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February 2010 Archives

February 1, 2010

On the Verge of a Meltdown?

Fundamentals

Gold futures have been trading in a very tight, side-ways pattern lately, due to uncertainty over the economy and the exchange rate of the Dollar. The economy has shown significant improvement over the past few months, even prompting the Fed to use the word recovery in the minutes from the last policy meeting. The employment picture, however, remains a major concern for market observers and traders. This week will give traders plenty to digest in this regard, with the ADP employment change, initial/continuing claims, and non-farm payrolls reports set to come out later this week. The equity and currency markets have been extremely choppy and lacking direction, which has caused the precious metals market to behave in much the same manner. Traders have been extremely cautious entering the short side of the market versus the Dollar, which has contributed to the currency's success. Whereas the December Dollar rally seemed to be triggered by short-covering, there seems to be some actual spec buying. If the rally in the Dollar continues, inflation may be held in check, which may, in turn, put considerable downside pressure on the Gold market.

Trading Ideas

Given the bullishness in the Dollar recently, the market fundamentals do seem to favor the downside for Gold. Also, a correction in equity prices could trigger liquidation of commodity positions as well, further bolstering the US currency. It also appears that the daily April Gold chart shows vulnerability, although there has not yet been a downside breakout. Some traders may possibly wish to short an April futures contract on a close below 1050, with a stop at 1065 and a downside objective of 1010. The trade risks roughly $1,500 for a potential profit of $4,000.

Technicals

Turning to the chart, the April Gold contract is trading near the 100-day moving average. Failure to hold the average could be seen as a technical setback in the intermediate term and a sign that there may be further corrections. Failure to hold near-term support at the 1064.20 suggests prices may come down to test the 1000 level, which is both technical and psychological support. Both the RSI and momentum indicators are flat and give no hint of the direction of the market near-term.

Rob Kurzatkowski, Senior Commodity Analyst

February 2, 2010

Will Oil Prices Gush Higher or Spill Lower?

Fundamentals

The year is off to a rough start for energy bulls, as Crude Oil prices have fallen over $10 per barrel in the past 3 weeks. The main catalysts for Oil's slide have been a rising U.S. Dollar, the Chinese government's attempts to slow down its economy, and the seemingly anti-business rhetoric coming out of Washington. However, there appears to be some bullish news starting to trickle out. Yesterday, the Institute of Supply Management's manufacturing index for January rose to 58.4, vs. 54.9 in December. This was the highest reading in nearly 4 years and is a good indication that the U.S. manufacturing sector is starting to recover, which is essential for Oil demand to improve. Also supportive were reports out of Nigeria that a pipeline operated by Royal Dutch Shell was breached by vandals, causing a shutdown of three flow stations to the Forcados export terminals. Nigeria is one of the top 5 oil exporters to the U.S., and any signs of instability there can spark buying interest in Oil. However, Chinese Oil demand remains a wild card this year, as its government's attempts to slow down its surging economy is leading may traders to look for a subdued increase in Oil demand from the world's most populous nation. OPEC members once again have failed to heed their quotas, as it is estimated that compliance was running at only 55% last month, with production rising to yearly highs. Large speculators, who have been net-long Crude Oil futures for months, have started to lighten-up on their positions lately, with the most recent Commitment of Traders report showing large non-commercial traders shedding 39,622 net long positions as of January 26th, leaving this segment net-long 167,130 contracts. Although Oil bulls have lightened-up on their positions during the sell-off, the net-long position is still burdensome -- and if Oil bulls don't get some bullish news soon, major support near 72.40 may yet again be put to a test.

Trading Ideas

Given the mixed fundamentals in the Oil market, one could make a valid argument that oil prices are heading either higher or lower in the near-term. One way to position for a large move in either direction or an increase in volatility could be to purchase a strangle in Crude Oil options. A strangle consists of a call and a put option in the same contract, same trading month, and same strike price. An example of this trade would be buying the March Crude Oil 74.00 strangle. With March Oil trading at 74.00 as of this writing, the 74.00 strangle could be purchased for about 3.84 points, or $3,840 per strangle, not including commissions. The trade will be profitable at expiration if March Crude Oil is trading above $77.84 or below $70.16.

Technicals

Looking at the daily chart for March Crude Oil, we notice strong support just above the 72.40 area. This area has been tested numerous times since mid-December, and Oil bears have not been able to overcome the buying that emerges at this key level. However, to put the bulls back in control, we would need to see a solid close above the 100-day moving average, which is currently near the $77.10 area. The 14-day RSI has emerged from oversold levels, currently reading a still weak 36.61. In addition to the weekly EIA energy stocks report, traders will be eagerly anticipating the release of January non-farm payrolls on Friday, with the consensus looking for payrolls to remain unchanged last month, vs. the 85,000 decline in December. Should the figures come in well off the estimates, the potential for a large move in Oil prices will likely increase. 72.43 remains support for March Oil, with resistance found at 77.10.

Mike Zarembski, Senior Commodity Analyst

February 3, 2010

Treasury Auction Announcement Looms

Fundamentals

T-Note futures are lower this morning, ahead of the US government's announcement regarding how much debt it plans to sell in the upcoming treasury auctions. The yield of the 10-Year note remains near the lowest levels of the year, unable to make a push lower. The employment data set to come out over the next three days will have a huge bearing on the near-term market direction. Last month's non-farm payrolls report hinted that the recovery in the job market may not be as strong as previously hoped. Friday's report may shed further light on whether last month's data was simply a bump in the road or a sign of tough times ahead. A surprise jump in new jobs may cause treasury yields to rise and Notes to fall, giving back some of the recent gains. Inflation would likely be a major concern among traders if the employment data indicates job growth, which could put downward pressure on the price of treasuries. Traders may also be inclined to enter into risk markets, such as equities and commodities, at the expense of Notes and Bonds.

