Fundamentals

While most traders in the U.S. were preparing for the upcoming Thanksgiving Holiday, an announcement late last Wednesday that Dubai World was asking its creditors for a six-month stay on payments on its estimated 60 billion debt sent markets into a tailspin during thin-market trading conditions. The initial reaction was to sell equities and commodities, both of which have been in bull markets since March. Ironically, the one place where funds did move was to the battered U.S. Dollar, which spiked higher on "safe haven" buying. Although holiday-shortened trading hours on Friday may have delayed the full effects of any market shake-out, there were signs that the initial panic may have already subsided, as commodity markets traded well off their worst levels by the end of Friday's trading session. In fact, some traders are looking for a rebound in commodities to start the week, as traders whose long positions were stopped-out during the sell-off re-establish their long positions as November comes to a close. In addition, analysts will focus on how retailers fared during the so called "Black Friday" start to the holiday shopping season. Should retail sales come in better than expected, it may give further credence to the improvement seen in recent economic reports and lend further evidence that the worst of the recession is now behind us. Hopefully, the Dubai debt crisis will not be the start of another worldwide credit crunch.

Trading Ideas

The "Thanksgiving Day sell-off" can be used as a lesson in market behavior when news hits during a time of low liquidity. Even firmly established market trends, like the current bull market in Gold, can be affected during a "flight to liquidity". December Gold has traded in a $60 plus trading range since the start of Friday's trading session, triggering sell-stops that have been accumulating from those holding long positions in this historic bull market. Some traders who want to explore alternatives for protecting a position against sudden sharp price moves, especially during less liquid trading sessions, may want to consider the futures options markets for strategies to help control risk. Using Gold as an example, a trader who is holding a long position in Gold but wants some downside protection should the market correct may want to possibly purchase a put option in Gold futures. The premium paid for the option is like the premium paid on an insurance policy, with the strike price selected acting like the deductible on the policy. So the closer the strike price to the current market price, the higher the premium paid. This allows a trader to determine the amount of risk he wishes to take, as well as limit the potential slippage that may occur by using a sell-stop order -- especially during off-peak trading hours.

Technicals

Looking at the daily chart for February Gold, we notice that large outside day on the candlestick charts that occurred during Friday's sell-off. Though this type of market reaction can be construed as a potential reversal signal, one has to take into account the timing of the correction during a holiday-shortened session in the U.S. Some traders may look at the Friday shake-out as restoring some health back into the bull market , as weak longs were shaken-out during the price decline as sell-stops were triggered and those joining the bull market late were taken out of the market due to margin-related selling. The 14-day RSI, which hit a vastly overbought reading of 85.5 on Wednesday, has now moved to a moderately overbought reading of 75.50. Even the widely-watched 20-day moving average was not taken-out during Friday's selling rout -- which prevented a short-term selling signal from being triggered, which may have lent additional fuel to the sell-off. The 20-day MA , currently near the 1126.00 area, will now act as support for the February contract, with resistance found at Friday's contract highs of 1196.80.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Bond futures sold-off sharply ahead of today's ADP payrolls report, which is expected to show that the decline in the labor market is easing. If today's number is in line with expectations of a 170,000 decline, Bonds could face selling pressure through the end of week, when the non-farm payroll report is released. Coming into the week, Bonds had been rallying due to concerns that the holiday shopping season may be worse than expected, and the buying hit a fever pitch when the market was blindsided by the Dubai news last week. Now that some of the concerns over Dubai's debt have eased, the Dollar has resumed its downtrend, lessening the appeal of government debt. The Treasury Department is releasing the size of next week's auctions today, which are once again expected to be sizable. The combination of a weaker Dollar and high supply could spark selling of treasuries. However, the market could trade sideways or even move higher if the Dollar can gain some footing and the equity market breaks. There does not seem to be any supportive force out there for the Dollar, so a shock for equities around the globe may be needed for the Dollar to find a bit of stability and Bonds to rally.

Trading Ideas

The March Bond has bearish fundamental leanings due to the weaker Dollar, potential improvement in the labor market, and the large supply of treasuries floating around. Technically, traders may have lost faith the Bond contract because of its inability to cross through resistance. Because of the aforementioned factors, some traders may possibly wish to short the March Bond contract at the market, with a protective stop at 123-01 and a downside objective of 118-10. The trade risks roughly $1,500 for a potential profit of $3,250.

Technicals

The March Bond contract formed a doji candlestick on Friday, followed by a sharp down day yesterday. This suggests a bearish reversal. Also, prices were not able to push through resistance at 122-10 in a convincing fashion, making the bearish reversal indication potentially stronger. Longs may have also taken profits due to the overbought conditions on the RSI, which have now come down to neutral levels, as has momentum. The stochastics are still showing overbought conditions, suggesting the market may see further downside in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Bank of Japan (BOJ) governor Masaaki Shirakawa is in a tough spot. Will he resist the calls from Japanese corporate and government leaders to take decisive actions (such as currency intervention) to stop the rise of the Yen? Or, will he resist the calls for action, hoping to discourage other nations from also intervening in the FX markets to weaken their currencies vs. the flailing U.S. Dollar in order to gain a competitive advantage in exports vs. other nations. On Tuesday, the BOJ board voted to provide YEN 10 trillion in 3-month funds at the current 0.1% rate, as well as YEN 1 trillion into short-term money markets in order to provide ample liquidity to an economy struggling under the weight of a strong Yen. Japanese consumer prices fell by 2.2% in October vs. year ago levels, which marks the eighth consecutive month of falling prices. This is leading some analysts to fear that deflationary pressures will get worse unless something is done to curtail the rising Yen. The BOJ actions were designed to, hopefully, stem the tide of the rising Yen, as it makes a statement to the market that the BOJ will maintain an accommodative monetary policy for some time to come. However, with Vietnam devaluing its currency by 5% last week and China's slow movement to allow the Renminbi to float freely vs. its current peg to the USD, BOJ officials may eventually have no choice but to intervene in the FX markets to stop the Yen's rise, in order to prevent its economy from sliding even further.

