« April 2010 | Main | June 2010 »

May 2010 Archives

May 3, 2010

Are European Officials Ready to Deal with Greek Debit Crisis?

Fundamentals

The month of May not only brings spring flowers but, hopefully, also an agreement by European Monetary Union (EMU) officials to finally craft some type of bailout agreement to aid Greece with its debt refunding. There is nothing like a hard deadline to get people motivated, and the looming Greek debt refunding on May 19th might be the catalyst to finally craft an agreement. Among the biggest hurdles has been the reluctance of Germany to support any aid package for its southern EU brethren. German voters are overwhelmingly against any German aid to help Greece with its deficits, and German Chancellor Angela Merkel would like to see any EU vote on helping Greece delayed until after the state elections in North Rhine- Westphalia on May 9th -- the most populous region in Germany. However, this would leave little time for any agreement to be reached and aid to be sent to Greece in time for its debt refunding only 10 days later. If that were not enough, Standard & Poors downgraded the credit ratings for not only Greece, but Portugal and Spain as well last week, as credit rating agencies fear that the debt crisis could spread to other European nations struggling to recover from the global economic crisis. Speculators are still negative towards the Euro, according to the Commitment of Traders report. As of April 20, both large and small speculative accounts were holding a combined net short position of 73,372 contracts. However, this position is well off the record 95,965 combined short positions that occurred just one month ago. Additional short-covering may occur early in the month, as traders lighten-up on risk if an agreement is reached. The likelihood of volatile trading in the Euro over the next several days looks to be heightened, as traders eyes are glued to the newswires awaiting comments from EU leaders regarding whether an agreement can be reached in time to divert a default by Greece on its debt obligations.

Trading Ideas

The Eurocurrency could be experiencing the "calm before the storm", as traders brace for the announcement of an agreement to help Greece with its debt refunding. Given the large net-short position in the Euro being held by speculators, the likelihood of a sharp rally caused by short-covering in the Euro is high if an agreement is announced. However, should EU officials fail to adequately address the pending debt crisis, we may see the Euro fall sharply. Traders looking for a large move in the Euro who are not sure of the direction may wish to consider the purchase of a strangle in Euro futures options. An example of this trade would be buying the June Eurocurrency 1.37 calls and buying the June Eurocurrency 1.29 puts. With the June Euro trading at 1.3277 as of this writing, this strangle could be purchased for about 117 ticks, or $1462.50 per spread, not including commissions. The premium paid is the maximum risk on the trade, with the trade being profitable should the June Euro futures be trading above 1.3817 or below 1.2783 at option expiration in June.

Technicals

Looking at the daily continuation chart for the Eurocurrency futures, we notice prices attempting to rebound from the recent lows made after the S&P credit ratings downgrade hit the wires. Since the lows were made at 1.3117 this past Wednesday, the Euro has rallied over 200 ticks, as weak shorts covered their positions going into the weekend. However, technical traders will note that the Euro must overcome some major technical hurdles in order to turn the trend in favor of the bulls. The major downtrend line drawn from the December 2009 highs comes into play near the 1.3500 area and should act as a strong resistance to any rally attempts. Above this technical barrier, we have the 100-day moving average, which comes into play just above the 1.3800 area. Near-term support remains at the April 28th lows of 1.3117.

Mike Zarembski, Senior Commodity Analyst

May 4, 2010

Cotton Stalls

Fundamentals

Cotton futures continue to trade sideways after making new contract highs last week. The market has been unable to maintain its upward momentum due to the lack of fresh market and economic news, yet has also averted a sharp sell-off on profit-taking. Traders are likely to take their cue from economic data released this week, as there has been no major shift in market fundamentals. The weather in the US growing region has been dry with sporadic rain, which can be seen as ideal. American consumers appear to be opening up their pocket books a bit more recently, which can be seen as supportive for prices. While data from the US has largely been uneventful, India's protectionist strategies could be creating a somewhat dicey situation for Cotton traders. By halting exports, the Indian government accomplished what it had set out to do -- cool domestic prices. However, these policies have made an already tight international market even tighter. Some traders may want to focus on how this will impact demand for Cotton fiber. Textile mills find themselves between a rock and a hard place. Not only is the price of Cotton increasing, but the rising cost of Crude Oil has made manufacturing synthetic fibers more expensive as well. The lack of a cheap substitute could continue to support Cotton prices.

Trading Ideas

The market forces seem to indicate a mildly bullish tone for the Cotton market. However, both the chart and fundamentals do leave the door open for a downside reversal. For this reason, some traders may wish to wait for the July Cotton contract to close above 85.00 before entering a futures contract. Some more conservative traders may wish to consider entering into a bull call spread by buying the July 86 call (CTN086C) and selling the July 88 call (CTN088C) for a debit of 0.60. The trade risks the initial investment of $300 for a potential profit of 1.40, or $700.

Technicals

Turning to the July Cotton chart, we see the market trading in a sideways consolidation pattern. Since the preceding move was higher, the consolidation may favor an upside breakout. Prices have found support at the 20 and 50-day moving averages, rebounding after flirting with the averages. For the market to regain its upward momentum, prices will likely have to close above the 85.00 level. For the market to signal a downside reversal, prices will likely have to break 76.00 on the downside.

Robert Kurzatkowski, Senior Commodity Analyst

May 5, 2010

Investors flock to U.S. Treasuries as Skepticism Remains on Greek Aid Package

Fundamentals

Bond bulls are starting to flex their muscles again, as investors begin to flee "risky" investments and move into the supposed "safety" of U.S. Treasuries, as concerns over the European Union/IMF bailout of Greece continues to weigh on markets worldwide. Although an aid package for Greece was announced earlier this week, there are still doubts as to whether this will be enough to prevent Greece from eventually defaulting on its debt, or whether other EU nations such as Portugal, Spain or Italy will also need aid to deal with their own debt issues. In addition, the German parliament has not yet voted on the Greek aid package, which is very unpopular with the average German voter, and any signs that Germany will balk on the agreement is adding to traders' nervousness. The biggest beneficiaries from the uncertainty surrounding the EMU have been the U.S. Dollar and U.S. Treasuries, which continue to be the favorite investment options in times of economic confusion. The fresh round of buying has sent 30-year bond yields to 4-month lows, as well as sparked renewed buying in shorter maturities, as analysts are now starting to pare back their expectation of a Federal Reserve interest rate increase later this year. Although the rally in bond prices appears to be gaining momentum, bullish traders may wish to be a bit cautious about adding to positions, as the U.S. Treasury is scheduled to auction $80 billion worth of treasuries next week, including an estimated $16 billion worth of 30-year bonds. With this huge supply coming to market, we may see some hedge selling ahead of the auction that could cap any further rally attempts in the near term, unless the European debt crisis becomes even more uncertain that nervous investor buying trumps commercial selling.

