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June 2010 Archives

June 1, 2010

Out of Gas

Fundamentals

Crude Oil futures have been unable to build on recent gains, due to fears that China's economy may be slowing. The Oil market has already faced immense pressure recently from the European crisis and the rising US Dollar. It is unlikely that Oil prices will be able to stabilize and build without restoration of confidence in the Eurozone, as shaken confidence could lead to further gains in the greenback and risk aversion by investors. China's government has taken steps to prevent a housing market bubble akin to the one that has gripped much of the West. The expectation is that the Chinese government will continue to tighten its interest rates and place restrictions on excessive real estate speculation. In addition to tightening policy, Chinese manufacturing slowed to levels not seen since last June. The Oil market is very well supplied at the moment, and there is no indication that OPEC will trim production anytime soon. The beginning of the driving season in the US seems to be overshadowed by the weaker Chinese data. Good results along with renewed optimism in the US economy could go a long way in stabilizing prices.

Trading Ideas

Given the near-term bearish technical bias and the uncertainty in Europe and China, some traders may wish to take on a bearish position. Given the psychological support near the 70.00 level, some traders may wish to take a more conservative approach and considering the possibility of entering a bear put spread, like buying the July Crude 71 put and selling the 70 put, for example, for a debit of 0.30, or $300. The trade risks the initial investment for a potential profit of $700.

Technicals

Turning to the chart, we see prices unable to cross back above the 75.00 level. This level happens to coincide with the 20-day moving average. The failure to cross the average can be seen as a negative in the near-term. Momentum was also showing some bearish divergence from the RSI, suggesting the market could find sustained downward pressure.

Robert Kurzatkowski, Trading Specialist

June 2, 2010

A Reluctant Leader?

Fundamentals

The Bank of Canada (BOC) surprised few analysts by raising the overnight lending rate by 0.25% basis points to 0.50% on Tuesday, as our neighbor to the north becomes the first of the G8 central banks to raise rates since September of 2008. The BOC's move on interest rates comes despite continued uncertainties surrounding a global economic rebound, due mainly to the debt situation plaguing the European Union. Domestically, Canada's economy looks quite healthy, as recent economic data points to a strong recovery and even signs of rising inflation, which caused the BOC to make its recent interest rate decision. Normally, once a central bank reverses course on its interest rate policy, it is usually the beginning of several rate changes, as bank governors move rates gradually to the desired level. However, in its statement issued after the rate hike announcement was released, the BOC made it clear that any further decisions on rate increases will take into account global, as well as domestic economic conditions. Given the current global economic climate, many traders believe the BOC will delay further monetary tightening actions until the global economy shows further improvements. This "dovish" statement has muted the extent of the rally in the Canadian Dollar, as traders push back expectations on when the next interest rate increase will come.

Trading Ideas

Although the Canadian Dollar futures rallied only moderately despite the rate hike announcement, longer term the shift towards monetary tightening should lead to a stronger "Loonie" -- especially vs. the U.S. Dollar, as the Federal Reserve is not expected to begin to raise interest rates until late in the 4th quarter of 2010, or perhaps even the 1st quarter of next year. Traders expecting the Canadian Dollar to strengthen may wish to explore futures options strategies that would benefit from an upward move in the currency. One such strategy could be the purchase of a bull call spread in Canadian Dollar options. An example of this trade would be buying the September Canadian Dollar 0.97 call and selling the September Canadian Dollar 1.01 call. With September Canadian Dollars trading at 0.9530 as of this writing, the spread could be purchased for about 1.33 points, or $1330, not including commissions. The premium paid is the maximum potential risk on the trade, with a potential profit of $4000 minus the premium paid should the September futures be trading above 1.0100 at option expiration in early September.

Technicals

Looking at the daily chart for the June Canadian Dollar, we notice the nearly 800-point drop in the value of the "Loonie" since the mid-April highs, as short-term-orientated traders shed their long positions as a "flight to safety" mentality took hold. Liquidation markets are among the toughest to predict, as prices can move far away from perceived "value" as positions are liquidated with little regard to longer-term fundamentals. We do see a potentially significant "bullish divergence" forming in the 14-day RSI, as this indicator failed to make a new low reading when prices plunged below 0.9250 on May 25th. In just a brief period of time, we have seen the June futures rally nearly 400 points, moving prices much closer to the 20-day moving average. The May 25th low of 0.9213 should now become major support, with resistance found at the 100-day moving average, currently near the 0.9685 area.

Mike Zarembski Senior Commodity Analyst

June 3, 2010

Can Notes Hold On?

Fundamentals

T-Note futures have come off recent highs due to some stability in Europe and renewed optimism in the US economy. Treasuries, however, have not completely lost favor with investors, as market jitters remain. Profit-taking has accounted for some of the pullback in prices. The upside potential for the Note market has improved, as the European crisis may delay any rise in interest rates by the Fed, suggesting yields can be pushed lower. The market may not be seeing the fear-trade buying that caused the price of the 10-year Note to jump 6 points in just under two months time, but the potential of a strong recovery in the US has been met with heavy skepticism. The current administration in Washington has curbed the pace of borrowing, at least for the time being, which could aid prices due to a cutback in supply. The possibility that China's robust economic growth will slow could also act as a crutch for the treasury market due to lack of opportunities in equities and commodities. Renewed optimism in the US economy and some semblance of stability in the Eurozone, however, could cool off demand for treasuries. Investment in Gold has also picked up recently, which could steal some of the Note market's thunder. If the US Dollar pulls back, it could fuel further demand for Gold at the expense of US debt.

Trading Ideas

The technical outlook for the T-Note market remains solid. Uncertainty has taken hold recently, which has had traders on the defensive. The technical outlook is unclear at the moment. It does not appear that the technicals favor technical buying, but the market has held near-term support levels to stave-off selling pressure. For this reason, some traders may wish to be patient and wait for a close below 121-16 before entering a short futures position in the September 10-year Note, with a protective stop at 122-00 and a downside objective of 117-00. The trade risks roughly $1,500 for a potential profit of $3,000.

Technicals

Turning to the September 10-Year Note chart, we see the market pulling back after forming a tombstone doji. Prices pulled back sharply, but were unable to strongly close below the 20-day moving average, which could have been seen as bearish in the near-term. Tuesday's spinning top indicates the market could bounce in the near-term. This conflicts with the momentum indicator, which has turned sharply lower, hinting at further selling pressure. Support near 120-00 and the 20-day moving average could be a gauge of near-term direction. So far, the market has held these two levels, but a close below 120-00 could trigger technical selling and shake-out some longs.

Robert Kurzatkowski Trading Specialist

June 4, 2010

Maybe It's Not So Bad After All?