Trading Ideas

The fundamentals have turned bearish to neutral for the 10-Year Note. On one hand, the economy still has significant challenges going forward, suggesting traders may maintain treasury positions as a safe haven. On the other hand, there seem to be new signs of life in the economy on a weekly basis, which could suggest that traders may lighten-up on their holding of treasuries. Technically, the chart suggests that the market may continue to trade sideways. For this reason, some traders may possibly wish to employ a neutral strategy, such as selling a strangle.

Technicals

The March 10-Year Note chart shows prices entering into an area of heavy chart congestion, which may limit the upside potential of the market. Prices have been gravitating toward the 117-116 level for the past six months, and it appears that the market may continue to do so for the foreseeable future unless there is a significant close above 120-00 or below 115-00. The oscillators are giving neutral readings, also suggesting sideways trading.

Rob Kurzatkowski, Senior Commodity Analyst

February 4, 2010

Traders Show No Love for the Euro

Fundaamentals

What a difference a year makes! That is the cry of currency traders especially regarding the plight of the Eurocurrency versus the U.S. Dollar. It was less than one year ago that many pundits were decrying the end of the greenback as the reserve currency, as many nations were diversifying their foreign exchange reserves away from the Dollar and into other major currencies -- especially the Euro. However, it looks like the Dollar is not ready or willing to give up its dominance quite so easily, as traders are beginning to take a closer look at the economic issues affecting the European Union, and they do not like what they are seeing. The biggest issue weighing on the Euro at this moment seems to be the economic plight facing Greece, whose increasing budget deficits have investors and credit rating agencies concerned that the country may be forced to default on its sovereign debt. If this were to occur, other member nations of the E.U. might be forced to help bail out Greece, despite tough talk out of Brussels that no financial bail-out would be forthcoming. Other E.U. member countries such as Portugal, Spain, and Ireland are also hurting from the economic fallout, which puts further pressure on the European Central Bank to remain accommodative in its interest rate policy longer than it may be comfortable doing. This is especially true if signs of rising inflation come to the fore. This plight has taken the luster out of the Euro, which has fallen by over 1200 pips since recent highs were made back in December of 2009, as speculators who were holding large long positions in the Euro were forced to liquidate as the value of the Euro fell. Ironically, the fiscal situation in the U.S. is not much better, as the U.S. is also facing record budget deficits and there is no indication that the Federal Reserve will be raising interest rates any time soon. So with both the E.U and U.S. facing economic challenges, it may be Gold that ultimately benefits, as investors look for a safe haven outside the currency markets.

Trading Ideas

With the Euro having already fallen 1200 points since its peak, it might be psychologically difficult to initiate a short position at current levels. However, the currency markets have historically been one of the best market s for trend-following traders, as trends in currencies can last for months, or even years! The next major support point for the Euro appears to be near the April 2009 lows of 1.2882, and a trader looking for a continued decline in the Euro who believes that the major support at 1.2882 will hold, could possibly look into buying a ratio put spread in the Euro options. An example of this trade would be buying the June Euro 1.35 put and selling 2 June Euro 1.285 puts. With the June Euro trading at 1.3914 as of this writing, the ratio spread could be purchased for about 60 ticks, or $750 per spread, not including commissions. The maximum potential gain of $8,125 minus the premium paid would be realized if the June Euro closed at 1.2850 at the option expiration in June. Since 2 puts are being sold for every 1 put purchased, the risk on the spread will increase should the Euro fall sharply below the 1.2850 level where the options were sold. Given this risk, traders should monitor their positions very carefully and set a pre-determined loss point at which to close-out their positions early.

Technicals

Looking at a daily continuation chart for the Euro Futures, we notice the market looks to be in the midst of a second down-wave, after spending nearly a month in a consolidation phase to start the year. Prices are now well below both the 20 and 100-day moving averages, and the 14-day RSI is holding just above oversold levels with a current reading of 30.35. We need to go back to the lows made in May of 2009 to find support near the 1.3475 area, with the next major resistance point seen at the 100-day moving average near the 1.4640 area.

Mike Zarembski, Senior Commodity Analyst

February 5, 2010

Jobs Data May Cloud Recovery

Fundamentals

Stocks suffered heavy losses yesterday, after the initial claims showed an unexpected rise, signaling that the employment outlook for the economy may not be as strong as had previously been hoped. This news comes on the heels of a disappointing ADP employment report and news that the Labor Department is expected to make large downward revisions to previous payroll data, indicating that losses of US jobs may have been understated to the tune of 800,000. Traders may be bracing for the worst, given the poor showing in jobs data over the past two sessions, so bad news may actually lift the market if it's not as bad as traders' expectations. The consensus estimate is a 15,000 jobs inc, but there are estimates by several analysts that suggest the figure may show a loss of 40,000-50,000 jobs. Other economic indicators have had a positive tilt, but the labor outlook may cloud an economic recovery going forward.

Trading Ideas

It looks as though the sustained rally may be running out of steam due to the unclear job outlook. Technically, it looks as though the S&P may be on the verge of breaking down. However, the chart has fooled traders several times during the rally, suggesting caution may be the better part of valor. For this reason, some traders may possibly wish to enter into a bear put spread with limited loss potentional - such as perhaps buying the March 1050 puts and selling the March 1030 puts for a debit of 7.50, or $375. The trade risks the initial investment for a potential profit of $625.

Technicals

Turning to the chart, the March E-mini S&P closed below its 100-day moving average, which may be seen as a significant technical setback. The contract also closed below the relative high close of 1068.00 in September, which was a support level for the S&P futures. The next significant support level comes in around the 1030 level. If this support level is violated, the market could very well test and push through the 1000 level on the downside. It appears that the 20-day moving average is on the verge of closing below the 50-day average, which could be seen as negative over the intermediate-term. The momentum indicator has dropped sharply, outpacing the RSI, which suggests a negative near-term bias.