Trading Ideas

Given the "flight to quality" buying and looming Treasury auction, June Bond futures could possibly see increased volatility during the next couple of weeks. Traders looking for a potentially large move in bond futures may wish to investigate the purchase of a strangle in 30-year bond futures options. An example of this trade would be buying the June bond 122 calls and buying the June bond 118 puts. With June bonds trading at 119-28 as of this writing, this strangle could be purchased for 50/64, or $781.25 per spread, not including commissions. The premium paid would be the maximum risk on the trade, with the trade breaking even at option expiration in May if June bonds are trading above 122-25 or below 117-07.

Technicals

Looking at the daily continuation chart for 30-year bond futures, we notice the just over 5-point rally since the beginning of April, when June bonds made 11-month lows of 114-06. Prices are now well above both the widely watched 20 and 100-day moving averages, and the 20-day MA has crossed above the 100-day MA , which is considered a bullish technical signal. The 14-day RSI is quite strong, with a current reading of 66.29. Tuesday's price surge took the June contract above recent resistance at 119-18 and sets up a potential test of the 121-18 area. Support for June bonds is seen at the 20-day moving average currently near the 117-04 area.

Mike Zarembski, Senior Commodity Analyst

May 6, 2010

Dollar Booms at the Expense of the Euro

Fundamentals

The Dollar Index is higher for the fourth consecutive session ahead of the ECB rate decision. Traders likely are not concerned about the actual rate decision from the central bank, but rather, what steps the ECB will take to deal with the crisis in Greece. The Euro has taken its lumps on several fronts. The crisis that began in Greece seems to have spread to Spain and Portugal, making the debt of European nations unappealing to investors. The Euro has also fallen because the ECB is expected to buy Greek bonds. What may be more troubling than the actual bailout is the turmoil that the crisis has created. The talks leading up to the bailout plan have created a rift between EU members that want to be proactive and try to contain the crisis, and others that see Greece as a lost cause and an anchor to the Eurozone economy. This animosity could make setting future economic policies a much more strenuous process. In Greece itself we see the contrast between the US and European countries, who are largely socialized. Protestors are opposed to measures that the government there has taken to cut spending and balance the budget. They want the government to continue spending beyond its means, whereas in the US, the tea partiers are calling for the government to begin spending within its means. What the current crisis and turmoil in the early part of 2009 have shown us is that the world is not ready to move away from the US Dollar as a reserve currency. Domestically, US equities have fallen sharply over the past few sessions due to fears that the situation Europe is grappling with may spread west. US Treasuries have rallied, causing the demand for greenbacks to increase. For the time being, the fundamentals seem to support the Dollar Index, as long as Europe struggles to figure out the Greek crisis.

Trading Ideas

Given the sharp rise in the Dollar Index over the past few days, it may be wise for traders to look for a pullback in prices -- or at the very least, consolidation before entering into a bullish position. Also, the market has been extremely volatile, suggesting that a more conservative strategy, such as a bull call spread, may perhaps be in order. Some traders may wish to consider purchasing a June Dollar Index 85 call (DXM085C) and selling a June 84 call (DXM084C) at a limit of 0.25, or $250. The trade risks the initial investment for a potential profit of $750 if the June Dollar Index closes above 86.00 at expiration.

Technicals

Turning to the chart, we see the June Dollar Index explode above the previous resistance level at 82.50. The false double-top confirmation has set the groundwork for this most recent rally, squeezing out fresh short positions. Recent price action has resulted in the RSI giving overbought readings, which could temper further advances. Prices also have not yet come down to test newly establish support near the 83.00 level. The next area of significant resistance comes in around the 87.00 level.

Robert Kurzatkowski, Senior Commodity Analyst

May 7, 2010

What a Difference a Year Makes!

Fundamentals

There is an old saying that "the cure for high prices is high prices", which means that producers will ramp-up production in a commodity to take advantage attractive prices. This is definitely what is occurring in the world Sugar market, as production estimates for the 2010-11 crop year have rebounded sharply, causing Sugar futures prices to plunge. Since February, front-month Sugar futures prices have fallen over 50%, as traders are now looking for a world Sugar surplus this coming season, as opposed to the Sugar deficits of the past two years. Sugar production in India, the world's second largest Sugar producer, is expected to come in between 25 and 30 million tons this year - which is well above the 19 million tons produced last season, as the monsoon rains were well below average last season. In addition, the Brazilian cane harvest is running well so far this season, as ideal weather conditions have the harvest off to a strong start. Analysts are now looking for a global Sugar surplus of between 5 and 7 million tons for the 2010-11 marketing year. In fact, the potential of increased Sugar supplies is so strong that the Indian government is expected to re-impose an import tax on Sugar, as local prices in that country have fallen and concerns of domestic shortages have subsided. The surging U.S. Dollar is adding to the bearish tone in all commodities, and Sugar is no exception. The most recent Commitment of Traders report shows large speculative accounts liquidating their long positions in Sugar futures, with large non-commercial traders shedding 15,393 contracts for the week ending April 27th. However, the net-long position is still over 120,000 contracts, and fresh long liquidation selling is likely if prices continue to slide.

Trading Ideas

With the technicals and fundamentals seemingly pointing to continued weakness in Sugar futures prices, some traders who have a bearish bias may wish to explore selling out-of the money calls in July Sugar futures options. An example of this trade would be selling the July Sugar 16-cent calls. With July Sugar trading at 13.63 as of this writing, the July 16 calls could be sold for about 0.17 points, or $190.40 per option, not including commissions. The premium received would be the maximum gain on the trade and would be realized if July Sugar is trading below 16.00 at option expiration in June. Given the risk involved in selling naked calls, traders should have an exit strategy in place should the trade move against them.

Technicals

Looking at the daily chart for July Sugar, we notice the steep sell-off since the middle of February, with only a brief consolidation period in late March and early April. Prices have fallen so sharply that it would take nearly a 7-cent rally to reach the 100-day moving average, which is currently near the 20.59 area. The 14-day RSI has moved into oversold territory, with a current reading of 27.36. The next support point for July Sugar is seen at 13.10, with resistance found at the 20-day moving average near the 15.85 area.

Mike Zarembski, Senior Commodity Analyst

May 10, 2010

What a Week!

