Fundamentals

2009 will go down as an exciting year for the futures markets, highlighted by Gold's historic bull run, Sugar's rise to near 30-year highs, and the collapse and now rebound in the U.S. Dollar. With 2010 having just arrived, let's take a brief look at a couple of markets that may catch traders' interest in the New Year.

Old crop Corn futures have been confined in a 50-cent per bushel trading range for the past 10 weeks or so, as traders weigh a slow start to U.S. export sales vs. the potential loss of hundreds of millions of bushels of Corn still standing in the fields in the upper Midwest. Some of this Corn will be abandoned by producers, but the exact amount is still a guess. This puts the final USDA Crop production report scheduled for January 12th even more in the spotlight, as traders await the final government figures for Corn production this past season. The last USDA estimate has U.S. Corn production at 12.921 billion bushels; however this was before inclement harvesting conditions severely delayed the harvest. Traders and analysts are looking for the USDA to shave almost 200 million bushels from the November estimate due to losses from the still unharvested Corn. If true and demand, both foreign and domestic, remains on pace, U.S. Corn stocks-to-usage ratios could fall to near 10%, or nearly 4% below last year's totals and the lowest stocks/usage levels since the 2003/04 season.

Fans of the movie "Trading Places" will remember Dan Aykroyd and Eddie Murphy standing in the Frozen Concentrated Orange Juice (FCOJ) ring buying back their short positions in the frenzy of trading as the true crop report was released. This year the FCOJ market may begin to heat up, as the USDA has forecast Florida's Orange crop production will fall to only 135 million 90-lb boxes this season, which is well below the 162.4 million boxes the Sunshine State produced last year. This leaves little room for error, especially going into the winter months when traders' thoughts turn to weather forecasts and any signs that freezing temperatures will strike the groves this coming winter. There are also signs that O.J. demand may start to increase after several years of usage declines, which could further "juice-up" traders' interest in this commodity in 2010.

Trading Ideas

Bull call spreads -- buying a lower strike price call and selling a higher strike price call in the same trading month - is often thought to be a good way for traders to take a bullish position in a commodity, but you should always know the maximum potential risk on the trade before considering entering the market. This can allow a trader to hold a position for a longer period of time -- especially during volatile market conditions. This strategy can be used in both the Corn and FCOJ markets mentioned the in fundamentals section of this newsletter. An example of this type of trade for Corn futures would be buying a July Corn 440 call and selling a July Corn 500 call. With July Corn currently trading at 435.00 as of this writing, the spread could be purchased for about 20 cents, or $1000 per spread, not including commissions. This is the maximum potential loss on the trade, with a potential profit of $3000 minus the premium paid if July Corn is trading above 500.00 at option expiration in June.

For FCOJ, traders could consider buying the May O.J. 135 calls and selling the May 170 calls. With May O.J. trading at 133.10, the spread could be bought for about 11.00 points, or $1650 per spread, not including commissions. As in the Corn example above, the premium paid is the maximum potential risk on the trade, with a potential profit of $5250 minus the premium paid if May O.J. is trading above 170.00 at expiration in April.

Technicals

Looking at the daily chart for July Corn, we notice the consolidation pattern Corn has been in the past several weeks. In addition, trading volume has declined during this period, which sets up an increasing potential for a breakout of this range -- especially if it occurs on higher than average trading volume. Normally the market needs some type of catalyst to jumpstart interest in a sideways market, and the January USDA report has all the earmarks to be this catalyst -- especially given the harvest delays the Corn market experienced this year. Current prices are above both the 20 and 100-day moving averages, which gives the market a bullish bias. The 14-day RSI is hovering at a supportive 59.19. Resistance is seen at the recent highs made on 11/18 at 441.75, with support seen at the recent lows of 390.50 made on 11/2.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Canadian Dollar futures have been on an extended holiday of sorts, trading within a 400-tick range since the end of October. However, it looks like bulls are starting to gain the upper hand as the New Year begins. A renewed interest in commodities has certainly benefitted the Canadian Dollar, as the country is a major supplier and exporter of grains, oil, and metals. In addition, the Canadian economy has weathered the recent recession better than its neighbor to the south, and it's banking sector remains on solid footing. The employment picture is also showing improvement, with this Friday's Canadian employment report expected to show a gain of 20,000 jobs in November, on top of the 79,100 jobs gain in October. Canada's real GDP has also shown positive growth recently, with a 0.2% gain in October on top of a 0.4% gain in September. This rebound in the Canadian economic picture has many analysts looking for Canada to raise interest rates much sooner than the U.S., which would add support for buying the Loonie vs. the U.S. Dollar.

Trading Ideas

With signs that the Canadian Dollar has broken-out to the upside, some traders may wish to explore bullish trading strategies using Canadian Dollar futures options -- like buying bull call spreads in March CD options. An example of such a trade would be buying the March Canadian Dollar 0.97 calls and selling the March 1.00 calls. With the March CD contract trading at 0.9638 as of this writing, the spread could be purchased for 1.05 points, or $1050, not including commissions. The premium paid would be the maximum risk on the trade, with a potential gain of $3,000 minus the premium paid if March Canadian Dollars are trading above parity with the U.S. Dollar at expiration in March. Some more aggressive traders may wish to also sell a March CD put below chart support, such as a March 0.93 put, to help offset some of the premium paid for the bull call spread. This would increase the potential profit on the trade, but also increase the risk as well.