Rob Kurzatkowski, Senior Commodity Analyst

February 8, 2010

Have Traders Abandoned Gold's "Flight to Safety" Status?

Fundamentals

It sure looks like some so called "Gold Bugs" have been swatted recently, as the yellow metal's historic price rise has hit some speed bumps lately. Ironically, one of the big bullish arguments for buying Gold was the fear of rising inflation tied to a weaker U.S. Dollar, as investors feared uncontrolled government spending and rising budget deficits. However, despite no real plan to control the U.S. budget deficit, the U.S. Dollar has risen sharply, especially versus the Euro, as fears of possible default on government debt by Greece, and possibly other members of the European Union have caused traders and investors to flee from the Euro and into the U.S. Dollar. The question that still needs to be answered is why investors are not rushing into Gold as a "safe haven" investment. It was just this past November that the International Monetary Fund sold 200 tons of Gold to the Central Bank of India, which really sparked the notion that Central Banks were view Gold as a way to diversify their foreign exchange reserves and to bring potentially huge buying interests into the Gold market. However, the Gold market has failed to extend its gains as 2010 begins, falling along with most other commodities, as fears that any global economic recovery will be slower than had been hoped for, due to China's attempts to put the brakes on its own economic expansion and the quagmire that the European Union has to deal with regarding possible government bond defaults by some of its member nations. This slowdown has put potentially rising inflation concerns on the back burner and is causing speculators to abandon their long positions in commodities -- including Gold -- which in turn sparks further long liquidation selling as margin calls are issued and even positions in fundamentally bullish commodities such as Sugar are forced to be liquidated to meet margin demands in other markets. So ultimately, the large long speculative holdings in Gold are actually working to its detriment lately, as liquidity needs trump even the most bullish fundamental factors in any given market. However, once the dust begins to settle, it would not be a big surprise to see the Gold market once again resume its bullish trend -- especially once all the weak longs have left the market and the one-sided bullishness that was overhanging the market has been removed.

Trading Ideas

Any trader holding a long Gold futures position this past week has experienced a harrowing sell-off, as sell-stops were triggered and forced out weak longs and those who entered long positions just as the market turned lower. Some traders who still look for gold prices to move higher in the long-term, but who wish to limit their potential risk, may want to consider the purchase of bull call spreads in Gold futures options. Looking out to the June gold futures, trading at 1053.70 as of this writing, a trader could choose to buy a June Gold 1100 call and sell a June Gold 1200 call for about 24.00 points, or $2400 per spread, not including commissions. The premium paid is the maximum potential loss on the trade, with a potential profit of $10,000, minus the premium paid should June Gold be trading above 1200.00 at option expiration in late May.

Technicals

Looking at a daily continuation chart for Gold, we notice the successive lower highs made after prices peaked back in early December. The recent failure of front month Gold to trade above the 20-day moving average sparked fresh short-term selling pressure. It looks like a large number of sell-stops were triggered once the 100-day moving average was taken-out on the downside. If we look at a Fibonacci retracement from the major lows made in late October of 2008 to the highs made this past December, we notice that Gold prices have not even fallen to the 38.2% retracement level! Ironically, this widely-watched level is currently corresponding closely with the 200-day moving average, which is just below the 1020.00 area and would make this a major technical support point. Despite the recent bouts of long liquidation selling, speculators are still holding a relatively large net long position, with the Commitment of Traders report showing both large and small speculative accounts holding a net long Gold position of over 261,756 contracts as of January 26th. Though this is down just over 34,000 contracts for the week, it is still a relatively large position that may spark further liquidation selling if support points are broken. 1018.00 is the next key support point for April Gold, with resistance found at the recent highs near 1125.00.

Mike Zarembski, Senior Commodity Analyst

February 9, 2010

Wheat Woes

Fundamentals

Grain futures are higher this morning, largely due to traders covering shorts and decreasing position size in light of the USDA's supply and demand report. There is not expected to be a bullish surprise in the report, but the unpredictability of the USDA's estimates is always on the minds of traders. Wheat futures have had little in the way of positive news lately. In addition to large supplies domestically, India, the world's second largest grower, is expected to increase plantings over last year's record crop. This could lead to a supply glut of the grain. The Wheat market has been plagued by weak demand and large supplies, so it would likely take a major revision in the USDA's supply and demand report to support higher prices. The consensus estimate is unchanged from last month's 976 million bushel ending stocks figure. Based on the current supply and demand data, it is difficult to make a case for Wheat to push higher, however further short-covering could act as support in the near-term. The Dollar's movement will likely also have an impact on how prices behave, as it could influence the allocation of funds toward commodities. The Dollar Index chart does show overbought levels, which hints that the greenback may move sideways or possibly lower.

Trading Ideas

Things have not gone in Wheat's favor either technically or fundamentally, but prices may be supported by a surprise in the USDA report and short-covering in the near-term. For this reason, some traders may wish to wait for confirmation of a downside breakout below the 470 level. Some traders may want to consider shorting a future on a solid close below 470, with a protective stop at 505 and a downside objective of 420. The trade risks $1,750 for a potential profit of $2,500.

Technicals

Turning to the chart, The March Wheat contract has bounced off of support in the 470 area, but has been unable to push above near-term resistance near 495. If prices fail to cross the 495 area in the near-term, the chart suggests that this may simply be a period of consolidation, which has a negative bias. The momentum indicator has remained flat, despite the recent bounce, hinting at near-term technical weakness.