Fundamentals

The month of May was particularly hard on equity bulls, when the Emini S&P 500 futures fell by almost 100 points as the European debt crisis, the oil spill in the Gulf, and the Chinese government's attempts to put the brakes on its surging economy struck fear in the minds of some investors and caused a stampede out of the market. Equity futures were not the only sector affected by this "risk-averse" mentality, as positions in energies, grains, and metals were also liquidated, with the main beneficiaries being U.S. Treasuries and Dollars. Now that June has arrived, we are starting to see some positive economic data out of the U.S. that has, at least for now, slowed down the selling. On Thursday, the Institute of Supply Management's (ISM) non-manufacturing index came in at 55.4 for May. Readings over 50 show expansion and signal improvement in businesses that make up the vast majority of the U.S. economy. In addition, jobless claims fell by 10,000 for the week ending May 29th, which is above analysts' expectation for decline of 5,000. The always highly anticipated non-farm payrolls report is scheduled to be released at 7:30 am Chicago time today, and traders are looking for a gain of over 500,000 jobs in May. This figure will include the temporary hiring by the government of census workers, but private business hiring is also expected to show a gain of nearly 175,000 jobs last month. Should today's data beat the pre-report estimates, it could be the catalyst to get traders' mindset back to the glass being half-full instead of half empty, as they viewed it in May.

Trading Ideas

With the CBOE's Volatility Index still reading over 30 as of this writing, there is still some "fear" premium in option pricing in stock index futures options. Traders expecting volatility to decrease in the next few weeks could choose to explore trading opportunities in Emini S&P futures options that would benefit from a drop in volatility. An example of this type of trade would be selling a strangle in the June Emini S&P 500 options, such as selling the June Emini 1175 calls in combination with selling the June Emini 950 puts. With the June futures trading at 1095.50 as of this writing, this strangle could be sold for 2.75 points, or $137.50 per spread, not including commissions. The premium received would be the maximum potential profit on the trade and would be realized if the June Emini settlement price is below 1175 and above 950 at option expiration the third Friday in June. Given the risk involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such strategy would be to close out the trade before expiration if the option premium on the strangle rises by 3 times the amount of premium received for originally selling the spread.

Technicals

Looking at the daily continuation chart for Emini S&P 500 futures, we notice that from the March of 2009 lows through the recent highs made in late April, the sell-off in May has not even reached the 38.2% Fibonacci retracement level. So given the perspective of how far we rallied from the recent lows, the current sell-off has been relatively minor so far. Prices have fallen below both the 20 and 100-day moving averages, although the 20-day MA is currently being tested once again. The 14-day RSI has moved up from oversold levels with a current reading of 44.96. Bulls will need to see the May 25th low of 1036.75 hold in order to re-exert control and set-up a potential test of the next major resistance point near the 1175.00 area.

Mike Zarembski Senior Commodity Analyst

June 7, 2010

Traders Turning a Cold Shoulder to the Coffee Market

Fundamentals

Arabica Coffee futures prices have become range bound lately, as mixed fundamentals have failed to put bulls or bears in the driver's seat. High quality beans have been scarce so far this year, as buyers scramble to secure supplies due to less than stellar crops out of Central America this past season. However, Brazil, who is the world's leading Coffee producer, is expecting a large crop this season, with current estimates for the 2010-11 harvest of just over 55 million bags. If true, this would be an increase of over 20% from last year's totals and is likely due to the cyclical nature of Coffee production. Although it appears that Coffee supplies should rebound this season, we still have to get through the South American winter, with potential frost and freeze scares providing traders a reason to keep a "weather premium" priced into the nearby futures contracts. Short-term weather forecasts area calling for cooler weather in parts of the Coffee producing areas of Brazil next week, but so far the chances for freezing conditions looks remote. Traders are also awaiting reports out of Central America regarding the extent of the damage caused in Coffee production areas due to Tropical Storm Agatha. So far it appears that there was little severe damage to the crop, but it may be too early to know the true extent of any damage to this season's production. The Commitment of Traders report shows that both large and small speculators are growing weary of the lack of direction in Coffee prices, as both non-commercial and non-reportable traders had shed a combined 6,544 contracts off their net positions as of May 25th. So unless the South American winter weather takes a turn for the worse, some traders may turn their focus to other markets as their cup of Coffee gets cold.

Trading Ideas

Since February of this year, the September Coffee futures have been stuck in a relatively narrow 11-cent trading range. Some traders expecting prices and volatility to remain muted could choose to explore trading opportunities that would benefit from a quiet market. One such strategy would be selling a straddle in Coffee futures options. An example of this type of trade would be selling the August Coffee 135 straddle. With September Coffee trading at 135.55, the straddle could be sold for about 9.00 points, or $3375, not including commissions. The trade would be profitable at this premium should September Coffee be trading below 144.00 or above 126.00 at expiration in July. Given the potential risk involved with selling naked options, traders should have an exit strategy in place should the trade move against them. An example of such an exit strategy would be to close out the trade before expiration should September Coffee close above the recent high of 142.75 or below the recent low of 131.55.

Technicals

Looking at the daily chart for September Coffee, we notice prices hovering near both the short-term 20-day moving average and the longer-term 100-day moving average. This scenario would seem to indicate that neither bulls nor bears currently have the upper hand. Many traders likely will begin to turn their focus to the rolling of positions out of the front month July contract and into September as July's June 22nd first notice day approaches. The 14-day RSI is about as neutral as can be with a current reading of 49.57. Resistance for September Coffee is seen at the April 5th high of 142.75, with support found at the February 25th low of 131.55.

Mike Zarembski Senior Commodity Analyst

June 8, 2010

Rain, Greenback Have Corn Reeling

Fundamentals

Corn futures continue to push lower, trading down to the lowest levels since October of last year. Traders are citing ample rainfall across much of the Corn Belt, which could result in higher output than last year's large crop. Also China, the largest importer of US grain, has seen its growing conditions improve, leading many to believe that export demand could decline. In addition to the market largely being seen as more than adequately supplied, Corn has faced plenty of selling pressure due to external market forces. The weakness in energy and commodity prices coupled with a stronger US Dollar has exerted a negative effect on grain prices. Given all the financial turmoil engulfing the globe, especially in Europe, some traders may continue their flight to quality, which is likely good news for the Dollar and bad news for commodity prices. The million dollar question facing Corn traders at the moment is whether the recent sharp selling will lead to value buying. If the answer is no, then the road ahead could be a rocky one for Corn prices.