Fundamentals

Volatility has returned to the futures markets, as concerns over the European debt crisis as well as a steep sell-off in equities markets has put traders on edge. Outside events have made the release of the usually highly anticipated April Non-Farm Payrolls report seem relatively unimportant, despite a better than expected gain in payrolls last month. Payrolls rose by 290,000 last month, which is well above the 200,000 gain analysts estimated. In addition, March payrolls were revised upward to 230,000, vs. 162,000 announced last month. The biggest negative in Friday's report was the rise in the unemployment rate by 0.2% to 9.9%, although the rise was attributed to a jump in the labor force, as formally discouraged workers are once again looking for work and are now counted in the official employment figures. Although the economic outlook for the U.S. appears to be turning for the better, traders still fear the situation in Europe, as the debt crisis facing Greece and possibly other EU countries remains unsettled, due to potential liquidity concerns for some European banks. In addition, the election results in the U.K. show no political party having a clear majority, leaving the formation of a government unsettled. Among the biggest beneficiaries of the uncertainty rattling the financial markets has been Gold futures, which have staged a sharp rally during the past few sessions, with the most active June contract trading well above the 1200.00 level, as investors move to gold as a store of safety -- especially given the wild swings seen in the forex markets the past several weeks.

Trading Ideas

Given the heightened volatility in the markets lately, options on Gold futures have become relatively expensive. This makes buying Gold calls outright much more costly. One way some traders may wish to help offset this cost is to explore bull call debit spreads in Gold options. The benefit of buying a debit spread is the premium received from selling an option will offset the price of the option purchased. The down side is that the potential gain is limited if Gold moves higher than the strike price of the call sold. An example of this type of trade would be buying the August Gold 1230 calls and selling the August Gold 1300 calls. With August Gold trading at 1212.00 as of this writing, the call spread could be purchased for about 23.50 points or $2350, not including commissions. The premium paid would be the maximum risk on the trade, with a potential profit of $7,000 minus the premium paid should August Gold be trading above $1300.00 at option expiration in July.

Technicals

Looking at the daily chart for June Gold, we notice the market attempting to test the highs made back in December of last year. The recent rally has come on higher than average volume, indicating fresh buying entering the market. Despite the uncertainly in the financial markets the past few days, the run-up in Gold prices has been relatively orderly, which can be viewed as a positive for Gold prices, as a panic-driven rally is usually a sign of a market putting in a major top! The 14-day RSI has moved into overbought territory, with a current reading of 72.20. 1230.00 looks to be the next resistance point for June Gold, with support found at the 20-day moving average, currently at 1163.00.

Mike Zarembski, Senior Commodity Analyst

May 11, 2010

Traders Jump Ship

Fundamentals

Bond futures have given up a good portion of the gains made last week, after the EU unveiled its $1 trillion rescue plan. Bonds rallied sharply during the peak of the Greek crisis last week, showing that investors prefer US treasuries over any other sovereign debt in times of crisis. Many traders remain skeptical that the EU rescue plan will be enough to prevent defaults, as governments must show restraint when it comes to spending for any plan to work. This is a phenomenon not only in Europe, but across the globe. Governments continue spending well above their means, hoping that a recovery will increase capital inflows in the form of tax dollars. Thus far, that has not happened. The US itself is guilty of spending well above its means, and the situation in Europe should serve notice that even the US can fall into this trap. In the meantime, some traders may continue to look to the Bond market as a safe haven if the EU situation worsens. US banks, which are still recovering from the housing bubble collapse and economic downturn, are said to have significant European debt exposure, which can be seen as supportive for Bonds. If the EU plan succeeds, Bonds could face significant downward pressure, as dissipating concerns would favor stocks over debt. Also, the Bond market can be seen as very oversupplied at the moment, suggesting prices could fall sharply once panic buying stops. For the time being, many traders will continue to take their cue from Europe.

Trading Ideas

The EU rescue plain has brought some sense of stability back to the treasury markets after a chaotic week last week, which was exacerbated by a trading error causing equities to drop sharply on Thursday. This could be seen as bearish in the near-term, possibly causing Bond prices to reverse course in the near-term. Barring another market panic, the upside potential of Bond prices seems limited because of expectations that he Fed may begin tightening this year. The chart also seems to support a bearish near-term view. For this reason , some traders may wish to enter into a bear put spread by buying the June Bond 120 puts (USM0120P) and selling the June 118 puts (USM0118p) for a debit of 0-25, or $390.63. The trade risks the initial investment for a potential profit of $1,609.37.

Technicals

Turning to the chart, we see the June bond contract reverse sharply from contract highs made last Thursday. This suggests that the uptrend that began in early April may reverse course in the near-term. The market may come down to test support around the 118-00 level in the short-term. In order for the market to maintain its upward momentum, prices will likely have to close above the recent high close of 123-11. The RSI has come back down to neutral levels, after registering an overbought reading of 77 on Thursday.

Robert Kurzatkowski, Senior Commodity Analyst

May 12, 2010

Does the world have way too much wheat this year?

Fundamentals

There certainly won't be any world wheat shortage this year, especially after the USDA estimated record world wheat ending stocks this upcoming year despite slight production declines. Domestically, all-winter wheat production was estimated at 1.458 billion bushels this year, above pre-report estimates of 1.434 billion bushels but below last year's 1.523 billion bushel crop. However, any decline in U.S. wheat production is being tempered with high wheat carryover totals, with the USDA estimating beginning stocks for 2009-10 at 950 million tons-- the highest levels seen the past 10 years. Global ending stocks for the 2010-11 seasons are expected to rise to 198.1 million metric tons, even though world wheat production for 2010-11 is expected to be down 1% from year ago levels. The rising U.S. Dollar is expected to hurt U.S. competitiveness in the world export market; especially with ample supplies of wheat seen worldwide sparking increased competition from other major wheat producing countries. Back here in the states, the current winter wheat crop is doing well so far with the USDA's weekly crop progress report showing 65% of the crop is rated good /excellent vs. only 46% this time last year. The spring wheat crop is now 67% planted vs. the 10-year average of 65% and well above the 34% planted this time last year due to the extreme wet weather we saw that season. Large speculators have been adding to their net-short Chicago wheat position, with the most recent Commitment of Traders report showing large-non-commercial traders holding a net short position of 26,966 contracts as of May 4th. This was a gain of 4,613 contracts for the week, and ironically occurred as wheat prices rose moderately. However, the steep sell-off we saw this past Monday, should act as encouragement to these traditionally trend-following traders, who could be adding to existing short positions as prices decline. We have not yet seen large scale short-hedging in wheat futures despite the upcoming harvest, as producers held back hoping for a rebound in prices to initiate their short hedges. Now that the USDA is predicting ample wheat supplies worldwide, we may see producers entering the market to lock in current prices in anticipation of potentially lower wheat prices as the harvest progresses.

