Fundamentals

Stock index futures look to end the month of August on a weak note, as a global sell-off in equities spreads to the U.S. In China, the benchmark Shanghai Index fell by 6.7 percent yesterday, as traders fear that tightening credit will put the brakes on the country's expanding economy. The sell-off sent share prices in China down over 20% since August 4th and has many traders believing that Chinese indices may have entered a bear market phase. Obviously things are much better for U.S. stock indices, with the S&P 500 down only slightly from its highest point of 2009. However, September has historically never been kind to equities, and many traders believe we may see a correction in U.S. share prices this fall, as professional traders come back from their summer holidays and trading volume improves from its doldrums. The direction the indices may take could be determined by the slew of economic data coming out to start the month, including reports on existing home sales, factory orders, jobless claims, and the always important non-farm payrolls data for August. Current estimates for U.S. payrolls are for a decline of around 225,000 jobs in August, slightly better than the 247,000 decline in July. The unemployment rate is expected to increase by 0.1% to 9.5% after the surprising 0.2% decline seen in July. If this week's economic data can help confirm that the worst of the recession is behind is, then equities may continue their stunning recovery. If not, the market's reaction in China may be an omen of a challenging fall for traders.

Trading Ideas

Given the potential for volatility to increase in September, especially with the unemployment report looming, some traders may wish to consider initiating positions that will benefit from an increase in volatility. An example of such a trade using futures options would be buying a straddle. A long straddle involves buying a call option and buying a put option at the same strike price in the same month. For instance, buying the September E-mini S&P 500 1015 straddle. With the September futures trading at 1015, the straddle could be purchased for 23.50 points, or $1,175 per straddle before commissions. The premium paid would be the maximum loss on the trade. Since this trade has less than 3 weeks to expiration, more risk averse traders may wish to consider closing out the trade early if the position loses half its value before expiration.

Technicals

Looking at the daily chart for September E-mini S&P 500 futures, we notice the market holding just above the 20-day moving average. The last time prices fell below the 20-day MA was on August 17th, and prices rebounded the following day. We are showing a bearish divergence in the 14-day RSI, as the highs made on Friday in the ESU9 did not correspond with a new high reading in the RSI. This may be a sign that buying momentum is beginning to wane and a correction in prices is due. 1038.75 is seen as resistance for the September contract, with support found at 975.50.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

"I'm not dead yet!" is not just a quote from a Monty Python movie, but also the cry from those bullish on U.S. Treasury futures, despite the sharp decline in prices since the beginning of the year. Recently, Ten-year Note futures have rallied to highs not seen since May, as the surging equities rally has stalled, causing investors and traders to move funds into perceived "safer" investments. There have been some news stories reporting that the slump in commercial real estate may trigger additional bank failures, which do not help to dampen concerns that the recent economic recovery might be starting to run out of steam. Yesterday's report on Q2 unit labor costs showed a decline of 5.9% on an annual rate, which demonstrates that wage inflation has been muted and is considered supportive to the views that the Federal Reserve will not need to worry about rising inflation for some time. Although the labor market has shown some signs of stabilizing, there are still concerns that U.S. job creation will continue to lag. Yesterday's Automatic Data Processing/Macroeconomic Advisers private-sector jobs survey has the U.S. shedding 298,000 jobs in August, which was above estimates of 215,000 jobs lost. While the number of jobs lost has begun to decline, there are still no signs that the U.S. will move towards actually creating jobs anytime soon. Expectations are that the monthly Non-farm payrolls report to be released on Friday will show an increase in the August unemployment rate to 9.5%. Trading volume in the Treasury market should be light the rest of the week -- at least until the NFP report is released. However, with the 3-day holiday weekend in the U.S. due to the Labor Day holiday on Monday, many of the bond trading desks will empty out by late morning on Friday, as traders take advantage of the end of summer holiday.

Trading Ideas

A quick look at a continuous chart for 10-year Note futures (TY) shows the market has moved into a consolidation pattern just after the recent lows were made back at the end of June. With this week's non-farm payrolls report on tap, many traders like to buy options of 10-year Note futures to either protect existing futures positions or to speculate on a big move in treasury prices if the report varies widely from expectations. This normally has the effect of increasing volatility levels in the options days before the report is released. Some traders looking for Treasury prices to remain range bound may wish to take advantage of any increase in option volatility by possibly selling strangles in TY options. An example of this trade would be selling October 120 calls and selling October 114 puts. With the December 10-year Notes trading at 117-21, this strangle could be sold for 20/64, or $312.50 per straddle before commissions. The premium received is the maximum possible profit from the trade. Given the potentially unlimited loss potential on short strangles, traders who may choose to implement this strategy should monitor their position closely. To help control the risk on the position, some traders may wish to exit the trade early if the TYZ9 futures trade at or above 120-00 or below 114-00 before expiration on September 25th.