Technicals

Looking at the daily continuation chart for Canadian Dollar futures, we notice the market trying to break-out from the 2-month long consolidation pattern. Prices are now above both the 20 and 100-day moving averages, which may be deemed bullish for both short and long-term traders. The 14-day RSI has turned up, with a current reading of 59.41. The only downside we see is that the breakout above resistance has not occurred on higher than average volume, which provides less confirmation that the break-out may be valid. The next major resistance point is seen at the October 15th highs of 0.9798, with support found at the 100-day moving average, currently near the 0.9385 level.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Gold futures have been steadily climbing over the past three weeks on a reversal in the Dollar and positive economic signs. The precious metal may, however, face pressure if the Fed hints at increasing interest rates, which could bolster the Dollar. Further signs of economic strengthening can be seen as a near-term positive for Gold, as it hints at inflationary conditions. Over the long-term, stronger conditions would likely force the Fed to raise rates on concerns that the low interest rate environment will overheat the economy. If the central bank maintains its soft tone and does not hint at raising rates, precious metals prices could come up to test $1,200 an ounce or higher. The strength in energy prices has aided the Gold market, but the precious metal has failed to keep pace with Crude Oil. This is a trend that may continue, given the improved fundamental outlook for energies due to destocking and the colder than expected winter. If energy prices do continue to push higher, traders can look for the upswing in Gold prices to accelerate.

Trading Ideas

Gold fundamentals have improved over the past two weeks on the weaker Dollar and stronger energy prices, and the technicals for the precious metal have also improved. However, there are still lingering questions about the Fed's interest rate policy and continued appetite for the metal by traders. Also, the February Gold contract has some technical hurdles to climb. For this reason, some traders may possibly wish to take a cautiously bullish approach to the metal by buying the February Gold 1150 calls and selling 1160 calls for 2.50, or $250. The trade risks the initial investment for a maximum profit of 7.50, or $750 if the February contract closes above 1160 at expiration.

Technicals

The February Gold chart shows prices finding support at the 1070 level in the near-term and has come up to test near-term resistance at the 1140 level. How prices behave at these levels will likely set the near-term direction for the market. Failure to close above 1040 could cause Gold to trade range-bound or possibly to trend lower. The 20-day moving average has crossed below the 50-day average, which can be seen as negative over the intermediate term. However, this crossover is hardly a convincing signal, as prices have closed back above both averages, signaling that a near-term low may be in place. The momentum indicator is speeding toward the zero line and is showing bullish divergence from the RSI indicator.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Treasury futures have been quiet to start the New Year, as traders gear-up for this morning's release of the Non-Farm Payrolls report for December. Market participants were caught off guard last month when the Labor department announced that "only" 11,000 jobs were lost in November, which was well below analysts' estimates. In addition the unemployment rate actually fell to 10%, which helped to support the favorable NFP figures. This month, traders are looking for another moderate decline in payrolls, with the average consensus calling for a loss of 25,000 jobs in December -- although there are some traders looking for slight gains in payrolls last month. In addition to the headline figures, analysts will be focusing on the average number of hours worked, as any increase could be a sign that economic activity is improving, if employers increase hours worked. Yesterday's jobless claims figures did little to move Treasuries, as jobless claims rose a scant 1,000 last week - but nonetheless better than the 8,000 gain expected. Although recent reports seem to show that the U.S. is slowly emerging from the worst of the recession, unemployment rates hovering near 10% are not acceptable to the Federal Reserve officials, and any interest rate increases by the Fed most likely will not occur until we have several months of increasing payrolls, as well as a steady decline in the unemployment rate.

Trading Ideas

Since the beginning of December, Ten-Year Note futures have fallen nearly 5 full points, as traders have turned bearish on Treasury futures after looking at record U.S. budget deficits and fearing rising inflation -- especially as it appears the U.S. is slowly coming out if its recession and the Fed will have to eventually end its accommodative stance. However, this large speculative short position may be the fuel for a short-covering rally, especially if the NFP report does not live up to expectations. Some traders looking for a bullish contrarian play may want to consider the Ten-Year Note options market for strategies that could benefit from a recovery in Ten-Year Note prices. An example of such a trade would be buying a March Ten-Year Note 116 call. With March Ten-Years trading at 115-26 as of this writing, the March 116 call could be purchased for 1-00, or $1,000 per option, not including commissions. The premium paid is the maximum risk on the trade, and some more risk averse traders may wish to consider selling a March 118 call against the long 116 call to help offset some of the premium paid for the long call.