Trading Ideas

With projected large world wheat carryover totals this year and looming U.S. winter wheat harvest pressure. It appears that wheat bears continue to hold the upper hand. Traders expecting wheat prices to continue to fall going into the harvest may wish to investigate selling out of the money call options in July wheat futures. An example of this trade is selling the July wheat 560 calls. With July wheat trading at 496.75 as of this writing, the July wheat 560 calls could be sold for 5.25 cents or $262.50 per call, not including commissions. The premium received is the maximum potential gain on the trade and would be realized if July wheat is trading below 560.00 at option expiration in June. Since selling naked calls can be risky, traders should have an exit plan in place should the trade move against them. An example of an exit strategy is to buy back the short call before expiration should July wheat trade above chart resistance near the 537.00 area.

Technicals

Looking at a daily chart for July wheat, we notice prices now moving below both the 20 and 100-day moving averages as Monday's sell-off seems to have put the recent up-move off contract lows made in early April in jeopardy. A trend line drawn from the April 5th lows touching the April 26th lows does not come into play until July wheat moves below the 481.00 area, at which point we may see fresh selling hit the market. The 14-day RSI has moved into neutral territory with a current reading of 49.72. The recent highs of 517.00 look to be the next resistance point for July wheat with support found at the uptrend line at 481.00.

Mike Zarembski, Senior Commodity Analyst

May 14, 2010

Playing Catch-up?

Fundamentals

After seemingly playing second fiddle to their more popular precious metals cousin Gold, Silver futures are starting to attract a bullish following, with the lead month July contract trading at its highest levels of the year. Among the reasons given for the renewed investor interest in Silver are concerns over the debt issues in Europe, which have caused traders to flee the Euro currency and in favor of alternative assets such as precious metals. Gold has been the biggest beneficiary of this "flight from currencies", as prices are once again approaching all-time highs in U.S. Dollars. Some of this demand for precious metals, especially from smaller investors and traders is now moving into Silver due to its much lower cost per ounce than Gold, as well as the belief by some investors that Silver prices will need to "play catch-up " to that of Gold. Silver prices are still trading well below their all-time highs that occurred in early 1980, during the infamous "silver short-squeeze". In addition, Silver's value as an industrial metal is also lending support, as there are certainly signs in the U.S. of an economic recovery, with the employment picture starting to turn slowly for the better. Finally, an improving economic picture combined with continued "accommodative" economic policies by the European, Japanese and U.S. Central Banks has many analysts fearing a rise in inflation. This is especially true given the European Central Bank's (ECB) announcement that they will purchase European bonds. This has led to concerns that the ECB is embarking on a policy of "quantitative easing", despite denials from ECB officials. The most recent Commitment of Traders report shows both large and small speculators are holding a net-long position in Silver of 57,756 contracts as of May 4th. Although this seems like a relatively large net-long position, it is well off the over 97,000 combined net-long position seen back in 2004. Given that the net-long speculative positions in both Platinum and Palladium are at or near record levels, and that Gold is starting to approach the record, it does appear that the net-long position in Silver may have some room to go before the speculative position moves to extreme levels.

Trading Ideas

Some traders who believe that the bullish run in Silver prices still has some legs, but who do not want to take the potential risk of holding a futures position outright, may wish to explore the purchase of bull call spreads in Silver futures options. An example of this trade would be buying the July Silver 20 dollar calls and selling the July silver 23 dollar calls. With July Silver trading at 19.61 as of this writing, this spread could be purchased for about 0.62, or $3,100 per spread. The premium paid would be the maximum risk on the trade, with a potential profit of $15,000 minus the premium paid if July Silver is trading above 23.00 at option expiration in late June.

Technicals

Looking at a daily continuation chart for Silver going back to 1970, we really notice the price that occurred back in 1979 and 1980. Even though we are still in the midst of a bullish run, we have not yet approached the highs seen back in 2008, when the commodity bull market was at its peak. During that time, front-month Silver futures did not trade above 21.00 and, in fact, formed a double-top formation, which triggered a price correction down to the 16.00 level. Silver prices have not been above 21.00 since late in 1980, and if we are able to move above this major resistance level, the possibility for increased buying by trend-following systems traders has the potential to spark a sharp run-up to the 25.00 area. Support is seen near the recent lows just above the 17.00 area.

Mike Zarembski, Senior Commodity Analyst

May 17, 2010

European Debt Issues Overshadow Positive U.S. Economic Data

Fundamentals

It certainly appears that traders' concerns regarding the debt crisis in Europe are heightening, causing another round of buying in so called "flight to safety" investments such as the U.S. Dollar, U.S. treasuries , and to a lesser extent Gold. The Euro Currency has fallen through another key support level at 1.2500 basis the June futures this past Friday, which has spurred additional selling by trend-following traders and triggered sell-stops resting below previous support levels. The Euro was not the only market on the "red" side of trading cards towards the end the week, as commodity markets and equity futures in general were being sold, with energy and base metals futures particularly hard hit. Even the currencies of countries with improving economic outlooks like the Canadian and Australian Dollars were caught in the sell-off. Ironically, economic data released last week was generally upbeat, as U.S. retail sales were up 0.4% and industrial production rose by 0.8% last month. March's data revisions were also for the better, which points to improving economic conditions here in the states. However, traders' focus has been on Europe and continued concerns that austerity measures being announced by struggling EU countries will be difficult to actually implement -- and even if successful, could lead to much slower economic growth in Europe, which would be a blow to the world economy trying to recover from the financial meltdown that began in late 2008. So until investors and traders can feel confident that the situation in Europe can be contained, we may have to get used to increasing volatility in the financial markets near-term.

Trading Ideas

Given the turbulent trading activity seen the past several sessions, it seems that specific market fundamentals are taking a back seat to a "flight to safety" mentally. For example, one of the first economies to recover from the economic recession has been Canada. The country's banks have been relatively untouched by the housing market turmoil, its employment outlook is stable to improving, and Canada is a leading exporter of raw materials, which will be in demand as we begin to see a worldwide economic recovery take hold. These fundamentals, as well as the potential for an interest rate hike possibly as early as June likely should be viewed as bullish for the Canadian Dollar. However, the "Loonie" has been sold-off by nervous traders liquidating their positions, as they move assets to the sidelines or into U.S. treasuries until calm returns to the financial markets. Some traders who are long-term bullish the Canadian Dollar can take advantage of the recent selloff to investigate the potential purchase of bull call spreads in Canadian Dollar futures options. An example of this trade would be buying the September Canadian Dollar 98 calls and selling the September Canadian Dollar 103 calls. With September Canadian Dollar futures trading at 0.9670 as of this writing, this spread could be purchased for about 163 ticks, or $1,630 per spread, not including commissions. The premium paid is the maximum potential loss on the trade, with a potential profit of $5,000 minus the premium paid should the September Canadian Dollar be trading above 1.0300 at option expiration in September.