Rob Kurzatkowski, Senior Commodity Analyst

February 10, 2010

Bullish USDA Report Sparks Cotton Rally

Fundamentals

Cotton bears have been running to the exits the past couple of days, as short-covering buying ahead of Tuesday's USDA report and estimates for increased U.S. Cotton exports have put a halt in the recent sell-off. The Department of Agriculture raised its estimates for 2009-10 U.S. Cotton exports to 12 million bales, which is up 1 million bales from January's estimate. U.S. January Cotton exports totaled 1.8 million bales according to the USDA. The size of the increase caught traders off guard and was viewed as extremely bullish by analysts just after the report was released. Increased Cotton usage out of China and India, the world's largest and second largest consumers of Cotton respectively, was responsible for the increased estimate, with the USDA raising China's Cotton consumption to 47.5 million bales, vs. 46.75 million bales in January's estimate. India's Cotton consumption was raised to 19.2 million bales, up 0.45 million bales from January's estimate. The government also lowered U.S. Cotton ending stocks to 3.30 million bales due to the increased exports estimate. Despite the fact that the government data was viewed as friendly to Cotton prices, some traders fear that the recent strengthening of the U.S. Dollar coupled with the Chinese government's attempts to slow down its economy may diminish U.S. exports in the coming months. If true, Cotton prices may fall into a consolidation phase as traders await the first USDA planting intention estimates due out on March 31st.

Trading Ideas

The USDA report seems to have brought an abrupt halt to the recent downtrend in Cotton prices, however there are still concerns that Chinese Cotton demand may slow -- especially if the Chinese government's efforts to slow its rapid growth rate increases. These fundamentals may signal a movement towards a consolidation in Cotton prices in the near-term. One trading strategy that can take advantage of a sidewise market is to sell strangles in Cotton options. An example of such a trade would be to sell the May Cotton 80 calls and sell the May Cotton 66 puts. With May Cotton trading at 73.01 as of this writing, this strangle could be sold for about 220 points, or $1,100 per spread, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized if May Cotton is trading below 80.00 or above 66.00 at the options expiration in April. Given the potential unlimited risk in selling strangles, a strong focus on risk management is essential. With both strikes residing out of major support or resistance areas, some traders may possibly wish to exit the trade early if May Cotton trades above 80.00 or below 66.00 before the options expire.

Technicals

Looking at the daily chart for May Cotton, we notice the abrupt turnaround in prices after last week's capitulation selling did not find any follow-through to start the week. Tuesday's steep up-move took prices above both the 20 and 100-day moving averages, which helped to trigger buy-stops from weak speculative holders of short Cotton positions. The 14-day RSI has moved sharply higher, currently at 52.93, after falling as low as 31.18 last Friday. Friday's lows of 67.80 now becomes support for May Cotton, and the recent high at 77.83 made on January 4th, looks to be strong near-term resistance.

Mike Zarembski, Senior Commodity Analyst

February 12, 2010

Where the Jobs Are!

Fundamentals

It certainly appears that the” Land Down Under” has its “Help Wanted” sign out, as the employment picture in Australia continues to brighten. Payrolls in January rose by 52,700, which sent the unemployment rate down to 5.3% -- which is the lowest level in nearly a year. The rise in employment comes despite efforts by the Reserve Bank of Australia (RBA) to raise its benchmark interest rate, currently at 3.75%, to help slow a surging economy and keep inflation in check. Although the RBA kept rates steady at its Feb 2nd meeting, any additional signs that the economy is starting to overheat -- such as sharp improvement in housing prices, retail sales, or wages -- could force bank officials to continue to put the brakes on the economy, by speeding up the withdrawal of previous stimulus measures and continuing to raise interest rates. The Australian economy has benefitted from trade with its northern neighbor, China, whose appetite for raw materials and grains is happily met by Australian businesses. Concerns that Chinese imports would slow considerably, due to efforts by the Chinese government to curtail bank lending and rampant speculation, has hurt the value of the Australian Dollar and other so-called commodity currencies, such as the Canadian Dollar and Brazilian Real, as traders were forced out of their long positions in these currencies vs. the U.S. Dollar and Japanese Yen. Now that the massive liquidation in “carry trades” may have run its course, some nimble speculators may wish to once again look at buying the “Aussie”, as the potential for rising interest rates and improved economic conditions make Australian investments even more appealing.


Trading Ideas

With the Australian economy showing solid signs of improvement, and long liquidation selling in the Aussie Dollar looking to have run its course, it appears that the Australian Dollar futures may have put in a near-term bottom late last week. Some traders looking for last Friday’s lows of 0.8547 to hold for the next several weeks may wish to investigate selling puts in the Aussie Dollar with a strike price below 0.8547. An example of this trade would be selling the March Australian Dollar 0.85 puts. With the March futures trading at 0.8867 as of this writing, the 0.85 puts could be sold for 0.0022, or $220 per option, not including commissions. The premium received is the maximum potential gain on the trade. Given that the potential loss in selling naked options can be very high, traders should have an exit strategy in place should the trade move against them. One such strategy would be to close out the trade before expiration if the March Australian Dollar trades below support at 0.8547.

Technicals

Looking at the daily chart for March Australian Dollars, we notice an over 300-pip rally in the futures after making 5-month lows last Friday. The buying spree has taken prices to the 20-day moving average, currently at 0.8897. The longer-term 100-day moving average looms just above current levels near the 0.8950 area. The 14-day RSI has recovered sharply after reaching oversold levels last week, with a current reading of 49.24. Thursday’s price surge also broke the downtrend line formed from the January 14th highs of 0.9275. As mentioned in the “Trading Ideas” area, 0.8547 has become key support for the March futures, with resistance seen at the 100-day moving average, currently near 0.8950.

