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March 2010 Archives

March 1, 2010

Will Buyers Emerge as Sugar Rally Fades?

Fundamentals

Sugar futures have certainly lost some of their bullish bias this past month, having fallen over 5 cents per pound since the start of the month, as concerns about world economic recovery and buyers beginning to balk at high prices have overshadowed continued tight supplies. The International Sugar Organization expects Sugar output to remain in a deficit for the remainder of the 2009-10 marketing season, with production expected to be below demand by over 5% during the remainder of the marketing season. However near-term, buyers have been reluctant to purchase Sugar at current prices, with Egypt and Pakistan recently cancelling import tenders due to high cash market prices. Output from Brazil, the world's largest Sugar producer, is expected to increase sharply this coming season, with output up just over 6.5% through mid-February. Indian Sugar production estimates have been raised to about 16 million metric tons this season, recovering from the dismal 14.7 million metric tons produced last season due to lack of timely rainfall. Although Sugar production is expected to rebound later this year, it will not help elevate current tight supplies -- especially if large users such as India, China, and the U.S. need to enter the market to meet immediate needs. So although there appears to be light at the end of the tunnel for Sugar buyers next season, when supplies are expected to increase, we may still see one last rally attempt this spring, as buyers need to get their immediate Sugar "fix"!

Trading Ideas

With Sugar prices now trading well-off the recent highs, but short-term supplies remaining extremely tight, we may see one last rally attempt in the May Sugar contract. There appears to be strong support around the 20-cent level in the May futures that should hold if one more bull market run occurs. Some traders may wish to investigate selling May Sugar puts below major support at 20 cents. An example of this trade would be selling the May Sugar 19.75 puts. With May Sugar currently trading at 23.53 as of this writing, these puts could be sold for about 0.28 points, or $313.60 per option, not including commissions. The premium received would be the maximum potential gain on the trade, and given the potential risk in selling naked options, traders should have a pre-determined exit strategy should the trade move against them. One such strategy would be closing out the trade before expiration in April if the option premium on the puts sold trade at 2 times the premium received.

Technicals

Looking at the daily chart for May Sugar, we notice prices have fallen below the 100-day moving average for the first time since mid-December of last year. Just since February 1st, Sugar prices have fallen nearly 20%, as speculative bulls have booked profits and lightened-up on their net-long positions. The 14-day RSI has become weak with a current reading of 36.56. Prices have now fallen back into the chart "consolidation" area which started back in September, which may draw buyers back into both the physical and futures markets for Sugar. 22.76 is seen as the next support point for May Sugar, with resistance now seen near 24.88.

Mike Zarembski, Senior Commodity Analyst

March 2, 2010

This Chocolate Isn't Sweet

Fundamentals

Cocoa futures continued their slide, falling to a six-month low on demand concerns. Traders are concerned that the sharp appreciation from lows made in late 2008 may dissuade buyers. Chocolatiers have looked to cut costs in the past by decreasing the amount of Cocoa in their finished product or reducing the size and keeping the same content for higher end brands. To make matters worse for Cocoa bulls, Ivory Coast deliveries have climbed 2.6 percent above last year's figures. The Cocoa harvest is also almost 7% of last crop year's pace. This will likely keep physical buying tame, as end-users will remain reluctant to buy at these higher price levels in light of the high prices. Also, the political situation in the Ivory Coast, which always seems to be dicey, has calmed considerably in recent days, with protests called off in light of the new election commission. For the time being, at least, the political situation is not part of the equation. The US Dollar has stood its ground recently, which has caused demand for commodities to remain lackluster, at best. Commodities that are vulnerable to selling pressure, such as Cocoa, have suffered due to poor fundamentals.

Trading Ideas

Both the fundamental and technical outlooks for the Cocoa market have tilted in the bear camp's favor. The only market-changing events that bulls can hope for at this point are a revival of political tensions in the Ivory Coast and a sudden collapse in the price of the greenback. The price of the commodity has swung wildly, suggesting some traders may wish to consider entering into a bearish option strategy and avoid the futures market, as it can be extremely unpredictable. Some traders may look to buy the May Cocoa 2800 puts (CCK02800P) and sell the May 2700 puts (CCK02700P) for a debit of 35 points or better. The trade risks its initial investment of $350 for a potential profit of $650 if the futures contract closes below 2700 on the April 1st expiration date.

Technicals

Turning to the weekly Cocoa chart, we see the market confirming a triple-top pattern. After initially holding its ground near the 3000 market, the selling pressure in the front month May contract has hit a fever pitch. Yesterday's close was slightly below the significant close of 2828 over one year ago. Failure to hold the 2828 level could result in prices coming down to the 2500 area or possibly even 2250. Yesterday's close was also below the first Fibonacci support line at 2877, suggesting prices could come down to 2675 in the near-term. The sharp selling pressure could result in oversold market conditions, which could be mildly supportive of price in the near future.

Rob Kurzatkowski, Senior Commodity Analyst

March 3, 2010

Coffee's Downtrend Starting to Get Cold?

Fundamentals

Since reaching 14-month highs back in mid December of last year, Coffee futures have turned cold, having fallen over 20-cents per pound on expectations of large supplies this season out of Brazil, the world's largest Arabica Coffee producer. Also setting a negative tone for the Coffee market as well as other commodities has been the resurgence of the U.S. Dollar, with the Dollar index futures hovering near 9-month highs. It appears that traders are ignoring current tight world coffee stocks, caused by disappointing production totals out of Central American and Columbia this past season, and are looking towards potentially huge supplies expected out of Brazil once the harvest begins in May. The current supply situation has been given less weight by traders now that spring weather is moving into the Northern Hemisphere, putting an end to the peak Coffee consuming season. Supplies of Robusta Coffee, however, look to remain tight next season, as Vietnam, the world's largest Robusta Coffee grower, is expecting its Coffee production to fall by 15% this season, to total only 14.2 million bags. Large speculative accounts continue to liquidate their net-long positions in Coffee futures, with the most recent Commitment of Traders report showing large non-commercial traders (commodity and hedge funds) were holding a net-long position of 11,372 contracts as of February 23rd. This was down nearly 3,000 contracts for the week and could signal that the recent down-move has been due to liquidation of positions, not the initiation of new shorts entering the market. With prices having rebounded since multi-month lows were made last week, the Coffee market might be due for a period of consolidation, at least until we start to see how large the Brazilian harvest may actually be.