Technicals

Looking at the continuous daily chart for the Ten-year note futures, we notice prices have been stuck in a 4-point range, with 119-00 at the top end of the range and just under 115-00 at the low end. Prices have been hovering on both sides of the 20-day moving average, which has chopped short-term momentum traders to pieces. The 200-day moving average looms near the 121-00 level, and longer-term position traders would be hard pressed to be bullish on 10-year Notes until prices close above this long-term indicator. The 14-day RSI remains in neutral territory with a current reading of 54.66. 119-00 is seen as resistance in the December TY futures, with support found at 113-06.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

The non-farm payroll results were mixed, with a smaller than expected decrease in jobs for the month of August, but a larger than expected increase in the unemployment rate. This has led to choppy trading in treasuries, as traders try to digest and interpret the data and what impact it will have on the economy going forward. The report may have a slightly bullish tilt for the treasury market in the near-term, as the V-shaped recovery some were expecting for the labor market may be stalling near the bottom. The rise in the equity markets seems to be a bit overdone at the moment, which can be seen as a bullish force for treasuries. On the other hand, Gold prices have seen a significant bounce due to a weaker dollar and perceived value, which has hurt demand for Bonds and Notes. The fact that treasuries and precious metals have been on an uptrend since mid-August shows that there is still genuine concern about the economy because consumer spending and unemployment remain huge question marks. Bond traders will look to next week’s auctions to provide further guidance. Barring a failed auction or a surprise spike in rates, Bonds seem to have a bullish bias going into the auctions.

Trading Ideas

Some traders may wish to consider taking a cautious approach ahead of next week’s auctions and choose to enter into an option trade instead of the futures market. The fundamentals and technicals seem to favor more upside. Some bullish traders may possibly wish to enter a bull call spread, buying the October Bond 121 call (USV9121C) and selling the October 123 call (USV9123C) at a limit of 0-35, or $546.88 to the buy side. The trade risks the initial debit of $546.88 for maximum profit potential of 1-29, or $1,453.13.

Technicals

Technically, The December Bond contract has been in an uptrend since mid-August. Today’s lows have held the uptrend line thus far, suggesting the trend may continue. The lows also tested and held newly established support near the 120-00 mark. The momentum indicator is showing bullish divergence from both price and RSI, favoring a bullish bias. The RSI continues to hover near overbought levels, and the stochastics are still overbought -- both of which could hinder further price advances.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

If one were to look up a textbook definition of a bear market, this year's natural gas market would be it. Yesterday, lead month Natural Gas futures fell to lows not seen since March of 2002, as the EIA weekly storage report showed 65 billion cubic feet (bcf) of gas was placed into storage last week. Although this figure was in-line with expectations and well below the 95 bcf injected into storage this time last year, traders continued to focus on weak industrial demand as well as burdensome supplies. Including last week's build, U.S. supplies of Gas in storage now total 3.323 trillion cubic feet (tcf), which is 18% above the 5-year average. It was a perfect storm for gas bulls this year, with industrial demand expected to be down just over 8.5% this year and summer cooling demand which never really materialized due to relatively cool summer weather in the Midwest and on the east coast. The market psychology is so bearish that traders have not been able to build a "weather premium" into prices, despite entering the peak Atlantic hurricane season during the month of September. Should the storm season spare the Gas infrastructure in the Gulf of Mexico this year, it is possible we may see a record amount of Gas in storage going into the winter. November 1st is considered the "official" start of the heating season in the U.S., in which energy producers begin to draw Gas out of storing to meet heating demand. Some traders believe we may reach maximum storage capacity of just under 3.9 tcf before this occurs. The previous record was 3.545 tcf of gas in storage in 2007. Large speculators are holding a large net short position in Natural Gas futures according to the most recent Commitment of Traders report (COT). According to the COT, large non-commercial traders were net short 89,239 contracts as of August 25th. Small speculative traders were net long 49,161 contracts. This information really highlights the trading styles of large and small speculators, as large speculators have historically been trend followers who will add to wining trades as the market moves in their direction. Small speculators like to try to pick tops and bottoms in a market, which is a difficult task for those lacking the funds to hold a position in the midst of a strong trending market.

Trading Ideas

Given the current weak fundamentals in the Natural Gas market as well as the upcoming rolling of long positions by the widely popular Natural Gas ETF the United States Natural Gas fund (UNG), which are expected to start on September 14th, some traders may wish to investigate bear spreads in Natural Gas futures. An example of such a trade would be buying November Natural Gas and selling October Natural Gas. As of this writing, November Gas is trading at a 1.130 premium to the October futures. A trader who chooses to hold a bear spread would want to see the November premium increase. Though the exchanges usually have a lower margin requirement for intra-commodity spreads, this trade is not without risk. Any production disruption in the Gulf of Mexico due to hurricanes or tropical storm threats could cause the front month futures to gain sharply on the deferred months. Additionally, the large short position by large speculators could cause sharp run-in prices should the market's fundamentals change dramatically as these large traders possibly attempt to exit the market all at once. As always, traders should closely monitor their positions

Technicals

Looking at the daily chart for October Natural Gas, we notice prices accelerated to the downside once the July 13th low of 3.584 was taken out. This was the bottom of a two-month long consolidation pattern that gave way in the direction of the major trend. The 14-day RSI is currently reading an extremely oversold 18.24, but has not yet shown any signs of reversing. 2.250 is seen as the next psychological support point for the October futures, with the 20-day moving average, currently near the 3.325 area, acting as resistance.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Not even a weak U.S. Dollar can spark a bullish reaction in the Wheat futures market, as the bear trend that began once the June 1st highs were made continues in full force. If there is one key reason for lower Wheat prices this year it is ample supplies. Record high Wheat prices in 2008 led producers worldwide to ramp-up production. In addition, growing conditions improved dramatically from last year, when it seemed that nearly every major Wheat exporting country was experiencing challenging production issues. U.S. Wheat prices need to remain stable in order to stay competitive in the world export market this year, as Europe, Russia, the former Soviet Republics, and Canada are all competing for business. If there is one bullish nugget out there it is found in Australia, where some Wheat growers are being hampered by dry conditions due to El Nino. However, it is still too early to mark down Australian Wheat production this season, as there remains ample time for needed rainfall to arrive. Non-commercial speculative accounts held a net-short position totaling 68,927 contracts in CBOT Wheat as of September 1st according to the most recent Commitment of Traders reports. This was up 9,745 contracts for the week and clearly demonstrates the extent to which trend-following systems play in the market. While the trend clearly remains in the bear camp, should any bullish news surface, these large net-short positions could be the fuel for a bullish run in the wheat market as these large speculative accounts begin to run for the exits. This is definitely something Wheat traders should keep in mind as we move into the final quarter of 2009.

