August Hogs is seen near the 60.75 area, with resistance found at last week's highs of 65.55.

Mike Zarembski, Senior Commodity Analyst

July 24, 2009

Bailouts Aren't Only for Banks

Fundamentals

Coffee futures have rebounded from oversold conditions earlier this month to trade at the highest levels in over a month. The Brazilian government entered into an agreement with domestic growers to buy 3 million bags of Coffee at a significant premium to the ICE futures prices. This has caused exports of the caffeinated bean to fall and has created tightness in supplies as a result. The Brazilian government, fearing a collapse in prices, made such a move in an attempt to establish a price floor for the commodity. The government is also expected to announce further aid to growers in the coming weeks, which could be supportive of prices. Traders have had a difficult time making sense of the weather situation in Brazil. Forecasters are expecting ample rain in the weeks and months ahead, but how the rain will impact the crops is unknown. Too much rain could impede the current crop harvest and result in premature flowering of the 2010-2011 crop, both of which can be seen as supportive of prices. On the other hand, the ample rains could result in a large bumper crop, which could counteract the government intervention and weaken Coffee prices. Like other commodities, Coffee has gotten a boost from the recent upswing in the equities market. Economic data released this week was significantly more upbeat than in prior weeks, giving traders some hope that the global economy is, in fact, recovering. The market has priced in further aid from the Brazilian government, so traders may take their cue from the equity and currency markets in upcoming sessions.

Trading Ideas

Both the fundamental and technical pictures have improved, but questions still remain. Traders may wish to enter a long position in the futures contract on a close above 130.00 with a protective stop at 127.25 and an objective of 140.00.

Technicals

Turning to the December Coffee chart, we see the market rebounding from oversold conditions in late June and early July. The market is now quickly approaching overbought levels on the RSI and resistance near the 130.00 level. In order to have its positive short term momentum spill over to a longer term positive bias, the Dec Coffee contract must close above the 130.00 mark. Failure to do so could result in range-bound trading between the 120.00 and 130.00 levels. The 130 mark is also significant for moving average watchers, as it coincides with the 50-day moving average.

Rob Kurzatkowski, Senior Commodity Analyst

July 27, 2009

Traders Getting on "Board" the Lumber Rollercoaster

Fundamentals

The past 4 weeks have not been kind to Lumber bulls as nearby futures have tumbled nearly $55 per 1,000 board feet despite signs that the U.S. housing market is not getting any worse. However, there are now signs that the downtrend may have run its course. On Thursday, the National Association of Realtors (NAR) reported that sales of existing homes in June rose by a higher-than-expected 3.6% to a 4.879 million annual rate, up from a revised 4.72 million in May. This was the 3rd straight increase in sales, and some analysts believe this might be a sign that the worst of the collapsing housing market may be over. Inventories of unsold homes also fell to a 9.4 month supply, down from 9.8 months in May. Sales of new homes for June will be released on Monday, and traders are hoping for an improvement here as well. May new home sales totaled a seasonally adjusted 342,000 down 0.6%. If there was a downside to the existing home sales figures, it was that the median price of an existing house continued to fall, coming in at $181,800, down 15.4% from June of 2008, as 31% of sales were of foreclosed homes. Rising unemployment continues to be an albatross around the neck of the housing market, and today's weekly jobless claims figures did nothing to help the psyche of the market. Weekly jobless claims rose last week by 30,000 to 554,000 on a seasonally adjusted basis. Despite the higher jobless claims figure, Lumber traders began a buying spree after the Housing figures were released, sending the most active September and November contracts up the $10 limit. Also supportive was the announcement that a major Lumber company was planning a shutdown at one of its mills, which could help to support cash market prices. Large speculators are net-long Lumber futures, according to the most recent Commitment of traders report, and Thursday's sharp rally may encourage additional buying by these momentum traders.

Trading Ideas

Given the strong support seen in the September Lumber futures at the 180.00 area and the sharp price rise after testing this key price level, traders may wish to consider a bullish strategy in September Lumber futures options. One such trade is to sell the September Lumber 180 puts. With September lumber trading at 191.50, the puts could be sold for about 4.00 points or $4.40 per contract before commissions. Traders would be able to keep the entire premium received if September Lumber closes above $180.00 at option expiration at the end of August. Given the risk involved in selling naked puts, traders should monitor the position carefully and may wish to close out the trade before expiration if the September futures close below 180.00.

Technicals

Looking at the daily chart for September Lumber we noticed buying once again emerged when the 180.00 area was tested again. However, in order to turn the market bullish, we would need to see a daily or preferably a weekly close above the 100-day moving average which is currently near the 199.00 area. Given the trending nature of the market since the end of May, it may be time for a bout of consolidation between support at 180.00 and resistance at the 200.00 level for the next few sessions.