Trading Ideas

The Japanese Yen looks to be at a crossroads, with the major trend pointing to a continued rise in the value of the Yen, vs. potential government pressure for the BOJ to take action to materially weaken the Yen to help its export driven corporations. This scenario could lead to a further increase in Yen volatility in the coming months, especially if currency intervention takes place. One possible trading strategy that may perhaps take advantage of an increase in volatility is the purchase of strangles in Yen futures options. An example of such a trade would be buying the February Yen 1.19 calls and the February 1.10 puts. With March Yen futures trading at 1.1476 as of this writing, the February 1.19/1.10 strangle could be purchased for 196 ticks, or $2,450 not including commissions. The premium paid is the maximum risk on the trade, with the trade showing a profit at expiration in February should the March Yen be trading above 1.2096 or below 1.0804.

Technicals

Looking at a daily continuation chart for Yen futures, we notice the market has been in a significant uptrend since yearly lows were made back in early April. Prices remain above both the 20 and 100-day moving averages, which would confirm the current bullish trend. The 14-day RSI has moved out of overbought levels, but is still reading a rather strong 64.99. Taking out the spike above 1.1700 caused by the "flight to liquidity" after the Dubai World debt crisis was announced, resistance is found near the 1.1650 level. Near-term support is seen at the 20-day moving average, currently near the 1.1250 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

The Dollar Index continues to feel pressure due to the better than expected initial claims data. Today's non-farm payrolls report may offer bears yet another reason to sell greenbacks if the report comes in better than expected and the stock market gains further traction. Aside from the jolt from Dubai, equities have not had a meaningful down day in some time. Profit taking seems to only be able to cause consolidation for stocks. The dollar does not seem to be able to find even a bit of good news these days. The current administration in Washington has not been able to stimulate job growth and continues to borrow at an unsustainable pace. The current jobless recovery would likely lead to an extended period of time before the Fed would be able to tighten. One of the only bright spots for the greenback seems to be the bank TARP repayments, which could bring down the size of treasury auctions. This is hardly the reassuring news that dollar bulls would like to see. Another is the fact that Japan would like to see the yen weaken to boost the nation's exports. What affect a weakening yen would have on the dollar remains to be seen, as traders may simply borrow yen as part of a carry trade versus higher yielding currencies. This could result in an only minimal impact on the Dollar Index.

Trading Ideas

Dollar Index fundamentals point to continued vulnerability, barring an extended shock to the equity market. Technicals have not shown any confirmation of a new downside breakout, but the chart shows the potential to start a new leg down if prices fall below the 74.00 level. Traders may wish to short the March future on a solid close below the 74.00 with a protective stop at 75.25 and a downside objective of 72.00. The trade risks roughly $1,250 for a potential profit of $2,000.

Technicals

The March Dollar Index chart shows that market consolidating between 74.00 and 75.00. The consolidation is forming a small pennant on the daily chart, suggesting the Dollar Index may see more downside ahead. To be able to gain some technical traction, the DXH10 would likely have to climb above the 77.50 level, which is no easy task. The oscillators for the March Dollar are very benign, with the RSI giving a neutral 42.28 reading and the momentum indicator in a holding pattern below the zero line.

Rob Kuzatkowski, Senior Commodity Analyst

Fundamentals

It appears that government statisticians woke up on the right side of the bed on Friday, as two major economic reports showed better than expected data on the U.S. economy. Starting the day off right, the Labor Department announced that November U.S. Non-Farm Payrolls fell by "only" 11,000, much better than the 125,000 loss most analysts were expecting. In addition, October payrolls were revised to a loss of 111,000 jobs vs. the 190,000 originally reported last month. The unemployment rate also declined, falling by 0.2% to 10%, which was a surprise for most traders. Average hours worked increased by 0.2 hours to stand at 33.2 hours. The service and health care sectors were among the biggest gainers, showing increases of 58,000 and 21,000 respectively. However, the manufacturing sector continued to shed jobs, with a loss of 41,000 reported for November. If the NFP report was not enough good news, the Commerce Department reported that U.S. factory orders increased by 0.6% in October, well above the unchanged level traders were expecting. Markets that should benefit from an improvement in the U.S. economic picture were among the biggest gainers after the reports were released, with Stock Index, Crude Oil, and the Dollar Index futures among those displaying "green" on traders quote screens. Gold futures, which have been on a historic bull run lately, traded sharply lower, falling below $1200.00 in the most active February contract, with the surge in the U.S. Dollar largely to blame for Gold's sharp decline. Though one month of sharply improved employment data does not a trend make, it certainly does paint a much brighter picture for the job market as 2010 approaches.

Trading Ideas

Friday's surprising employment report caused traders to begin to liquidate their positions in several strong trending markets, such as long Gold and short the U.S Dollar Index. Although it is still too early to call a major reversal in either of these trends, some aggressive traders may wish to consider trading strategies that would take advantage of short-term contra-trend price movements. An example using the Gold market would be to sell 1NYSE-LIFFE February mini-Gold futures and buy 1 COMEX January 1170 call. With the February Gold futures trading at 1170.90 as of this writing, the January 1170 calls were trading at 44.20 or $4420 per contract, not including commissions. The hope here is that any gains on the short mini-futures would help to offset some of the premium losses on the long option position, should long liquidation selling move prices lower in the short-term. However, should the uptrend re-assert itself, the delta on the long standard size Gold option contract should increase, allowing traders to get longer as prices move higher.

