Fundamentals

Compared to several other commodity markets, Sugar futures have held their bullish tone lately, due to concerns that Brazilian sugar cane production will be lower than expected due to dry conditions as the growing season nears the end. However, some recent changes in fundamentals might be signaling a price correction could be near. The back-up of ships at Brazilian ports is beginning to ease, which should allow Sugar supplies to reach buyers, helping to elevate current tight supplies. In addition, world Sugar supplies are expected to return to a surplus this season, with the International Sugar Organization expecting a Sugar surplus of just over 3 million tons in the 2010/11 marketing year. Production out of India, the world's largest Sugar consumer, is expected to increase sharply after two consecutive years of well below normal production. Although Sugar demand from Russia and other Asian countries is expected to increase, the production gains expected this year look to be sufficient to meet any expected increases in demand. Speculative traders are still holding a large net-long position in Sugar, with the most recent Commitment of Traders report showing both large and small speculators net-long a total of 158,253 contracts as of August 24th. Although the net-long position is far short of the record 303,210 contracts speculators held back in early 2008, it is still a formidable position, and should prices begin to decline, long liquidation selling could spark a test of support near the 17.50 area.

Trading Ideas

Some traders looking for weakness in Sugar prices who wish to limit their potential risk may wish to explore trading strategies using options on Sugar futures. One example would be buying a bear put spread, such as buying the October Sugar 19.50 puts and selling the October Sugar 18.50 puts. With October Sugar futures trading at 19.74 as of this writing, this put spread could be purchased for about 0.40 points, or $448.00, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $1,120 minus the premium paid which would be realized if October Sugar is trading below 18.50 at option expiration in September.

Technicals

Looking at the daily chart for October Sugar, we notice prices holding just above the 20-day moving average. The market seems to be consolidating within a narrow 1-cent per pound range, as volume remains relatively light ahead of the Labor Day holiday in the U.S. There appears to be a bearish divergence forming in the 14-day RSI, as this indicator failed to make a new high reading despite prices reaching 5-month highs last week. The August 25th high of 20.37 looks to be near-term resistance for October Sugar, with support found at the August 10th low of 17.51.

Mike Zarembski. Senior Commodity Analyst

Fundamentals

Crude Oil futures posted solid gains yesterday, after the ISM manufacturing index posted a stronger number than analysts had expected. The positive news from the manufacturing sector was a welcome relief for traders, who have been inundated with negative economic data of late. All signs seemed to have begun pointing toward the possibility of a double-dip recession, so the report offers a ray of hope for the economy. Traders even shrugged off the EIA's report showing another large build in Crude Oil inventories. Therein lies one of the two major obstacles for Crude Oil bulls. The US is very well supplied at the moment, indicating there needs to be an uptick in economic activity and consumer use for inventories to be worked down. This weekend marks the end of the driving season, so next week's MasterCard survey, which reports spending at the pump, could be of great importance in the near- term. The other problem facing Oil bulls is the US employment situation. Consumers have been reluctant to open their pocketbooks at the pump and at the register. Today's initial and continuing claims report as well as the non-farm payroll data tomorrow could shed a bit more light on where the current employment situation stands. Yesterday's ADP number was worse than consensus estimates, but was better than whisper numbers on the street, which also offered some encouragement. The market could ride the wave of optimism sparked by the solid manufacturing number in the near-term, but if inventories and unemployment remain high, Oil bulls may have to hope for a cold winter to work down current stockpiles.

Trading Ideas

The fundamental outlook for the Crude Oil market remains biased toward the bear camp due to the large inventories of petroleum and the uncertain economic outlook. The ISM number does give traders some hope, but needs to be followed up with more positive data to swing the bias toward the bulls. The chart shows Oil holding the lower end of the range it has been in and may be forming a near-term bullish reversal. Some traders may wish to consider entering into a long October Mini Crude Oil position on a close above 75.50, with a protective stop at 73.50 and a target of 79.25. The risk of the trade is in the neighborhood of $1,000, with a potential profit of roughly $1,875.