Trading Ideas

If coffee prices remain range-bound ahead of the start of the Brazilian harvest, some traders may wish to investigate trading opportunities that will benefit from a sideways market. One such trading strategy would be selling out of the money strangles in Coffee futures options. Since mid-December, May Coffee futures have traded within a price range bounded by 149.20 on the high side and 126.60 on the low side. A trader could sell a May Coffee 155 call, and at the same time sell a May Coffee 120 put. With May Coffee trading at 132.05 as of this writing, this strangle could be sold for about 0.85 points, or $318.75 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade. Given the potential loss on selling naked options, traders should have an exit strategy in place in case the position moves against them. Some traders may possibly wish to consider exiting the trade early if the premium on the strangle moves to 3 times the amount received, or if May Coffee closes above resistance at 149.20, or below support at 126.60 before the options expire in April.

Technicals

Looking at the daily chart for May Coffee, we notice prices holding below both the 20 and 100-day moving averages, which confirms its current bearish bias. However, we do notice a bullish divergence forming in the 14-day RSI, as the February 25th lows of 126.60 failed to produce a new low in the RSI. This lends some confirmation to the belief that the downtrend is beginning to look tired, and we are likely to see prices move sideways for awhile. Also notice how volume has fallen the last few sessions, right after the roll from the March contract was completed. We did not see any increase in volume as prices moved lower, which could signal that little fresh selling has taken place other then the liquidation of existing long positions. Near-term support remains at 126.60, with near-term resistance found at 137.35.

Mike Zarembski, Senior Commodity Analyst

March 4, 2010

Argentina Gives Beans a Boost

Fundamentals

The grain complex at the CBOT received a lift from extremely heavy rains in Argentina, which could cause crop damage. Grains also received support from a weaker Dollar and higher equity prices. The equity markets have been relentless, seemingly rallying every time investors expect a meaningful correction to surface. This suggests that the dismal demand outlook for Soybeans may not be as bad as many had expected, and the resilience of the economy may stoke the flames of inflation. The rains in Argentina and Brazil could offer the market near-term support. However, the market could remain in a very tight trading range until next week's USDA report. The inclement weather in South America could cause the USDA to trim its forecast for ending stocks, which could further support the market. Traders may also look east for support, as Malaysia may fall short of its palm oil goals and China may increase its imports of Bean Oil. This could cause crushers to begin aggressively buying Beans, with the expectation that demand for crush will improve. Traders may also wish to focus on the price of Crude Oil, which has firmed in recent weeks, but has been quiet in recent trading sessions. Oil is a driver of the commodity markets, in general, and the possibility that biofuel demand could increase if Crude keeps rising has certainly caught the attention of grain traders.

Trading Ideas

Soybean fundamentals have improved with the weather problems in South America and potential increase in Asian demand. Supplies, however, are more than ample at the moment, which could be a stumbling block for future rallies. Likewise, the technical picture for Beans has improved with the snap back from relative lows made a month ago, but prices have been choppy since then, indicating a great deal of uncertainty. Some of this choppiness can be attributed to the fogginess surrounding next week's USDA report. Given the bearish nature of the past two reports and the South American weather issues, some traders may be looking for a bull tilt to the upcoming report. Some traders may wish to put on a conservative bullish position, such as a bull call spread. Traders may possibly wish to consider buying the May Soybean 980 calls (SK0980C) and selling the May 1000 calls (SK01000C) for a debit of 10.00, or $500. The trade risks the initial investment for a potential profit of $500 if the May contract closes above 1000 at expiration.

Technicals

Turning to the chart, we see May Soybeans edging higher in recent sessions, but the market remains trapped in a range between 950-975. Prices have flirted with the 50-day moving average for the past two sessions. A close above the average could be seen as technical progress, as the market has traded below the average for the past two months. A close above resistance at 975 could be a sign that the Beans may be set to test the 1000 level in the near-term. The oscillators are neutral at the moment and give no signal of what may lie ahead.

Rob Kurzatkowski, Senior Commodity Analyst

March 5, 2010

What, Me Worry?

Fundamentals

Apparently, stock index futures traders believe all will be well with the economic environment in the U.S., as S&P futures continue to rally, moving ever so closer to testing the yearly highs. Stock bulls did get some good news on Thursday, as weekly jobless claims resumed their decline, falling from 3-month highs. Jobless claims fell by 29,000 for the week ending on February 27th. More importantly, continuing claims also fell to levels not seen in over a year. Also supportive was release of the Labor Department's report on non-farm productively for the 4th quarter, which showed a better than expected increase of 6.9%. Unit labor costs fell by a 5.9% annual rate, which should help elevate concerns of wage inflation and give Federal Reserve officials another reason to keep interest rates near record low levels for the foreseeable future. Not all the economic news out on Thursday was positive, as U.S. factory orders rose by only 1.7% in January, which is below estimates of a 2.0% gain. Pending home sales fell by a much larger than expected 7.6% in January, as the harsh winter weather took its toll on potential home buyers. Traders will likely now turn their focus to Friday's release of non-farm payrolls for February. The current consensus is for payrolls to have fallen by 70,000 jobs last month, although the range of estimates is rather wide this month, as traders and analysts try to estimate the effects on employment attributable to the severe winter weather seen in the eastern parts of the U.S. last month. The unemployment rate is expected to increase by 0.1% to 9.8%. Although there are signs of improvement in the U.S. economy, it's unlikely many are willing to say we are completely out of the woods -- especially until we see firm signs of sustained employment growth, which would do wonders for consumer confidence levels and help to justify the equities market rally that began nearly a year ago.

Trading Ideas

With economic indicators providing a mixed picture for equities in the near-term and the VIX (CBOE's S&P 500 Volatility Index) hovering near its recent lows, we may start to see some bigger moves in the S&P futures, with an increase in volatility a definite possibility. Given this scenario, some traders may wish to investigate strategies that will benefit from a big move in the indices, as well as an increase in volatility. One such trade involves the purchase of April E-mini S&P 500 straddles. With the June E-mini futures trading at 1114.50 as of this writing, the April 1115 straddle could be purchased for 53.00 points, or $2,650 per straddle, not including commissions. The premium paid is the maximum potential loss on the trade, and the trade will show a profit at expiration in April should the June futures be trading above 1168.00 or below 1062.00. Given the effects of time decay on a long straddle position, some traders may wish to close out the trade before expiration if the price on the straddle falls to 50% of the original purchase price.

Technicals

Looking at the daily continuation chart for E-mini S&P futures, we notice the recent rally from the February 9th lows of 1054.00 has occurred on declining volume. This could be construed that traders do not truly believe the recent rally will hold, as they are not aggressively adding to long positions as the index rises. The 20-day moving average is attempting to cross above the 100-day moving average, which if accomplished, would send a buying signal to momentum traders. The 14-day RSI is moderately supportive, with a current reading of 58.13. 1125.00 is seen as near-term resistance, with major resistance found at 1147.25. Near-term support is found at 1084.50, with major support seen at 1054.00.