Trading Ideas

It looks as though both market fundamentals and technicals continue to face south for the Corn market. Prices are really at the mercy of external market forces, barring a major shift in growing conditions, suggesting prices will continue to take their cue from the greenback and investors' appetites for risk. Given the state of Europe at the moment, this seems to favor the downside. Some traders may wish to take a short position in the July Corn futures contract at 335 or better, with a protective stop at 355 and a downside target of 300. The trade risks roughly $1,000 for a potential profit of $1750.

Technicals

Turning to the chart, we see the July Corn contract breaking-out to the downside, below support near 350. This suggests that prices could make a run at the major support level at 300. The 300 level has proven to be the new 200 level for Corn in recent years - a basement if you will. Corn prices have held this level, suggesting a downside breakout below 300 may result in unpredictable price action. The recent wave of selling has led to oversold conditions on the RSI indicator, which could provide some much needed support for prices.

Robert Kurzatkowski, Trading Specialist

June 9, 2010

Sugar Prices Begin to Stabilize

Fundamentals

After a near vertical decline since the beginning of March, Sugar futures prices have started to stabilize after falling nearly 40% during the past 3 months. An improving supply outlook and speculative long liquidation have been the main catalysts behind Sugar's sour price outlook. Brazil's Sugar output for the 2010/11 season is expected to be nearly 20% higher than last year, as weather conditions have been ideal for harvest in the Sugar producing regions of the country. In addition, many traders now believe that Sugar production in India, the world's largest Sugar consumer; has improved enough that the country will once again be an exporter of Sugar this year. The anticipated increase in production in addition to a strong U.S. Dollar has sparked a bout of long liquidation selling by speculators. In the most recent Commitment of Traders report, the combined non-commercial and non-reportable net long positions fell by just over 6,000 contracts to stand at 126,538 contracts for the week ending June 1st. Even though the net-long position is well off the all-time highs seen back in 2008, this still large net-long position could trigger an additional bout of liquidation selling should recent lows fail to hold or we see additional "flight to liquidity" closing out of "risky" assets. Not all fundamentals are favoring those bearish on Sugar prices, as Pakistan is expected to import an additional 375,000 tons of Sugar later this summer, after having already purchased 825,000 tons. Thailand is believed to have sold out if its 2009-10 Sugar production, causing cash market prices in Asia to trade at a premium to futures prices. However, analysts expect this premium to dissipate once supplies from India come to market. For the next several sessions, many traders' focus will be on the "roll", as longer-term traders switch their positions from the soon-to-expire July contract and into the October, or more distant contract months.

Trading Ideas

Although Sugar futures have moved relatively sideways since the beginning of May, the still large net-long speculative position coupled with potentially large Sugar output from Brazil and India could spell even lower prices as we move into the fall. Some traders looking for Sugar prices to continue to tumble could choose to investigate the purchase of bear put spreads in Sugar options. An example of such a trade would be buying October Sugar 14.50 puts and selling October Sugar 13.50 puts. With October Sugar futures trading at 15.00 as of this writing, the put spread could be purchased for about 0.45 points, or $504 per spread, not including commissions. The premium paid would be the maximum risk on this trade, with a potential profit of $1120 minus the premium paid should October Sugar be trading below 13.50 at option expiration in September.

Technicals

Looking at the daily chart for October Sugar, we notice prices starting to consolidate after hitting a "spike" low of 13.67 on May 7th. Since that time, October Sugar briefly tried to test resistance at 16.00, but sold-off after three attempts failed to penetrate this major resistance point. Currently, prices are hovering on both sides of the 15.00 level, trying to close above the 20-day moving average, which could trigger some short-term momentum buying. Longer -term, Sugar bulls would need to see a close above the 100-day moving average, currently just above the 18.00 area, to re-exert control. Traders holding short positions would want to see prices close below near-term support near the 14.32 area, which could set-up a potential test of the May 7th lows of 13.67.

Mike Zarembski Senior Commodity Analyst

June 10, 2010

Can Cocoa Stay Hot?

Fundamentals

Cocoa futures managed to hold onto gains yesterday in a very choppy session. The third consecutive up day was driven by concerns that the Ivory Coast crop may be smaller than previously expected due to disease. Whether or not the Ivory Coast crop will suffer significant damage from swollen-shoot disease may very well hinge on the government's response. If the government is proactive in helping farmers eradicate the spread of swollen shoot by eliminating diseased trees, then the damage could be minimal and fears overblown. Overall, crop conditions in the Ivory Coast have improved and farmers are looking for some sun for a change, after the recent heavy rains. Supplies are tight, but not as tight as many had expected, which could cool-off buyers. A strong midcrop could shift traders' focus towards demand, rather than supply. Demand has been extremely sluggish, despite prices being below $3,000 a ton. Traders may also look to outside markets to provide clues as to when demand may kick-up. The Eurozone turmoil has provided a boost to the US Dollar and has pushed the British Pound to the lowest level in over a year. This is a bearish force for Cocoa prices. Also, the economic uncertainty suggests that demand could remain lackluster and not stress supplies.

Trading Ideas

Both the technical and fundamental outlooks for the Cocoa market remain a bit murky. The Cocoa market could find itself able to break away from the broad commodities market if the swollen shoot disease is not contained. On the other hand, if the outbreak is contained, Cocoa could find itself at the mercy of outside markets. Likewise, the chart offers few clues as to the price direction. Some traders may wish to trade the 2800-3100 range, while being mindful of a potential breakout.

Technicals

Turning to the chart, we see the September Cocoa contract bouncing after flirting with minor support near the 2900 level. Despite this bounce, the bull camp may be a bit disappointed that prices were not able to push through the 3100 level recently. The market may continue to encounter resistance on the upside from the 100-day moving average and the 3100 level. At the same time, support at the 2800 level has held when tested this year. This suggests that the market could remain range-bound for the foreseeable future.

Robert Kurzatkowski, Trading Specialist

June 11, 2010

Will the U.S. Remain Well Oiled?

Fundamentals

Crude Oil futures have been choppy lately, as mixed fundamentals have traders reluctant to lean in either direction. In the bearish camp we have continued concerns that the global economic recovery will be slowed by the continued fallout from the European debt crisis, which would be a negative for energy demand as industrial and consumer users curtail their energy usage. In addition, U.S. Crude Oil inventories are ample, with storage space becoming a concern -- especially in Cushing, Oklahoma, which is the delivery point for the NYMEX futures contract. OPEC is expected to have produced 70,000 barrels per day less than anticipated last month due to the current supply situation. On the bullish side, the U.S. Energy Department, in its Short-term Energy Outlook, expects U.S. oil production from the Gulf of Mexico to decline by just over 6% due to the government's decision to put a moratorium in place on deep water drilling. Also supportive are expectations that Chinese exports are running well above last year's totals, which is leading some traders to believe that the Asian juggernaut will still show rapid economic growth, despite Chinese government attempts to put the brakes on its robust growth rate. The most recent weekly EIA energy stock report showed that refinery operation rates increased to 89.1% last week, which caused weekly Crude Oil inventories to decline for the second consecutive week. If this trend continues, we could start to see U.S. Oil inventories begin to decline. Ultimately, the next move in Oil prices may come down to the mentality of market participants, as continued fears of a global slowdown could spur further "flight to liquidity" selling in the energy complex , while positive economic data out of the U.S. and Asia could spur renewed buying as traders re-access their economic growth forecasts upward.