Technicals

Turning to the chart, we see the October Crude Oil contract holding the 71.50 level, after testing that level several times over the past week. Yesterday was the second time the market bounced after a large down day testing this level, hinting that the market may have formed a near-term W-bottom. A close above 75.50 could be seen as confirmation of the pattern. The measure of the pattern indicates the October contract could once again test the $80 level, which has offered stout resistance in the past. A close below 71.50 suggests bearish price action may ensue. The RSI has rebounded from oversold levels and now sits in neutral territory. However, momentum has remained flat, creating near-term bearish divergence.

Robert Kurzatkowski. Trading Specialist

Fundamentals

Bond traders will be glued to their computer screens Friday morning, instead of leaving early for the beach ahead of the long Labor Day weekend in the US, as important economic data is scheduled to be released at 7:30 am Chicago time -- the widely anticipated non-farm payrolls report for August. Analysts expect payrolls fell by about 120,000 jobs last month, which is a bit better than the 131,000 jobs lost in July. The unemployment rate is expected to tick up to 9.6%, vs. 9.5% in July. Although trading activity may begin to wane once the employment number has been digested, many traders will next likely turn their attention to the release of the ISM non-manufacturing index. It was surprising gains in its sister report, the ISM manufacturing index, on Wednesday that helped trigger a steep sell-off in the treasury futures, as bond bulls rushed to the exits on "good news" from the manufacturing sector. Many traders are looking for the service index to fall to 53.0 in August, which is down from the 54.3 reading in July. However, even if we see a slight decline in the ISM reading on Friday, any reading above 50 still means an expansion of jobs in the sector, although possibly at a slower pace than the previous month. A look at the most recent Commitment of Traders reports shows speculators increased sharply their net-long position in 10-year note futures last week, adding a whopping 74,365 contracts for the week ending August 24th. This increase corresponds to a move to yearly highs for treasury prices, as economic data released at that time painted a gloomy picture for the economic recovery in the US. Since that time, 10-year note prices have fallen below the 20-day moving average, which is viewed by some chartists as a short-term sell signal, leaving recent long positions in the red. This could spur a further bout of long liquidation selling, should this morning's economic data turn out to be better than anticipated.

Trading Ideas

Some traders expecting a large move in the price of 10-year note futures but who are unsure as to the direction the move will take may choose to explore option strategies that could benefit from a large move in the underlying futures. One example of such a strategy would be the purchase of a strangle in 10-year note options. For example, a trader could buy the October 125.5 calls and buy the October 123.5 puts. With the December 10-year note futures trading at 124-20 as of this writing, this strangle could be purchased for about 31/64ths, or $ 484.38 per spread, not including commissions. The premium paid would be the maximum risk on the trade, and the position will be profitable at option expiration in September should the December 10-year note futures be trading above 125-31.5 or below 123-00.5.

Technicals

Looking at the daily continuation chart for 10-year note futures, we notice prices hovering just below the 20-day moving average; the steep upmoved seems to have ended, as prices have began to consolidate just below recent highs. We do have a bearish divergence in the 14-day RSI, as this momentum indicator failed to make a new high reading when prices reached yearly highs on August 25th. The next major support point is not seen until 122-06.5, with resistance found at 126-28.

Mike Zarembski. Senior Commodity Analyst

Fundamentals

China's Cotton crop may have suffered worse damage than previously expected, which will likely cause the nation to suffer its second consecutive decrease in output. This comes on the heels of news that Pakistan's crop is suffering similar damage. These two Asian heavyweights will likely need to import heavily to meet current demand. This bears a striking resemblance to the Wheat situations a little while back, when US farmers enjoyed favorable growing conditions while farmers elsewhere suffered damage. The Cotton market has rallied very sharply over recent weeks due to the smaller, lower quality crops being produced elsewhere. The question now becomes whether the market is overdone or if it can sustain the recent rally. Certainly, further gains over the short-term are possible, but a more sustained rally could result in textile manufacturers looking for other alternatives. The relatively low price of petroleum may make synthetic fabrics more attractive.

Trading Ideas

The Cotton market is riding the wave of extremely bullish news currently, but many traders may become uneasy at the scope and swiftness of the rally. As we have seen with other markets such as Wheat, prices can quickly outpace fundamentals. The chart shows no sign of letup at the moment, but that can easily change due to the extreme nature of the move. Some traders may wish to hold-off for the moment before taking action and wait to see if the market will give an indication whether it will correct or consolidate.