Mike Zarembski, Senior Commodity Analyst

July 28, 2009

Bond Boredom

Fundamentals

Treasury futures have weakened since mid-July on stronger equity and commodity prices. Recent economic reports have reversed course and shown significant improvement, especially in housing, which has weakened demand for defensive instruments. Rising commodity prices once again raise the prospect of inflationary pressure creeping into the economy, lessening the appeal of fixed income instruments. There has also been the question of supply and demand. The increased government spending both by the previous and current administrations has resulted in more frequent and larger Bond issues, much to the ire of existing debt holders. China has noted its displeasure at the size of the US debt on several occasions, leaving US officials scrambling to reassure the emerging nation that government deficits will shrink. It is difficult to reassure investors in government debt when there is so much supply and very little demand, which could cause yields to rise if the equity rally continues. Not everyone is bearish on Bonds, however. Many investors may be seeing this as an opportune time to enter the treasury market, as they are skeptical of a long-term economic recovery. Many have brought up the prospect of a double dip recession, where the economy will recover for a brief period before falling into another recession. This viewpoint does not represent the consensus opinion in the market but, nonetheless, does represent enough investors to avoid a large scale collapse in the Bond market.

Trading Ideas

The mixed technical and fundamental data suggests that Bond traders may wish to capitalize on the range-bound trading range instead of attempting to catch a trend up or down. Further declines in Bond prices could create a short-term buying opportunity for traders. One such trade would be to buy the September Bond contract at 114-00 with a protective stop at 111-25 and an upside target of 118-00. This trade would risk roughly $2,218.75 for a profit potential of $4,000. A more conservative strategy would entail buying a September Bond 116 call (USU9116C) and selling a September Bond 118 call (USU9118C) for a debit of 0-45, or $703.13. The maximum profit on the spread is $1,296.87.


Technicals

Turning to the chart, the September Bond contract was unable to mount rallies beyond mid-May highs and has fallen back to the mid teens as a result. This indicates that the market may be stuck in range-bound trading between 112-00 and 121-00 for the foreseeable future. The 112-00 level is of key importance for the Bond contract, as this has been a significant support level for the past two years. Failure to hold at 112-00 could be seen as a major downside breakout. It does not look like there is enough momentum to push prices below this level at this point, as indicators are giving oversold readings, which would be seen as supportive for the market.

Rob Kurzatkowski, Senior Commodity Analyst



July 29, 2009

Will Short-Covering "Fuel" a Rally in Natural Gas Futures?

Fundamentals

The old saying "every dog has its day" has been quite apropos for the Natural Gas futures market during the past week, as the market staged a significant rally since the lows of 3.227 in the August contract were made on July 13th. Much of the rally was attributed to short-covering by speculators, as better then expected corporate earnings and signs of improving economic data have traders starting to look forward, expecting demand to begin to improve. However, in the near-term, the U.S. still has more than ample supplies of Natural Gas in storage. As of July 10th, Gas in storage totaled 2.886 trillion cubic feet (tcf), up 18.7% from the 5-year average of 2.432 tcf. Mild summer weather in the Midwest and Northeast has lessened the demand for air conditioning, which curtails the demand for power production. In addition, there have still not been any definitive signs that industrial demand is turning up, as the EIA predicts industrial demand to be down by 8.2% in 2009. Gas producers are trying to respond to slack demand by curtailing drilling for Natural Gas. It is estimated that rig counts are down nearly 60% from the end of the third quarter of 2008. As we move closer to the peak hurricane season in the Atlantic starting in September, we may begin to see traders start to price in a weather "risk premium" in the fall month contracts, as any significant storm damage to the energy infrastructure in the Gulf of Mexico could curtail production for some time and send prices higher as the current gas" surplus" is absorbed. However, early in the season we are already seeing some forecasters predict fewer storms this year -- most recently; WSI Corporation lowered their estimate to 10 named storms down from 11 they earlier predicted. WSI also lowered the number of storms expected to reach hurricane strength to 5, down from the 6 storms earlier predicted. Although it appears that Natural Gas bears continue to hold the upper hand given current Gas fundamentals, traders should not become complacent with the current lack of volatility the Natural Gas market is presently experiencing -- especially with a large net-short position still being held by large speculative traders. This short position could be the fuel for a sharp move up in prices should any supply disruptions occur.


Trading Ideas

With Natural Gas prices at relatively low price levels as we head into the heart of the hurricane season, the odds of a "weather premium" being built into the fall month contracts increases. One way a trader may wish to play this scenario is to investigate bull call spreads in the fall month contracts. An example of this trade is buying the November 5 calls and selling the November 7 calls. The November options expire in the last week of October, which is nearly the end of the peak hurricane season. With November Natural Gas trading at 4.560, the spread could be purchased for about 360 points, or $3600 per spread before commissions. More aggressive traders may possibly wish to sell puts below the current contract lows of 4.25 to help offset some of the long premium cost of the bull call spread. An example would be selling the 3.80 puts for November, which could be sold for about 240 points or $2400 per option currently. Traders considering this strategy should remember that when selling these puts you are potentially increasing the downside risk of this trade and so should have an exit strategy in place in the event the November Gas moves below support at the 4.250 level.


Technicals

Looking at the daily chart for September Natural Gas, we notice prices once again failed to take-out the 100-day moving average. This is important for Natural Gas bulls, as many technical traders will not consider a market to be bullish unless prices are above the 100-day MA. The 14-day RSI is turning weak, with a current reading of 43.07. 3.366 remains support for the September contract, with resistance found at last week's highs of 4.045.