Trading Ideas

Given the range-bound trading action seen in Oil the past couple of weeks, due to mixed fundamental data, some traders may wish to investigate a trading strategy that will position them to take advantage of a large directional move should oil futures move out of the eight-dollar or so recent price range. One such trading strategy could be the purchase of a strangle in Oil futures options. An example of this trade would be buying an August Crude 80 call and buying an August Crude 68 put. With August Crude trading at 75.60 as of this writing, this strangle could be purchased for about 2.90 points, or $2900 per spread, not including commissions. The premium received would be the maximum risk on the trade, with the trade profitable at expiration in July if August Crude is trading above 82.90 or below 65.10.

Technicals

Looking at the daily chart for July Oil, we notice prices breaking through resistance at the May 28th high of 75.72. A close above this point could set-up a test of the 77.75 area. The 14-day RSI has recovered nicely from oversold levels, with a current reading of 50.72. Although prices are now above the 20-day moving average, long-term Oil bulls would need to see a close above the 100-day moving average, currently near the 80.00 area, to definitely establish control. Should the attempted breakout through resistance fail to hold, we could see a potential test of the June 7th low near 69.50.

Mike Zarembski Senior Commodity Analyst

June 14, 2010

Just Keeps on Getting Bigger!

Fundamentals

That was the cry from OJ traders after the USDA released its estimate for the 2009-10 Florida orange crop. The USDA raised the crop size by 2 million 90-pound boxes to 133.6 million boxes. This was on the lower end of analysts' pre-report estimates for a 2 to 3-million box gain. The increase was attributed to larger fruit size on the remaining Valencia crop that is still awaiting harvest. The total US 2009-10 orange crop was also raised buy 2 million boxes from the May 1st estimate to 194.2 million boxes. Despite the larger fruit size, the USDA did keep their yield estimate unchanged at 1.55 gallons per box. Now that the current orange crop harvest is nearly complete, many traders will turn their focus to the 2010-11 season, with ideal growing conditions so far leading analysts to expect orange production to increase to over 160 million boxes. There was a large increase in Florida orange movement recently, totaling just over 6.1 million gallons for the week ending May 29th. This was nearly 3 times the previous week's totals, with much of the juice expected to be shipped to Europe. Although OJ futures have remained range-bound the past couple of months, speculators continue to hold a bullish bias. According to the most recent Commitment of Traders report, the combined net-long position held by both non-commercial and non-reportable traders totaled 14,889 contracts as of June 1st. Although this was a decline of 1,605 contracts for the week, speculators are hesitant to get short OJ futures as we head into the beginning of the Atlantic hurricane season -- especially in light of forecasts that we could be in store for an active tropical storm season this year.

Trading Ideas

With the "official" start of the Atlantic hurricane season having occurred on June 1st, some speculators honor the season by purchasing out of the money call options in OJ futures options as a speculative play should a tropical storm strike the citrus growing regions of Florida. This buying tends to "inflate" the price of options tied to the fall contract months of September and November. Some traders looking to take advantage of the relatively high premiums afforded in these calls but who wish to limit their potential risk could consider investigating selling call spreads in OJ options. An example of this trade would be buying the November OJ 200 calls and selling the November 170 calls. With November Orange Juice trading at 141.10 as of this writing, the spread could be sold for about 2.50 points, or $375 per spread, not including commissions. The credit received would be the maximum potential profit on the trade. Given the potential risk on the trade, traders should have an exit strategy in place should the trade move against them.

Technicals

Looking at the daily chart for September OJ, we notice prices hovering near both the 20 and 100-day moving averages. This is a classic sign of a market that is trending sideways. Even the 14-day RSI is holding neutral, with a current reading of 51.63. 147.25 looks to be the next major resistance point for the September contract, with support found at the April 8th lows of 130.70.

Mike Zarembski Senior Commodity Analyst

June 15, 2010

Sugar High

Fundamentals

Dollar weakness has helped support the slumping commodities market in recent sessions, leading to the 5-day rally in Sugar. The inability of the Sugar market to take our early May lows near the 14.00 level has led to short covering. Supplies of the sweetener remain tight, but could be aided by a strong Indian crop this year. This could result in lower Indian imports and less stress on global supplies. Also, the Brazilian crop season has started off very strongly, indicating the upcoming crop will eclipse the previous crop year. This, however, impacts the Sugar market down the road. In the near-term traders may continue to focus on tightness in the cash market and improved economic sentiment. Global equity markets have breathed a collective sigh of relief due to the lack of distressing European news. This has contributed to the renewed enthusiasm in the commodity markets. This has had a double positive effect on the Sugar market. Not only are traders a bit more enthused about the prospect of economic growth, but the US dollar has taken a hit due to traders are not as risk averse as they were just a couple of weeks ago.

Trading Ideas

The fundamental outlook for the Sugar market has improved with the weakness in the greenback. The short-term supply tightness and attractive cash market prices may continue to support prices and provide a near-term basement for prices. The double bottom pattern on the daily chart has been confirmed, albeit on the lightest volume in over a week. The light volume may temper the bullish sentiment created by the confirmation of the reversal pattern. Traders may wish to buy an October futures contract on a second close above the trigger line on good volume with a protective stop at 14.85 and an upside target of 17.80.

Technicals

Turning to the October Sugar chart, we see yesterday's close confirm a double bottom pattern. The close was above the 50-day moving average, adding to the bullish sentiment from the double bottom pattern. The measure of the double bottom suggests that prices could reach the 17.70's and possibly test stout resistance at the 18.00 level. The 18.00 level will likely have a hand in determining the intermediate direction of the Sugar market. A breakout above this level suggests the beginning of a new uptrend that could test contract highs. Failure to cross this level could lead to disappointment among traders.

Robert Kurzatkowski, Trading Specialist

June 16, 2010

Too Much of a Good Thing?