Technicals

Looking at a daily continuation chart for Ten-Year Note futures, we notice prices holding below both the 20 and 100-day moving averages, which signals that both long and short-term bears remain in control. However, the market appears to be attempting to consolidate just above the 115-00 level in the March contract, as attempts to push prices below this level have failed to hold. In addition, the downtrend line drawn from the recent highs of 121-215 made on November 27th have been taken out on the upside, which could be a signal that the selling pressure is starting to run its course -- at least in the short-term. The 14-day RSI has moved above oversold territory, but is still reading a rather weak 37.51. The December 31st lows of 114-285 look to be critical support, with major resistance found at the 100-day moving average near the 118-00 level.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Crude Oil has risen to 15-month highs on a failing greenback and cold weather, which could tighten Heating Oil supplies in the Northeast. Russia has also failed to reach an agreement with Belarus on Oil supplies, which could cut off Russian exports to continental Europe. This suggests supplies may tighten more quickly than previously anticipated. Dollar bulls hoping that the strength of the currency would follow through into 2010 have had their hopes dashed. The weaker than anticipated non-farm payroll number may actually be a mixed blessing for Crude Oil traders. On one hand, the employment situation in the US may not be improving as greatly as many had hoped, which could delay further economic improvement. This does not bode well for petroleum demand. On the other hand, the bleaker employment outlook may result in the Fed raising rates later than many traders had expected, which may cause the Dollar to come under further duress. Traders wishing to hedge inflation may use Crude Oil as their investment vehicle of choice, choosing to invest in a root cause of inflation rather that Gold, which is a beneficiary of inflation. The increase in speculator interest in Crude Oil could also result in prices moving too quickly to the upside, causing overbought conditions quickly.

Trading Ideas

The fundamental outlook for Crude Oil remains strong and will likely remain strong as long as the US Dollar is unable to gain traction. Technically, the breakout could be a sign that prices may be set to move higher and possibly test levels near $90. The market, though, does risk getting overheated from the fundamental and technical buying, which may make the market exposed to a possible violent correction. For this reason, some traders may wish to consider taking on a spread with limited exposure - for example, possibly purchasing a March Crude Oil 85 call (CLH085C) and selling a March 88 call (CLH088C) for a limit of 1.60 to the buy side. The trade risks the initial investment of $1,600 for a potential profit of $1,400 if the March contract closes above $88 at expiration.

Technicals

The March Crude Oil chart shows prices breaking out above near-term resistance at 80.50. The next significant area of resistance comes in at 88.28, a relative low close from December 2007. The 20-day moving average appears to be on the verge of crossing through the 50-day to the upside, which could be seen as bullish in the mid-term. The oscillators are showing that Crude Oil is becoming overbought, which could cause a pullback or consolidation due to profit-taking.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Neither bulls nor bears wish to take control of the Soybean market, as traders await the release of the January crop report this morning. This report will include the final USDA estimate of the size of the 2009-10 Soybean crop, with traders expecting a figure close to 3.33 billion bushels -- or slightly above the November estimate of 3.319 billion bushels. Ending stocks, however, are expected to decline, as U.S. Soybean exports have been running above projections so far this marketing year, as China has been a big buyer of U.S. Beans. Traders are looking for Soybean ending stocks to be approximately 235 million bushels, down 20 million bushels from the December estimate. Although demand for U.S. Soybeans has been good so far this season, many analysts fear that a majority of this business will move to South America as the Southern Hemisphere harvest comes near. Both Argentina and Brazil are expected to produce large Soybean crops this year, and both countries expect to see robust export business -- especially if the U.S. Dollar continues to show signs of a recovery. This fear is what is keeping any rally attempts in Soybeans in check, as there is great fear that all the Chinese export business will go elsewhere. Large speculative traders apparently do not share the same concerns, as their net-long position continues to increase. According to the most recent Commitment of Traders report, large non-commercial traders increased their net-long Soybean position by 15,393 contracts as of January 5th. This market segment is the only group net-long Soybeans at this moment, and should the USDA report be deemed “bearish”, we could see major long liquidation selling emerge -- which could make $10 plus beans only a distant memory.

Trading Ideas

Soybeans and Corn tend to battle for acreage each winter, as supply and demand forces adjust prices so producers plant the proper amount of each crop to ensure adequate supplies. However, outside factors such as the weather can throw the market into disequilibrium, which may take a year or more to correct. This exact situation might be occurring with the Soybean and Corn markets, as potentially hundreds of millions of bushels of Corn may never get harvested due to weather conditions. With a potentially record Soybean harvest out of South America looming, some traders may wish to investigate buying May Corn futures and selling May Soybean futures. Due to the price differences between the two crops, this trade is usually done in a 2 Corn vs. 1 Soybean ratio. As of Monday’s close, the 2 Corn:1 Soybean ratio spread was trading at a $1.51 Soybean premium. Traders who choose to buy Corn and sell Soybeans would want to see the ratio narrow -- or even see Corn go to a premium to Soybeans by the spring.