Mike Zarembski, Senior Commodity Analyst


February 16, 2010

Not Dead Yet

Fundamentals

Just as Gold seemed to have lost its luster, traders began buying-up the precious metal when the futures traded down to the 1050 area. The bounce coincides with weakness in equities and a rebound in Crude Oil, indicating that traders still have faith in the metal as a safe haven investment. Over the same period of time, the Dollar Index has been trading sideways, unable to break out to new highs. The uncertainty over European debt given the Greece debacle and traders' lack of enthusiasm with US fixed income instruments suggests that there is a chance that the price of Gold may disassociate itself from its natural inverse Dollar relationship if the currency climbs slowly. In times of global economic turmoil, both the greenback and precious metals are seen as flight to quality investments. However, a strong enough surge in the US currency could eventually dampen the appeal of Gold as an investment and cause traders to flock to fixed income instruments. Equity prices will likely also have an impact on traders' decisions. If equity prices were to continue falling, it would be viewed as a sign that traders expect the economic recovery to cool, thus decreasing the likelihood of runaway inflation. There are plenty of arguments for both Gold bulls and bears at the moment, hinting at erratic market action.

Trading Ideas

Both the fundamental and technical outlooks for the Gold contract offer a cloudy outlook. The lack of direction would normally set-up for a neutral strategy, such as a short strangle or a long straddle. The possibility that volatility will remain high may make a short strangle too haphazard at the moment, yet the high premiums on Gold options due to the volatility suggest that there may not be enough market movement to cover the cost of the premiums. For this reason, some traders may wish to wait on the sidelines and enter the futures market once the outlook clears up.

Technicals

Turning to the chart, the April Gold contract is currently trading above the 100-day moving average. The recent closes below the average were a technical defeat for the bull camp, however this move back above the average could be a sign that selling pressure may abate. This may also make the downward crossover of the 20 and 100-day averages less significant. To gain additional upward momentum, the April contract would likely have to cross above the relative high close at 1117.40.

Rob Kurzatkowski, Senior Commodity Analyst

February 17, 2010

What Has Hog Traders in a "Fowl" Mood?

Fundamentals

A growing supply of poultry in the U.S. is creating difficulties for producers and traders of "the other white meat", as a Russian ban of poultry exports from the U.S. has created serious pricing issues for pork. Since January 1st, U.S poultry exports to Russia have been banned due to the use of chlorine as a disinfectant in U.S. poultry processing plants. The ban has been a big blow to U.S. poultry producers, as Russia was the largest export market for U.S. poultry, accounting for just over 20% of Russian consumption. This has caused additional poultry supplies to hit the U.S. market, allowing retailers to lower prices, making pork less competitive price-wise for the average consumer. The weakness in Pork demand comes despite lower supplies of Hogs coming to market, due to inclement weather conditions in parts of the Midwest. U.S. Pork production is down almost 3.5% from last year and shows little signs of improving unless demand starts to pick-up. Summer-month Hogs are trading at a large premium to the 2-day CME Lean Hog index, currently at 67.35, which may spark speculative spreading vs. the lead month April futures, which is trading at a very small premium to the cash index. Although Lean Hog futures prices have rallied off the recent lows seen earlier this month, any rally attempts could be short-lived, unless negotiations with Russian officials can resolve the poultry export ban that has the pork industry crying "fowl"!

Trading Ideas

Given the large premium June Lean Hogs are trading vs. the Lean Hog Cash index and no clear signs that the Russian poultry ban will be removed any time soon, some traders may wish to investigate buying puts in June Lean Hog futures options. With June Lean Hogs trading at 78.150 as of this writing, one can purchase a June 76 put for about 3.000, or $1,200 per option, not including commissions. The premium paid would be the maximum risk on the trade, with the trade being profitable if June Lean Hogs are trading below 73.000 at expiration in June.

Technicals

Looking at the daily chart for April Lean Hogs, we notice prices attempted to test the 20-day moving average on Tuesday, but were met with a good amount of selling. The latest price recovery off the recent lows made on February 1st came on declining volume, which may signal that buying of late was nothing more than a short-covering rally. The 14-day RSI is neutral, with a current reading of 46.53. Support for April Lean Hogs is seen at the February 1st lows of 65.675, with resistance found at last week's highs near the 69.600 level.

Mike Zarembski, Senior Commodity Analyst

February 18, 2010

Dollar Dilemma

Fundamentals

The Dollar Index rally seems to have stalled at the moment, as traders take profits and reassess market fundamentals. The market has lost steam from the January rally, but there seems to be sufficient signs of an economic recovery in the US, and just enough concern over the situation with Greece to support a stronger greenback during the past several weeks. The most recent news from Europe suggests Germany strongly opposes aiding the country's troubled treasury, tempering hopes that the nation will get a much needed cash infusion. For the exchange rate of the Dollar to move higher, however, traders may be holding out for fresh economic data that shows the US economy is improving . Yesterday's housing data did show housing starts picking up at a faster clip than market observers had expected, and building permits did beat analyst estimates, although they were down from December. If US economic conditions do continue to improve, the greenback may find itself continuing to gain against the yen, which may continue to find itself on the short end of the carry-trade. Inflation data over the next two days may have help set the near-term direction for the Dollar. If inflation is higher than expected, treasuries could fall out of favor with investors, who may choose to invest in equities and commodities instead. This scenario would present significant challenges to the US currency.

Trading Ideas

Market technicals and fundamentals do not provide a clear direction for the Dollar. Given the volatile nature of the currency markets, the odds of the Dollar Index trading in a quiet, tight range are not very high. For this reason, some traders may wish to put on a straddle trade, looking for the market to make a move. For example, some traders may wish to buy the March Dollar Index 80 call (DXH080C) and the March 80 put (DXH080P) for a total premium of 1.50, or $1,500. To at least break even at expiration, the price of the DXH10 will have to close at or above 81.50, or below 78.50 at expiration.