Technicals

Looking at the daily chart for February Gold, we notice the uptrend line drawn from the near-term lows of 1028.00 made in late October is now in jeopardy, as well as the widely watched 20-day moving average. Just below these two chart points could lurk long liquidation sell stops, although the so called "Thanksgiving Day commodity massacre" may have already taken many of these stop orders out. This leaves the recent lows of 1135.80 as a critical short-term support point. The 14-day RSI is showing a bearish divergence, as it failed to make a new high reading on Thursday when new all-time highs were made. Thursday's high of 1227.50 should now act as key resistance, and should February Gold manage to rebound to take-out this key resistance point, fresh momentum buying could signal a test of the 1300.00 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

With winter still nearly two weeks away, a below-normal temperature forecast for the central and eastern portions of the US have spurred renewed buying interest in Natural Gas futures. The most active January contract has once again moved above the $5.00 level, triggering speculative buy stops as weak shorts run for the exits. This has been the story for Natural Gas futures all year, as weak industrial demand combined with ample U.S. production has sent Gas storage levels soaring. As of November 27th, over 3.8 trillion cubic feet of Gas was in storage, or 14.5% above the 5-year average. Besides small rounds of short-covering buying, there has been little in the way of any meaningful rally attempts all year, as the weak fundamentals have kept Gas bears in charge. The most recent Commitment of Traders report shows large non-commercial traders (commodity and hedge funds) holding a net-short position of 71,431 contracts as of December 1st. Although this is down over 7,000 contracts for the week, it may take a weekly close above the 100-day moving average to really shake the funds out of their short positions. Last Friday's better than expected non-farm payrolls report put an abrupt end to the current downtrend, as any signs that the employment picture is improving could lead to an uptick in industrial demand, which is desperately needed to help absorb the large amounts of Gas in storage. Private weather forecasters are calling for below normal temperatures in the Midwest and on the east coast for the next two weeks, which should officially start the winter withdrawal season for Gas in storage. Traditionally, November 1st is considered the starting point, when Gas is removed from storage to meet increased demand from utilities for heating. However, as of last week we were still seeing Gas being placed in storage, a modest 2 bcf build according to the EIA, which helped to move prices to contract lows to end the week. Now that the first real cold snap is expected to reach the Chicago area on Thursday, following a moderate snowstorm expected in the Great Lakes region, thoughts of winter finally arriving will fill traders' heads, and we could start to see trading activity in Natural Gas futures begin to heat up!

Trading Ideas

The upcoming start of winter combined with signs that the worst of the recession is, indeed, behind us could be a signal that the near-term lows in Natural Gas futures may be in place. With less than 3 weeks to expiration, some aggressive traders may wish to explore selling January Natural Gas put options with strike prices below the current contract lows of 4.432. An example of this trade would be selling the January Natural Gas 4.3 puts. With the January futures trading at 5.124 as of this writing, the 4.3 puts could be sold for 0.026, or $260 per option, not including commissions. The premium received is the maximum gain on the trade, and given the risk involved in selling naked options, careful risk management is essential. Traders may wish to consider exiting the trade if the January futures close below major support at 4.432 before the January options expire on December 28th.

Technicals

Looking at the daily chart for January Natural gas, we notice prices accelerated to the upside after Friday's positive Non-Farm Payrolls report sparked a rally in Natural Gas futures, in the belief that better industrial demand could occur. Technically, the failure to take-out the contract lows made on Thursday, tied to a relatively large net-short position by large speculative traders, set-up an ideal scenario for a short-covering rally to start the week. However, there are still some technical obstacles ahead before bulls can really start to get the upper hand. First is near-term resistance seen at the recent highs of 5.192 made on November 30th. Should this barrier be taken-out, the 100-day moving average looms near the 5.400 area. The 14-day RSI is showing a bullish divergence, as this key indicator failed to make a new lower reading last Thursday, when contract lows were made.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Gold traders have been accustomed to wild ranges and high volatility, but the last few sessions have had wild swings that even the most seasoned traders have been left scratching their heads. Friday's sharp sell-off put an end to the sharp upswing in prices of the past few weeks, if only temporarily. The question now becomes - is this a trend reversal or simply a correction? Fundamental factors have been working in the precious metals' favor, as government spending continues at an unsustainable rate and interest rates remain low. The meteoric rise in prices, however, may be making traders reluctant to buy at current levels and has given holders of long positions the opportunity to take profits. As prices correct, traders may wish to see how prices behave at current levels. If prices are able to level off, traders may view this as a buying opportunity, making the current sell-off nothing more than a bump in the road. If prices begin to slip, Gold may come under extreme pressure if long-holders resolve is shaken. Gold may find itself a victim of its own success if traders view the rise in prices as too much, too soon.

Trading Ideas

Given the shakeup in the Gold market, some traders may wish to wait for the market to offer clearer confirmation of a trend. The fundamental outlook for the metal remains positive, as long as central banks keep monetary policy loose and keep buying reserves of the precious metal. Profit-taking pressure may overwhelm the market in the near-term, given the sharp run-up in prices over the past few months and the fact that we are slowly approaching year-end. Some traders willing to take a gamble that prices will correct further may possibly wish to consider testing the short side of the market by selling a futures contract on a close below 1120, with a protective stop at 1150 and a downside objective of 1070. The trade risks $3,000 for a potential profit of $5,000. This should be viewed as a somewhat risky trade, which may not be suitable for all traders.