Technicals

Looking at the daily chart for May Soybeans, we notice that despite the recent price weakness, the overall price trend is higher. Prices are still above the 100-day moving average, which is a widely used signal of whether a market is longer-term bullish or bearish. However in the short-term, prices have fallen below the 20-day moving average, and several attempts to take-out the recent highs of 1086.75 have failed. The 14-day RSI has also turned weak, with a current trading of 41.80. Recent lows of 997.75 look to be the next support point for May Soybeans, with resistance found at the 1086.75 highs made on December 1st.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Trade in Cotton futures has been choppy lately, as market participants weigh a fairly bullish USDA report vs. a general sell-off in commodities. Cotton prices declined on Tuesday, despite the USDA lowering U.S. Cotton carry-out totals to 4.3 million bales, vs. 4.5 million bales in the December report. The USDA also lowered 2009 all-Cotton production to 12.401 million bales, vs. 12.592 million bales as of December 1st. However, a sharp sell-off in the grain complex tied to a bearish USDA report spilled over into Cotton and commodities in general. Adding to the misery for Cotton bulls was the announcement out of China of another interest rate increase. This is being done to help tighten credit conditions and curb excess speculation in the world's most populous nation. Traders fear this will curtail Chinese demand for commodities in general, including Cotton, which could cause a major hit on U.S. exports this year. However, much of Tuesday's declines were wiped out yesterday, as fresh buying emerged near recent support at the 72.50 level. Despite the sideways trade of late, the longer-term trend is still bullish for Cotton, as world production estimates continue to decline. There is still hope for a stronger world economic outlook this year, which should lead to increased Cotton consumption.

Trading Ideas

Cotton prices are up almost 50% from the lows made back in March of last year, and the recent consolidation phase may have encouraged weak longs to exit the market, which could be a catalyst for renewed buying should the up-move resume. Some traders looking to take advantage of the price consolidation to establish a long position in Cotton may possibly wish to look at the Cotton options market to establish a bullish trading strategy. An example of one such trade would be buying a bull call spread in July Cotton, such as buying the July 80 calls and selling the 90 calls. With July Cotton trading at 75.68 as of this writing, the spread could be bought for about 2.50 points, or $1,250 per spread, not including commissions. The premium paid is the maximum risk on the trade, with a potential profit of $5,000 minus the premium paid should July Cotton be trading above 90.00 at option expiration in June.

Technicals

Looking at the daily chart for March Cotton, we notice prices starting to consolidate after they failed to move above 77.00 in the first week of 2010. The ensuing sell-off moved prices below the 20-day moving average, which triggered a sell-signal for short-term momentum traders. However, longer term prices are still well above the 100-day moving average, and it would take a close below 70.00 to turn the longer-term trend bearish. In addition, prices are holding well at the uptrend line drawn from the August 27th lows of 59.47. The 14-day RSI has turned neutral, with a current reading of 49.58. The recent lows of 72.43 should act as near-term support for the March contract, with major support found at the 100-day moving average near the 69.50 area. Resistance is seen at the recent high made on January 4th at 76.77.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Bond futures are higher for the second consecutive session, after several encouraging Treasury auctions and expectations that inflation may be tamer than previously expected. The yield curve had moved up extremely sharply, but now seems to be flattening a bit after comments from several Fed members indicating that the central bank does not expect to tighten its interest policy anytime soon. This would normally be seen as a policy that could result in inflationary conditions, but China has been tightening its interest rate policy and increasing bank reserve rates in an attempt to prevent its economy from overheating. China has been the engine that has driven many commodity prices higher, so a controlled cooling of its economy could keep commodity prices in check. On the home front, it appears that consumer spending is not coming back with the vigor that many had hoped for, raising the possibility that equities are becoming extremely overvalued. The non-farm payroll number a week ago was especially disappointing given the expectation that the worst may be over for the labor market, which has made Bonds more appealing. While the previously-mentioned factors all seem to favor higher Bond prices and lower yields, the major stumbling block may be the Dollar's exchange rate. A weaker Dollar could lessen the appeal of treasuries and stoke inflation down the road. A firm Dollar, however, could aid a rally in Bonds.

Trading Ideas

Given the improvement in both the technical and fundamental outlooks for March Bonds, some traders may wish to enter the long side of the market. Traders may wish to consider buying the March Bond future at 117-00 or better, with a protective stop at 115-16 and an upside objective of 119-00. The trade risks roughly $1,500 for a potential profit of $2,000.

Technicals

The March Bond chart shows prices holding support at the 115-00 level. The contract confirmed a small double-bottom pattern on the daily chart, hinting that prices may come up to test stout resistance near 118-00. A breakout above the 118-00 mark suggests that prices, at the very least, may trade between 118-00 and 120-00. Support at 115-00 can still be seen as a significant technical level on the downside, with a breach of this level suggesting a test of the 112-00 level. Prices have crossed the 20-day moving average, suggesting that a near-term low is in place. The momentum indicator is nearing the zero line. A crossover can be seen as a bullish indicator.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