Mike Zarembski, Senior Commodity Analyst

March 8, 2010

Bond Prices Fall as Non-Farm Payrolls Come in “Better” Than Expected

Fundamentals

There was no joy for Treasury bulls Friday morning after the widely anticipated U.S. Non-Farm Payrolls report for February was released. Non-farm payrolls for February fell by “only” 36,000 in February according to the Labor Department, despite the severe winter weather that affected much of the northeastern parts of the U.S. This was much better than the pre-report consensus of a decline of around 70,000 jobs last month. The unemployment rate remained steady at 9.7%, which was also better than anticipated. One area where the severe winter weather may have had an effect was in the average hours worked, which fell by 0.2 hours to stand at 33.1 hours last month. Bond futures declined after the report was released, as traders sold existing positions that were purchased before the report in anticipation of a much larger decline in payrolls last month. In addition, traders sold bond futures in anticipation of next week’s U.S. government bond and note auction, expected to total $74 billion dollars, with $40 billion of 3-year notes, $21 billion of 10-year notes, and $13 billion of 30-year bonds up for auction. Traders typically sell bond futures ahead of the treasury auction as a hedge against cash purchases. Even though the payrolls report was better than expected, we still had job losses last month, with an estimated 8.4 million jobs having been lost since December of 2007. Until we start to see actual gains in the employment picture, it is doubtful that the Federal Reserve will begin aggressively raising interest rates anytime soon, which will be supportive to the short end of the Treasury yield curve. The long end of the curve could remain under pressure due to rising inflationary fears tied to the huge government deficits the U.S. is running and concerns that bond buyers will require much higher interest rates to continue their purchases of U.S. Government Bonds in the future.

Trading Ideas

A quick look at the daily chart for June 30-year Bonds will show what looks like the development of a trading range pattern with a high boundary of 118-02 and a low boundary of 113-13. Traders anticipating that the June contract will remain within this price range might choose to investigate selling strangles in the April Bond options, with strike prices outside of the above-mentioned boundary. An example of this trade would be selling the April Bond 120 calls and selling the April Bond 113 puts. With June Bonds trading at 116-22 as of this writing, this strangle could be sold for 12/64, or $187.50 per strangle, not including commissions. The premium received is the maximum potential gain in the trade and will be received if June Bonds remain above 113-00 and below 120-00 at option expiration on March 26th. Given the risk involved in selling naked options, traders should have an exit strategy in place should the position go against them, such as closing out the trade early should June Bonds close above 120-00 or below 113-00 before the options expire.

Technicals

Looking at the daily chart for June 30-year Bonds, we notice that the recent rally attempt has been stymied by the better than expected February NFP figures. Prices are trying to hold above both the 20 and 100-day moving averages, but this is proving difficult. The sell-off gives further support to the belief that we may see a more range-bound trade the next few weeks unless we get a major shock either bullish or bearish to the market. The 14-day RSI has turned neutral, with a current reading of 51.35. 118-02 remains resistance for June Bonds, with near-term support found at the recent lows of 114-15 made on February 18th.

Mike Zarembski, Senior Commodity Analyst

March 9, 2010

Hot Threads

Fundamentals

Cotton futures were lower Monday, ahead of today's USDA supply and demand report. The sluggish price action the market has seen was not at all surprising, given the strength that the market has seen for the better part of a month. Also, the rise in prices has caused many farmers to begin selling their inventories, causing some traders to worry about a short-term supply glut. There is also uncertainty on the ending stocks figure, which could put some downward pressure on prices if it comes in higher than expected. Despite the choppy price action and investor concerns over the USDA data, Cotton market fundamentals remain strong. Better than expected retail sales data indicates that shoppers may not be as shy with their pocketbooks in the future as they have in the past when it comes to clothing. The real test in this regard will come when clothing stores return to regular pricing, as some of the retail sales data may still be skewed by closeouts and sales of winter items with the coming change of season. The employment outlook continues to show signs of life, with the Non-Farm Payrolls number coming in at what can be seen as "normal" levels. The strong export sales figures have also been encouraging, indicating that demand has remained strong in the face of rising prices. The recent pullback in prices can be attributed to profit-taking by long-only and index funds who have provided support for the Cotton market. If other soft commodities continue to falter, the Cotton market could benefit from fund and speculative buying.

Trading Ideas

Cotton fundamentals and technicals both favor the bull camp at this point, and there would likely have to be a major revision in the USDA data for the market fundamentals to shift. Some traders may choose to enter the long side of the market on a breakout from the tight consolidation pattern on the daily chart, but an option play may be the more conservative route. Some traders may wish to buy the May Cotton 82 call (CTK082C) and sell the May 86 call (CTK086C) for a debit of 1.50, or $750. The trade risks the initial investment for a potential profit of $1,250.

Technicals

Turning to the chart, May Cotton appears to be forming a bullish flag. If confirmed, the pattern indicates that the May contract has plenty of upside potential. If the pattern does not pan out, however, there is a possibility that prices could pull back and possibly test support near the 75.00 level, which can be viewed as a significant support level. Despite the downward move in prices and the RSI, momentum continues moving higher, which can be seen as bullish divergence and a sign that prices may continue their uptrend in the near future.

Rob Kurzatkowski, Senior Commodity Analyst

March 10, 2010

Will There be Some Surprises in the USDA March Crop Report This Year?

Fundamentals

The March USDA Crop Production report is typically greeted with a big "yawn" by grain traders, because normally the final previous year's production is already known, and traders are more eager to see the estimates of the next crop year's prospective planting intentions that are reported at the end of March. However, Mother Nature put a twist in this year's report, as the USDA is expected to revise its 2009 Corn and Soybean crop estimates due to the lateness of this year's harvest -- including some areas where the Corn crop has yet to be taken out of the ground. Traders are expecting the USDA to lower the size of the 2009 Corn crop by between 30 and 70 million bushels from the 13.151 billion bushel estimate in January. However, traders also expect the USDA to lower U.S. Corn demand estimates due to lower U.S. export projections, as a stronger Dollar has hurt the competitiveness of U.S. Corn in the world market. Traders are expecting the USDA to leave U.S. Corn carryout for the 2009-10 season near the 1.719 billion bushel estimate from its January report. Also affecting U.S. Corn demand is the concern that the late harvest has affected the quality of the Corn crop in some areas. In addition, South American producers are expected to harvest bumper Corn and Soybean crops this season, making both Brazil and Argentina strong competitors in the export market this year. New crop corn futures will be watched closely by traders, as warm and wet weather forecasts for the Midwest could cause localized flooding in some areas of the Corn Belt -- especially given the snow cover in the upper Midwest. Concerns that a wet spring will once again delay Corn plantings should give some support for December 2010 futures, particularly if it appears that planting delays will be lengthy enough that some producers switch from planting Corn to planting Soybeans, which have a shorter growing season.