Trading Ideas

While Wheat prices continue to move lower, the possibility for a short-covering rally increases as we move towards the winter months here in the U.S. Some traders wishing to take advantage of the current downtrend and who also may want to position themselves for a possible rally later in the year may wish to consider buying call calendar spreads in CBOT Wheat futures. An example of this trade would be buying a December 500 call and selling an October 500 call. With December Wheat currently trading at 467 ½, the calendar spread could be bought for 12 7/8, or $643.75 before commissions. Here the trader would hope to take advantage of time decay on the short October option to help offset the cost of the longer-term December option.

Technicals

Looking at the daily chart for December Wheat, we notice the downtrend is alive and well after a brief consolidation phase during late August. Prices continue to hover just below the 20-day moving average, and a close above this widely watched moving average could spark a bout of short-covering by weak bears. The 14-day RSI is in oversold territory with a current reading of 28.06. Traders should notice the major bullish divergence in the RSI, which could be an indicator that the downtrend is beginning to become a bit long in the tooth. 450.00 is seen as the next major support point for December Wheat, with resistance found at the 20-day moving average currently near the 495.00 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Never underestimate the U.S. Soybean producer, as despite a wet spring delaying Soybean plantings, the U.S. is expected to produce a record Soybean crop this year. Current estimates from traders and analysts are that 3.25 billion bushels of Soybeans will be produced, up moderately from the 3.199 billion crop estimate the USDA reported in the August crop report. Soybean yields are expected to have increased as well, with the trade looking for an average yield of 42.5 bushels per acre, up nearly 1 bushel per acre from the August report. The only thing that may possibly prevent this year's Soybean crop from being one for the record books would be an early frost/freeze. However, weather forecasters are calling for average to above average temperatures in the Midwest the next 7 to 10 days, which should help the crop as it moves to maturity. A record crop would help to alleviate tight old-crop ending stocks seen this year, as soaring Chinese demand for Soybeans has kept U.S. exports strong despite relatively high cash prices. We will learn what the USDA thinks about this year's Soybean crop when the September Crop Production and Supply/Demand report is released this morning at 7:30 a.m. Chicago time.

Trading Ideas

Given the potential for a record Soybean crop and with seasonal harvest pressure on the horizon, some traders may possibly wish to investigate buying bear put spreads in November Soybeans. An example of this trade would be buying the November 900 puts and selling the November 850 puts. With November Soybeans trading at 930.25, the spread could be bought for about 16 cents, or $800 per spread before commissions. The premium paid would be the maximum loss on the trade, with a potential gain of $2500 minus the premium paid should November Soybeans be trading at or below 850.00 per bushel at option expiration in October.

Technicals

Looking at the daily chart for November Soybeans, we notice prices continue to hover below both the 20 and 100-day moving averages. This would be considered a bearish signal by most technicians, however the market has moved into a strong support area around the 900.00 bushel area. This may be the start of a period of price consolidation until the harvest gets under way. The 14-day RSI is weak, with a current reading of 40.62. Major support is found at the recent lows just above the 880.00 area, with resistance found at the 20-day moving average, currently near the 966.00 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Crude Oil futures are lower this morning, following a drop of over two and a half dollars on Friday due to oversupply concerns. Distillate supplies are at their highest levels in 26 years ahead of fall and winter when Heating Oil demand rises. If we have a mild winter in the Northeast, this could result in distillate stocks rising even further. There is also concern that Gasoline demand may begin to taper off now that the peak driving season is over, which may create a glut of motor fuel. Demand side concerns seem to have driven trading last week and spilled over into this week. Consumer spending remains a major concern for analysts covering the economy and energies. Without a significant increase in spending by consumers, there is a very good chance that the recovery the US and much of the world has seen in recent months may stall or reverse course and result in a double dip recession. This has left many traders wondering if prices rose too quickly relative to economic conditions and supplies. Also, speculative long positions rose last week despite the sharp drop in prices on Friday. The CFTC's Commitment of Traders report can be seen as an overbought/oversold indicator. The net long position is not great enough to be considered overbought, yet traders may wish to keep an eye on this number, as it could be seen as a leading indicator. Overall, fundamentally, the Crude Oil market seems to have a bearish tilt at the moment. Despite the bearish fundamentals, traders may want to closely watch the movement of the US Dollar, as it will likely have an impact on commodity prices in general, and could prop-up prices of commodities that do not have strong fundamentals.

Trading Ideas

Given the negative shift in fundamentals and somewhat shaky technicals, some traders may wish to enter into a bearish position. Those desiring to enter the futures market may find it wise to wait for a confirmation of the triple-top pattern before initiating a position. Option traders, however, may possibly wish to enter into a bear put spread because of the limited risk involved. Since the October options expire in three days, some traders may perhaps be better suited to enter into November options instead. Bearish traders can purchase a November Crude Oil 67 put and sell a November 64 put for a debit of 1.00. The cost and risk of the trade are $1,000, while the maximum profit is 2.00, or $2,000.