A chilly start to 2010 has Natural Gas bulls starting to warm up to a futures contract that has been mired in a bear market since the middle of 2008. This past Thursday, the Energy Information Administration reported that 266 billion cubic feet (bcf) of Gas was removed from storage the week ending January 8th, just missing the all- time record draw of 274 bcf that occurred in January 2008. This was well above last year's 88 bcf draw and has helped to cut into the record amount of Gas held in storage going into the winter. Supplies now total 2.852 tcf, or 3.7% above last year's totals. However, old habits tend to die hard, as traders reacted to the EIA figures by selling Gas futures, as weak longs were "disappointed" that the draw did not reach record levels. In addition, some private weather forecasts are calling for a warming trend to enter the Midwest and Northeast, with above-normal temperatures expected to last through the last week of January. Although lead month Natural Gas futures prices have doubled since the lows were made back in September of 2009, some traders remain skeptical that prices will rise much higher until we see industrial demand improve. The December non-farm payrolls report did little to negate these feelings, as the Labor Department announced that 85,000 jobs were lost last month. Since it appears that a robust economic recovery is not imminent, it might be the weatherman who will be the focus of energy traders' attention in the first quarter of 2010.

Trading Ideas

Many traders spend their time trying to predict where prices are heading. However, sometimes it might be easier to try to figure out where prices are not likely to go! This is the strategy of option sellers who try to collect option premium by selling out-of-the-money options in hopes that the options will expire worthless. In the March Natural Gas contract, there appears to be good chart support at the recent lows near the 4.550 area. Some traders who believe that this support point might hold may wish to consider selling puts below this support point. An example of this trade would be selling the March Natural Gas 4.45 puts. With March gas futures trading at 5.643 as of this writing, the puts could be sold for about 0.31 points, or $310 per option, not including commissions. The premium received would be the maximum potential gain on this trade, and given the inherent risk in selling naked options, traders should definitely have an exit strategy in place in case the trade moves against them. Some examples would be closing out the trade if the futures move through some key chart point, such as the support at 4.550 in this example. Other traders may choose to close out the trade if the option premium moves some set percentage of the premium received, such as buying back the put if the option premium trades at 3 times the amount of premium received for originally selling the option. No matter what method a trader chooses to utilize, strong risk management techniques are critical to the survival of an options selling strategy.

Technicals

Looking at the daily chart for March Natural gas, we notice a potential ascending triangle formation. This is normally viewed as a bullish chart formation, which is confirmed if prices break out above the upper trendline once the current consolidation phase has ended. The 20 and 100-day moving averages are bracketing recent daily price ranges, which confirm that prices are still in a consolidation mode. The 14-day RSI is also reading a very neutral 51.94. Support for March Natural Gas is seen at 5.327, with resistance found at 6.027.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Wheat futures are lower this morning, following weaker grain inspection figures indicating that demand for US Wheat continues to weaken. Overall world demand for the grain does remain fairly stout, but the stronger US Dollar has hurt exports of domestic grain. The weekly inspections figure shows 9.4 million bushels inspected for export, which is the lowest figure this marketing year. This is also 24% lower than last week's figure. Wheat continues to feel outside pressure from the record high Corn acreage, which has caused traders to liquidate longs and go short the grain complex. It looks as though long-only index funds may have rebalanced their portfolios last week, indicating that there may be little fresh buying, which could possibly open the door to more feverish selling in the event that investors pull their capital out of long-only funds. Specs continue adding to the short position in Wheat, but not enough to trigger oversold levels. There are few bright spots for the Wheat market at this point, and it may take a sharp reversal in the US Dollar for traders to once again go long the grain.

Trading Ideas

Given the weak fundamental outlook, some traders may wish to employ a bearish strategy in the Wheat market. However, there has not yet been a confirmation of a new downside breakout, so traders may wish to remain cautious. Some traders may wish to wait for a solid close below 494.25 before establishing a short position, with a protective stop at 510 and a downside objective of 470. The trade risks approximately $762.50 for a potential profit of $1,212.50.

Technicals

The March Wheat chart shows prices coming down to test the October 30th low close of 494.25. This can be seen as a critical support area, which could determine the intermediate market direction. The next significant area of support would be near the 470 level, which if breached, may suggest that price could test early October lows. The RSI is nearing oversold levels, which could act as a buffer to the downside.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Just when it looked liked the recent rally in the U.S. Dollar had run its course, the greenback has soared to 2 ½ week highs in the March Dollar Index futures, as traders move back into their "risk averse" mode. Among the major factors bringing traders back into the U.S. buck are the continuing actions out of China to help curtail its rapid economic growth, including the Bank of China telling banks to restrict lending for the remainder of January. This comes on top of Chinese officials already raising bank reserve requirements and hiking benchmark interest rates in order to prevent a potential "asset bubble" from forming in the world's most populous nation. In Europe, European Central Bank (ECB) officials seem to be playing hardball with Greece, whose budget problems have caused rating agencies to downgrade the country's debt. Several members of the ECB's executive board, including Juergen Stark and ECB President Jean-Claude Trichet, have commented that the European bank will not adjust its policies or rules to help Greece or other member countries experiencing budgetary woes. These events, along with the victory by Republican Scott Brown in the special election to fill the vacant Senate seat in Massachusetts, have drawn traders to the U.S. Dollar. This Dollar strength is putting pressure on speculators who are holding so called "carry-trades" in which investors borrow in a low yielding currency (U.S. Dollar or Japanese Yen) and invest the proceeds in higher yielding currencies or investments ( Australian Dollar, Brazilian Real and equities). Given the size and leverage of these positions, traders must unwind these positions in greater amounts as the Dollar and or Yen rise, causing a "snowball effect", which could lead to further gains in these currencies as margin calls are issued, which could cause further liquidation of these "carry-trades".