Technicals

Turning to the chart, we see the Dollar Index crossing through technical support at 79.50 and psychological support at the 80.00 levels. Prices will likely have to break-out above resistance at the 81.00 level, which is the upper end of chart congestion from May to July of last year. If the market is able to gain traction above the 81.00 level, the chart does not show significant resistance until prices near 85.00. On the flipside, the market does risk confirming a small double-top on the daily chart on a significant close below the 79.70, which could send prices tumbling into the mid 70's. Thus far, prices were able to hold the 20-day moving average after testing it on Tuesday. A close below the average could be seen as negative over the near-term, as it would indicate that a near-term high may be in place.

Rob Kurzatkowski, Senior Commodity Analyst

February 19, 2010

Stalemate!

Fundamentals

It appears that Natural Gas traders are already looking towards spring and an end to the traditional gas storage draw season, as not even the withdrawal of 190 billion cubic feet (bcf) last week could spark a rally in Natural Gas futures. The 190 bcf withdrawal appeared bullish -- especially when compared to last year's 44 bcf draw and the 5-year average of 129 bcf of gas taken out of storage. The particularly brutal winter weather in the eastern half of the U.S. has certainly lessened the burdensome supplies of Natural Gas we had going into the winter, with current inventories standing at 2.025 trillion cubic feet (tcf), which is 2.7% above the 5-year average, but only 1.3% above last year's totals. However, traders seem to be ignoring weather forecasts calling for below normal temperatures in the eastern regions of the U.S. over the next couple of weeks and are focusing on industrial demand, which still has not shown sufficient signs of improvement -- at least not enough to placate traders' fears that gas storage levels will be plentiful once warmer weather approaches. Gas drillers in the U.S. are also starting to increase their operating rig counts, as well, which should keep U.S. gas supplies ample. So unless there is a major supply disruption or industrial demand improves dramatically, Natural Gas futures prices appear to be heading for a consolidation phase until either bullish or bearish fundamentals win out.

Trading Ideas

It sure looks like neither bulls nor bears have the upper hand in the Natural Gas market -- at least in the short-term -- which sets up potential trading opportunities that may benefit from a sideways market. Looking at a chart for April Natural Gas futures, we notice price consolidation between 6.250 on the highs and 4.600 on the lows. A trader looking for April Gas to continue to trade within these boundaries may wish to consider selling a strangle in April Natural Gas. An example of this trade would be selling the April 6.25 calls and selling the April 4.50 puts. With April Gas selling at 5.216 as of this writing, the strangle could be sold for about 0.058 points, or $580 per strangle, not including commissions. The premium received is the maximum potential gain on the trade. Given the inherent risks involved in selling naked options, traders should have a pre-determined exit point in the event the trade moves against them, such as closing out the trade early if April Natural Gas trades above the call strike price or below the put strike price before option expiration in March.

Technicals

Looking at the daily chart for April Natural Gas, we notice prices forming what appears to be a symmetrical triangle pattern. This chart formation is considered an area of indecision where neither bulls nor bears have the upper hand. Prices are currently slightly below both the 20 and 100-day moving averages, giving a slight edge to gas bears. The 14-day RSI is in neutral territory, with a current reading of 43.74. Minor support is seen at January 28th lows of 5.056, with major support at 4.595. Minor resistance is seen at the February 8th highs of 5.638, with major resistance seen at 6.180.

Mike Zarembski, Senior Commodity Analyst

February 22, 2010

Is the End of "Easing" Near?

Fundamentals

The Federal Reserve surprised most market participants Thursday afternoon by announcing a 0.25% increase in the discount rate. The discount rate is the interest rate charged to banks for emergency loans, and normally any changes in this rate are considered more symbolic in nature. But traders are taking a somewhat different stance this time, as many consider this the Fed's "first shot" at attempting to ease off the stimulus gas pedal and begin the interest rate tightening cycle. Fed officials were quick to emphasize, however, that this action was not the start of a broad tightening of credit, and that any increases in the Fed Funds interest rate were still a ways off. Before Thursday's announcement, it was generally believed that the Fed would remain "accommodative" with its interest rates policy -- at least until there were clear signs that the U.S. employment picture was improving, with new jobs being created month over month. The general consensus was that there would not be enough of an improvement in the employment picture to satisfy the Fed until late in 2010, or perhaps into 2011. Now, after the Fed's action, traders are beginning to price-in an increasing chance of a 0.25% rate hike in the Fed Funds rate as early as September of this year. Currency futures reacted strongly to the Fed's announcement, with the U.S. Dollar rising sharply -- especially vs. the Yen and Euro Currency, as traders took the Fed action as a signal that the U.S. economy would recover much more quickly than the economies of the European Union or Japan. Whether the Federal Reserve is ready to speed-up the tightening cycle will still be dependent upon upcoming economic data releases. One of the biggest concerns among some Fed officials is being able to keep the inflation rate in check, especially if the current accommodative stance is kept on too long. However, if Friday's release of the Consumer Price Index (CPI) for January is any indication, this fear may be premature. The CPI rose a modest 0.2% in January, with the so-called "core" rate, which excludes energy and food prices, actually falling by 0.1% last month. This was the first decline in the "core" rate since 1982! Although several Fed governors have come out saying that the Fed's action is not the start of something bigger, traders seemed more inclined to focus on what the Fed actually does, rather than what might be said.