Technicals

Turning to the chart, February Gold showed a parabolic rise in prices during the month of November and into the beginning of December. Thursday's spinning top candlestick was a signal of at least a near-term correction. The sharp drop in prices on Friday offered validation of at least a short-term correction, possibly a large one. Monday's price action indicated much indecision among traders. It appears that the overbought conditions may have added to the selling pressure on Friday, but the RSI has come back down to neutral territory. The momentum indicator is nearing the zero line. If the indicator falls below the zero line, prices could see further downside pressure.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

There was little for Corn traders to get excited about in Thursday's USDA December Crop Report. This report, which does not include crop production estimates for Corn or Soybeans, places its focus on U.S. carry-out totals, as well as world ending stocks estimates. The USDA raised U.S. Corn ending stocks by 50 million bushels to 1.675 billion bushels. This was slightly above the average analyst estimate of 1.648 billion bushels. The increase in new-crop Corn carry-out was due to a lowering of U.S. Corn export expectations, as the USDA cited slower than expected Corn shipments and strong export competition from Ukraine, which is expected to export an additional 1 million tons of Corn from the USDA's November estimate. The USDA lowered the world carry-over totals for Corn only slightly to 132.3 million metric tons (mmt), vs. 132.4 mmt in its November estimate. Corn futures have fallen from their recent highs lately, as a recovery in the U.S. Dollar and the EPA's deferral on making a decision regarding raising the percentage of ethanol in gasoline have taken some of the bullish momentum out of the Corn price. However, there are still concerns about the amount of Corn still out in the fields at this late date, with some traders estimating that there may be over 1 billion bushels of Corn still to be harvested. With a major winter storm having moved through the Midwest, there are concerns that some of the crop may have been lost or damaged, which could significantly affect the final crop total when the USDA releases its highly anticipated final crop production report on January 12th.

Trading Ideas

With Corn futures already trading off their highs and the potential for a fairly large reduction in the final new-crop production figure next month, some traders may wish to explore bullish strategies in the Corn market. An example of a bullish strategy using Corn futures options would be the purchase of a bull call spread. For instance, a trader could buy the March Corn 400 calls and sell the March Corn 450 calls. With March Corn trading at 391.50 as of this writing, the spread could be purchased for 13.75 cents or $687.50 per spread, not including commissions. The premium paid is the maximum risk on the trade, with a potential profit of $2500 minus the premium paid if March Corn is trading above 450.00 at option expiration in February. More aggressive traders may also want to possibly consider selling a March Corn 360 put in addition to buying the bull call spread, with the premium received for selling the put helping to offset a portion of the premium paid. However, this does increase the downside risk on the trade, and good risk management should be used anytime one sells naked options.

Technicals

Looking at the daily chart for March Corn, we notice Corn prices rising sharply on Thursday, despite a fairly neutral to bearish USDA carry-out estimate. Some of the rally can be tied to a moderate rebound in commodity prices in general on Thursday, but it sure looks like traders are being cautious about selling too much Corn short, given the potential for a much lower revision in U.S. Corn production totals next month. Prices are holding below the 20-day moving average, but above the 100-day MA, which presents a mixed technical picture. The 14-day RSI is moving to neutral territory with a current reading of 46.84. The 100-day moving average, currently near the 368.00 area, should act as near-term support for the March contract, with the recent highs of 425.00 seen as strong resistance.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Crude Oil futures have been losing ground recently, on stockpiling in the US and recent strength in the Dollar. The Dollar has not been gaining strength on its own merits, but rather concern that Japan will look to weaken the Yen and questions about the creditworthiness of England. It is somewhat surprising that Oil has slipped the way it has in recent weeks, considering the mild improvement in the labor market, which has gone from hemorrhaging jobs to trickling them away. Oil traders tend to be very forward-looking, and this would normally be considered a bullish development. Bulls have also been very keen on Gold, so the recent meltdown in the price of the metal may have forced some longs out of the market due to margin calls and shaken the overall resolve of traders in commodities. More directly related to petroleum, traders are concerned that the recent stockpiling reported by the EIA may create a glut that will be difficult to work down, even if the economy is able to make further strides. There are also questions surrounding the employment data and whether the data may be slightly misrepresented because employers are not eliminating jobs around the holiday season. For the time being, it looks as though the bears have the upper hand until the bull camp can find some positive factors to latch onto.

Trading Ideas

Crude Oil fundamentals have somewhat weakened recently, due to the large supply of product on the open market. However, the employment picture does seem to have improved, which could prevent a complete collapse in prices. Many traders believe that Crude Oil, like Gold, may have gotten a bit too far ahead of itself, which has been one of the major reasons for the recent selling. The chart does seem to be indicating the possibility of a further technical breakdown. Some traders may wish to take a wait and see approach, waiting for several solid closes below the 70.00 level before considering taking on a bullish position.

Technicals

The February Crude Oil chart shows prices breaking down below a relatively critical support area near $75. Prices are quickly approaching the next major support area near $70. For the Oil market to right the ship, prices will likely have to bounce back above the previous support line around $75. Further declines, on the other hand, could be a signal that the uptrend in Oil prices may be over and the market may see choppiness – or, possibly a new downtrend develop. The RSI has fallen to oversold levels, suggesting that the selling pressure seen over the past week may begin to cool off a bit. Momentum has remained relatively flat during the heavy selling, giving further indication of possible near-term strength.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Sugar prices continue to soar, with the most active March contract moving above the 25-cent level. Current tight supplies coupled with harvest delays in Brazil, the world's largest Sugar producer, due to wet weather have given trend-following traders more confidence to add to existing long positions. This should be the second consecutive year in which Sugar production has failed to meet demand, with the International Sugar Organization (ISO) estimating a 7.2 million metric ton deficit in the 2009-10 season. However, the highest prices seen since the early 1980's have Sugar-producing countries increasing production for the next marketing year. Brazil is expected to see a 10% production increase next season, and India, the world's largest consumer of Sugar, is looking for a 50% plus increase in its Sugar output from a very disappointing 15 million metric tons this past season. Production next season is expected to increase enough that the ISO now expects a Sugar surplus of around 1 million metric tons for the 2010-11 season. The conflicting fundamentals between crop years is producing active trading in Sugar spreads, with the focus on the nearby bull spreads -- especially March/May and March/ July, with the market trading in a backwardation of over 1 cent in the March/May 2010 spreads, as any additional production is not expected to hit the market until the middle of 2010. Though the expected increase in production should help keep price increases in check next season, ample demand should help prevent prices from falling too far, and single-digit Sugar prices are unlikely in the next several months.