Technicals

Turning to the chart, we see the December Cotton contract making a sharp and parabolic run-up in prices. The steep move may be cause for concern for traders in long positions, as markets can sometimes correct very sharply after making such a move. Some traders may want to pay attention and attempt to spot any sort of reversal pattern or consolidation pattern forming to give a clue as to how the market may behave. The RSI is giving overbought readings, which may be a moot point given the news-driven buying at the moment.

Rob Kurzatkowski. Trading Specialist

Fundamentals

Ignoring the benefits of grass fed beef, commodity bulls are feasting on Corn futures once again, as prices have risen to their highest levels in nearly 2 years. Recent gains can be attributed to some private forecasts calling for lower than anticipated Corn yields this year. This past Friday, Informa Economics estimated 2010 U.S. final Corn yields at 158.5 bushels per acre, which is well below the USDA's August estimate of 165.0 bushels per acre. If final Corn yields do fall sharply, we could see historically tight U.S. Corn ending stocks. This surprising estimate triggered a flurry of trading volume in Corn futures, with the Exchange reporting a new volume record in Corn futures and options on Friday! The most recent Commitment of Traders reports shows that large and small speculators are on opposite sides of the fence as to the future direction of Corn prices. Non-commercial traders (usually commodity and hedge funds) added 25,157 additional net-long Corn contracts the week ending August 31st, to increase their net-long position to a whopping 381,635 contracts. Non-reportable traders (typically small speculators) are net-short 140,232 contracts. This disparity tied to new highs being made may send prices even higher should weak shorts be forced to buy back their positions as new highs are being made. With Corn prices at 2-year highs, it will be interesting to see how the market will handle "hedge selling", as producers begin to harvest this year's Corn crop. The key question will be whether producers will try to lock-in current prices, or if they are willing to hold Corn in storage in anticipation of potentially higher prices in the coming months. Many Corn traders will be anxiously awaiting this coming Friday's September USDA crop production and supply/demand reports, to see if government forecasters are willing to lower Corn yield estimates as sharply as some traders expect, or if they will take a more cautious stance and wait for "actual" yield reports before making any serious adjustments to the size of the 2010 U.S. Corn crop.

Trading Ideas

With the Corn bull market still intact, but with the potential for increasing volatility ahead of the release of the USDA report this Friday, Corn bulls may wish to explore option trading strategies that will limit their potential risk, but still allow for some upside potential. An example of such a trade would be buying a bull call spread. For instance, with December Corn trading at 464.75 as of this writing, a trader could buy the December Corn 480 calls and sell the December Corn 600 calls for a debit of 21 ½ cents, or $ 1,075.00 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit at expiration in November of $6,000 minus the premium paid, which would be realized if December Corn was trading above 600.00 at option expiration in November.

Technicals

Looking at the daily continuation chart for Corn, we notice prices breaking-out to the upside on what turns out to be record trading volume this past Friday! Prices are now well above both the 20 and 200-day moving average, and momentum is strong. The 14-day RSI has moved into overbought territory, with a current reading of 73.67. However, the RSI did move to a new high reading with the move to 2-year highs, which helps to confirm the up-move. The next resistance point is seen at the psychologically important 500.00 level, with support found at the 20-day moving average near the 430.00 area.

Mike Zarembski. Senior Commodity Analyst

Fundamentals

With so much of the focus on the three major grains, Corn, Wheat and Soybeans, the Rough Rice market has slipped under the radar. The market has been in an upward channel since early July, boosted by crop losses in China and Pakistan. The El Nino weather pattern has also delayed plantings in the Philippines, another major exporter. The same weather pattern resulted in extremely dry weather in China's growing region. This has been followed by the La Nina weather pattern, which brings much wetter than normal conditions. While the increase in moisture has been welcome, it has also brought its own problems, including a sharp rise in pests that destroy crops. Also, consumers have been looking for alternatives to Wheat, because prices have surged due to extremely dry weather in Russia. US export demand could continue to rise due to the combination of normal and substitute demand. However, there is no guarantee that US demand will see the same surge that other countries have seen. Importers have favored shipments from Thailand and India to this point. Also, Pakistanis favor basmati rice from India over other varieties. Traders may wish to keep an eye on the severity of the La Nina rains and Wheat prices to gauge future price action.