Trading Ideas

Fed fund futures are used by traders to speculate on potential changes in the Fed Funds rate set by the Federal Reserve. To calculate what the market is expecting the Fed Funds Futures rate to be, you take the current price of the Fed Funds futures month you are interested in and subtract that price from 100. For example: a Fed Funds futures price of 99.50 translates into a Fed Funds futures rate of 0.50% (100-99.50 = 0.50%). Currently, the September Fed Funds futures are trading at 99.67, which relate to about a 62% chance that the Fed will raise the Fed Funds rate by 0.25% basis points by the end of September. Traders expecting an increase of this magnitude or more may wish to sell the September Fed Funds futures. Those who believe that the Fed will not likely hike the Fed Funds rate before September may choose to buy the September Fed Funds futures. Currently, futures contracts are listed out through December of 2011, allowing traders to speculate on Fed interest rate actions almost 2 years into the future.

Technicals

Looking at the daily chart for December 2010 Fed Funds futures, we notice that the uptrend line drawn from the December 31st lows has been broken. This indicates that the market is not anticipating any further interest rate cuts. Yesterday's surprise Fed announcement sent prices below the 20-day moving average, possibly signaling traders' anticipation of an interest rate hike by the end of the year. However, prices have failed to take-out support at the recent low of 99.36, despite the Fed announcement. Resistance is found at the contract highs of 99.50 made on February 5th.

Mike Zarembski, Senior Commodity Analyst

February 23, 2010

Stocks Move Higher, Momentum Slowing

Fundamentals

Stock index futures were higher for the sixth consecutive session, albeit only modestly so, despite the Fed's surprise decision to raise the discount rate last week. The move by the central bank can be seen as a positive for the economy as a whole, as the FOMC tends to err on the side of caution. The rate hike may mean US central bankers are fairly confident that the economy has formed a base it can build on. It will be interesting to see if stock traders will remain enthusiastic, as some market observers believe the Fed may have jumped the gun in its surprising move. Many believe that interest rates need to remain low in order for the economy to rebuild, and that inflation may continue to move forward at a snail's pace. The argument can also be made that inflation is a major concern for traders going forward, so the tightening of rates may be the appropriate action from the central bank. On the economic front, jobs remain the major concern among traders. During this long economic downturn, companies have learned to operate very lean, suggesting they may be tentative about hiring new workers. This presents a problem, and could create a vicious cycle of lack of jobs leading to a smaller bottom line, leading to fewer jobs, etc. Fed Chairman Bernanke is expected to touch on the discount rate decision, as well as possible changes to the Fed Funds rate and job growth when he testifies before Congress later this week. The market does seem a bit stretched at the moment, so some traders may be looking for positive reinforcement to keep the rally moving.

Trading Ideas

The fundamental outlook for equities remains extremely murky presently. A host of modestly better economic indicators seem to be overshadowed by the problems the labor market has been experiencing. The chart shows the recent rally finally beginning to lose some steam, but the strong bounce the market saw from the 1050 level could be a sign the future downside potential may be limited. Given the hefty option premiums and the uncertainty in the fundamental market outlook, some traders may look to enter into a short-sighted trade. If the market opens lower this morning, traders may wish to consider shorting the March E-mini S&P, with a protective stop at 1126 and a downside target of 1075. The exact risk/reward ratio cannot be determined, as we do not yet have an entry price.

Technicals

Turing to the chart, the March E-mini S&P has been rallying on light volume, suggesting some traders may be hesitant to buy into the rally. Yesterday's spinning top formation suggests that the chart may be favoring the downside in the near-term. Both the RSI and momentum indicators are showing bearish divergence from prices, suggesting that the oscillators also favor the downside. The inability of the market to move above the 50-day moving average could also be seen as favoring the bear camp.

Rob Kurzatkowski, Senior Commodity Analyst

February 24, 2010

Fundamentals Take a Back Seat as Oil Prices Hover Near $80

Fundamentals

Oil prices remain resilient, hovering near $80 per barrel, despite less than stellar fundamentals. Some of the recent gains in Oil were attributed to a refinery workers' strike in France, which sparked a run-up in Gasoline prices. Oddly, a refinery shutdown may actually be bearish for Oil prices vs. refined products, as Oil demand decreases due to the refinery shutdown. In the U.S., low refinery margins have refineries operating at levels well below capacity, curbing Oil demand from actual users of the product. Despite lower refining output, U.S. gasoline supplies remain more than ample. Traders are looking for U.S. gasoline supplies to have increased by between 500,000 and 1 million barrels last week when the Energy Information Administration (EIA) releases their weekly energy stocks report. The increase is expected despite expectations of lower gasoline imports last week due to the strike in France. Crude Oil inventories are also expected to show an increase of nearly 2 million barrels. Not even a rising U.S. Dollar, especially vs. the Euro, could derail the recent up-move. So what is behind Crude's strength? Looking at the most recent commitment of traders report, we notice large non-commercial traders (traditionally commodity funds and large speculative accounts) increased their net long positions by nearly 19,000 contracts for the week ending February 16th. This increase was before the last upsurge to $80 in the April contract. These traders tend to be more technical or trend-following in nature, and will add to winning long positions as prices move higher. Non-reportable positions (small speculators) decreased last week, as small traders continued to abandon their net-short positions as oil prices rose. So it appears that technical considerations, not fundamentals, are in vogue in the Oil markets lately, and until proven incorrect, large speculators will want to continue to add to their long positions as long as the up-trend remains in place and their statement balances increase.

Trading Ideas

Given the Oil market's seeming ignorance to bearish fundamentals, it may be difficult to fight the trend and take a short position in Oil. By using options on Oil futures, however, a trader is able to establish a bearish position in Oil with a predefined risk that may allow one to ride out any short-term up-move without the fear of potentially unlimited risk. One such strategy would be selling bear call spreads in Oil options. An example would be selling the April Crude Oil 85 calls and buying the April Crude Oil 90 calls. With April Crude trading at 78.51 as of this writing, the spread could be done at a credit of 0.35, or $350 per spread, not including commissions. The premium received is the maximum potential gain on the trade and would be realized if April Crude Oil is trading below 85.00 at the option expiration in March. The maximum loss would be $5,000 minus the premium received if April Oil is trading above $90.00 at option expiration. Given this potential risk, some traders may wish to minimize the risk by closing out the trade early if April Oil trades above resistance at 85.00 before the options expire.