Trading Ideas

Given the fractured economic condition of several European Union member countries, most notably Greece, Italy, Spain, and Ireland, and much division on how to address the economic issues facing these countries, the Eurocurrency could remain under pressure. Traders looking for the Euro to continue to weaken vs. the U.S. Dollar may wish to investigate the purchase of bear put spreads. An example of this trade would be buying the March Euro 1.40 put and selling the March Euro 1.35 put. With March Euro trading at 1.4088 as of this writing, the spread could be purchased for about 130 ticks, or $1,625 per spread, not including commissions. The premium paid would be the maximum risk on the trade, with a potential profit of $6,250 minus the premium paid if March Euro's are trading below 1.3500 at option expiration in March.

Technicals

Looking at the daily chart for the March Dollar Index (DX), we notice that Wednesday's breakout above the 20-day moving average was met with strong buying interest, not only by short-term momentum traders, but also from liquidation buying by those short the Dollar. Also notice that during the Dollar's sell-off last week, we still failed to close below the 100-day moving average, which appears to signal that 3+ week down-move in the DX futures was nothing more than a correction in what may be the early stages of a sustained bull move for the Dollar. The 1-day RSI has also turned supportive, with a current reading of 62.71. The December 22nd highs of 78.77 look to be the next resistance point for the March DX contract, with support found at the 100-day moving average, currently near the 76.85 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Gold futures have given back the gains made since the beginning of the year on a stronger US Dollar and tame inflationary data. Additional gains in the Dollar could further erode demand for the metal and cause traders to look to the treasury market instead. India, the world's larger user of Gold, imported 18% less Gold in 2009 than it did in 2008, hinting that the physical market may remain cool. The sharp rise in jobless claims in the US also hints that jewelry demand may remain lackluster at best, and could take a very long time to recover to levels seen several years ago. In addition to the impact of jewelry demand, the poor job data indicates that the recovery may not be proceeding at the rate that many had hoped, which could cool inflation fears and may cause stock prices to pull back. A correction in stock prices may also bolster the Dollar because of the inverse relationship between the two over the past several years. If the Dollar is unable to hold-on to its recent gains, investment demand could revive. Commodity prices, in general, have given back some of their recent gains, especially in energies. The petroleum market may also have a large impact on precious metal prices over the near-term.

Trading Ideas

It appears that the fundamentals for Gold have cooled because of the job data and remarkable resilience of the US Dollar in the face of rising government debt. However, the market can reverse course at any moment, given its volatile nature and Dollar sensitivity. The April chart has not offered confirmation of a downside breakout, suggesting it may not be wise to take on a position until the chart offers a clearer indication of direction. Instead, some traders may wish to play it by ear and see how the market responds near support at 1086.00.

Technicals

Turning to the chart, April Gold futures are nearing support at the relative low close at 1086.00. We have seen two consecutive closes below the 20-day moving average, which suggests the market may have made a near-term high. April Gold also appears to be on the verge of testing the 100-day moving average. A close below this longer average could negatively impact the metal technically, and be a sign of intermediate-term weakness. Failure to push through support at 1086.00 suggests that prices could be range bound or could rebound to test resistance near 1150.00.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Last week was tough for those long U.S. stock index futures. First, we get news from China that the government is taking steps, such as raising interest rates and putting the brakes on its domestic lending in order to prevent its economy from overheating and causing what some fear could be a mammoth speculative bubble; then last Thursday, President Obama announced a plan to force U.S. banking institutions to end proprietary trading and restrict the ownership of hedge funds by these institutions. Although the proposal did not mention a time frame for banks to divest of their speculative businesses and exact details on how the proposal would be implemented were sparse, traders feared that any uncertainly would not encourage banks to loosen-up the purse strings for lending, which would be a key factor in helping the fledgling economic recovery along. These policy changes could be viewed as the catalyst for a correction in the U.S. equity markets, which have surged upward since the major lows were made back in March of last year. Although it is still too early to know if a good earnings season can calm jittery investors' nerves and the recent sell-off will be viewed as just another buying opportunity, it certainly looks like traders and investors will need some really good economic news to once again jump back on the bullish equities bandwagon.

Trading Ideas

Given the nearly 9-month-long bullish trend in equities without a major correction, the equities markets look to be overdue for some profit-taking selling. Buying bear put spreads in the E-mini S&P 500 options would be one way traders could possibly position themselves to take advantage of a stock market correction. An example of such a trade would be buying the February E-mini S&P 1100 puts and selling the February 1000 puts. With the March E-mini's trading at 1103.00 as of this writing, the spread could be purchased for about 15.00 points, or $750 per spread, not including commissions. The premium paid would be the maximum risk on the trade, with a potential profit of $5,000 minus the premium paid if the March E-mini S&P futures are trading below 1000 at the option expiration in February.