Trading Ideas

The weather in the Northern Hemisphere has wreaked havoc on various crops this year, providing grain bulls with trading opportunities. The overall negative tone to the economy could offer resistance to upward price movement, but in theory, market fundamentals should prevail. The 12.00 level on the chart can be seen as potentially stout resistance, and a breakout above this level can be seen as fairly significant. For this reason, some traders may wish to enter into a long position on a significant close above the 12.00 level, with a stop at 11.25 and target of 13.15.

Technicals

Turning to the chart, we see the November Rice contract breaking the downward trendline in mid-August. Since then, prices have crossed through resistance at the 11.50 level and are testing additional resistance near the 12.00 mark. The combination of chart resistance and overbought readings on the RSI could cool buying pressure in the near-term. However, some traders could disregard the overbought conditions on a fresh breakout above the 12.00 level. If prices fall below 11.00, it would be seen as a setback for the market.

Rob Kurzatkowski. Trading Specialist

Fundamentals

Coffee futures have been running hot lately, with the front month December futures attempting to test the $2 handle for the first time since 1997. Coffee bulls cite tight supplies of high quality Coffee as the catalyst for the steep run-up in prices, as the market has not yet fully recovered from the two consecutive years of below average production from Columbia, who is a leading supplier of high grade Arabica Coffee. However, Columbia's production is expected to increase this season, with its August production up over 50% from last season. Other major Coffee producers such as Costa Rica and El Salvador are also expected to see production increases, so supplies of quality Coffee should increase this season. So if supplies are expected to increase, why are Coffee futures reaching 13-year highs? One reason might be renewed interest by commodity funds in not only Coffee, but also other "softs" such as Cotton and Sugar. In fact, it appears that funds are also in a buying mood for other so called "commodity staples", such as the grains, and for livestock futures as well. This speculative buying may be the real reason behind Coffee's move higher, but until we see commercial selling emerge to take advantage of these "high" prices, there appears to be few willing sellers waiting to try to pick a top in this bull market.

Trading Ideas

The Coffee futures market's moves could become more volatile now that speculators are attempting to move prices through resistance at 200.00. Some traders who are anticipating a big move in Coffee prices and an increase in volatility may wish to consider investigating the purchase of a strangle in Coffee options. An example of such a trade would be buying the December Coffee 215 calls as well as buying the December Coffee 175 puts. With December Coffee futures trading at 193.30 as of this writing, this strangle could be purchased for about 11.50 points, or $4,312.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with the trade profitable at option expiration in November should December Coffee be trading above 226.50 or below 163.50.

Technicals

Looking at the daily chart for December Coffee, we notice the recent leg of the rally has occurred on lower volume. In addition, the 14-day RSI has formed a major bearish divergence! Wednesday's attempt to test the 200.00 level was met with selling pressure, with some commercial selling noted at new contract highs. This possible "reversal" signal could spark additional selling from not only commercial hedgers, but also from weak longs as well. 200.00 remains strong resistance in the December futures, with support seen at the 20-day moving average, currently near the 181.00 area.

Mike Zarembski. Senior Commodity Analyst

Fundamentals

It seems neither bulls nor bears can take control of the Crude Oil futures market, as prices seem destined to remain range-bound for the near future. Traders seem to be confused by the conflicting data presented in economic reports on whether we are really seeing a recovery in the world economy. In addition, there are many opinions regarding why Oil prices are holding above $70 per barrel, given the record or near record inventories here in the US of Crude and refined products. It appears that there is still sufficient demand from investors for commodities as an asset class, which seems to be keeping a bullish bias in Oil prices. The most recent EIA energy stocks report showed a modest drop in Oil inventories last week, primarily due to sharply lower imports. With refineries in the process of shutting down for seasonal maintenance, we likely should expect lower utilization in the next few weeks, which should also damper demand for Oil by actual end-users. However, the wide contango (deferred futures months trading at a premium to nearby futures months) in the WTI oil futures is once again reviving interest in "carry trades" in the Oil market, where those able to finance and store Crude can sell deferred futures and "lock-in" a reasonable return. This "investment" demand is partially holding Oil prices steady, as "traders" help to take up some of the demand for Oil that actual users of the product currently do not need.