Trading Ideas

Given the tightness currently seen in the world Sugar market and the expected potential increase in production later in 2010, some traders may wish to explore Sugar option strategies that could take advantage of the differing fundamentals expected next year. One such strategy would be buying a put calendar spread. An example of this spread would be buying a July Sugar 22-cent put and selling a March Sugar 22-cent put. With March Sugar trading at 25.19 and July Sugar trading at 22.53, the spread could be purchased for 1.98 points, or $2,217.60 per spread, not including commissions. The hope would be that March Sugar will continue to gain on the July futures, with the premium received for selling the farther out of the money March put helping to offset the cost of the just out of the money July option, as well as allow the trader to hold a bearish option position in July, when increased supplies of Sugar are expected to hit the market.

Technicals

Looking at the daily chart for March Sugar, we notice prices finally broke out of the 3-month-long price consolidation formed from the contract highs made back in September. The breakout was confirmed by higher than average volume. Prices are now well above both the 20 and 100-day moving averages, and momentum is strong with the 14-day RSI currently reading 69.60. The most recent Commitment of Traders report shows large non-commercial traders adding an additional 1,520 net long positions to their position, which stood at a net-long 143,582 contracts as of December 8th. However, this was before the recent price breakout to the upside, and a further increase in the net-long position is likely in next week's report. 25.43 looks to be the next resistance point for March Sugar, with contract highs of 26.25 looming as the next upside target should 25.43 resistance be taken out. Support is seen at the 100-day moving average currently near the 23.00 level.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Bond futures continue to drop, causing the yield curve to be at its steepest level since 1980. Improvements to the employment outlook have stoked fears of inflation in the future, which may result in the Fed aggressively raising rates in the future. Also, the size of longer-dated auctions has resulted in lackluster buying interest and an upswing in long bond yields. Supply will likely be a key consideration among traders and will likely inhibit price appreciation unless economic conditions in the US deteriorate quickly. The recent stability the US Dollar has seen may limit the slide in Bond prices. Also, the possible downgrade of British debt could cause international traders to find solace in the relative safety of US debt. The fundamental outlook for Bonds shows grey clouds with silver linings. Today's FOMC policy statement is expected to be very vanilla, so as not to disrupt the markets. Nonetheless, early trading may be somewhat subdued, but volatility could be on the upswing in the afternoon.

Trading Ideas

Given the weak market fundamentals and somewhat shaky technicals, some traders may possibly wish to be short the Bond market. However, there are several factors traders should consider before entering into a position. First, the Fed is expected to keep interest rates low well into next year -- and possibly beyond -- which may prevent yields from jumping much higher, thus limiting the downside potential. Also, a downgrade to UK debt could send shockwaves through the fixed income market and spark flight to quality buying of US Bonds. Lastly, some traders may wish to wait for a solid close below the 117-10 level before a technical breakout is confirmed. Some traders wishing to short the Bond market may want to consider selling the March futures contract on a solid close below 117-10, with a stop at 118-10 and a downside objective of 115-00. The trade risks roughly $1,000 for a potential profit of roughly $2,312.50.

Technicals

Turning to the chart, the March Bond contract has seen very narrow ranges in the past few sessions. Prices have been hovering around the 117-16 level, which can be seen as solid support. If this support level is broken, Bond prices could trade into the lower teens. Failure to violate this support area could result in sideways trading for the foreseeable future between 117 and 120. The RSI remains in the lower end of neutral readings, and a dip to oversold levels can be seen as supportive in the near-term. Momentum is showing some bearish divergence from the RSI, hinting at near-term weakness.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

It looks like traders (and OPEC Oil ministers) don't want to see Oil prices in the sixties, as the lead month January futures failed to spend much time below $70 this past week. Oil prices got a boost by a relatively bullish Energy Information Administration (EIA) weekly energy stock report. The report released on Wednesday showed that U.S. Oil stocks fell by 3.689 million barrels last week, or over double the average analyst's estimate of a 1.7 million barrel decline. Distillate inventories also declined sharply, falling by nearly 3 million barrels last week. Prices moved up sharply after the report was released, aided by options-related buying tied to options expiration in the January contract later that afternoon. However, looking into the details of the report, the headline figures start to lose some of their bullish luster, as refinery rates once again fell below 80%, as profit margins for U.S. refineries remain tight. Crude Imports fell by 365,000 barrels per day last week, signaling weak user demand. In addition, oil inventories in Cushing, Oklahoma (the delivery point for the NYMEX Crude Oil futures contract) rose by an additional 700,000 barrels last week, as some big market participants are finding it more profitable to store Crude Oil and sell deferred month futures than actually using the Crude for refining. Some of the recent price weakness in the Oil market the past several days has been tied to a resurgent U.S. Dollar, as concerns about credit downgrades in some members of the European Union as well as the credit issues in Dubai have brought a bid back into the greenback. A stronger U.S. Dollar has equated to lower commodity prices, and Oil is no exception, especially given the large net-long position being held by speculative accounts in the Oil market, which triggered a major bout of liquidation selling in Oil as the Dollar rose. The next major event for Oil traders is the December 22nd OPEC meeting being held in Luanda, Angola. However, as with the past few oil cartel meetings, no changes are expected in members' oil production quotas.