Technicals

The October Crude Oil chart seems to be forming a triple-top formation, which has yet to be confirmed by a solid close below 67.42. Like any other technical pattern, traders may wish to wait for confirmation before acting on it. The October contract is also nearing the 100-day moving average. The past few times the market has flirted with the average, the Oil market has found support. A significant close below the average could signal the beginning of an extended period of stagnation in prices, or possibly, the beginning of a new downtrend. Currently, the RSI indicator is nearing oversold levels, suggesting the market may find some near-term support. It is interesting to note that the moemtum indicator has held up fairly well, despite the sharp drop on Friday, which also suggests near-term strength.

Rob Kurzatkowsi, Senior Commodity Analyst

Fundamentals

If the analysts at the USDA are correct, the answer is a resounding YES! Friday’s release of the September crop report has government statisticians calling for a U.S. Corn crop which totals 12.955 billion bushels, up nearly 200 million bushels from the August estimate. Average Corn yields also improved, rising by over 2 bushels per acre to 161.9 bushels per acre. If the current production trend continues and the weather cooperates, we could be seeing the second largest Corn crop on record. Although the U.S. production estimate was deemed bearish by traders, there was some bullish news in the form of the world Corn carry-out estimate. The USDA lowered its estimate for world Corn carry-out to 139.12 million metric tons. This was down over 2 million tons from the August estimate, as feed usage estimates were raised. Corn has seen some support recently, as traders have begun unwinding long Soybean/short Corn spreads lately as new-crop soybeans start to come to market, which helps to elevate the extremely tight old crop carry-over that sends the Soybean market into a backwardation. Small speculators are holding a large net-short position in Corn futures according to the most recent Commitment of Traders report released on Friday. This large position could spark a bout of short-covering buying should December Corn fail to take-out major psychological support at $3 per bushel. However, many analysts feel that any rally may be short-lived, as producers use any strength in futures prices to hedge their production since the Corn harvest is about to begin shortly.

Trading Ideas

Traders that may be expecting Corn prices to continue to trend lower may wish to possibly consider the Corn options market for possible trading ideas. One such trade might be buying bearish put spreads in December Corn options. An example of this trade would be buying the December 300 puts and selling the December 2 70 puts. With December Corn trading at 317 ¼ as of this writing, the put spread could be purchased for 7 ½ cents or $375 per spread before commissions. The premium paid would be the maximum risk on the trade, with a potential profit of $1500 minus the premium paid if December Corn is trading at or below $2.70 per bushel at the option expiration in November.

Technicals

Looking at the daily chart for December Corn, we notice prices continuing to hold just below the 20-day moving average. This is keeping short-term momentum traders in the bearish camp. However, the large short position being held by small speculators is setting the stage for a short-covering rally as these weak shorts run for the exits when buy stops are triggered. The market failed to take-out the key $3.00 level last week, and this area remains a very key support point. The 14-day RSI is neutral to weak, with a current reading of 42.68. The next resistance point for December Corn is seen at 337.50.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Natural Gas futures have rebounded sharply, rising for the sixth time in seven trading sessions. Coincidentally, futures are now trading at levels last seen prior to the CFTC announcing that the United States Natural Gas Fund (UNG) will no longer have a position limit exemption on August 19th. The Fund being forced to unwind positions, in addition to weak fundamentals and opportunistic traders sensing a trading opportunity, has forced prices down to what may be seen as artificially low levels. It looks as though those traders riding the short wave down have now been forced out of the market themselves. Now, traders are left with the question of where Natural Gas prices are heading next. The low price levels have attracted value buyers to the market, but will they be Atlas supporting the Gas market on their shoulders? Probably not - at least by themselves.

Economic data released yesterday was better than expected across the board. Retail sales had a better than expected showing, as did the Empire Manufacturing Index. Also, the PPI numbers came in higher than anticipated, which can be seen as inflationary and a positive for commodities in general. Traders may be holding out hope that improved economic conditions will help work down the supply glut. Like Crude Oil earlier this year, analysts are beginning to show concern that the depressed price levels could result in lower Natural Gas production.

Bargain prices, green shoots and production concerns are all supportive of Natural Gas prices, but the market is not without downside risk. Current supplies of Gas are 17% above seasonal averages heading into the fall months. This summer has been extremely mild, and forecasters are expecting these weather conditions to spill over into winter. Even with trimmed production, a mild winter will make it much more difficult to work down the supply glut. The fundamental outlook remains murky, suggesting a tug of war may ensue, leading to sideways trading.

Trading Ideas

Given the neutral fundamental and technical outlooks, traders may wish to enter in to a neutral option spread position. One such strategy would entail entering a short strangle position. Some traders may wish to sell the October Natural Gas 2.50 put (NGV92.5P) and sell the October 4.50 call (NGV94.5C) for a credit of 0.045, or $450. The maximum profit on this spread is the initial credit, yet the trade has unlimited risk potential. It might possibly be advisable to exit the short strangle if the underlying contract price nears either of the strike prices.