Fundamentals

"Rain makes grain" is the old adage of grain traders who know that ample moisture during the growing season usually assures a bumper crop come fall. This year has been no exception, as US summer cash crops are off to a good start. The most recent crop progress report released on Monday afternoon shows the US Soybean crop is rated 73% good to excellent as of this past Sunday. However, some traders fear that the heavy rains that have occurred throughout the Midwest and Great Plains growing regions during the past few weeks could begin to hamper the emerging crop. Some Soybean fields may need to be replanted due to heavy rainfall causing them to be flooded out. In addition, the recent rains have delayed the winter wheat harvest in some areas, which could delay or even eliminate some of this acreage from being double-planted into Soybeans this year. Excessive rainfall has really hampered grain producers in western Canada, where an excess of rainfall is expected to lower the acreage dedicated to canola production this year. Lower Canadian canola production could give a boost to Soybean prices if buyers are forced to switch their purchases from canola oil to Soybean oil. Many Soybean traders will also turn their focus to the east, as less than stellar weather conditions in China could force the world's most populous nation to become an aggressive buyer of US grains this season if production levels disappoint. This upcoming season could provide interesting trading opportunities in Soybeans, as the potential for a record US harvest as well as a potentially disappointing crop are still possible as we move further into the heart of the summer, when weather forecasters become very popular figures in the Midwest.

Trading Ideas

As the calendar turns and we enter the official start of summer in the northern hemisphere, many experienced traders prepare for an increase in price volatility in the grain markets. Those traders looking for a potentially large move in Soybean prices who are unsure as to the direction of the price move could explore the purchase of a strangle in Soybean futures options. An example of this trade would be buying the August Soybean 970 calls as well as buying the August Soybean 900 puts. With August Beans trading at 942.75 as of this writing, this strangle could be purchased for about 35 cents, or $1,750, not including commissions. The premium paid would be the maximum risk on the trade, and the trade will be profitable at expiration in July should August Soybeans be trading above 1005.00 or below 865.00.

Technicals

Looking at the daily chart for new-crop November Soybeans, we notice after reaching 8-month lows last week prices rallied over 40 cents, moving above the 20-day moving average, as traders started to fear that recent heavy rainfall may further delay Soybean plantings as well as potentially harm some of the recently emerging plants. However, overall crop conditions are still very good, and fresh selling has emerged as the November contract moved above the 925.00 area. The 14-day RSI has moved into neutral territory with a current reading of 50.49. In order for bean bulls to re-gain control, we would need to see prices close above the 200-day moving average, currently near the 950.00 area. Support is seen at last week's lows at 886.75.

Mike Zarembski, Senior Commodity Analyst

June 17, 2010

European Relief Tests Dollar

Fundamentals

The Dollar Index has been in a steady decline, after making contract highs earlier this month. The European bailout of Greece, along with attempts to be more proactive to avert a similar crisis in Spain, has restored some investor confidence. This has led to an increased appetite for risk, which has hurt the greenback as a defensive play. There is also a mindset among traders that the Euro may have fallen too sharply against the Dollar in the near-term. Now that the Dollar has fallen back, traders have a moment to step back and reassess the global economic climate. Some of the enthusiasm that helped propel the stock market has begun to wane, as has the extreme pessimism that rocked the markets late last month. The Bank of Spain is conducting stress tests on the nations' banks. If the results are positive, it could be a shot in the arm for the Euro, and could result in further pressure on the Dollar. Conversely, the market's sudden appetite for risk could disappear very quickly if the findings show the government will require international aid.

Trading Ideas

The Dollar Index has shown chinks in its armor in recent sessions. The greenback was strong by default due to the market duress in Europe, rather than strong US fundamentals. At the same time, Europe is far from being out of the woods, so the greenback still has upside potential. For this reason, some traders may wish to take a more conservative approach and enter into a bear put spread, buying the July Dollar Index 86 puts and selling the July 85 puts for a debit of 0.45. The trade risks the initial cost of $450 for a potential profit of $550 if the September futures contract closes below 85.00 at expiration.

Technicals

The September Dollar Index chart shows prices approaching support near the 86.00 level, after failing to cross the 89.00 mark. Yesterday also marked three consecutive closes below the 20-day moving average, indicating that a near-term high may be in place. The RSI indicator has fallen from overbought levels and is quickly approaching oversold levels, which could provide some support to prices.

Robert Kurzatkowski, Trading Specialist

June 18, 2010

Climbing a Wall of Worry?

Fundamentals

"No market can go straight down forever!" That seems to be the catch phrase of buyers of the Eurocurrency the past several sessions, despite continued concerns about the fiscal policies of several E.U. members. Since falling to its lowest levels since 2006 on June 7th, September Euro futures have rallied nearly 500 ticks on what many traders believe is nothing more than short-covering buying. The rally in the Euro also corresponds with a rally in U.S. equity prices, as it appears that traders and investors are starting to view an economic recovery in the U.S. will not necessarily be derailed by the European debit crisis. Talk that Spain would be seeking financial aid from the E.U. or possibly the IMF on Wednesday failed to cause much reaction in the Euro, which only fell slightly vs. the greenback. If we take a look at the most recent Commitment of Traders report, we notice non-commercial traders (hedge and commodity funds) decreased their net-short position by over 20,000 contracts. This report was as of June 8th, which was at the beginning of the recent price correction in the Euro. This is a good lesson for traders on the potential short-term dangers of entering a market when traders' sentiment moves to extreme levels -- either bullish or bearish -- despite the fundamental outlook.

Trading Ideas

Fundamental traders who believe that the Euro will fall further due to the continued problems of many E.U. countries may wish to consider using the recent rally to begin to initiate trades that will benefit should that rally prove to be no more than a correction in the long-term bearish trend. An example of such as trade would be buying out of the money put spreads in Eurocurrency futures options. For example, with December Euro futures trading at 1.2405 as of this writing, the December 1.20/1.10 put spread could be purchased for about 0.0220, or $2,750 per spread not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $12,500 minus the premium paid at expiration in December should the December Euro futures be trading below 1.1000.

Technicals

Looking at the daily continuation chart for the Eurocurrency futures, we notice that the front month futures have finally moved above the 20-day moving average for first time since mid-April. The 14-day RSI had bottomed just over a week before the recent lows were made, which set-up a potential bullish divergence, which was confirmed by the recent rally. Although the short-term trend has turned positive for the Euro, bulls would need to see a close above the 100-day moving average, currently near the 1.3180 area, in order to regain control. Support is seen at the June 7th lows of 1.1874.