Trading Ideas

Signs of improving economic conditions in the U.S. coupled with Oil's unwillingness to stay below $70 per barrel could motivate some traders to investigate neutral to bullish option strategies in Crude Oil, such as selling puts in February Oil options. An example of such a trade might be selling the February Oil 65 puts. With February Crude trading at 74.57 as of this writing, the puts could be sold for 0.60, or $600 per option, not including commissions. The recent lows in February Crude come in at 66.82 (9/25/09 lows), so February Oil would have to fall below this major support point before there is any chance of the 65 puts moving to in the money. Since risk management is essential, especially when selling naked options, some traders may wish to possibly consider exiting the position before expiration in January should February Crude close below support at 66.82.

Technicals

Looking at the daily chart for February Crude going back the past 6 months, we notice Oil prices making a series of higher lows, starting with the July 13th lows of 63.61, to the September 25th lows of 66.82. After drawing a trendline connecting these major lows, we notice the latest Oil sell-off just missed testing the trendline, as prices rebounded the past few days. However, to turn the momentum back in favor of the bulls we would need a weekly close above the 100-day moving average currently near the 75.50 area. Momentum has turned neutral, with the 14-day RSI currently reading 44.45. Because we are seeing conflicting fundamentals in the Oil market, it may be likely that we will fall back into a trading range market for the remainder of 2009. Near-term support for February Crude is seen at 70.83, with near-term resistance found at 75.50.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Stock index futures are higher this morning, after upbeat earnings news from Oracle, RIMM and Nike after the bell yesterday. Today figures to be a choppy trading session, as it is quadruple witching, which tends to lead to more erratic trading. Also, there are no major economic releases or earnings reports that may give the market direction. It will be interesting to see if the market will be able to hold onto these gains after yesterday's sale of Citigroup stock at a discount to repay TARP funds. Citi, Bank of America, and Wells Fargo have all raised capital to repay government assistance. Traders initially viewed the event as a positive sign that the troubled lenders were on solid economic footing. They are now beginning to see that the $31 billion that the lenders had raised this month may simply be a way for the banks to rob Peter to pay Paul. Citi, in particular, did not seem ready to repay the Treasury, but was under pressure to do so after BoA announced the repayment of TARP funds. Yesterday's initial and continuing claims data was slightly worse than expected, but traders may discount the remaining data for the year and look forward to next year's data, as many employers are reluctant to shed jobs during the holiday season. The S&P has been trading in a very tight range for the past month and a half, and volatility remains at low levels. This may change when the market rings in the New Year, but the fundamental bias seems to be neutral or slightly bearish for the remainder of this year. There are no bearish fundamental indicators due to economic data, but the fact that stocks have rebounded so strongly during the course of this year may make equities subject to profit-taking pressure.

Trading Ideas

Given the lack of fresh fundamental news and indecision among traders, the fundamentals suggest the market may be in store for more range-bound trading. Likewise, the chart also points toward very subdued trading in the near-term. For these reasons, some traders may wish to take on a neutral strategy, such as selling a short strangle. An example of one such strangle could entail selling the January E-mini S&P1000 put (ESF01000P) and selling the January 1140 call (ESF01140C), for a credit of 10.00, or $500. The maximum profit is the initial credit, if the underlying March contract closes between the strikes on the January 15th expiration date. Remember, however, that the trade has unlimited loss potential, so some traders may wish to exit the position on a close through either of the strike prices.

Technicals

The March E-mini S&P chart shows very tight price action over the past month and a half. Generally, breakouts from these tight areas result in explosive moves. For the time being, however, the indicators suggest that the consolidation may continue between 1080 and 1120. The RSI is hovering near the 50 percent level, and the momentum indicator has been very close to the zero line. Like the chart itself, the oscillators are very benign and point to further range-bound trading.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Speculators have been going cuckoo for Cocoa futures lately, as the most active March futures are approaching 30-year highs. Tight global Cocoa stocks have been the main catalyst behind the price surge, as supplies out of the Ivory Coast, the world's largest Cocoa producer, have been disappointing. Domestic cash Cocoa prices in Nigeria and the Ivory Coast are starting to rise, as exporters try to obtain supplies before stocks become even tighter later in the season. With signs of an improvement in the global economic outlook, many traders believe that chocolate demand could improve going into 2010, which would increase Cocoa demand. However, the recent resurgence in the U.S. Dollar could take a bite out of speculative demand for Cocoa, as a higher Dollar makes commodity prices more expensive for non-Dollar buyers. Speculators are holding net-long positions in Cocoa futures according to the most recent Commitment of traders report, with non-commercial (large speculators) and non-reportable (small speculators) holding a combined net-long position of 44,368 contracts as of December 8th. Although the speculative position is rather large, it is still well off the record highs set in 2008 at over 73,000 contracts. As long as the greenback continued to be bid, the potential for long liquidation selling to occur in Cocoa and other commodities looks to be increasing. However, should the greenback start to falter, there appears to be plenty of room for additional speculative buying to occur in Cocoa, especially given its current bullish fundamentals.

Trading Ideas

Even though the fundamentals still point to potentially higher Cocoa prices, the market might be overdue for a correction. A quick look at the daily chart for March Cocoa shows that the 3100 level appears to be an area of solid support. A trader looking to take advantage of a potential downside move in Cocoa who believes that the 3100 area will hold may want to explore buying a put ratio spread in March Cocoa options. An example of this trade would be buying the March Cocoa 3250 put and selling 2 March Cocoa 3000 puts. With March Cocoa trading at 3250 as of this writing, the trade could be done for a debit of 65 points, or $650 per spread. Given the fact that this trade involves selling more puts than are being purchased, solid risk management is essential. Traders may want to consider closing out the trade early should March Cocoa close below 3000.