Mike Zarembski, Senior Commodity Analyst

July 30, 2009

Rain Dance

Fundamentals

Sugar prices are sharply higher once again this morning, due to rain issues in India and Brazil, which may curb production for the 2009-2010 crop year. A much milder than expected monsoon season in India has traders changing their initial opinions that Indian production will resume normal levels after a disastrous 2008-2009 crop year. This could very well result in India continuing to be a net importer instead of a net exporter of Sugar cane. Analysts are suggesting that India's imports will now be 5.0 million metric tons, which is double prior estimates. Brazil, on the other hand, has had more than enough rain and could lend some rain to India. Heavy rains have interfered with the current crop year harvest. The market has priced-in a large Brazilian crop to at least partially offset the increase in Indian imports, but harvest delays could result in a much larger global supply deficit. Brazil has been asked to shoulder the burden and produce more Sugar cane to make up for deficits elsewhere. The South American nation has certainly made the effort, but this could be thwarted by the el Nino wind pattern dumping more rain than farmers can deal with. Similar to what has been occurring in other commodity markets, Sugar traders have been keeping a close eye on the CFTC's efforts to curb commodity market speculation. While Sugar traders have not been targeted in the same way that Crude Oil and Wheat speculators have, there are a large number of funds participating in the market which may be forced to limit their activity. This can be seen as having a negative influence on prices, but a decision by the Commission could be weeks away. The US Dollar will play a minor role in influencing the market going forward, but outside markets have only had a minimal impact on the Sugar market of late.

Trading Ideas

Given the recent run-up in prices and volatility, some traders may wish to wait for a more opportune time to enter the long side of the market. The overbought technical conditions suggest that prices may possibly pull back, perhaps near the 18.00 level. Therefore, some traders may wish to consider buying an October Sugar contract on a limit at 18.15, with a stop at 17.60 and an upside objective of 19.45. This trade risks around $616 for a profit potential of approximately $1,456.

Technicals

Turning to the chart, the October Sugar contract continues to climb, after breaking out of a bullish wedge pattern on the daily chart. Prices have not yet made the measured move from the formation, which suggests prices could rally to the 19.30's. The technically overbought conditions could hamper the push higher and suggest that prices may need to correct a bit before advancing. The RSI indicator is at 80%, while the slow stochastics are in the mid-to-high 90's. The 18.00 level can be seen as near-term support, which was tested after the initial breakout from the wedge. Declines below 18.00 could result in a reversal of near term technicals.

Rob Kurzatkowski, Senior Commodity Analyst

July 31, 2009

Are Coffee Prices Consolidating?

Fundamentals

Coffee futures traders have been on a rollercoaster ride since May, with thirty-cent price swings both higher, and now lower the past three months. The ride may be at an end, and a consolidation period may be approaching as fundamentals turn mixed. First up for the bulls, weather forecasts are calling for colder and wetter conditions in the Coffee growing regions of Brazil, the world's largest Coffee producer and exporter. Wet weather, in particular, can hamper the quality of the coffee beans, and any signs of continued wet weather will be closely monitored by traders. The Columbian Coffee crop continues to disappoint, with just 4.24 million bags produced for the beginning of the year through June 30th. If the production trend continues, the country will miss the government's current target of just over 11 million bags. For the bearish camp, the strength in the Brazilian Real vs. the U.S. Dollar has caused Coffee sales to accelerate, with June shipments up over 470,000 bags vs. June 2008. Large speculators have begun to lighten-up on their net long positions in Coffee futures, with the Commitment of Traders report showing large non-commercial traders shedding 4687 net long contracts the week ending July 14th. This puts the large speculative position at 3173 contracts. Commercials during this time have turned to becoming net sellers in the Coffee market, which may accelerate on any short-term rally attempts. Given the mixed arguments as to the direction of Coffee prices, it appears that traders may begin to switch to decaf as the market's volatility begins to wane.

Trading Ideas

If Coffee prices do start to consolidate, some traders may want to consider option strategies that can take advantage of a range-bound market. Since the middle of June, September Coffee prices have not been higher than 126.30 or lower than 113.35. If a trader believes that prices will stay within this range over the next few weeks, they could explore the possibility of selling September Coffee strangles. September Coffee options expire on August 14th, so time decay will work for a short strangle position. An example of this trade is selling the September Coffee 130 calls and selling the September 112.5 puts. With September Coffee trading at 124.70, this strangle could be sold for about 1.50 points, or $562.50 per strangle, not including commissions. Notice that the strike prices are outside of the current price range, and given the potential unlimited risk involved in selling strangles, a trader should closely monitor the position and may possibly want to consider closing out the trade should September Coffee trade at or above the call strike or at or below the put strike.

Technicals

Looking at the daily chart for September Coffee, we notice the price consolidation has taken hold. Daily price swings continue to hover right around the 100-day moving average, which gives neither bulls nor bears the edge. The 14-day RSI is still in neutral territory, with a current reading of 57.12. Resistance is found at the recent highs of 126.30, with support found at 113.35.

Mike Zarembski, Senior Commodity Analyst