Technicals

The October Natural Gas chart shows the market making great strides technically since reaching contract lows earlier this month. Prices have advanced beyond the 20-day moving average, suggesting a relative low may be in place. The market flirted with the 50-day moving average, which happens to coincide with the July 13th low of 3.584 and could offer resistance. If prices are able to cross this average, the October contract may face stout resistance near the 100-day moving average near the 4.00 mark. The short-term full stochastics are beginning to enter into overbought territory, suggesting the pace of the current rally may begin to lose steam.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Traders have been inundated with economic reports the past two days, with the upshot being that the economy is showing signs of improvement. On Tuesday, the Commerce Department released the data on U.S. retail sales for August which showed the "success" of the "Cash for Clunkers" program, as overall sales rose by 2.7%. This was well above the 2% rise most traders were expecting. Even without auto sales, retail sales rose a much better than expected 1.1% last month, which shows it is hard to keep the U.S. consumer down. The August Producer Price Index rose a much higher than expected 1.7% in August as energy prices rose by 8%. However, the so-called "core" rate, which excludes energy and food prices, rose a more moderate 0.2%, which should help alleviate fears that inflationary pressures are rising. The Empire States Business Conditions Index recorded its highest levels since the fourth quarter of 2007, when in September it rose to 18.88. This is well above the worst reading seen back in March, when the index was -38.23. Although the data seems to be confirming the worst of the nearly 2-year long recession is behind us, government officials remain cautious. Federal Reserve Chairman Ben Bernanke said on Tuesday that he believes it is likely the worst of the recession is behind us, but recovery will be hampered by credit conditions and a weak labor market. This cautionary tale being expressed by the Fed Chairman may be a signal that the Federal Reserve is in no hurry to raise rates anytime soon. Looking at the Fed Funds futures, it appears the odds of a rate hike will start to increase once we enter 2010. However; many traders believe it won't be until the end of the first quarter when we may see the Fed begin their rate-tightening cycle, and if history is any guide, once the cycle begins we should expect to see a steady increase in rates for many months.

Trading Ideas

Traders looking to speculate regarding when the Fed will move on interest rates may want to consider using Fed Funds futures. The contract price is calculated by taking the perceived average Fed Funds rate for the month and subtracting that rate from 100. So, for example, if the market believes the average fed funds rate for October will be 1.25%, then the price of the October futures contract will be 100 - 1.25 = 98.75. The May 2010 Fed Funds futures contract is currently trading at 99.495, which implies an average Fed Funds Rate for May of 0.505% (100-0.505=99.495). Currently, the Fed's target rate is between 0 and 0.25 percent. Traders who believe that the average rate will be higher than 0.505% in May might choose to sell the May Fed funds futures contract, while traders believing the average Fed Funds rate will be less than 0.505% in May might consider buying the May Fed Funds Futures.

Technicals

Looking at the daily chart for the May 2010 Fed Funds futures, we notice the uptrend line formed from the August 7th lows has been broken. The market has consolidated, as recent economic news has painted a more positive picture of the economy going forward. Traders may wish to remain mindful of the 20-day moving average, which is currently near the 99.44 area, and a close below this widely watched indicator could spark additional selling, as well as test support near the 99.30 area. The 14-day RSI has moved just below overbought territory, with a current reading of 63.17. The recent highs at 99.545 look to be the next resistance level for the May futures.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Bond futures are slightly higher this morning, but are eyeing their second losing week in a row due to improved economic data. Resulting strength in equities has hurt the Bond market on two fronts. The stability of stock prices has resulted in lower demand for treasury products to hedge risk. Secondly, the greenback tends to move inversely with equity prices and the lower value of the currency makes government debt less attractive to overseas investors. It is interesting to note that the PPI indicator came in significantly higher than expected, giving evidence that inflation concerns may soon rise to the forefront of investor concerns in coming weeks and months, which can be seen as a negative force for Bonds. CPI data came in pretty much in line with expectations, but it may only be a matter of time before rising costs are passed on to the consumer -- especially if economic data strengthens. Inflationary pressure has made precious metals a much more attractive investment for risk-averse traders.

While the previously mentioned factors are negatives for treasury prices, it's not all doom and gloom for Bond traders. The equity markets have continued to rally from lows made in the first quarter of the year without a meaningful correction, which suggests that prices appear to be due for a correction. The million dollar question is when and how much the market will correct. The PPI data is negative for treasuries in the near-term, but this can be a catch-22 for companies. If companies are going to absorb these higher costs to stimulate consumer spending, profit margins are going to be thin. If they pass the costs onto consumers, spending may continue to flounder. Fundamentals seem to support a bearish view for Bonds, but further price advances are certainly not out of the question.

Trading Ideas

The fundamentals and technicals do not give a strong bias one way or the other for Bond prices, so traders may wish to enter into a neutral breakout strategy. One such strategy would be buying a long strangle. Some traders may wish to purchase the November Bond 122 call (USX9122C) and the November 117 put (USX9117P) for a combined price of 2-10, or $2,156.25. Given the high cost of the trade, it may be appropriate for some traders to consider exiting the call position if the price of the December Bond contract closes below 117-16, while letting the put position run. Conversely, some traders may alternatively wish to exit the put on a close above 121-05 and let the call position run.

Technicals

The December Bond chart shows the market forming a triangle/wedge formation. The market can break out either way from such a formation, but the pattern does have an upward bias, as the trend preceding the formation is up. If the market does break out to the downside, the 117-16 area would be a support area. If this support is broken, the market may see significant downside pressure. The oscillators are neutral at the moment, with the momentum indicator showing very slight bearish divergence from the RSI.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Coffee traders must like thrill rides, as futures prices have resembled a roller coaster the past few months. The latest uphill climb for Coffee prices has the December futures trading at one-month highs, as the Brazilian government announced a price support program for Coffee that will allow the government to purchase up to 10 million bags of Coffee in 2009 and 2010. This is being done to allow producers to gain needed funds without forcing large sales of Coffee to the market once the harvest begins. It will also allow the Brazilian government to increase its Coffee stockpiles, which can be used to supply the market during the cyclical down years in crop production. The beginning of fall in the Northern Hemisphere is also the start of increased coffee demand, as roasters obtain supplies for the coming winter months. A weak U.S. Dollar, especially vs. the Brazilian Real, is also a supporting factor in the Coffee futures market. Speculators are only modestly net-long Coffee futures according to the most recent Commitment of Traders report. Combined, both large and small speculators are holding a net-long position of 6,934 contracts as of September 8th. This relatively small position leaves room for additional buying by momentum traders should the uptrend continue. Hedge selling by South American producers could also be a bit light going into the harvest due to the Brazilian government support program.