Trading Ideas

Since the sharp sell-off seen in Corn futures following the January USDA crop report, July Corn futures have traded in a relatively narrow 35-cent range. USDA reports have historically been a catalyst to trigger major moves in the grain markets, and some traders may wish to wait until the report is released to see the direction the market moves once the report is out. Given the recent trading range in which corn has been stuck, some traders may wish to investigate entering a trade in the direction of a price breakout outside of the recent range. An example of this trade would be placing an OCO order (one cancels other) to buy July Corn above the recent highs at 402.25 on a stop, and an order to sell July Corn below the recent lows of 368.75 on a stop. If one side of the order is filled, the other side of the OCO order will be cancelled. At this point, a trader may possibly wish to place a stop loss order 10 cents below recent highs of 402.25 if the buy side of the OCO is filled, or 10 cents above the recent lows of 368.75 if the sell side of the OCO is filled.

Technicals

Looking at the daily chart for July Corn, we notice that prices remain well below both the 20 and 100-day moving averages, giving Corn bears the upper hand. The 14-day RSI has begun to trend lower, with a current reading of 41.41. Support remains at the February 5th lows of 368.75, with resistance seen at the highs of the recent trading range made on January 13th at 404.50.

Mike Zarembski, Senior Commodity Analyst

March 11, 2010

A Bitter Taste

Fundamentals

Sugar prices continue to tumble on expectations that Indian output will be higher than previously expected. The bearish supply news comes on the heels of Indian buyers backing out of import deals, which has quickly cast a dark cloud over the Sugar market. The country is said to be adequately supplied at the moment and will not require imports at this time, which could result in a glut of supply on the market. The improved crop yields in India have the potential to increase output by almost a million metric tons over prior estimates. Neighboring growers, namely Thailand, have also increased their acreage to meet the global shortfall, which has alleviated some of the long term supply fears. Soft commodities as a whole have fallen out of favor with fund traders, as evidenced by the recent meltdown in the Sugar, Cocoa, and Coffee markets. The Dollar Index has also stood its ground. Both of these factors have given the Sugar prices little outside support. At this point, there would have to be a monumental swing in fundamentals for prices to rebound sharply from current price levels.

Trading Ideas

Given the scope and severity of the recent decline in Sugar prices, some traders may wish to tread lightly and look for volatility to die down before entering the market. It could seem foolhardy to enter into new short positions at this point, as the market may experience some short-covering. Instead, some traders may choose to look for a rebound as an opportunity to enter into a bearish option position, or to short the futures.

Technicals

The May Sugar chart can simply be described as catastrophic. Prices have broken sharply through support near the 22.50 and 20.75 levels sharply and are now testing the 50 percent Fibonacci retracement from the beginning of the rally at 19.40. If this level is broken, the May contract could tumble another 1.00 points before finding additional support. The oversold conditions on the RSI could spark some short-covering, but this may only be a temporary reprieve for bulls, as the recent sell-off has done major crop damage and could very well have changed the long-term market trend.

Rob Kurzatkowski, Senior Commodity Analyst

March 12, 2010

Will U.S. Drivers "Get their Motors Running " if Gasoline Goes Above $3.00?

Fundamentals

The days of relatively "cheap" Gasoline prices appear to be ending once again, a byproduct of improving economic conditions tied in with curtailed production. Despite attempts by the Chinese government to dampen its surging economy, energy demand remains robust, with China's oil imports in February coming in at the second highest total in its history! Although U.S. energy demand is still well below the levels seen 3 years ago, Oil prices are stubbornly holding near the $80 per barrel level due to Asian demand. Relatively high oil prices and lackluster U.S. gasoline demand has hurt refinery margins to the point where major and minor refiners have curtailed production, which has been hovering near an 80% utilization rate, and have actually shut-down some refineries due to the current economics of producing refined products. This situation could make Gasoline supplies tight going into the summer -- especially if we continue to see some improvement in the employment picture. On Wednesday, the Energy Information Administration (EIA) reported that U.S. Gasoline stockpiles fell by 2.9 million barrels last week to stand at 228,984,000 barrels, as refinery operating rates fell to 80.73%, which is down over 1% in the past week. Although supplies are just over 16 million barrels above last year at this time, supplies should become tighter, because environmental regulations require special gasoline blends for some major population centers in the U.S., which forces refiners to produce these custom blends as summer approaches, which can cause shortages in some areas. It remains to be seen whether U.S. motorists will balk at paying $3.00 plus for gasoline this summer and continue the trend of cutting back on driving that we have seen the past two years, or if improving job prospects and consumer sentiments will bring the public back to the roads, despite higher retail Gasoline prices.

Trading Ideas

Even though gasoline prices are currently trading near their yearly highs, the potential for even higher prices remains -- especially if we continue to see an improvement in the employment situation. Some traders looking for gasoline prices to continue to rise may choose to investigate purchasing a bull call spread in RBOB Gasoline futures options. An example of this trade would be buying the June RBOB 2.35 calls and selling the June RBOB 2.50 calls. With June RBOB futures trading at 2.2663 as of this writing, the spread could be purchased for about 0.0500 points, or $2,100 per spread, not including commissions. The premium paid is the maximum potential loss on the trade, with a potential profit of $6,300 minus the premium paid should June RBOB be trading above 2.50 at option expiration in late May.

Technicals

Looking at the daily continuation chart for RBOB gasoline futures, we notice the bullish trend in gasoline prices began at the end of December of 2008. Since that time, we have made higher highs and higher lows, with prices failing to close below the 200-day moving average since May of 2009. Even though futures prices are up sharply from the Dec '08 lows, we have barely recovered 50% of the decline from all-time high prices made in July of 2008! The 14-day RSI remains strong, but has moved slightly below overbought levels with a current reading of 65.78. Near-term support for May RBOB is seen at the recent lows made on February 25th at 2.1330, with resistance seen near the 2.3500 area.

Mike Zarembski, Senior Commodity Analyst

March 15, 2010

Are Soybean Prices on the Verge of a Major Breakdown?

Fundamentals

Soybean futures prices have stagnated, holding in a relatively narrow 75-cent range the past few weeks, as conflicting fundamentals have neither bulls nor bears in control. The USDA March crop report was deemed neutral by trader, as a drop in the ending stocks estimate was countered by rising estimates of the South American Soybean crop. The USDA lowered the 2009-10 U.S. Soybean carryout by 20 million bushels to 190 million bushels. The drop in ending stocks was tied to a 20-million bushel rise in the estimate for U.S. Soybean exports to a record 1.42 billion bushels. Globally, however, the Soybean carryout for the 2009-10 season was raised by nearly 1 million metric tons from the February report, as production estimates out of Brazil continue to be raised. The USDA is estimating the Brazilian Soybean crop at 67 million metric tons, up 1 million tons from the month before. If the estimates are accurate, this would be a record for that nation. The Argentinean crop estimate was unchanged at 53 million metric tons. Traders will likely now turn their focus to the USDA's prospective plantings estimate, due to be released on March 31st. There are some private forecasts calling for a slight decline in U.S. Soybean plantings this coming season from the 77.5 million acres planted last year. However, this estimate could change significantly, especially if Corn producers run into planting delays due to a wet spring. The Soybean crop is traditionally planted later than Corn due to its much shorter growing season. Should U.S. growers run into difficulties getting the Corn crop in again this year, it would not be a surprise to see a switch into Soybeans, and the potential for another record U.S. Soybean crop is not out of the question.