Technicals

Looking at the daily continuation chart for the E-mini S&P futures, we notice the uptrend line drawn from the March 2009 lows has been broken, sparking a fresh round of selling as long liquidation sell-stops were triggered and short-term momentum turns bearish. Prices are now below the 20-day moving average and are looking to test the longer term 100-day moving average, currently near the 1080.00 area. The 200-day moving average, which is widely used by longer-term traders as the benchmark for whether a market is bullish or bearish, does not come into play until near the 1000.00 level, which is also a major psychological support point. The 14-day RSI has turned lower, with a current reading of 41.40, having fallen from the high sixties just 1 week ago. Looking longer-term, we notice the market running into stiff resistance just above the 50% Fibonacci retracement level, from the 2007 highs to the March 2009 lows. 1080.00 is seen as the next support point, with resistance found at last week's highs of 1147.25.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Sugar futures are higher in overnight trading, on expectations that demand for the sweetener will remain robust for the foreseeable future. The fact that India has had a relatively dry monsoon season indicates that the world's largest user of Sugar will continue to ramp-up imports to deal with demand and output shortfalls. Brazil is also experiencing weather concerns on the other end of the spectrum, with too much rain possibly cutting output. Buyers are also racing to secure supplies. Indonesia is currently negotiating the purchase of 181,000 tons of Sugar. Pakistan, Egypt and Mexico are also moving to secure supplies. Despite the overall weakness seen in commodities lately, the Sugar market remains resilient because of the strong fundamentals. In the short-term, a stronger Dollar and weaker commodity prices could put a damper on the Sugar rally, despite the strong fundamentals, as commodity funds could see clients moving capital out.

Trading Ideas

Given the strong fundamentals, the Sugar market seems to favor the bull camp in the long term. However, the Dollar seems to be gaining some momentum, which could limit traders' appetites for commodities in the near-term. Also, the chart remains very bullish for the March Sugar contract, but the oscillators hint at possible near-term weakness. For these reasons, some traders may wish to consider putting on a bull call spread, buying the March 29 calls (SBH029C) and selling the March 30 calls (SBH030C) for a debit of 0.30, or $336. The trade risks the initial investment for a possible profit of $784.

Technicals

Turning to the March Sugar chart, we see prices breaking out of the triangle patter, making the measured move. The combination of making the measured move and near overbought conditions on the 14-day RSI could put pressure on the Sugar market in the near-term. The 20-day moving average may be a level that traders focus on going forward, as the market rebounded strongly the last two times the average was tested. A violation of the average could be a sign that the market could move lower in the short-term. Momentum is diverging from both price and RSI, hinting at near-term weakness.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

What a difference a year makes! Last year at this time, front month Lumber futures were trading below $140.00 per 1,000 board feet price levels that were last seen in the mid-1980's, as the economic fall-out from the U.S. housing crisis was nearing its crescendo. Supplies of unsold homes on the market were soaring, and several home builders were forced into bankruptcy as the housing market ground to a halt. Since that time, Lumber prices have nearly doubled, as it appears that the recession has ended and economic growth has emerged -- although much more slowly than most of us would like to see. Inventories of existing homes have also fallen from the worst levels seen last year, standing at a 7.2 months' supply in December. Although it appears that the housing market is starting to recover, Lumber prices may have already priced-in a much better scenario than is actually occurring. December housing starts fell by 4.0% from November's totals, to a seasonally adjusted annual rate of 573,000, according to the Commerce Department. This is much improved from the 466,000 annual rates back in January of 2009, but not even close to the 2,276,000 annual rate seen in January of 2006! Although building permits in December surged by nearly 11%, one cannot help to wonder how new home sales will fare in the near-term, given the huge number of existing homes on the market -- especially those in or facing foreclosure. With unemployment still hovering around 10%, it may take some time for potential home buyers to feel confident enough to re-enter the market for new homes, in order to get the construction industry back on its feet and the demand for Lumber to improve immensely

Trading Ideas

The rise in Lumber futures prices has tied-in fairly closely with the recovery in equities prices, since the lows in both markets were made in the first quarter of 2009. The S&P futures have recently broken the uptrend line formed from the March lows, which could signal a major change in trend for equities. If so, it may not be long before Lumber prices also start to weaken -- especially if commodity prices follow equities lower. Given this potential scenario, some traders may wish to consider entering a short position in March Lumber by either selling futures out-right, or buying Lumber puts. Given the relative illiquidity of Lumber options, some traders may wish to consider selling March Lumber futures (currently at 250.80 as of this writing), with a buy stop above the recent highs of 257.30.

Technicals

Looking at the daily continuation chart for Lumber, we notice prices remain well above both the 20 and 100-day moving averages -- and more importantly, above the uptrend line drawn from the October lows. However, there are a few technical signals that signal a correction may be near. First, the trading volume has fallen sharply the past few trading sessions, which may be a signal that fresh buying is not emerging near recent highs. Also, the 14-day RSI is showing a bearish divergence, which can be a signal of fading upward momentum. A close above the recent high of 257.30 could trigger a test of the 270.00 level in the March futures, while a close below the 20-day moving average, currently near the 241.50 level, may set-up a test of support near 225.00.