Technicals

Looking at the daily chart for March Cocoa, we notice that the long-awaited correction is underway. The continued rise in the U.S. Dollar has hurt commodity bulls, and a market like Cocoa, which is trading at historically high levels, can be particularly vulnerable to bouts of long liquidation. Friday's sell-off took the March futures below the 20-day moving average, which triggered a sell signal for short-term momentum traders. The strong selling moved the 14-day RSI below the 50 level, with a current trading of 44.60. 3100 appears to be strong support for March Cocoa, with resistance found at the 20-day moving average currently near the 3355 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

The high flying Australian Dollar has weakened in recent weeks, due to a stronger greenback and weaker commodity prices. The recent weakness the currency has seen is not of its own merits, as Australia offers favorable interest rates and is seeing its own economic recovery. Also, Australia is an exporter of raw materials to China, which has seen strong growth over the past two quarters. Nonetheless, the exchange rate of currency is heavily influenced by the movement of the US Dollar and commodity prices. Traders have begun to question whether the recent pullback in commodity prices is for real, or if we are simply seeing a correction driven by profit-taking near year-end. The US Dollar has found strength due to concerns over the creditworthiness of European government debt and encouraging economic data. The direction of the greenback will continue to have a major bearing on the Aussie, not only because of the obvious reason of the exchange rate. The US Dollar's movements directly affect commodity prices, which in turn, affect the exchange rate of the Aussie. The Australian Dollar has also felt some pressure from the unwinding of carry-trades before year-end. This time of year tends to be more illiquid, which has made the forex markets more volatile than usual and resulted in a rather sharp drop in the Australian currency.

Trading Ideas

The fundamental outlook for the Australian Dollar has soured in the near-term. Long-term, the US debt load and probability that commodity prices will appreciate do paint a positive picture for the Aussie and could limit its downside potential in the near-term. The technical outlook appears much bleaker that the fundamentals and suggests the Aussie may be in for a rough ride in the near-term. Given the fact that fundamentals have shifted because of outside influences, traders may wish to take a more cautious approach and enter into a bear put spread, buying the February 0.8650 put (ADG00.865P) and selling the February 0.8500 put (ADG00.85P) for a debit of 0.0050, or $500. The trade risks the initial investment for a potential profit of 0.0100, or $1,000, if the March contract closes below 0.8500 on the February 5th expiration date.

Technicals

Turning to the chart, the March Aussie Dollar had confirmed a triple-top formation, hinting that prices could come down to test support in the 0.8500 area. The recent close below the 100-day moving average can also be seen as a significant technical setback for the currency. The stochastics are already at oversold levels, and the RSI has now drifted into oversold territory as well. This could provide the Australian Dollar with some much needed support in the near-term. 0.8500 can be seen as somewhat of a "make or break" level, as a breakdown below this key support level could spark a new downtrend.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

As happened with its cousins in the "softs" complex Cocoa and Cotton, the Coffee bull market has taken a pause, a victim of a resurgent U.S. Dollar and long liquidation by commodity funds. Coffee fundamentals still look positive, with the USDA estimating 2009-10 world Coffee production at 125.2 million bags, down slightly from the November International Coffee Organization (ICO) estimate for the 2008-09 season crop of 128 million bags. Lower production is expected out of Brazil this coming season, with the USDA estimating production at 43.5 million bags, vs. 51.5 million this past production year. Coffee output is also expected to decline in the major Coffee producing countries of Vietnam and Columbia this upcoming season, which has contributed to the bullish tone the past few months. Both large and small speculators are net-long Coffee futures according to the most recent Commitment of Traders report. As of December 15th, the combined net-long position of non-commercial traders totaled 41,190 contracts, which was up just over 6,000 contract for the week. Since that time, the most active March contract has lost nearly 7 cents per pound, as a stronger U.S. Dollar has taken the luster off commodities, causing long liquidation and position squaring ahead of the New Year. Although the longer-term trend is still bullish, we may need to see further long liquidation by speculators -- especially those who came late to the bullish party - in order to restore some technical health to the bull market.

Trading Ideas

Although the Coffee market is currently in a correction phase in the bull market, there appears to be strong support between the 130.00 and 125.00 levels. Some traders looking for support to hold in the March Coffee futures may wish to explore selling puts below this key support level. An example of such a trade would be selling the March Coffee 130.00 puts. With March Coffee trading at 142.35 as of this writing, the 130 puts could be sold for 1.90 points, or $712.50 per option, not including commissions. The premium received is the maximum potential profit on the trade, which would be realized if March Coffee is trading above 130.00 at option expiration in February. Given the potential risk involved in selling naked options, strong risk management is essential. Some traders may possibly wish to consider closing out the trade before expiration if March Coffee closes below 130.00 -- or if the price of the option moves to 3 times the premium received.

Technicals

Looking at the daily chart for March Coffee, we notice Tuesday's steep sell-off moved prices below the 20-day moving average, which is considered a sell signal for many short-term trading systems. However, prices still remain above the 100-day moving average, which is used as a bullish/bearish barometer by longer-term trend traders. In addition, the trendline drawn from the July 13th lows has not been tested since September, which keeps the bullish trend alive. The 14-day RSI has moved solidly neutral, with a current reading of 49.31. The next support point for March Coffee is seen at the 100-day moving average currently near the 137.50 area, with resistance found at the recent highs made on December 16th at 149.50.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Crude Oil futures are holding firm near the $78 a barrel mark, aided by a slightly weaker Dollar and cold temperatures. The cold blast that has hit much of the US suggests that demand for heating fuels, such as heating oil, may rise. Energy traders have been greeted with solid economic data recently, most notably a better than expected initial claims figure, which shows the lowest unemployment claims in nearly 15 months. Traders may take this with a grain of salt, as many employers are less prone to lay off employees during the holiday season. If the contraction in the labor market does subside during the new year, it could give Oil a significant boost. The market does still appear to be oversupplied at the moment, which coupled with a strong showing for the Dollar, could reign-in rallies. Supplies, however, have come down to the lowest level since the Jan 9th EIA report, suggesting stockpiles are being worked down. If economic conditions do improve significantly, there is a genuine risk of a supply squeeze in 2010. The long-term fundamental outlook has improved significantly due to inventory levels being worked down and economic conditions improving. A setback for the Dollar could spark significant rallies in Oil prices. A stronger greenback could, at the very least, keep Crude Oil prices in check or could cause prices to correct.