Trading Ideas

Soybean futures will soon be hit with harvest reports out of South America and the first estimates for prospective plantings here in the U.S. Given the potential for increased volatility ahead of these major events, some traders may choose to investigate buying strangles in May Soybeans, which would benefit from an increase in volatility and a large price move in either direction. An example of this trade would be buying the May Soybean 900 puts, in addition to buying the May Soybean 970 calls. With May Soybeans trading at 923.75 as of this writing, this strangle could be purchased for about 29 cents, or $1,450 per spread, not including commissions. The premium paid would be the maximum risk on the trade, which will be profitable at expiration in April if May Soybeans are trading above 999.00 or below 871.00.

Technicals

Looking at the daily chart for May Soybeans, we notice the relatively tight trading range Beans have been trading in since the beginning of February. However, taking a longer-term view, there appears to be a double-top formation covering the June and December 2009 highs. This pattern could be a signal that the recent highs just below 1100.00 may signal a major top is in place, and that the longer-term trend will favor lower prices. The 14-day RSI has turned weaker the past couple of trading sessions and currently stands at 38.00. 911.00 looks to be the next significant support point for May Soybeans, with major support found at 887.75. Resistance is seen at the top of the recent range at 985.00.

Mike Zarembski, Senior Commodity Analyst

March 16, 2010

Market Quiet Ahead of FOMC, OPEC

Fundamentals

Crude Oil futures are weaker ahead of tomorrow's OPEC meeting, which is widely expected to be a non-event. The Oil cartel is not expected to change its production quotas, as they have to be pleased with where prices are in light of current global economic conditions and the resilience of the US Dollar. The Crude Oil market has already priced-in an economic recovery for the most part, and prices are relatively high for the current market fundamentals. Supplies are ample at the moment, and we will be entering the low demand period between peak winter heating demand and the driving season, which could buffer current inventory levels. Today, traders' focus will be on the Fed, as the FOMC will make their rate decision today. Like the OPEC meeting, there is no expectation of a change in the status quo, but traders will likely closely watch what the central bank has to say about rate policy going forward. If there is any indication that rates will be raised sooner rather than later, Crude Oil could find itself under pressure. Given the lack of new positive economic developments, Oil prices favor a slight negative bias over the near-term, with the potential of trading into the low 70's, barring a significant pullback in the Dollar or inventory shock.

Trading Ideas

Given the lack of fresh bullish fundamentals and technical resistance, the Crude Oil market can be seen as neutral over the intermediate term and bearish in the near-term. Some traders may wish to take advantage of the range that Crude Oil has found itself in consider shorting the May Mini Crude Oil futures contract with a protective stop at 83.25 and a downside objective of 74.00. The trade risks roughly $1,500 for a potential profit of $3,000.

Technicals

Turning to the chart, we see prices reaching the upper end of the range the market has found itself in since last fall. Since October, prices have been trading between 70.00 and the low 80's. The first area of support below current levels comes in around the 78.00 level, with more significant support near 74.50 and 72.50. On the upside, resistance comes in around 82.25 and the elusive 85.00 level. Momentum is beginning to show bearish divergence from the RSI, signaling a bearish near-term bias.

Robert Kurzatkowski , Senior Commodity Analyst

March 17, 2010

The Euro Cannot Go Straight Down-- Can It?

Fundamentals

The steep sell-off in the Eurocurrency that began back in early December 2009 looks to have stalled, at least for now, as it appears that European finance ministers have come up with a plan to help Greece out of its financial quagmire should its current plan to reduce its account deficits not be sufficient. The plan is expected to involve the use of emergency loans, if necessary, although the exact details have not been released. This news has assured traders that the European Union members will come to Greece's aid if needed. This takes one of the main catalysts for the Euro's decline off the table, at least for now, and may trigger additional Euro buying as speculators begin to cover their short positions in the currency. Adding additional support for the Euro was a "better than anticipated" German ZEW confidence index this month, coming in at 44.5, vs. 43.5 anticipated by analysts before the figure was released. Even though the German confidence figure was better than expected, the index still fell for the sixth consecutive month, showing that any improvement in the German economic outlook will not come easily. One of the biggest potential movers in the Euro might be the very large short positions being held by speculators. The most recent Commitment of Traders report shows large non-commercial traders short 73,213 contracts as of March 9th. Although this is down 11,587 contracts for the week, this is still a large short position being held that could be vulnerable to further short-covering buying should chart resistance points be taken-out. This is especially true given the speed and size of the Euro's decline, and a technical correction seems to be overdue.

Trading Ideas

Although in this author's opinion, the longer-term trend for the Euro is still pointing down, the 1700 pip decline in the currency without a meaningful correction has put the market in a technically oversold position. In addition, the daily chart is starting to show a rounded-bottom formation forming, which could be signaling a short-term bottom is in place. One way to react to a potential short-term bottom in the Euro could be to consider selling puts in April Eurocurrency with strike prices below the recent lows of 1.3433. An example of this trade would be selling the April Eurocurrency 1.3350 puts. With the June futures trading at 1.3759 as of this writing, the puts could be sold for about 0.0024, or $300 per option, not including commissions. The premium received would be the maximum potential profit on the trade and would occur should the June Eurocurrency be trading above 1.3350 at option expiration on April 9th. Given the potential risk involved in selling naked options, traders should have an exit plan in place should the trade move against them. One such plan would close-out the trade before expiration should the June Eurocurrency close below support at 1.3433.

Technicals

Looking at the daily continuation chart for the Eurocurrency, we notice a rounded-bottom pattern forming, which can be viewed as a possible reversal signal. Also, the downtrend line drawn from the December highs has been broken, which could spark further short-covering buying by technical traders. The 14-day RSI has turned up, moving above the 50 mark, with a current reading of 53.14. Should the recent lows hold, the next resistance point is not seen until the February 3rd highs at 1.4026. Support is found at the March 2nd lows of 1.3433.

Mike Zarembski , Senior Commodity Analyst

March 22, 2010

Can it be a Bull Market if No One is Buying?