Technicals

Looking at the daily chart for the June Canadian Dollar futures, we notice how increasing volatility in the financial markets translated into a wild ride for "Loonie" traders. We saw the currency sell-off over 400 ticks in just two trading sessions, and then rally over 600 ticks before Friday's sell-off. Normally a 100-tick move in a session is considered a large move! Friday's sell-off took prices below the 20-day moving average, and the market held near the longer-term 100-day MA by the close of trading. The 14-day RSI has turned lower, with a current reading of 43.57. Given the wide price swings seen during the past few sessions, current support and resistance points are quite wide, with strong support seen at last Thursday's lows of 0.9293, with resistance seen at last week's highs of 0.9891.

Mike Zarembski, Senior Commodity Analyst

May 18, 2010

Debt Crisis Sacks Copper Prices

Fundamentals

Copper futures are higher this morning, following a two-day sell-off in which the price of the metal had dropped over 26 cents. With the exception of Gold, the commodity markets have been reeling due to concerns that the Greek financial crisis could turn into the European crisis and, eventually global crises, quashing demand for the base metal. In additional to the sovereign debt troubles, traders are also concerned that China may be much more aggressive in curbing real estate speculation. The US Dollar Index has rallied for the past 4 weeks, which has also played a part in keeping the price of the metal in check. The greenback continues to be a place of refuge for investors concerned about the current European situation. Until fears over the solvency of European debt abate, the greenback may very well keep gaining versus the Euro and other currencies. The move over the past two days was extremely sharp, pushing the price of Copper below $3. Some traders may view this sell-off as being a bit overdone, which may trigger some value buying in the near-term. Prices may have fallen too sharply too quickly given the relatively tight Chinese stockpiles of the metal. However, any inventory builds in either LME or Shanghai could send value buyers scurrying away from the market.

Trading Ideas

The fundamental outlook for the Copper market remains a bit blurry. On one hand, the rising dollar and efforts by Beijing to curb real estate speculation continue to pressure prices. On the other hand, Shanghai stockpiles of the base metal remain relatively tight, and there has not been any indication that Chinese users of Copper plan to curb purchases. The effects of the Greek/European crisis remain unknown at the moment, as one cannot point to any specific data showing the impact it has had on the Eurozone. The chart seems to favor the downside, but this is tempered by prices entering an area of support. For these reasons, some more conservative traders may be better suited on the sidelines. Some more aggressive traders may wish to consider selling the July Copper contract on a close below 2.8575, with a downside objective of 2.64 and a stop at 2.93. The trade risks roughly $1,812.50 for a potential profit of $5,437.50.

Technicals

Turning to the chart, we see the July Copper contract breaking out a pennant pattern on Friday and following up with a sharp sell-off yesterday. The pattern has already made its measured move due to the large swing in prices over the past two sessions. Prices did manage to close below the psychological support level at 3.00, but have held chart support at 2.8575. If the 2.8575 level is not held, prices could drift down to the low to mid 2.60's. The heavy selling pressure resulted in both the RSI and stochastics giving oversold readings, which could offer some temporary relief.

Robert Kurzatkowski, Senior Commodity Analyst

May 19, 2010

"Black Gold" Bulls are Seeing "Red"!

Fundamentals

Oil bulls are certainly having a rough month of May so far, as the soon-to-be lead July contract has fallen over $17 per barrel since May 1st. The continued lack of confidence by traders for a legitimate solution to the rising debt crisis in Europe has sparked a move away from so called "risky" trades and into the perceived "safety" of the U.S. Dollar, Treasuries, and Gold. Long Crude Oil was a favorite trade of speculative accounts for months, as traders bought oil futures in anticipation of a global economic recovery, which in turn was expected to improve oil demand, especially from Asia and the U.S. However, the fears that the EU quagmire could spread outside of the "continent" and put the brakes on the recovery have been put in the spotlight, leading to a harsh liquidation of long commodity positions, including Crude Oil. Also sending a negative tone to NYMEX WTI oil futures has been the surge of oil inventories in Cushing, Oklahoma, the delivery point for the NYMEX futures contract. Inventories at Cushing have gone to record levels, causing near-by futures to trade at a huge discount to more deferred contract months. The soon-to-be-expired June futures even briefly traded below $70 per barrel on Monday, before rebounding above this key psychological level at the close. However, some traders believe that the option expiration for the June futures options may have been behind the fall below $70, as those holding short puts at the $70 strike were forced to sell additional futures contracts to hedge their positions. Barring any additional news out of Europe, Oil traders will turn their focus to the weekly Energy Information Administration (EIA) energy stocks report. Pre-report estimates are for U.S. oil inventories to have risen by 800,000 barrels last week, as refinery operation rates are expected to have fallen by 0.3% last week. What will be interesting to watch for in the EIA report is the levels of oil and gasoline imports last week, to see if any economic slowdown in Europe will translate into additional fuel being sent from Europe to the U.S. If so, we may see U.S. refining rates continue fall, which could cause near-term oil futures to continue to tumble faster than the deferred months, as the "market" bids for storage.

Trading Ideas

After the steep sell-off seen in oil futures this month, some technical indicators, including the 14-day RSI, are showing that the market may have become oversold. In addition, the July oil futures are now running near several key support points at 71.65, 70.00, and even near the 65.00 area. Some traders expecting a rebound in oil prices -- or at least to see these key support points hold -- could look into selling puts in oil futures options. An example of this trade would be selling the July oil 63 puts. With July Crude trading at 74.13 as of this writing, these puts could be sold for about 0.47 points, or $470 per contract, not including commissions. The premium received is the maximum potential profit on the trade and would be realized if July crude Oil is trading above 63.00 at option expiration in June. Given the risk involved in selling naked puts, traders should have an exit strategy in place in the event the trade moves against them. An example of an exit plan would be to close out the position before expiration should July Oil close below major support at 65.00.