MIke Zarembski, Senior Commodity Analyst

Fundamentals

The Dollar Index has seen very quiet sessions the past few days, following the directionless days in the equity markets. The currency did get a boost from the Fed yesterday, when the central bank used the word "recovery" for the first time. This suggests that both the Fed and the US government may take steps to slowly wean the economy off of the stimulus packages. This could result in a decrease in liquidity, decreasing the money supply. The long-term direction of the Dollar may ultimately be determined by two factors: interest rates and government spending. The greenback is still at a major disadvantage against higher-yielding currencies, and has found itself on the short end of carry trades. Increasing rates may aid in further cooling of selling pressure. If the US government does see a recovery taking place, some of President Obama's stimulus packages could be reined-in. Even if there is no decrease to the government's voracious appetite, the recovery could give the treasury time to find more efficient ways to put taxpayers' money to work. The strong showing in the most recent treasury auctions could be a sign that talks of diversification away from the Dollar by other governments may be more rhetoric than practice, but time will tell whether this is an anomaly or a trend.

Despite the previously mentioned factors, the Dollar is not without risk. As previously alluded to, low interest rates could cause the Dollar to quickly lose favor with investors and result in pressure from new carry trades. Also, if the Fed is not aggressive enough to raise rates when the time comes, inflation could be a major concern and would likely result in lowered demand for Dollar-based investments. The Dollar could also face pressure if the economy begins to cool, causing the Fed to maintain current policies.

Trading Ideas

The fundamental outlook for the Dollar Index has improved, hinting that prices may move high or stabilize, but there is also downside risk for the currency. Technically, the chart shows price edging toward resistance, so some traders may wish to keep an eye on these technical levels before taking action. For these reasons, some traders may wish to take on a bullish to neutral strategy, such as a bull put spread. One such spread would involve selling the March 77 put and buying the March 76 put at a credit of 0.20, or $200. The maximum profit on the spread would be the initial credit, and the max loss 0.80, or $800.

Technicals

Turning to the chart, we see the March Dollar Index breaking the relative high close of 78.61 on December 22nd. The contract is now entering an area of heavy congestion on the chart, which may act as a stumbling block, technically. The 79.50 and 80.00 levels are the next areas of resistance. A breakout above 80.00 may have a positive psychological impact on traders, in addition to crossing a technical hurdle. Failure to cross these resistance levels can be seen as a setback for traders and could cause the market to trade sideways or reverse. The RSI is nearing overbought levels, which can put some pressure on prices.

Rob Kurzatkowski, Senior Commodity Analyst

Fundamentals

Apparently not in the feedlots, as the U.S. cattle herd is expected to be at its lowest levels in over 50 years. The main reason for the large drop in future "hamburgers on the hoof "was due to lower beef demand tied to the weak economy as consumers switched to cheaper sources of protein. Lower beef and dairy prices this past year gave cattle ranchers and dairy farmers little reason to expand their herds, as many were operating at a loss due to lower product prices. However, there are some signs that cattle prices might be in for a rebound this year, especially if exports improve to Asian nations such as South Korea and Taiwan after last year's 3% decline in U.S. beef exports. However, the ban on U.S. poultry exports to Russia have some traders concerned that a larger supply of poultry hitting the U.S. market will weigh on beef and pork prices, as consumers switch to this potentially cheaper cut of meat. Traders are estimating the U.S. cattle herd to have fallen to about 93.17 million head as of January 1st, down nearly 1.5% from year ago levels. We will get the official government estimate this afternoon, when the USDA releases its semi-annual report on the size of the cattle herd at 2 pm Central time.

Trading Ideas

Although the short-term trend points to lower cattle prices, reduced cattle inventories and potentially improved export prospects might sway traders to a more "bullish" slant later this year. Traders looking for an up-tic in cattle prices might wish to explore the purchase of bull call spreads in the summer-month live cattle futures options. An example of this trade would be buying the June cattle 88 calls and selling the June cattle 94 calls. With June cattle trading at 87.525 as of this writing, the spread could be purchased for about 2.00, or $800 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $2400 minus the premium paid if June Cattle is trading above 94.00 at option expiration in June.

Technicals

Looking at the daily chart for April live cattle, we notice prices falling nearly $3 per hundredweight since the recent highs were made on January 20th. The sell-off took the market south of the 20-day moving average, which is viewed as a "sell" signal by many short-term momentum trading systems. However, there appears to be strong support at the 100-day moving average, currently near the 88.60 area. The 14-day RSI has turned neutral, with a current reading of 48.38. The most recent Commitment of Traders (COT) report shows large speculative accounts holding a large net-long position in cattle futures as of January 19th of over 86,000 contracts. However, this was just before the recent sell-off, and we should see this long position trimmed substantially when this afternoon's COT report is released. Support is seen at 88.60, with resistance found at 91.35.

Mike Zarembski, Senior Commodity Analyst