Fundamentals

The classic trading mantra "The trend is your friend" certainly describes the behavior of the U.S. Stock indices since March of last year, with the S&P 500 reaching highs not seen since the end of September 2008. The latest fuel to rocket stock prices higher was the "non-action" by the Federal Reserve after their latest FOMC meeting on Tuesday. In their post-meeting statement, Fed officials noted that the U.S economy is improving, but that current economic conditions and tame inflation catalysts warranted keeping interest rates at an exceptionally low level for an "extended" period of time. This statement was similar to the January statement and alleviated some of the concerns that the Fed would be moving to raise interest rates sooner than previously thought. This announcement should make equity investments attractive, as raising interest rates too soon during an economic recovery could hurt businesses trying to recover from the economic downturn. Although it is not too surprising that we have seen a stock market recovery since the lows were made in March of last year, the real conundrum for technical traders is the relatively low trading volume seen during the rally. Normally, technical traders would like to see volume increasing in the direction of the trend, as confirmation of the validity of the trend. However, even though the stock indices have been making new highs, volume has been anything but robust. In fact, it seems that volume has actually increased during the brief market corrections we have seen this past 12 months, sending confusing signals to traders and market analysts alike. One possible answer to this phenomenon is the rise of automated trading programs that now account for a large percentage of the markets' volume. Given the higher volatility seen on major down moves, it is not surprising that these automated algorithms would produce higher volume during more volatile trading action. What seems to be missing from the market rally is the participation of the individual investor, who it appears, has missed most of the rally so far, as the long-awaited price corrections in the stock indices never really materialized, and investors have become a bit gun-shy chasing the market as it continues to make new recovery highs. It is certainly possible that the highs in the indices will not be seen until the public finally returns to the market, at which point we could see the major indices finally stage a pullback, which will be of little use for those investors who have joined the bullish party late.

Trading Ideas

Although the nearly yearlong rally in the E-mini S&P 500 futures has shown little signs of abating, the possibility of a correction continues to loom -- especially given the lackluster volume seen. One way to play a move in the market without favoring one direction or the other would be to buy strangles in the E-mini S&P futures options. An example of this trade would be buying the April E-mini 1165 calls and the April 1150 puts. With the June E-mini S&P trading at 1158.75 as of this writing, this strangle could be purchased for about 21.50 points, or $1,075, not including commissions. The premium paid would be the maximum risk on the trade, and the trade would be profitable at expiration in April if the June E-mini is trading above 1186.50 or below 1128.50.

Technicals

Looking at the daily continuation chart for the E-mini S&P futures for the past 2-years, we notice since the highs were made back in May 2008 all the way to the lows of March 2009, the index has rallied back past the 61.8% Fibonacci level. The market is well above both the 100 and 200-day moving averages, and the up-trend line drawn from the March lows does not come into play until the 1089.00 area. The 14-day RSI has moved into overbought territory, with a current reading of 72.94. The next major resistance point is seen at the psychologically important 1200.00 level, with support seen at the recent lows at 1054.00.

Mike Zarembski , Senior Commodity Analyst

March 23, 2010

Gold Traders Continue to Yawn

Fundamentals

Gold futures are little changed this morning, as traders find little reason to become enthusiastic about the precious metal. The greenback continues to hold onto recent gains on comments from ECB Chairman Trechet indicating the central bank does not favor a Greece bailout. Both the US currency and Gold continue to trade in a range, indicating that traders are a bit confused about their respective directions. Gold's range has been particularly tight during this first quarter of the year. While the strength of the Dollar has been a negative for the metal, stock prices continue to creep higher, which can be seen as supportive. However, the degree to which the SEC's new stringent short-selling rules have impacted the stock market remains unknown. We have not seen stocks sell off with any vengeance since the rules have been instituted, so the slow climb could be a product of having a lack of short-sellers to act the yang to the buyers' ying. One could say that the gains may be unnatural. The Greece dilemma presents a unique situation for Gold traders. On one hand, the instability of the Greek financial system has the potential to spill over into the Eurozone as a whole. Also, it raises the question of who may be the next distressed nation. There have been fears that the US government's debt may be downgraded, which in combination with Europe's woes, could make the government bond market unattractive to investors. Gold tends to strengthen during times of economic duress, which indicates that the metal has the potential to benefit as a result of the aforementioned issues facing the EU and US. On the other hand, European dissent has helped keep the Dollar strong. Like Gold, the Dollar has been a place of refuge for concerned traders. If Europe fails to agree on an aid package and the drama continues to play out, the Dollar could strengthen at the expense of the Euro, making Gold unappealing to traders.

Trading Ideas

Given the fact that the fundamental and technical outlooks for the Gold market remain unclear in the near -term, some traders may wish to take on a longer-term strategy. The fact that the long-term outlook is directionless at the moment suggests that the strategy that some traders may wish to possibly employ might be a directionless trade that anticipates a breakout, such as a straddle. Some traders may wish to buy a June 1100 straddle for a debit of 60.00, or $6,000. Because of the high cost of the trade, some traders may wish to consider selling the put in the event that the market breaks-out to the upside, and the opposite in the event of a downside break-out in order to salvage some value.

Technicals

Turning to the chart, we see the range of June Gold having tightened into a narrower trading range as the quarter has progressed. This tightening of the trading range suggests that the market may be nearing a breakout point. The direction of the potential breakout is unknown. The chart has given little indication as to the direction of the potential breakout, as have the oscillators.

Robert Kurzatkowski, Senior Commodity Analyst


March 24, 2010

Copper "Bull Market" Takes a Vacation?

Fundamentals

Copper traders have apparently been on spring break the past couple of weeks, as the market has become range bound following a nearly month-long 65-cent rally in Copper prices. The consolidation seems to be tied to confusion regarding the direction of the Euro Currency vs. the U.S. Dollar, as the financial situation in Greece is anything but settled. Copper supplies at the London Metal Exchange (LME) continue to fall, with exchange Copper stocks currently totaling 520,675 metric tons as of Tuesday morning, which may show that demand for the physical metal is picking up. However, the future demand outlook for China looks muddled, as traders fear the continued tightening monetary policies by the Chinese government may curb the appetite for commodities, as government officials try to reign-in the surging economy. The Copper market showed little reaction to Tuesday's release of U.S. existing home sales figures for February, which fell by 0.6% last month to a 5.02 million annual rate, but were within analysts' expectations. Traders will now turn their attentions to Wednesday's morning's release of U.S. new home sales for February, with hopes that government tax credits for home buyers that will expire in April have spurred new home sales and hopefully will act as a jumpstart to the building industry. With Copper prices up nearly 2.5 times from the lows made back in December of 2008, the bull market seems a bit long in the tooth, and unless a bullish catalyst can be found soon, the market appears vulnerable for a correction -- especially once traders return from their spring "vacations".