Technicals

Looking at the daily chart for July oil, we notice how sharply oil prices fell, especially once the 50-day moving average was taken out on the downside. Prices briefly attempted to consolidate around the 200-day moving average, but also succumbed to a sharp round of long liquidation selling tied to the fall of the Euro currency vs. the U.S. Dollar. Before the sell-off begins, we should give some notice to the bearish divergence that formed starting at the April highs, in which this momentum indicator failed to make a new high reading as the July contract moved towards $90.00 per barrel. Currently, the 14-day RSI has moved into oversold territory, with a current reading of 28.51. The February lows of 71.65 look to be the next support point for July oil, with resistance seen at the 200-day moving average currently just above the 80.00 level.

Mike Zarembski, Senior Commodity Analyst

May 20, 2010

Aussie Dragged Down Under by Credit Woes, Consumer Sentiment

Fundamentals

The continued European debt concerns and potential economic slowdown in China are weighing heavily on the Aussie Dollar. The currency has tumbled more than 800 ticks over a two-week span. Commodity prices, including the base metal sector that the Australian economy relies on, have tumbled in recent weeks on concerns that Europe is quickly losing control over the Greek situation. The extreme measures being taken by Germany, including the ban on short-selling of certain financial securities and sovereign debt, are a sign that financial policymakers may be grasping at straws, trying to stop the bleeding by any means possible. Domestically, the economic uncertainty both domestically and in China have taken their toll on the psyche of Australian consumers, as evidenced by the poorest showing in consumer confidence in over a year and a half. Australia raised interest rates for the sixth time since October of last year two weeks ago. Normally, such a move would be seen as a positive for the high yielding currency because of favorable interest rate parity. The higher borrowing costs have been cause for concern for consumers, who may be weary of opening their pocketbooks. Australian policymakers were looking for a gradual reduction in the exchange rate of the Aussie Dollar, but the sharp reduction in the exchange rate over the past two weeks may be alarming. The sharp fall in the currency could attract some value buying from investors, who may see the decline as too drastic and too quick. If Europe does manage to get a grip on their financial crisis, the Aussie has the potential to rebound sharply. On the other hand, if China continues to restrict real estate speculation and the European situation worsens, the Aussie could find itself continuing to face sustained downward pressure.

Trading Ideas

It looks as though both the technical and fundamental outlooks are stacking the deck against the Aussie Dollar. However, some traders may wish to approach the currency with a bit of caution because of the sharp decline in prices. Some traders may wish to consider taking on a conservative bearish strategy, such as a bear put spread. One such strategy would be buying the June 84 puts (ADM00.84P) and selling the June 83 puts (ADM00.83P) for a debit of 0.0030. The spread risks the initial cost of $300 and has a potential profit of $700 if the June futures contract closes below 0.8300 at expiration.

Technicals

Turning to the chart, we see the sharp sell-off resulting in a violation of support in the .8550 area. The next support areas can be seen near 0.8250 and 0.8000. The 0.8000 level may be of special interest to traders, as it is both psychological and technical support. If prices are able to rebound above the 0.8550 level, the market could find itself trading sideways for the foreseeable future. The rapid decline in prices has resulted in the RSI indicator falling to oversold levels, which may offer a bit of much needed support in the near-term.

Robert Kurzatkowski, Senior Commodity Analyst

May 21, 2010

"Risk Off"!

Fundamentals

The "risk off" mentality is alive and well, as traders and investors flee "risky" investments due to the continued uncertainty surrounding the European debt crisis and its potential effects on the still fragile global economic recovery. Among the hardest hit commodity sectors have been industrial metals and energy, with both Platinum and Palladium futures falling to their lowest levels in over 3 months, and lead month July Crude Oil hovering near the $70.00 level. Both of these hard hit sectors rallied sharply earlier this year, as traders expected increased demand for commodities, since it appeared that the worst of the recession of late 2008-09 was over and a bout of economic growth would spur an increased appetite for physical commodities. This belief led to rising speculative net-long positions being built in both the oil and metals sectors and has set the stage for the rather rapid decline we are now seeing, as these large long positions are being liquidated, with fewer willing buyers to absorb this selling. Ironically, the Euro Currency failed to make new lows yesterday, despite the rapid sell-off seen in other currencies like the Australian and Canadian Dollars. This "support" for the Euro is most likely not due to traders' belief that a solution to the debt crisis will occur shortly, but rather probably due to short-covering buying by speculative shorts in the currency, as the market has heard rumors there may be potential Central Bank intervention in the FX markets to support the beleaguered currency. Short-covering buying can also be seen in the rise of the Japanese Yen, which was a favorite "borrowing currency" by traders of so-called "carry trades". If they have not done so already, traders should become familiar with the Commitment of Traders report released each Friday afternoon by the Commodity Futures trading Commission (CFTC). This report shows the net-long and short positions for large and small speculative traders, as well as activities of commercial traders in the futures markets. Avid readers of this report would have seen the large net-long positions being built-up by speculators in Crude Oil, as well as both Platinum and Palladium, in addition to the huge net-short positions in the Euro and Yen. This information can serve as a warning to traders that should world events trigger a "flight to liquidity," markets that are heavily one-sided by speculative interests may be prone to increased, volatile trading activity as positions are liquidated.

Trading Ideas

Given the potential for rising volatility in the futures markets near-term, some traders may wish to look longer-term and search out potential trades to take advantage of "price distortions" caused by speculative liquidation. An example of this type of trade would be to explore the purchase of bear put spreads in the Japanese Yen. September Yen futures are up nearly 200 pips as of this writing, trading at 1.1132. The September Yen 109/104 put spread could be purchased for about 1.87 points, or $2,337.50 per spread, not including commissions. The premium received would be the maximum potential risk on the trade, with a potential profit of $6,250.00 minus the premium paid, which would be realized if the September Yen is trading below 1.0400 at option expiration in September.

Technicals

Looking at the daily continuation chart for Japanese Yen futures, we notice that since the August 2009 lows near the 0.9000 area, the front month Yen futures rallied nearly 2800 pips to their highest levels back in November of last year. Although prices have once again moved above the 200-day moving average, we notice that the up-trend line drawn from the August 2009 lows through the major lows before the highs were made in November has been broken to the downside. Only the upward "spikes" made during the past few sessions were able to penetrate this key trendline, and only for a very short time period. There is also a possibility of an intermediate "head and shoulders" technical formation being created, which if true, could signal the Yen's bull run may be near an end. The 14-day RSI is supportive, however, with a current reading of 63.06. The "Flash Crash" spike highs of 1.1375 look to be the next resistance point for June Yen futures, with major support not seen until the recent lows of 1.0532.

Mike Zarembski, Senior Commodity Analyst

May 24, 2010

A Victim of Its Own Success?