Trading Ideas

Given relatively supportive fundamentals in the Coffee market recently, some traders may wish to explore bullish trading strategies in Coffee futures. One such strategy is to buy bull call spreads. An example of this trade would be buying December 140 calls and selling December 160 calls. With December Coffee trading at 136.20, the spread could be purchased for about 4.60 points, or $1725 per spread before commissions. The premium paid is the maximum risk on the trade, with a potential profit of $7500 minus the premium paid should December Coffee be trading above 160.00 at the option's expiration in November.

Technicals

Looking at the daily chart for December Coffee, we notice we are on in the middle of the third uptrend since prices broke out of a consolidation pattern in Late April. However, the latest price movement has made higher lows and lower highs so far, which may signal that we may be in the middle of much longer period of price consolidation. For the short-term, prices remain well above both the 20 and 100-day moving averages,which currently favors the bull camp. The 14-day RSI is strong, with a current reading of 66.41. The August 10th high of 141.65 is the next major resistance point for December Coffee, with support found at the 100-day moving average, currently near the 129.20 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Sugar futures have largely been trading sideways since the beginning of August, due to mixed fundamental data. Global supplies of the sweetener have been extremely tight, but growers, such as Brazil, have been trying to increase output to compensate for the miniscule Indian crop. However, Brazil is now running into weather concerns of their own, as intermittent rains are beginning to interfere with the harvest. Analysts have increased the forecast size of the Australian crop, which could put some pressure on the Sugar market in the near-term. Indian monsoon rains have provided some hope that the Indian crop will be able to rebound, but there are whispers suggesting that the crop may, in fact, come in smaller than expectations. The bumper crop in Brazil may be able to compensate for a smaller Indian crop. Overall, Sugar market fundamentals seen to have weakened in recent weeks, suggesting further consolidation or possibly price weakness.

Trading Ideas

Some traders may possibly wish to remain on the sidelines until the Sugar market gives some sort of sense of direction. Given the extreme volatility the market has seen for the better part of the year, some neutral strategies may not be feasible. The premiums may perhaps be too great for long straddles and strangles, while the potential for extreme moves may make short straddles and strangles too risky. Some traders may decide to wait for the head and shoulder top to confirm before entering a short futures contract.

Technicals

The March Sugar chart shows the market could possibly be topping. There are signs that the chart may be in the midst of forming a head and shoulders top pattern, which if confirmed, could send prices falling into the mid-teens. The pattern is still a way off from being confirmed, but this is something some traders may wish to keep an eye on going forward. Trading has taken place just below the 20-day moving average for most of this month, which can be seen as resistance. The inability of the market to move above the average may be a sign of weakening technicals. The 50-day moving average is without earshot at current prices, suggesting the market may test the average in upcoming sessions.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Not every U.S. grown commercial cash crop is looking at near record yields this year, as the Cotton crop has had its share of weather issues. Too much rain is the current problem with the crop, as heavy rains in parts of the southeastern U.S. have hurt the quality of the crop as we near harvest. Mississippi is especially a concern, as an estimated 70% of the bolls were reported opened. Fortunately, most of the rest of the southeastern growing region is reporting delays in crop development, which has prevented damage due to the inopportune timing of recent rains. The weekly crop progress report released on Monday shows 50% of the U.S. Cotton crop was rated good to excellent. However, 19% of the crop was rated poor to very poor, with Texas reporting 30% if the crop as poor to very poor. Even though this year's crop will not be a bin buster, the recent rally in prices has curtailed U.S. Cotton exports, despite a very weak U.S. Dollar. China, the world's largest Cotton importer, announced that its Cotton imports fell by 41% in August, compared to 109,663 metric tons last year. This was also much lower that July imports which totaled 131,400 metric tons. The weak exports have traders fearful that the recent price rally may have run its course, especially as we enter the month of October, which historically has produced seasonal low prices for Cotton due to harvest hedge pressures. Speculators appear to be showing little concern for seasonal trends, as both large and small speculative accounts are holding net-long positions in Cotton futures, according to the most recent Commitment of Traders report. As of September 15th, non-commercial traders were holding a net-long position of 40,190 contracts, up 13,487 for the week. Although technically the current trend is up, there looks to be significant resistance near the 65.00 level that, if tested, could draw additional commercial hedge selling and test the will of bullish speculators to keep buying at the top of the recent price range.

Trading Ideas

Given the strong technical resistance seen near the 65.00 cent area and the upcoming harvest, some traders may wish to explore bearish trading strategies in Cotton. One example might be buying Cotton puts. With December Cotton trading at 64.27, the December 64 puts could be purchased for about 2.68 points, or $1,340 per option. The premium paid is the maximum loss on the trade, and more risk adverse traders may wish to cover the position should the recent highs of 65.47 be taken out on a closing basis.