Trading Ideas

With Copper prices caught in a narrow 17-cent range the past few weeks and trading volume beginning to fall, some traders might be lulled to sleep just before the market makes a large move outside the recent price ranges. Some traders may wish position themselves for a breakout of the consolidation by placing a buy stop order above the recent highs of 3.487 and a sell stop order below the recent lows of 3.315. If one side of the trade is filled, some traders may wish to leave the other order working as a protective stop order should the initial breakout of the trading range turn out to be a false signal.

Technicals

Looking at the daily chart for May Copper, we notice prices still holding above both the 20 and 100-day moving averages, giving Copper bulls the upper hand despite the recent consolidation pattern prices have fallen into. Notice that volume has fallen during this range-bound trade, as traders focus their attention to more "exciting" markets such as the Euro or Gold. The most recent Commitment of Traders reports shows large non-commercial traders (large speculators) adding to their net-long positions in Copper, while commercial traders take the other side of the trade. Should Copper prices fail to make new highs soon, we may see some of the speculative long positions begin to get liquidated, as large specs move on to other trading opportunities. The 14-day RSI remains supportive, with a current reading of 55.77. Support is seen at the 3/15/10 lows of 3.3150, with resistance seen at the 3/1/10 highs of 3.4870.

Mike Zarembski, Senior Commodity Analyst

March 25, 2010

No Safe Haven

Fundamentals

Bond futures had sharp declines yesterday, as investors' appetites for government debt continue to wane. Yesterday's auction of 5-year notes drew a yield of 2.605 percent, versus consensus estimates of 2.556 percent, which likely indicates lackluster demand. The auction showed the lowest demand for US debt in 8 months. The poor showing by foreign investors can largely be attributed to China, which may be retaliating against efforts from US lawmakers to force the country to float its currency. One could expect today's auction of 7-year notes to have lackluster demand, which could push yields higher. Bond futures have priced-in higher yields, indicating that another poor showing may not have a great influence on price action today. Treasuries could actually be seen posting gains if the results of the auction are only moderately worse than expected, as the shock hit the market yesterday. Government debt, in general, may be entering a period of lackluster demand. Global equity markets continue to slowly creep higher, and the fallout from the Greece debt situation continues to spread. Rating agencies could be watching sovereign debt closer these days, and we have seen a downgrade of Portuguese bonds by Fitch, citing a sharp increase in debt. Traders have feared a similar fate for US debt, which could cause yields to increase. This may make investors a bit gun shy at the present moment.

Trading Ideas

The fundamental outlook for Bond futures remains negative, especially if China continues to push back against pressure to raise the value of the Yuan. However, the downside on the Bond contract may be limited unless the FOMC decides to raise rates, which is extremely unlikely in the near-term. Some traders may wish to look to the chart to determine market direction. If the June Bond contract is able to hold support between 115 & 116, some traders may possibly wish to buy the futures, with an upside target of 118-00 and a stop at 114-16. The trade risks between $500 and $1,500, depending on point of entry, with a profit target of between $2,000 and $3,000.

Technicals

Turning to the chart, we see yesterday's sharp selloff in the June Bond contract taking prices down to minor support at 116-00, the trigger line from the previously confirmed double-bottom. In order to signal a downside breakout, prices would have to fall below major support at 115-00. If prices gain traction between the 115 &116 levels, prices could remain range-bound for the foreseeable future, with 119-00 likely the upper boundary of the range. The oscillators are neutral at the moment.

Rob Kurzatkowski, Senior Commodity Analyst

March 26, 2010

Traders Flee the Euro as EU Summit Begins

Fundamentals

Bears are running rampant in the Euro, as the beleaguered currency has fallen to 10-month lows vs. the U.S. Dollar as investors move to safer havens ahead of a meeting by European Union officials. Many traders fear that there will not be any consensus by EU leaders as to how to deal with the financial turmoil in Greece, with talk now centered on a possible bail-out involving the International Monetary Fund (IMF). If this were not enough to send investors out of the Euro, Fitch Ratings lowered the credit rating of Portugal by one notch to AA- and issued a negative outlook for the country. The resistance by some EU countries, most notability Germany, to a rescue package for Greece or other struggling EU nations highlights the dissention among the ranks of Eurozone nations and brings fears that the monetary union could fall apart in the future unless some solution to the financial quagmire can be reached. The falling Euro has been a boon for trend-following speculators such as commodity funds, who have been net-short the Euro for some time. The most recent Commitment of Traders report shows large non-commercial traders holding a net short position of 44,717 as of March 16th. Although this is a large net-short position, is it well off the record of just over 73,000 net-short positions seen just a few weeks ago. The move to 10-month lows for the Euro futures should draw in fresh selling from commodity funds, as the recent consolidation phase has apparently come to an end.

Trading Ideas

The breakdown of the June Euro through support at 1.3433 could signal the start of the next wave down for the currency, with a potential test of the April 2009 lows just below the 1.2900 area a likely target. Some traders looking for further weakness in the Euro may choose to explore the purchase of bear put spreads. An example of this trade would be buying the June Euro 1.3300 puts and selling the June Euro 1.2800 puts. With June Eurocurrency futures trading at 1.3354 as of this writing, the spread could be purchased for about 0.0153 points or $1,912.50, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential profit of $6,250 minus the premium paid should the June Euro be trading below 1.2800 at option expiration in June.

Technicals

Looking at the daily continuation chart for the Eurocurrency futures, we notice the "rounded bottom" formation created since the middle of February failed to halt the Euro's slide. The minor bout of short-covering buying seen last week failed to even set-up a test of minor resistance at 1.4000! Bearish momentum re-exerted itself once the brief rally attempt above the 20-day moving average failed as well. The 14-day RSI is weak, but has not moved back into oversold territory yet, with a current reading of 37.37. The next support target for the Euro futures is the April 2009 lows near the 1.2878 area, with 1.4000 still seen as the next resistance point.

Mike Zarembski, Senior Commodity Analyst

March 29, 2010

Grain Traders Await the USDA Prospective Plantings Report

Fundamentals

Now that spring has arrived, grain traders are turning their attention to how many acres U.S. producers will dedicate to Corn and Soybean production. Already several private forecasters have given their acreage estimates ahead of the widely anticipated USDA Prospective Plantings report due out on March 31st. Corn acreage estimates have varied widely, with estimates running between 87 and 91.5 million acres expected to be used for Corn production. For Soybeans, traders are looking for around 79 million acres being planted, although some analysts are looking for nearly 81 million acres! Weather conditions will be critical in determining how many acres actually do get planted this year, as a warm and dry spring will benefit Corn plantings, as producers are able to get into the fields earlier than anticipated -- but a wet and cold spring will favor Soybeans, which have a much shorter growing season than Corn. Although acreage predictions are only early estimates so far, traders are already anticipating an ample crop this upcoming season, as both new-crop December 2010 Corn and November 2010 Soybeans are trading well off their highs. This is true especially for Corn, as traders still remember how difficult the weather was for last year's Corn crop -- especially during the harvest -- yet U.S. producers still managed to produce over 13 billion bushels of Corn! In the past, the Prospective Planting report has triggered some volatile trading sessions the day the report was released, with prices moving up or down the maximum daily price limit on several occasions. Traders should be prepared for the potential of increased volatility in the next several trading sessions leading up to the USDA estimate.