Mike Zarembski, Senior Commodity Analyst

June 21, 2010

Copper Rally Corrodes as Economic Data Disappoints

Fundamentals

Copper bulls were hoping for positive economic data out of the U.S. last week, in order to give the recent rally off 8-month lows some fresh momentum. However, their hopes were dashed this past Thursday, as government data failed to confirm an economic rebound. For starters, the Labor Department's weekly initial jobless claims report showed a gain of 12,000, to 472,000 last week, which is well above the 6,000 decline most analysts were expecting. In addition, the Federal Reserve Bank of Philadelphia general economic index for June fell sharply to a reading of 8, vs. 21.4 in May, which signals slower growth in manufacturing in the Pennsylvania, New Jersey and Delaware region than was anticipated. On top of this disappointing data, traders reported that copper imports into China were being delayed, which could signal Chinese buyers had adequate supplies of the" red metal" and demand may slow going into the summer. Copper inventories at London Metal Exchange (LME) approved warehouses increased for the first time in several weeks this past Thursday, jumping by 1,025 tons to stand at 460,175 tons. Recent weakness in the U.S. Dollar -- especially vs. the Euro-- may have added support to the recent gains in Copper prices, but with few concrete solutions to the European debit crisis being put forth, any movement downward in the Euro could spark further selling in Copper futures, as well as commodity markets in general.

Trading Ideas

July Copper was only able to briefly move above the 20-day moving average before aggressive selling came into the market and sent prices once again below $3 per pound. Given the illiquid nature of options on Copper futures, traders looking for Copper prices to fall would most likely need to look to the futures market to establish a short position. For risk management purposes, those traders short lead month July Copper may wish to consider placing a protective buy-stop above the recent high of 3.0490 in case the trade moves against them.

Technicals

Looking at the daily chart for July Copper, we notice the downtrend formed from the mid-April highs of 3.6910 remains in full force, despite the recent rally attempt. Last Thursday's sell-off all but shut-down any short-term bullish momentum, with the 14-day RSI failing to even crack the 50 level. Although a possible attempt at a test of the recent lows near the 2.7200 area looks likely, prices may actually become range bound given the mixed economic data we have seen lately. Support for July Copper is seen at the June 7th low of 2.7200, with resistance at the June 16th high of 3.0490.

Mike Zarembski, Senior Commodity Analyst

June 22, 2010

Yuan Provide Copper Psychological Bounce

Fundamentals

The Copper market got a reprieve from selling pressure yesterday as a result of the Chinese decision to allow the Yuan’s exchange rate to strengthen. There is a perception that the move would put the industrial giant at a slight disadvantage from an export standpoint, which could bolster the domestic manufacturing sectors for Western nations. Also, it would make the import of rate materials less expensive, which could test inventories of commodities, such as base metals, grains and petroleum. Despite these bullish factors, it still appears as though Chinese imports of Copper are set to decline. The housing market has come under assault by the bureaucrats in Beijing, who have imposed laws to cool off the housing sector. The struggles facing the Euro zone have not been in focus the way they have been at the beginning of the month, but there is much skepticism as to whether enough has been done to avert long term damage. These lingering doubts are very much in the back of traders’ minds and can quickly temper any sort of enthusiasm. The hear no evil, see no evil, speak no evil approach doomed many traders just a year and a half ago when the markets imploded. Unless material evidence materializes showing that the governments of Europe and the European banking sector are on solid footing, the bounce could be temporary.

Trading Ideas

The Chinese decision to raise the Yuan’s exchange rate can be seen as a temporary psychological boost, but may do very little to improve fundamentals in the near-term. Technically, the charts seem to favor the downside, if only to test the 2.75 level. For these reasons, traders may wish to short the September Copper contract at 2.95 with a protective stop at 3.05 and a downside objective of 2.75. The trade risks around $2,500 for a potential profit of $5,000.

Technicals

The continuation chart for the Copper contract shows prices failing to hold the recently rally above the 3.00 level. On the downside, the 2.75 mark ac be seen as a critical level. If the market is able to hold here, prices could stabilize and trade range bound. If, on the other hand, prices come down and violate the 2.75 level, the downtrend that started in April could continue. The momentum indicator is showing bearish divergence from price and RSI, hinting at further downside potential.

Robert Kurzatkowski Trading Specialist

June 23, 2010

Rain in the Plains is keeping producers from harvesting grain

Fundamentals

There certainly has been no shortage of moisture this spring in the southern regions of the Great Plains -- the heart of the U.S. hard red winter wheat production area. The USDA weekly crop progress report released this past Monday showed the combined winter wheat harvest was 17% complete so far this season, up 2% from this time last year but below the 10-year average of 27% completed. The rainy weather has caused a slight decline in the quality of the crop still in the ground with the winter wheat crop now rated 65% good to excellent, down 1% from the previous week. However, the wheat that has been harvested looks to be of good quality and yield reports are coming in average or above. The entire grain complex has received a boost of late due to concerns about this year's production out of Canada, as heavy rainfall has plantings way behind schedule, and there are even concerns that a good portion of the crops may not get planted at all this season. These concerns have spurred a significant rally in canola, oats and spring wheat futures, as these commodities would be most affected by any planting reductions. Outside North America, wheat production and supplies look robust. Wheat supplies in Australia, the world's fourth largest exporter, total 11.15 million metric tons, up from just over 8.7 million tons last year. Though mother nature is not cooperating with the wheat harvest now, eventually the U.S. crop will be harvested, and unless we start to see improved export demand or major production declines from non- U.S. wheat growers, hedge selling pressure may overwhelm recent speculative buying , putting the recent wheat price rally in jeopardy.

Trading Ideas

Since making contract lows just above the 440.00 level earlier this month, September Chicago wheat has rallied over 40 cents per bushel, mainly due to crop concerns in Canada, as well as harvest delays in Kansas and Oklahoma. However, given the huge surplus of wheat worldwide, producers may look at any rally attempts as a reason to sell to lock in prices as the harvest progresses. Those traders looking for Chicago wheat prices to fall could investigate bearish trading strategies to take advantage of a decline in wheat prices. An example of such a trade is buying a bear put spread in Chicago wheat options. For example, a trader could purchase a September Chicago wheat 460 put and sell a 410 put. With September wheat trading at 473.25 as of this writing, this spread could be purchased for about 16.50 cents or $825 per spread, not including commissions. The premium paid is the maximum risk on the trade with a potential profit of $2500 minus the premium paid, which would be realized at expiration should September wheat be trading below 410.00 at option expiration in August.

Technicals

Looking at the daily chart for September Chicago wheat, we notice price struggling to hold above the 20-day moving average. Though a move through this technical indicator could spur fresh buying from short-term momentum traders, it appears that momentum buying has been met by hedge selling, as producers take advantage of the rally to initiate selling hedges during the harvest. The 100-day moving average remains well above the current price, coming in just above the 500.00 area. It would take a close above this level to put wheat bulls back in charge. The 14-day RSI is in neutral territory with a current reading of 51.64. The next major resistance point is found at the May 28th highs at 495.00. Major support is found at the contract lows of 442.50.