Technicals

Looking at the daily chart for December Cotton, we notice prices continue to hover above both the 20 and 100-day moving averages. In addition, the 20-day MA has just crossed above the 100-day MA, which is considered a bullish technical signal. However, last Friday's attempt to test resistance at 65.00 has been met with fresh selling interest. If 65.00 holds, it looks like the Cotton market might be entering a consolidation phase, with support seen near the June lows around the 55.00 area, which could be a test if long liquidation selling occurs.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

The Dollar Index has seen a period of steady decline in September, after trading mostly sideways for the month of August. Despite many analysts forecasting a correction in equity prices, stocks have been extremely resilient, which has been a bearish force for the US Dollar. Yesterday's FOMC policy statement did little to indicate that this negative trend will reverse itself. The policy board indicated that a recovery is afoot, but also ruled out ending its own monetary stimulus. This means that the Dollar could face considerable pressure for the foreseeable future. There have already been signs that inflation is beginning to rear its ugly head in the most recent CPI report, which could further strain the economic recovery, thus resulting in the Fed keeping interest rates lower than previously expected.

Former Fed Chairman Greenspan warned the G-20 nations that the $9 trillion of fiscal stimulus spent globally to aid an economic recovery may haunt the leaders of industrialized nations. He also pointed to the fact that the US national debit has reached 84% of GDP, which could put pressure on US Bond prices and the greenback. G-20 debt will reach 82.1% of GDP by next year. It seems as though pushing through health care reform is the current administration's top priority, which could drive up the national debt even further, instead of trying to reign in debt. There is little one can say about the bullish forces that may influence the Dollar.

Trading Ideas

Given the bearish fundamental and technical forces working against the December Dollar Index, some traders may wish to consider entering into a bearish position. One such strategy could be a bear put spread, buying the December Dollar 75 puts (DXZ975P) and selling the December 72 puts (DXZ972P) for a debit of 0.60, or $600. The trade risks the initial investment for a maximum profit of 2.40 points or $2,400.

Technicals

The December Dollar Index chart shows prices trending lower, after breaking out of a bearish wedge ealier this month. Yesterday's doji candlestick suggests the contract may bounce in the near-term. There is nothing on the chart, however, to indicate the market may be nearing a bottom. The market is struggling to bounce back from oversold levels. The oversold conditions could slow the pace of selling near-term.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Crude Oil futures have fallen to nearly 2-month lows, on the back of a very bearish EIA energy stocks report. On Wednesday, the Energy Information Administration reported that U.S. Crude Oil stocks rose by 2.855 million barrels last week, well above the 1.4 million barrel draw most analysts were expecting. However, really bearish figures were seen in the energy products -- Heating Oil and Gasoline -- which both posted sharply higher increases last week. Ironically, the product builds came despite lower refinery rates, as product imports increased and domestic demand decreased last week. As we enter the fall refinery maintenance season, we may see Oil inventories increase even further as refinery shutdowns decrease current Oil demand. Some analysts believe Oil prices have been inflated, not due to real demand increases but as a "hedge" against a weakening U.S. Dollar. Like the Currency futures, speculators in the Crude Oil market are holding large net-long positions, as a weak U.S. Dollar is deemed bullish for commodity prices. However, once the speculative position moves to an extreme level, a massive short-covering rally in the U.S. Dollar becomes more likely, as weak currency longs rush for the exits on signs of a change in trend. The same situation may be occurring in the Crude Oil market, as traders rush to take profits, as there appear to be some technical signals that the Dollar's decline might be near an end -- at least in the short run.

Trading Ideas

Given the potential for a continued sell-off in Crude Oil prices due to liquidation of speculative long positions, some traders may wish to investigate bearish trading strategies to take advantage of any long liquidation. One such strategy would be selling bear call spreads. An example of this trade would be selling the November Crude Oil 73 calls and buying the November 76 calls. With November oil trading at 66.43 as of this writing, the spread could be done at a credit of 37 ticks, or $370 per spread before commissions. The credit received is the maximum gain for the trade. The maximum loss on the trade will occur if November Oil is trading above $76.00 at the option expiration in October.

Technicals

Looking at the daily chart for November Crude Oil, we notice the price decline accelerated once we had a daily close below the key 100-day moving average, which occurred on Wednesday of this week. This could be interpreted by both long and short-term technical traders that the trend has turned bearish. The 14-day RSI has also turned weak, with a current reading of 37.77. The July 13th lows of 61.38 are the next major support point for November Oil, with resistance found at the 100-day moving average, currently near 69.70.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Crude Oil futures are lower once again this morning as a result of the stronger US Dollar and concerns that the market may be oversupplied. The commodity and financial markets were surprised by a rally in the greenback during the G-20 meeting. Stimulus spending by G-20 members has caused debt to rise to a high percentage of GDP, similar to the US, causing foreign currencies to drop. Lingering concerns that the sharp increase in government debt around the globe may cause a double dip recession seems to be having an influence on trading. Time will tell whether this bounce in the Dollar has legs or is simply a short-covering rally due to technical support and oversold conditions.

The large supply of Crude Oil on the market, along with excess Gasoline and Heating Oil, has traders concerned that there may be a supply glut. With the driving season over, traders will turn their attention to the distillates market, which includes Heating Oil. Heating Oil stockpiles are above seasonal norms, and forecasts call for a mild winter, which could lead to further stocking of the petroleum product. Iranian tensions have done little to boost the price of Crude Oil. Traders seem worn out by the constant rhetoric from Iran and their western counterparts, suggesting market participants may wait for signs of material escalation in the conflict before diving headlong into the market. Even if the cantankerous nation was to cut their output in the face of possible sanctions, there is a mindset among traders that maybe the petroleum market is so oversupplied at the moment that we do not need Iranian Oil.