Trading Ideas

December Corn futures have been on the defensive lately, trading near 6-week lows as of this writing. Although the trend is favoring lower Corn prices, any acreage estimate surprises in the USDA report could cause a big move in Corn prices. Some traders anticipating an increase in Corn volatility may want to explore the purchase of a strangle in December Corn futures. An example of this trade would be buying the December Corn 440 calls and buying the December Corn 340 puts. With December Corn trading at 386.00 as of this writing, this strangle could be purchased for 41 cents, or $2,050 not including commissions. The premium paid is the maximum risk on the trade, with the trade being profitable should December Corn be trading above 481.00 or below 299.00 at expiration in November. Given the large amount of premium required for the trade, some traders may wish to exit the trade early should the value of the strangle fall by 50% from the entry price.

Technicals

Looking at the daily chart for December Corn, we notice prices have been trading at the lower end of a 25-cent trading range since the middle of January. Prices are now well below both the 20 and 100-day moving averages and momentum has turned weak, with the 14-day RSI reading 38.15. Should support fail to hold at the recent lows of 382.75, the next major support point is not found until the 350.00 area. Resistance is seen at the recent highs made on 3/3/10 at 406.25.

Mike Zarembski, Senior Commodity Analyst

March 30, 2010

Sugar Sell-off Cools

Fundamentals

Sugar prices have remained relatively steady over the past week, spurred by an uptick in demand on sagging prices. The drop in prices suggests that India may force beverage and confection makers to import the sweetener to increase domestic stocks. While Brazil and India are both expected to sharply increase their supplies in the next crop year, demand from much of the world has remained stout. China may import more Sugar than previously expected due to inclement weather conditions in the country's growing region. In the near-term, supplies do remain fairly tight, but the prospect of large Brazilian and Indian crops could prevent prices from making any material gains. The oversold conditions have also caused traders to take profits on shorts. It is still unclear if the market is trying to find a base here at current levels, or if we are seeing consolidation before prices begin sliding again. The Dollar's recent lack of direction has caused many commodities to either trade range-bound or begin moving on their own merits. In the case of Sugar, almost apocalyptic conditions were priced in, which is why the market had such a sharp drop. Now that prices have come down to more realistic levels, traders will be very sensitive to any changes in the fundamental outlook over the near-term.

Trading Ideas

The fundamental outlook for the Sugar market has become modestly more favorable, but the spurt in demand can be seen as a product of opportunistic buyers rather than something the market can build on. Likewise, the chart shows that the market has stopped the bleeding for the moment, but little else positive could be said at present. Some short-term traders may possibly wish to short the May futures contract on a close below 16.50, with a downside objective of 15.00 and a protective stop at 17.00. The trade risks roughly $560 for a potential profit of $1,680.

Technicals

Turning to the chart, the May Sugar contract has been trading in a very tight range for the past week, forming what appears to be a consolidation pattern on the daily chart. It is still unclear whether this consolidation can be seen as a sign that the market is trying to find a base. The technicals suggest that the May contract may not find significant price support until the market trades down to the 15.00 level. The RSI indicator is showing the market recovering from oversold conditions, which could make the market susceptible to additional selling pressure.

Rob Kurzatkowski, Senior Commodity Analyst

March 31, 2010

U.S. Cotton Production Poised for a Rebound This Year

Fundamentals

The improvement in Cotton prices the past year should finally lead U.S. Producers to plant more Cotton this upcoming season. Average analysts’ estimates are for U.S. Cotton plantings to total 10.40 million acres, or nearly 14% above last year’s meager 9.15 million acres dedicated to Cotton. If true, this would be the first rise in Cotton acreage in 3 years, as new-crop Cotton futures are finally competitive with that of Soybeans and Corn. The global economic recession has hurt Cotton demand the past couple of years, as end-users kept inventories lean. Now that there are signs of a rebound in consumer demand, mills are expected to increase their Cotton purchases. However, lower Cotton production the past few years has kept U.S. carryout levels tight, with traders estimating 2009-10 Cotton carryout at only 3.2 million bales. The tight carryout totals could become an issue for Cotton end users should the improvement in consumer sentiment levels translate into improved demand for textiles this year. Dry weather in Texas has allowed Cotton plantings to begin in the Lone Star state, with the USDA reporting that 4% of the crop has been planted so far this year, which is slightly ahead of last year’s pace. All eyes will now turn to the USDA’s Prospective Plantings report due out on Wednesday morning at 7:30 Chicago time to see the first government estimate of the number of acres that are predicted will go into U.S. Cotton production.


Trading Ideas

Cotton prices have moved into a consolidation phase, with July Cotton trading within a 5-cent price range the past month. With the prospective planting report ahead and the upcoming growing season just beginning, Cotton prices could become more volatile, as weather conditions move to the forefront in traders’ minds -- especially in the Cotton growing regions in the Mississippi Delta and Texas. Traders looking for an increase in Cotton price volatility may wish to investigate the purchase of Cotton strangles. An example of this trade would be buying the July Cotton 85 calls as well as buying the July Cotton 78 puts. With July Cotton trading at 81.20 as of this writing, this strangle could be purchased for about 530 points, or $2,650 per strangle, not including commissions. The premium paid would be the maximum risk on the trade; with the trade being profitable at expiration in June should July Cotton be trading above 90.30 or below 72.70.

Technicals

Looking at the daily chart for July Cotton, we notice the month-long consolidation pattern that has kept prices within a relatively narrow 5-cent range. The short and long term-moving averages are sending conflicting signals, with prices well above the longer 100-day moving average, but trading below the short-term 20-day MA. The 14-day RSI has turned neutral, with a current reading of 52.34. The most recent Commitment of Traders report shows both large and small speculators are holding net-long positions in Cotton, with both groups having added to their long positions last week. This sets-up a scenario where we would need to see prices move above resistance near the 84.00 cent areas in the July futures to spur further buying momentum. However, should support at the lows of the recent trading range near the 79.25 fail to hold, the large speculative long positions may be liquidated, adding additional selling pressure that could set-up a test near the 75 cent area.

Mike Zarembski, Senior Commodity Analyst