Trading Ideas

With the Oil market still stuck in its trading range pattern, some traders may wish to explore trading strategies that will benefit should the market continue to hold within its recent price range. One example of such a strategy would be the sale of a strangle in Crude Oil options, with the strike price just outside of the recent price range. For example, with November Crude Oil trading at 77.37 as of this writing, one could sell the November 87 calls as well as November 67 puts for a combined premium of 0.71 points, or $710 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in October should November Crude Oil settle below 87.00 and above 67.00. Given the risk involved in selling naked options, traders should have an exit strategy in place in case the position moves against them. One such strategy would be to buy back the strangle before expiration should November Crude Oil close above the call strake or below the put strike.

Technicals

Looking at the daily chart for November Crude, we notice prices moving sharply higher on Friday, with an attempt at testing near-term resistance at 77.82 on word of the Enbridge pipeline leak in Romeoville, Illinois on Thursday, which could cause short-term supply disruptions. However, oil supplies remain ample, and any test of resistance at 77.82 could be met with fresh selling -- especially once Oil movement resumes through the pipeline. Although recent strength has pushed prices above short-term moving averages, the longer-term 200-day moving average still looms nearly $4 above current price levels. Near-term support is found at the 20-day moving average near the 75.45 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Wheat futures are modestly lower this morning, on projections that Australia's production of the grain may jump substantially after heavy rains blanketed much of the growing region. The Australian Bureau of Agricultural and Resource Economics-Bureau of Rural Sciences forecast that the 2010-2011 crop output may jump to 25.1 million metric tons from 21.7 million metric tons -- a jump of over 15%. This news may only be a temporary setback for the Wheat market, which is seeing strong demand due to a weaker US Dollar and crop production setbacks in Asia. The USDA lowered its global production projection for the fourth consecutive month this past Friday, albeit by a smaller amount than traders had expected. Even with the tight supplies for this crop year, traders have to wonder if prices may have gotten a bit too high relative to fair value. Even with all of the crop problems facing farmers abroad this year, we are coming off several years of ample harvests. Prior surpluses will likely not be worked down completely, which could potentially limit the upside potential of the market. One of the key driving forces behind the Wheat market's rally has been fund buying. This past week was no different, with index funds adding more than 7,000 contracts last week. In total, non-commercial reportable positions totaled over 22,000 contracts long. With lack of opportunities in other markets, traders could possibly maintain a substantial long position for the foreseeable future. This may support the market, despite fears that prices may be higher than they should be

Trading Ideas

The Wheat market has extremely strong fundamentals at the moment, but prices have also moved quickly higher. It remains to be seen if speculative interest in the Wheat market can sustain itself. Some traders may wish to use the chart as guidance going forward. A breakout above 800 could be seen as significant, as could a downward breakout below 650.

Technicals

Turning to the chart, we see the December Wheat contract trending higher since the market came back to the 655 level in mid-August. Prices have initially been unable to cross through the 750 mark, despite testing the level several times over the past week. This and relative highs near the 800 level could be barriers for the December contract. On the Downside, the 650 mark could be a key level for Wheat. The 20-day momentum indicator is showing bullish divergence from the 14 day RSI, which can be seen as bullish in the near-term.