Trading Ideas

Given the fact that fundamentals seem to have improved but remain vulnerable, as do the technicals, some traders may wish to put on a bullish to neutral strategy, such as a bull put spread. For example, some traders may wish to sell the Feb 72.50 put (CLG072.5P) and buy the Feb 70 put (CLG070P) for a net credit of 0.50, or $500. The trade risks 2.00 or $2,000, and the maximum gain is limited to the premium received.

Technicals

The Feb Crude Oil chart shows prices rebounding sharply after coming down to the $70 level. Prices are now flirting with resistance at the $80 level, which may be a stumbling block for prices in the near-term. A significant close above the 81.37 level could signal a new breakout and would suggest prices could make a run at 88.71, which is the next area of solid resistance. If prices are not able to make a run above 80.00, prices could be caught in a range between 70.00 and 80.00 for the foreseeable future. The stochastics show an overbought reading and the RSI is getting close to overbought levels as well, hinting that prices could face pressure in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Sugar futures have been one of the best performing markets of 2009, as prices have more than doubled since the start of the year. It has been nearly 30 years since world Sugar prices have been this high, with the most active March contract trading above the 27 cents per pound level as of this writing. Tight cash market supplies have been the driving force behind the price surge, as the market has been in a deficit situation for the past two years. Delays in the harvest out of Brazil have added to the current supply situation, as wet weather conditions have kept producers out of the cane fields. Lately, the rise in prices has been especially notable given the recent strength in the U.S. Dollar, which would normally be a negative factor for commodity prices. Although production is expected to rebound in the 2010/11 season, those supplies will not help to elevate the current supply issues. It may take even higher prices near-term to help cull demand from countries such as Indonesia and India; at least until new crop supplies can enter the market.

Trading Ideas

Given the near-term tightness in Sugar supplies and the potential for a rebound in production in the 2010/11 season, some traders may wish to consider buying near-month Sugar futures and selling deferred Sugar futures. A example of this trade is buying March2010 Sugar and selling July 2010 Sugar. As of this writing, March Sugar is trading at a 4.40-cent premium to the July futures. Traders buying this spread are looking for the price differential to continue to widen. Traders should remember that trading futures spreads may not necessarily be less risky than holding an outright position. The spread could narrow instead of widen, and it is also possible for one month of the spread to be trading higher on the day and the other month to be trading lower.

Technicals

Looking at the daily chart for March Sugar, we notice the recent run-up in prices was accompanied by lower volume. This is most likely due to the holidays, but could also be a sign that fresh buyers are not chasing the market higher and short-covering is behind the price rise. The 14-day RSI has just reached overbought territory with a current reading of 71.15. We may not know the true health of the bull market until the trading desks are back at capacity after the New Year's holiday. Monday's highs of 27.40 are seen as resistance in the March contract, with support found at last week's low of 25.10.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Gold futures continue to meander in sideways trading due to the choppiness of the US Dollar and the lack of fresh buying interest. The unexpected Dollar rally had caught precious metals traders off-guard and has caused some traders to rethink their strategy. Over the long-term, Gold fundamentals remain bullish, and the large 2, 5 and 7-year note auctions think week suggest that the US government is unlikely to halt its spending spree anytime soon. In the near-term, however, it looks as though the strength of the greenback and reluctance of traders to buy at relatively high levels may limit the upside potential of the market. The ICE exchange showed that speculators have actually gone net long the Dollar Index, suggesting traders are now expecting the US currency to rally in the near-term. The strength of the Crude Oil market in recent weeks has also stolen some of Gold's thunder. We have seen that while Crude Oil and Gold tend to move in the same direction, the percentage moves have varied greatly at times over the past two years. Crude Oil had been underperforming against Gold when the precious metal was soaring, and it now looks like "black gold" may be the market speculators are focusing on because of a change in petroleum fundamentals. Even with the positive shift in Crude Oil fundamentals, that market may be heading toward a stumbling block. The geopolitical tension with Iran and renewed terrorism fears could cause a shift toward positive sentiment in Gold, but if fears fail to materialize as larger legitimate threats, the metal could continue on its current path.

Trading Ideas

The near-term fundamentals for Gold may continue to be driven by the movement of the US Dollar. The fact that speculators have once again gone long the Dollar Index suggests that the upswing in the greenback may continue, pressuring Gold prices. Technically, Gold has not had any fresh technical setbacks, but remains extremely vulnerable if support near 1075 and 1065 is broken. For these reasons, some traders may wish to short the February Gold contract on a close below 1065 with a protective stop at 1080 and a downside objective of 1035. The Trade risks roughly $1,500 and has a potential profit of $3,000.

Technicals

Turning to the chart, the February Gold contract shows prices consolidating after selling-off sharply. When markets consolidate, a breakout tends to follow the preceding trend that headed into the consolidation. For this reason, the 1075 support level is key for Gold traders. If prices close solidly below this level , it could possibly signal the beginning of a new down leg for the metal. Since breaking the 50-day moving average, the February contract has been unable to gain enough upward momentum to cross back upward through the average. A close above the average could signal price stability. The 20-day moving average is closing in on the 50-day. A downward crossover of the two averages could be a sign that technical momentum is working against Gold.

Rob Kurzatkowski, Senior Commodity Analyst