Fundamentals

"Go for the Gold" was not only the motto of most Olympic athletes, but apparently of speculators as well, as the cumulative net-long position of large and small speculators has approached record levels. According to the Commitment of Traders report, the combined net-long position of Non-Commercial (large speculators) and Non-Reportable (small speculators) traders in COMEX gold futures and options totaled 324,388 contracts as of May 11th, which was a gain of just over 19,000 for the week. This surging long position was just below the record combined net-long position of 328,344 contracts which occurred back in October of 2009. Ironically, the near-record long position occurred just days before the gold market made at least a near-term top, with the June futures trading just below the 1250.00 level. Since that time, the "flight to liquidity" caused by continued uncertainty surrounding the European debt crisis and its effects on the fledging global economy, caused investors and traders to rush to the sidelines, which triggered a rout of long liquidation in many commodities, including Gold. In the span of a week, June Gold has fallen over $80 per ounce, as weak bulls exited the market and those late to the party licked their wounds. Another potential reason behind Gold's less than stellar performance this week could be due to traders liquidating their Gold position to help meet margin calls caused by losses in other markets, such as equities, treasuries, and energies. Although Gold's upward climb has been rather orderly in U.S. Dollar terms, it has been a much more parabolic rise valued in Euros, Pounds, or Yen, which certainly could lead to liquidation selling by traders who believed the market has moved "too far too fast." Although it is certainly too early to tell if the gold market has put in a significant top, or if we are only in the midst of a "correction" before the next move higher, the potential for increased price volatility in the "yellow metal" near-term certainly appears likely.

Trading Ideas

For those traders fortunate enough to have been long Gold futures for some time, the recent sell-off has traders questioning whether to cover their long positions and potentially miss another run at all-time highs, or hold tight and risk further erosion should prices continue to fall. Some traders facing this dilemma may wish to explore how using options on Gold futures could provide a tool to help control potential losses, while still allowing for some upside potential. An example of such a strategy would be the purchase of a bull call spread. Employing this strategy, the trader would buy a lower strike call and at the same time sell a higher priced call. For example, with August Gold trading at 1186.30 as of this writing, one could buy an August Gold 1200 call and sell an August Gold 1300 call for about 28.00 points, or $2800, not including commissions. The premium paid for the spread would be the maximum potential risk on the trade, with a potential profit of $10,000 per spread minus the premium paid should August Gold be trading above 1300.00 at option expiration in July.

Technicals

Looking at a daily chart for June Gold, we notice prices have closed below the 20-day moving average for the first time since late March! Although this is considered a bearish short-term signal by some momentum traders, the uptrend line drawn from the February 5th lows is still over $45 away, coming in at the 1135.50 area, which also corresponds to the location of the longer-term 100-day moving average. This so called "line in the sand" should be heavily defended by Gold bulls, as a close below this key area could spur further selling pressure as sell-stops are triggered. The 14-day RSI has moved solidly back into neutral territory, with a current reading of 48.90. With support seen at the 1135.50 level, the nearest resistance point would appear to be at the 20-day moving average near the 1196.00 area, with major resistance found at the contract highs of 1249.70.

Mike Zarembski, Senior Commodity Analyst

May 25, 2010

Looking for a Floor

Fundamentals

Cocoa futures have rebounded over the past week on short-covering and tight supplies. After suffering, following the overall commodities markets lower in recent weeks on Dollar strength, traders seemed to have shifted their focus back toward the fundamental outlook. Expectations for the output deficit have been raised to 69,000 metric tons, up from analyst estimates of a 18,000 metric ton shortfall earlier this year. The production shortfall more than counters last year's surplus of 67,000 metric tons. The choppiness in equity prices has helped take some of the pressure off longs, and it seems as though the shock from the Greek financial crisis was quickly priced into the market, allowing buyers to step in. This is the slow time of the year for crop news, so traders tend to look to outside markets to find direction. The huge revision by the ICO does give traders some fresh market news to trade off of, but the bullish sentiment may wear off without a fresh infusion of news. The slowness of market specific news could make the Cocoa market vulnerable to swings in the Dollar and equity prices.

Trading Ideas

It looks as though both the fundamental and technical outlooks for the Cocoa market have improved, but remain vulnerable. The slow season for news could make the market succumb to outside forces, despite solid market fundamentals. The sharp move lower on the chart followed by a rebound in prices that is not quite as sharp of a move suggests possible bearish consolidation. Also, the bearish divergence hints at a dead cat bounce. For these reasons, some traders may wish to wait for the July contract to either close above the 3000 level on the upside or 2800 level on the downside before taking action.

Technicals

Turning to the chart, we see the July Cocoa contract bouncing off the 2800 level, which can be seen as a critical support level. Beyond 2800, the next support area comes in around the 2500 level. Resistance can be seen at 3000. In order for the Cocoa market to gain further upside momentum, prices would have to cross recent highs near 3250. The momentum indicator is showing strong bearish divergence from both price and RSI, suggesting the bounce off the 2800 level may be an aberration.

Rob Kurzatkowski, Trading Specialist

May 26, 2010

Are Natural Gas Bears Being Lulled Into a False Sense of Security?

Fundamentals

It's been a tough go being a bull in the Natural Gas futures market, as the commodity has been in a bear market since the end of the 2008 commodity price surge. However since April, it looks as though the market has entered a period of price consolidation, with the July contract mired in a relatively narrow, at least by natural gas standards, 60-cent range. Conflicting fundamentals might be behind the recent price stagnation, as above average amounts of gas in storage is countered against potentially rising demand for electricity generation as we enter the prime cooling demand months of summer. Natural Gas in storage here in the U.S. now totals 2.165 trillion cubic feet (tcf) as of May 14th, which is 16.6% above the five-year average. In addition the number of rigs used in Natural Gas drilling has also increased, now totaling 969, which is up 18 from the previous week. So with the supply side still looking very bearish, one would think that those holding short positions would feel confident with their positions. However, anyone who has studied the history of the Natural Gas market would know that a trend change can seemingly happen at a moment's notice -- especially as the calendar turns, and we move towards the beginning of the Atlantic hurricane season. The most recent Commitment of Traders report shows non-commercial traders (large speculators such as hedge and commodity funds), decreasing their net-short position by over 11,000 contracts for the week ending May 18th, as traders closed out positions in a "flight to liquidity", as concerns over the European debt crisis continued to mount. The large spec net-short position still totals over 95,000 contracts, and could be a catalyst for a large short-covering rally should we see any serious disruptions in the gas production areas of the Gulf of Mexico. Although the peak hurricane month of September is still a way off, the possibility of any weather-related disruption should always be in the back of traders' minds.