Rob Kurzatkowski, Trading Specialist

Fundamentals

Currency bulls are heading to the "land down under", as the Australian Dollar has rallied to its highest levels since April vs. the US Dollar on signs of improving economic data, as well as an end to the uncertainty surrounding the formation of a new collation government. Prime Minister Julia Gillard was able to finally put together a collation government, after recent election results left neither Ms. Gillard's Labor Party nor the opposition Liberal /National Coalition led by Mr. Tony Abbott enough seats in the House of Representatives to form a majority government. With the political situation settled, traders have once again focused on the Aussie Dollar's status as a "commodity currency", especially with solid growth coming out of China, who is one of Australia's major trading partners. Growth and employment in Australia have been robust lately, especially when compared with the US and Europe. This solid growth has allowed the Reserve Bank of Australia (RBA) to increase short-term interest rates to 4.5%, which is well above that of the US, where interest rates are expected to remain in a range between 0.25 and 0.50 percent for the foreseeable future. This wide rate differential has led many large speculators to enter into so called "carry-trades", by borrowing from low yielding currencies such as the Japanese Yen and the US Dollar and using the funds to buy the Australian Dollar. As long as the interest rate differential continues to widen and economic conditions continue to show signs of improvement, the "risk-on" mentally of speculators may continue to support the Australian Dollar as investment funds continue to move into the" non-US Dollars", including the Canadian, New Zealand, and Australian Dollars.

Trading Ideas

With the Australian Dollar currently in bullish hands, traders looking for a continued up-move in the "Aussie" might wish to consider investigating trading strategies which utilize options on Australian Dollar futures. Technical traders will note that there appears to be solid support on the daily charts near the 0.8750 area. More aggressive traders may wish to explore selling puts on the "Aussie", with a strike price below chart support near 0.8750. An example of such a trade would be selling the November Australian Dollar 0.8700 puts. With the December futures trading at 0.9235 as of this writing, the November 0.8700 puts could be sold for about 0.0041, or $410 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if the December futures are trading above 0.8750 at option expiration in November. Given the risk involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such exit strategy might be to buy back the option before expiration should the option premium trade at three times the price originally received when the option was initially sold.

Technicals

Looking at the daily continuation chart for Australian Dollar futures, we notice prices attempting to test the April high at 0.9330. Prices are now well above both the short-term 20-day moving average and the longer-term 200-day moving average, triggering both long and short- term system buy-signals. However, the up-move may begin to run into some difficulties near the recent highs, as the 14-day RSI is starting to show a bearish divergence. Volume has also been fairly lackluster during the past several sessions, which might be a sign that fresh buying is starting to wane. Major resistance is seen at the April 12th highs of 0.9330, with support found at the 20-day moving average, currently near the 0.9025 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Sugar futures are lower for the second consecutive session after testing the 25.00 level. The price of the sweetener has been on the rise since bottoming out in May, on concerns that the Brazilian and Indian crops may fall short of demand. Dry conditions in Brazil were of particular concern for traders, as it could have adversely affected next year's crop size. Rains are forecast for the better part of next week, which has eased concerns. Overall, the market may remain undersupplied, and importers could stockpile the sweetener given the global shortfalls and the uncertain outlook. India and Pakistan have had their own dose of bad weather, and the extent of damage from recent flooding remains unknown. The Sugar market seems to be overbought at the moment, in light of more favorable growing conditions in Brazil. This could trigger some profit-taking, as traders reassess their situation.

Trading Ideas

The supply and demand fundamentals for the Sugar market have not changed drastically, but rather, traders' future expectations may have shifted. The market had a gloomy outlook for the Brazilian crop, which has improved. Technically, we see the market possibly ripe for a correction, but the scope is unknown. Some traders may wish to play the Sugar market extremely cautiously at the moment, for example by entering into a bear put spread, or by protecting short positions with long calls

Technicals

Turning to the chart, we see a reversal pattern surface on the October Sugar chart. The candle on both Friday and Monday are gravestone dojis, with yesterday's being the more significant of the two. While this can be seen as a reversal, whether it is a long-term or short-term reversal remains to be seen. Support comes in near the 22.75 level, and the market could find additional price support at 21.04, the 38.2% Fibonacci retracement. The RSI is still overbought, which could aid selling pressure in the near-term.