Mike Zarembski, Senior Commodity Analyst

June 24, 2010

FOMC, Supply Weighs on Crude

Fundamentals

Crude Oil futures fell sharply on an unexpected build in supplies and a bearish statement from the FOMC. The Fed had mentioned that financial conditions have softened due to the European debt crisis, creating an environment that is not conducive to growth. The statement can be seen as bearish for equities and commodities, while supporting the US Dollar as a defensive play. Crude inventories bucked the seasonal trend and rose more than 2 million barrels ,versus expectations of a drawdown of 800,000 barrels. The International Energy Administration (IEA) lowered its demand forecast, citing lower demand from China. China's insatiable appetite for petroleum has been a key force in driving Crude prices higher since the early 2000's. Slower demand growth from the Asian giant could further bolster supplies, creating an oversupplied market. It certainly appears as though these developments have taken the wind out of the bull camp's sails. Traders will continue to question the demand component of the supply and demand equation, as OPEC will likely keep supplies steady for the foreseeable future. This could make it difficult for the Oil market to pick up any steam.

Trading Ideas

The economic landscape is not very supportive of Crude Oil -- or any commodity for that matter. Europe still needs to sort out their financial mess for traders to have any confidence in the Eurozone and global economy. The chart also shows that traders are reluctant to drive prices above the high $70's. For these reasons, some traders may wish consider a bear put spread, buying the August 74 put (CLQ074P) and selling the August 72 put (CLQ072P) for a debit of 0.55, or $550. The trade risks the initial cost for a potential profit of $1,450 if the August contract closes below 72.00 on the July 15th expiration.

Technicals

Turning to the chart, we see the continuation chart form two successive spinning top candlesticks, followed by yesterday's large down candle. This can likely be seen as bearish in the near-term. The first candle tested resistance at the $80 level, only to fail. Prices were also unable to cross above the 100-day moving average. The 20-day moving average happens to coincide with support at the $75 level. A violation of the average and minor support here could indicate that a near-term high is in place and may also result in a test of support near the $70 level.

Robert Kurzatkowski, Trading Specialist

June 25, 2010

Too Much Caffeine for Coffee Traders?

Fundamentals

The Coffee futures markets in both New York and London have certainly been downing "double espressos" the past couple of weeks, as prices continue to surge higher. Lead month September Coffee has rallied over 30 cents per pound, sending prices to highs not seen in over 12 years. Analysts attribute the rally to tightening supplies of high quality Arabica coffee, especially that of deliverable grades against the ICE futures contract. Before the price spike, coffee prices were contained in a relatively narrow price range, as traders focused on the potential for a huge harvest out of Brazil, the world's largest Coffee producer. However, Brazilian Coffee is not deliverable against the New York Arabica contract, which is negating its influence on futures prices. Poor harvests in Columbia the past two seasons have curtailed supplies in the cash market and have sent domestic cash prices to a large premium vs. September futures. If that was not enough, Robusta Coffee futures, which trade in London, have also seen a sharp price rise, as producers continue to stockpile supplies awaiting even higher prices. This lack of origin selling -- especially out of Vietnam -- has caused exchange warehouse stockpiles to decline, triggering concerns of a possible short squeeze in the July futures. Trend following speculative accounts have certainly jumped upon the bullish Coffee bandwagon. The most recent Commitment of Traders report shows large non-commercial traders added an additional 20,391 new net-long positions for the week ending June 15th. This huge surge in speculative long positions triggered buy stops as prices moved higher. Origin selling has started to come into the futures market, but commodity fund buying has willingly taken the commercial offers, keeping the bullish momentum going. With prices now having moved "parabolic", traders fortunate enough to be holding long positions should be on the lookout for a potentially sharp price correction should speculative buying start to decline. There is an old trading adage that "It takes a whole lot of fresh buying to move prices higher, but only a lack of buying to have prices collapse". These are words that every trader should take to heart!

Trading Ideas

A market that starts to move in a "parabolic" fashion can be difficult for even those fortunate to be holding a winning futures position in the market. At this point, the potential for an even more violent price move increases as both "fear" and "greed" enter traders' psyches. Some traders holding a long position in Coffee futures who would like some down side protection in case prices reverse may wish to explore initiating a "collar" position using Coffee futures options. Using the September futures, which are currently trading at 168.55 as an example, a trader holding a long September Coffee futures position could purchase a September 155 put, and at the same time sell a September Coffee 195 call. The purchase of the put acts as floor on his futures position, and the sale of the call helps to pay for the premium paid for the protection of the put. However, the sale of the call also caps the potential upside gain on the trade should the coffee price continue higher than the strike price of the call sold.

Technicals

Looking at the daily chart for September Coffee, we notice the extent of the violent up-move once prices broke above the multi-month consolidation pattern. If we look at the 14-day RSI during the consolidation, we do note that the RSI was making higher lows even as prices were testing the recent lows near the 131.00 area. The strong rally on June 10th sent prices above both the 20 and 100-day moving averages on a closing basis, which may have triggered fresh momentum buying. The large increase in volume added validity to the price rally, although some of the increase was due to the "roll" from July into the September contract. The 14-day RSI is well into "overbought" territory, with a current reading of 82.15. The lows of the recent consolidation near the 155.00 level look to be near-term support, with Thursday's spike highs of 176.50 acting as near-term resistance.

Mike Zarembski Senior Commodity Analyst

June 28, 2010

"Where's the Pork?"

Fundamentals

Although the famous quote from one of the national hamburger chain's commercials was "Where's the beef?", livestock futures traders are probably exclaiming "Where's the pork ?" ahead of this past Friday's USDA quarterly Hogs & Pigs report. The report released minutes after the end of trading is expected to show all Hogs and pigs as of June 1st totaling 96.9 percent of last year's figures. Hogs and pigs kept for breeding are expected to fall to 96.5 percent of year ago levels, and those kept for marketing are expected to total 97.0 percent of last year's figures. The declines expected in the size of the U.S. Hog herd are part of the fallout from the slow pace of the economic recovery, which hurt producers' profit margins because retail consumers switched to alternative and cheaper protein sources such as chicken, which put a damper on wholesale pork prices. Operating losses forced some more marginal Hog producers to either exit the business entirely or sharply curtail their breeding herd to help stem the "red ink". However, the Hog market finally got a bit of good news at the end of last week, as the U.S. and Russia have finally worked out an agreement that will allow the U.S. to resume chicken exports to Russia after a six-month ban. The resumption of chicken exports is important to the pork industry, as the excess supplies of chicken due to the export ban caused wholesale poultry prices to fall, which in turn allowed retailers to run chicken price specials and made pork look more expensive to consumers. Although expected tighter supplies of Hogs coming to market should support wholesale prices later this year, there are still concerns about the speed of the economic recovery and whether consumers will be able to afford to have pork on their barbecue menus this summer.