Trading Ideas

As veteran traders of Natural Gas options know, option premiums in the late summer and early fall time periods can be relatively "expensive", making outright purchases cost prohibitive for many traders. Short option traders may be tempted by the rich premiums these options normally command, but fear the potential of a sharp rise in volatility should a weather event disrupt Gas production in the Gulf. Traders who believe that Natural Gas prices will remain relatively steady going into the fall but who wish to potentially profit if volatility moves sharply higher may wish to explore a combination trade of selling an at the money straddle and using some of the premium received to buy multiple out of the money call options in Natural Gas options. An example of this strategy would be selling the October natural gas 4.30 straddle and buying twice as many October natural gas 6.00 calls. With October Natural Gas trading at 4.295 as of this writing, this combination (selling 1 straddle and buying 2 otm calls) was trading for around a 0.850 credit, or about $8,500, not including commissions. The trade would be profitable if October natural gas was trading below 5.150 and above 3.450, or above 6.850 at option expiration in September. The trade would not be profitable at expiration if October natural gas was trading below 3.450, or above 5.150 and below 6.850.

Technicals

Looking at the daily chart for July Natural Gas, we notice the choppy price action that has occurred since the beginning of April, as both bulls and bears battle it out to gain control. Currently, bears have the upper hand, as prices have fallen below the 20-day moving average. The 14-day RSI has also turned lower, with a current reading of 40.47. However, since the beginning of April, there has only been one successful attempt to move prices below psychological support at 4.000, and that move was soundly rejected and sparked an over 50-cent rally, as weak shorts ran for the exits. The May 6th lows of 3.971 remain major support for July Natural Gas, with resistance found at the 20-day moving average, currently near the 4.250 area.

Mike Zarembski, Senior Commodity Analyst


May 27, 2010

Greenback Poised for Breakdown?

Fundamentals

The Dollar Index continues to move higher, largely due to concerns over the Euro, but many have begun to question whether the currency will be able to maintain its upward momentum. The greenback has become the currency of choice by many investors recently due to the problems Europe is facing and the prospect of slower Chinese growth. It certainly seems as though the world may be entering a period of uncertainty, which suggests that investors may be staying in cash instead of taking on riskier investments. This certainly favors the US Dollar. If the mounting tension between North and South Korea comes to a boiling point, there may be a sense of panic in the market, which could further bolster the greenback. If on the other hand, we see a diplomatic solution to the tension on the Korean peninsula, the Dollar could find itself coming under some selling pressure. The same can be said if the EU can restore some confidence in the Euro. Some investors do not see this happening until the union forms a monetary fund to rescue distressed nations. If confidence in Europe and the global economy is restored, the Dollar could find itself facing immense pressure. The Fed has been extremely slow to raise interest rates, and the currencies of younger, faster growing economies like Brazil, Canada and Australia have all suffered severe depreciation versus the Dollar. This suggests that investors could quickly pounce on these currencies if the economic outlook improves.

Trading Ideas

The fundamental outlook for the Dollar Index remains a coin flip. The economic uncertainty facing the global economy favors the Dollar, due to its status as the world's reserve currency. Looking beyond the reserve currency status, the Dollar Index does not have much going for it fundamentally. Interest rates are low, and the economy is certainly not growing at an eye-popping rate. The chart shows the potential for a downside move. Some traders may wish to wait until the June contract confirms a downside breakout below 85.30 before entering into a short futures position.

Technicals

Turning to the chart, we see the June Dollar Index forming what could potentially turn into a double-top formation. Some traders may be a bit cautious approaching the pattern, as the chart has already had one false double-top signal in mid-April before the rally really picked up steam. The RSI is showing overbought readings, suggesting some bearish pressure. The June contract continues to trade well above the major moving averages, and the other oscillators are fairly neutral.

Robert Kurzatkowski, Trading Specialist

May 28, 2010

"Risk" Back On?

Fundamentals

What a difference a week makes! Just last week it seemed that all traders wanted to do was close out their open positions in the commodity markets and move to "safe havens" such as U.S. Treasuries and the U.S. Dollar, fearing that the fallout from the European debt crisis would spread throughout the globe and trigger a major set-back to the economic recovery. However, some positive economic reports in the U.S. as well as denial that China was prepared to liquidate some of their Euro-zone bonds has given some traders renewed confidence to re-establish positions in equities and commodities. The return to "risk on" trading since last week has caused lead month July Crude Oil to rally nearly $7, after trading at 8-month lows last week. July Copper surged over 26 cents per pound , and even the beleaguered June Eurocurrency futures appear to be trying to form a short-term bottom! The upcoming long Memorial Day holiday as well as end-of-the-month position squaring might be behind some of the renewed buying, as traders close out recently established short positions. This volatile trading activity can make it very difficult for fundamental traders to hold their positions, as the sudden and sharp price swings trigger stop loss orders when current price trends change. Although it may still be too early to tell if we are headed into a "calmer" trading environment as we begin the unofficial start of summer, after the extreme volatility we have seen this past month, I suspect most traders are happy to see the month of May finally come to an end!

Trading Ideas

During the recent sell-off in Crude Oil futures, option volatility rose, as nervous traders rushed into the futures options market to buy options to help protect against extreme price moves. This buying has elevated the option premiums, as many traders now require a higher premium to accept the risk of holding short option positions. Traders who expect Crude Oil volatility to begin to fall may wish to consider taking advantage of higher option premiums by exploring potential opportunities associated with establishing a short options position. An example of such a trade would be selling out of the money puts in July Crude Oil options. With July Oil trading at 74.10 as of this writing, the July Crude 60 puts could be sold for about 0.14, or $140 per option, not including commissions. The premium received would be the maximum potential profit on the trade and would be realized if July Oil futures are trading above 60.00 at expiration on June 17th. Given the risks involved with selling naked options, traders should have an exit strategy in place should the trade move against them. An example of such a strategy would be to buy back the short option before expiration if July Crude trades below the recent low of 67.15.

Technicals

Looking at the daily continuation chart for Crude Oil futures, we notice how sharply prices have fallen this past month as traders switched their focus from potential demand increases due to improving economic conditions to a risk averse mentality which caused a major liquidation of positions in the commodities sector, with the exception of Gold. The sharp rally in Oil on Thursday has positioned the lead month July contract to test the 20-day moving average, currently near the 75.25 area. After falling into oversold levels earlier this week, the 14-day RSI has rebounded sharply, currently reading a more neutral 46.26. In order for Oil bulls to once again regain the upper hand, July Oil would need to close above resistance at the 100-day moving average, currently near the 79.30 area. Support is seen at the May 25th low of 67.15.

Mike Zarembski Senior Commodity Analyst