Trading Ideas

It seems as though the deck is stacked against the Crude Oil market, once again. Given the Iranian tensions and fickle nature of Crude Oil traders, however, the Oil market can turn on a dime for no discernible reason. Consequently, some traders may wish to take a cautious approach and consider entering into a relatively conservative strategy, such as a bear put spread. For example, some traders may choose to consider buying a November Crude Oil 65 put (CLX965P) and selling a November 62 put (CLX962P) for a debit of 1.25, or $1,250. The trade risks the initial investment for a maximum profit of 1.75, or $1,750.

Technicals

The November Crude Oil chart shows the market finally violating the triple-top pattern on Thursday. Friday's spinning top pattern, however, indicates that the market may be set for a small bounce in the near term. This is supported by near oversold conditions on the 14-day RSI. If the market does not see a bounce in the next several sessions and we see a sell-off on oversold conditions, the breakdown on the chart can be seen as particularly important. The $60 level is a critical support area for the November Crude Oil contract. A significant close below $60 suggests prices may come down to test the low 50's or even the mid 40's.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

December Yen futures are trading at 8-month highs, as traders are starting to look at the U.S. Dollar as the new “funding currency” for so called “carry trade” positions. The Yen was the previous favorite for funding these trades, as its low interest rate environment and bearish demographics allowed traders to borrow in Yen to invest in higher interest rate environments such as Australia, New Zealand, or Brazil. However, with little signs that the Federal Reserve will alter its position on keeping interest rates low to nurture a tenuous economic recovery, many investors are now using the “greenback” in place of the Yen for the sell side of “carry trades”. The rise in the Japanese Yen vs. the U.S. Dollar has taken many traders by surprise, causing continued short-covering by speculators. This was helped in part by statements by new Japanese finance minister, Hirohisa Fujii, last week that traders interpreted as an endorsement for a stronger Yen. The Yen’s recent strength is causing serious issues for many Japanese manufactures, who prefer a weaker Yen to make its exports more competitive. If the value of the Yen were to continue to rise, the Japanese government, now led by recently elected Democratic Party of Japan (DPJ) leader Yukio Hatoyama, would feel serious pressure from Japanese corporations to potentially intervene in the interbank market to weaken the Yen to prevent a potentially serious economic slowdown of an economy dependent on exports. Though the DJP is not keen on the idea of government intervention in the currency markets, the Yen’s new-found strength may force the government’s hand sooner rather than later.

Trading Ideas

Although the current trend for Yen futures is bullish, the possibility of government intervention to weaken the Yen must be in the back of the mind of every Yen bull. Given the possibility of a big price move in either direction, some traders may choose to investigate trading strategies that will benefit from an increase in volatility. An example of one such trade would be the purchase of strangles in Yen futures options. With the December Yen trading at 1.1192 as of this writing, the December 1.15 call/December 1.08 put strangle could be purchased for 2.74 points, or $3,425 per strangle before commissions. The premium paid would be the maximum loss on the trade, and the position would be profitable at expiration if the December Yen is trading above 1.1774 or below 1.0526.

Technicals

Looking at the daily continuation chart for the Japanese Yen, we notice the market has been in bullish control since early April; however, the real strength in the up move has only occurred since the beginning of August. Notice how prices have held just above the 20-day moving average ever since we saw a bullish crossover of the 20-day MA over the 200-day MA. The 14-day RSI has just moved into overbought territory, and a bearish price correction is not out of the question given the just over 10-handle move we have seen the past several weeks. 1.1500 is seen as the next major resistance point for the December Yen, with support found at the recent lows near the 1.0800 area.

Mike Zarembski Senior Commodity Analyst

Fundamentals

Cocoa futures advanced yesterday on a report from the Ivory Coast government that suggests output may fall by as much as 15% by the world's largest producer due to lack of private investment and pesticides. The government's program to provide farmers pesticides to prevent black pod disease has been hampered, suggesting that not only will the Ivorian crop fall short of demand, but quality issues may plague the market. The International Cocoa Organization forecast a global deficit of 73,000 tons for the current crop year, and the leaked report from the Ivory Coast government would lead one to believe that there will be a deficit next year - the fourth consecutive yearly deficit. This news is certainly bullish for the Cocoa market. With Brazil struggling to meet the world's Sugar demand, little resources are left for the South American nation to fill the vacuum created by the Ivorian shortfall. This means that producers will have to take it on the chin and pay up for Cocoa beans because of a lack of substitute commodities.

Trading Ideas

Both the technical and fundamental outlooks for the December Cocoa contract point toward the possibility of further price advances. Some traders may wish to consider going long the December Cocoa (CCZ9) contract at 3125 or lower. Upon entering the trade, longs may perhaps want to work an OCO order, selling at 2975 on a stop and 3325. The trade risks roughly $1,500 for a maximum profit of $2,000.

Technicals

The December Cocoa chart shows prices firmly establishing themselves above the $3,000 a ton mark. There has been a period of consolidation, which has caused the RSI to come back down to neutral levels. The chart pattern does, however, show the market may be vulnerable in the event that price do drop below the 3,000 level, but the technicals do still favor the upside. Momentum is showing bullish divergence from both price and RSI. This, coupled with spinning top candlestick, paint a bullish short-term technical outlook.

Robert Kurzatkowski, Senior Commodity Analyst