Trading Ideas

Lean Hog futures have been in an uptrend since August of 2009, as traders began anticipating lower Hog supplies in the coming months after producers began to liquidate a fair portion of the breeding herd due to unprofitable operating margins. Now that prices have recovered, there are concerns as to whether consumer demand will increase given the slow pace of the economic recovery. Current fundamentals may favor a period of price consolidation until the market is able to determine the longer-term supply and demand outlook. Some traders expecting Lean Hog futures prices to move sideways the next several weeks may choose to explore trading strategies that would benefit from a sideways market. One such strategy would be the sale of a strangle in Lean Hog options. An example of this trade would be selling the August Hog 90 calls as well as selling the August Hogs 75 puts. With August Hogs trading at 83.525 as of this writing, this strangle could be sold for about 1.000, or $400 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in August should August Hogs settle below 90.00 and above 75.00. Given the potential loss involved in selling naked options, traders should have an exit strategy in place in case the position moves against them. An example of such a strategy would be to close out the trade before expiration should August Hogs close above the short call strike price or below the short put strike price.

Technicals

Looking at the daily chart for August Hogs, we notice the extent of the uptrend that has been formed since the major lows were made back in August of 2009. The uptrend line was broken briefly earlier this month, as a commodity wide sell-off tied to weak equity prices sparked a serious bout of liquidation selling. However, the sell-off was short-lived, as buyers took advantage of price weakness to initiate new long positions. The 14-day RSI has moved back into neutral territory with a current reading of 53.63. The June 7th low of 78.20 looks to be strong support for August Hogs, with resistance seen at last week's high of 85.10.

Mike Zarembski Senior Commodity Analyst

June 29, 2010

Can Gold Continue to Grind Higher?

Fundamentals

Gold futures could not sustain an early rally toward record highs, due to a stronger US Dollar and commodity weakness. Despite the down day, Gold traders did get a bit of bullish news early, when the ETFS Gold Bullion Securities and ETFS Physical Gold ETFs indicated that their physical holdings climbed to a record $10 between the two funds. Given the jitters surrounding the EU, it is not surprising to see investors heading to higher ground. This indicates that European investors continue to worry that their investments could face currency risk and are looking to invest in physical assets instead of stocks, bonds and other paper investments. The effect on the Dollar-based gold market, however, remains unclear. A weaker Euro could very well help propel the greenback versus other currencies. A stronger US Dollar could mean diminished demand for commodities and weaken speculator demand for the yellow metal. The Commitment of Traders Report (COT) showed the speculative long position rose by 10,120 contracts, 8,219 of which were non-commercial reportable positions. This could be a sign that the market may be heading toward overbought levels. Many of these trades may have been placed with the expectation of friction at the G20 summit which never materialized. The focus now shifts back to the global economy and growth prospects.

Trading Ideas

The fundamental outlook for August Gold remains a bit murky. There is plenty of uncertainty facing Europe and much of the rest of the globe, but this seems to be fueling longer-term investment buying. Purely speculative buying seems to be coming in a bit slower. A stronger US Dollar could slow buying in the COMEX contract. The chart shows no signs of the market letting up at this point, but the market has refused to make new highs as well. For these reasons, some traders may wish to wait on the sidelines and see which way the market will break out. Traders may wish to focus on new contract highs on the upside and closes below 1225 on the downside.

Technicals

The August Gold chart shows prices heading toward record highs set last week, only to sell-off when the US market opened. The 20-day moving average has been the support line for the market for the past couple of weeks. A close below the average, along with the inability to make new highs, could trigger further selling and possibly signal a near-term top. Solid closes below the 1230 level could send prices down to their lowest levels in over a month. New contract highs, on the other hand, could trigger further technical buying.

Robert Kurzatkowski, Trading Specialist

June 30, 2010

Downtrend "Corntinues"!

Fundamentals

"The Weatherman" has looked kindly on Corn producers in 2010, as the U.S. Corn crop is off to a blazing start. Ample moisture and ideal temperatures so far this season have crop condition ratings coming in higher than average for this time of year. On Monday, the USDA released its weekly crop progress report which rated 73% of the U.S. Corn crop good to excellent! The strong start to the growing season has some traders looking for a possible record Corn harvest this fall, especially if the Midwest can avoid any significant hot and dry spell after the July 4th holiday. U.S. Corn exports have been disappointing lately, with this week's exports totaling 35.4 million bushels, which is well below the 47.7 million bushel average needed to meet USDA projections. Before traders start looking forward to the long Independence Day holiday this weekend, there is still one important report that will capture grain traders' interest, as the USDA will release its acreage and quarterly grain stocks report at 7:30 am Chicago time today. Analysts are estimating an increase of 500,000 acres dedicated to Corn production from the March 31st estimate, coming in at just over 89.3 million acres. This is nearly 3 million acres higher than in 2009, and if yields come in better than expected, we could see a record Corn harvest this year. U.S. Corn stocks are expected to be near 4.61 billion bushels, or just over 350 million bushels higher than a year ago. This potential for a huge Corn crop has bears on the offensive, as aggressive selling has sent new-crop December Corn futures prices to new contract lows. So unless the weather forecasts turn hot and dry in the coming months, or U.S. Corn exports improve, we may soon see Corn price quotes starting with a "2" for the first time in 4-years.

Trading Ideas

Although new-crop December Corn futures are trading at contract lows, it is still early in the growing season and any change in the weather forecast that includes hot and dry conditions could be the fuel to spark a short-covering rally. Traders expecting Corn prices to continue lower but who wish to limit the risk on the upside should Corn prices rally may wish to investigate strategies using Corn futures options. An example of such a trade would be selling a December Corn 350 call and buying 1 December Corn 410 calls. With December Corn trading at 344.00 as of this writing, the spread could be done for a credit of 14 cents, or $700 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if December Corn is trading below 350.00 at option expiration in November. The potential loss is capped at $3,000 minus the premium received for selling the spread and would occur should December Corn be trading above 410 at option expiration.

Technicals

Looking at the daily chart for December Corn futures, we notice prices trading well below the 100-day moving average since the beginning of the year. Since that time, the market has had several periods of price consolidation before the major downtrend has resumed. The 14-day RSI has once again moved into oversold territory, with a current reading of 28.34. The last time the RSI was at oversold levels, the market staged a minor 20-cent rally back in late January/early February, stopping out weak bears along the way. The next support point for December Corn is seen at 340.00, with resistance found at the 20-day moving average near the 366.00 area.

Mike Zarembski Senior Commodity Analyst