Technicals

Looking at the daily chart for April Crude Oil, we notice a "Doji" appeared on the daily chart, marking what appears to be a top in the latest up-move. This candlestick chart indicator can be a sign that the current trend has run its course, as the market has entered a period of equilibrium where neither bulls nor bears have control. Although prices remain above both the 20 and 100-day moving averages, yesterday 's sell-off did take prices below the 100-day MA , which may spark long liquidation selling should we close below this widely-watched technical indicator. The 14-day RSI has turned lower, moving to a more neutral reading of 55.59. Monday's high of 80.78 appears to be near-term resistance for the April contract, with major resistance seen at the January 11th high of 84.96. Near-term support is seen at the 20-day moving average, currently near the 75.80 area, with major support seen at the February 5th low of 69.80.

Mike Zarembski, Senior Commodity Analyst

February 25, 2010

Yen Struggles to Find Direction

Fundamentals

Yen futures have mounted a comeback the past few sessions, as traders cover Euro/Yen carry trades due to the financial turmoil in the Eurozone. The Japanese currency could very well have plummeted if the crisis in Greece had not happened. The Yen could benefit from the much softer rhetoric from Fed Chairman Ben Bernanke during his Congressional testimony. The central bank head stated that the US economy is in a "nascent" recovery, which may require low interest rates for an extended period of time. The Yen became the focus of traders looking to put on carry trades, as many had expected the Fed to have a more hawkish tone with regard to interest rates, or possibly to raise the Fed Funds rate. The central bank raised its overnight discount rates last week, which was an unexpected move that market observers believed may have hinted toward a rise in the Fed Funds rate. Mr. Bernanke dashed these hopes, which were a bit overblown, and this could put the greenback under pressure against major currencies. Traders executing carry trades may switch from Yen to Dollars in order to balance out positions.

Trading Ideas

The fundamental and technical outlooks appear to give conflicting views of the Yen. The fundamentals seem to indicate that the Japanese currency could move higher, yet the technical outlook appears to hint that the Yen could move lower over the near-term, and trade sideways over the intermediate-term. This suggests that some traders may wish to consider taking advantage of the possible lack of direction by trading the range and shorting the March contract when prices approach 1.1200, and reversing if and when the currency falls back into the low 1.0900's. Some traders may possibly wish to abandon the strategy on a significant close above 1.1250 or below 1.0750.

Technicals

Turning to the chart, the March Yen continues to trade sideways, unable to break resistance in the 1.1250 area. Yesterday's doji pattern hints at a possible near-term reversal. The fact that the March contract was unable to close above the 20 and 50-day moving averages could also be seen as a technical setback for the currency. Momentum has also been lagging behind both price and RSI, as well as hinting at technical weakness.

Rob Kurzatkowski, Senior Commodity Analyst

February 26, 2010

"Loonie's" Flight Cut Short

Fundamentals

The "Loonie's" flight to parity vs. the U.S. Dollar has taken a detour lately, as concerns that the global economic recovery may be on shaky ground has traders fleeing "risk trades." The budget crisis in Greece and China's attempts to slow its surging economy are among the biggest reasons traders are nervous. The Canadian Dollar and other so called "commodity currencies", such as the Aussie Dollar and Brazilian Real, surged last year, as prospects for improving economic conditions had traders eager to invest in countries whose exports of raw materials would benefit from a recovery. Nearly 50% of Canada's exports are derived from the raw materials sector, making the country a favorite for investment during an economic upturn. Traders expecting better economic circumstances placed so called "carry trades" by buying the "commodity" currencies and selling the low yielding U.S. Dollar and Japanese Yen. However, concerns that the Greek debt situation will not be resolved easily has put "safety" ahead of potential longer-term gains in some traders' minds, triggering an unwinding of these "carry trades", which increased the selling pressure on the Canadian Dollar - especially vs. the Yen. Traders have also reassessed their expectations regarding when the Bank of Canada (BOC) will raise short-term rates, with the consensus now expecting it will be the beginning of the third quarter of this year before the BOC will act. Although the longer-term outlook for Canada and the "Loonie" looks bright, in the near-term the Canadian Dollar could remain on the defensive until the market believes that the European Union has a reasonable plan to deal with the Greek crisis and any global economic recovery will not be stymied.

Trading Ideas

Although the Canadian Dollar is in a short-term downtrend, the economic prospects for our neighbors to the north look positive in the long-term. Some traders wishing to take advantage of the recent set-back to take a bullish position longer-term may wish to consider buying a bull call spread in longer-dated Canadian Dollar options. Using the June contract, currently trading at 0.9383, a trader could choose to buy the 0.95 call and sell the 1.00 call for a debit of about 1.38 points, or $1,380 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 June Canadian Dollar is trading above 1.0000 at option expiration in June.

Technicals

Looking at the daily chart for the March Canadian Dollar, we notice prices accelerated to the downside after falling below the 20-day moving average. Much of the selling is tied to long liquidation as sell-stops are triggered and buyers holding back waiting for lower prices. The next major support point does not come into play until just below the 0.9300 area, at which point the market may wish to test the mettle of "Loonie" bulls to see if fresh buying emerges. The 14-day RSI has weakened considerably, with a current reading of 40.36, although it remains well above oversold levels. The February 5th lows of 0.9274 look to be the next support point for the March contract, with resistance found at the week's high of 0.9643.

Mike Zarembski, Senior Commodity Analyst