Robert Kurzatkowski, Trading Specialist

Fundamentals

There is a lot of beef on the buy side of speculators' trading cards lately, as commodity funds have moved to a record net-long position in Live Cattle futures. Many of the "bullish" views in Cattle prices comes from the over $10 per hundredweight rally seen in the December futures since mid-June, which sent prices over psychological resistance at 100.00 during the past several weeks. However, recent fundamentals may cause these funds to cut-back on the protein. The most recent Cattle on Feed (CoF) report showed that high prices being received for Cattle caused an increase in placements on feedlots last month, which is up over 7%, month-to-month, which should likely lead to an increase in the supply of market-ready cattle later this year. However, the run-up in cash Cattle prices has hurt processor margins, with many packers operating at loss. A look at the most recent Commitment of Traders report shows large non-commercial traders holding a net-long position of a whopping 144,200 contracts as of September 14th. This record long position was calculated prior to this past Friday's CoF report and the resulting sell-off on the rather bearish placements figure. It will be interesting to see the extent of long liquidation selling that may have occurred after the bearish report and whether the funds' long position is still near record levels. This huge long position could leave the market vulnerable to a steep price correction should the market fail to take-out last week's high of 102.650 in the very near future.

Trading Ideas

Traders looking for a price correction in December Cattle, or even those who are long Cattle futures but who wish to hedge against any price correction -- especially given the huge long position being heal by speculators -- may wish to investigate the purchase of a put in Cattle futures options. An example of such a trade would be buying the December Live Cattle 98 puts. With the December futures trading at 100.950 as of this writing, the 98 puts could be purchased for about 1.60 points, or $640 per option, not including commissions. The premium paid would be the maximum potential loss on the purchase, with the option profitable at expiration in December should the December futures be trading below 96.400.

Technicals

Looking at the daily chart for December Live Cattle, we notice a potential reversal on last Thursday's failure after reaching new contract highs. We also have a bearish divergence forming in the 14-day RSI, which may lead further credence that at least a near-term top may be in place. Prices are now hovering near the 20-day moving average, with a strong close below this short-term indicator potentially triggering a "sell" signal for short-term momentum trading systems. The 98.700 area looks to be strong near-term support in December Cattle, with the contract high of 102.650 acting as resistance.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

The bull market in Gold futures got a major boost yesterday afternoon, after the Federal Reserve policy making committee left open the possibility of additional easing to help spur economic growth. Traders reacted to this statement by selling the U.S. Dollar, which helped to support commodities -- especially Gold. In addition, some investors and traders are looking to diversify away from specific country "currency" risk and move some assets into Gold, which has become a sort of "reserve" currency. The stage now seems to be set for a test at the psychologically important $1300 level. However, there is great debate as to whether fresh buying will emerge at this new historic high for Gold, or if traders will begin to lighten-up their long positions once this key milestone price level is hit. The most recent Commitment of Traders report shows both large and small speculative accounts holding a net-long position totaling 321,828 contracts as of September 14th. This is approaching the record 328,344 net long contracts held by speculators back in October of 2009. This total does not include very recent activity, and with the Gold market's run to new highs, it would not be a surprise if we have reached a new record long position in this week's report. Although the market does appear to be overbought and a profit-taking price correction would not come as a surprise, it would be difficult, from an historic perspective, to call an ultimate top in Gold until prices move parabolic and bullish sentiment moves to an extreme level.

Trading Ideas

With Gold prices trading near a potentially major resistance point, the possibilities of a significant price move or increased volatility is heightened. Traders who expect Gold to make a large move but who are uncertain of the direction of the move may want to explore the purchase of a strangle in Gold futures options. For example, with December Gold trading at 1292.30 as of this writing, one could purchase the November Gold 1310 calls and also purchase the November Gold 1280 puts for about 24.60 points, or $2,460 per strangle, not including commissions. The premium paid would be the maximum potential risk on the trade, with this strangle profitable at option expiration in late October should December Gold be trading above 1334.60 or below 1255.40.

Technicals

To get an historical perspective on the previous great bull market in Gold, we are looking at a continuation chart for lead month Gold futures going back to the 70's and early 80's. Notice Gold's parabolic rise in 1979 to early 1980, as prices went up over 4-fold and ended with a spike top in January of 1980. Although the current Gold bull market has well surpassed the highs made in 1980, the current price rise has been relatively orderly, with many periods of price consolidation before making new highs. Current resistance is seen at the 1300.00 area, and if this key level is taken-out, some analysts look for a potential run to the 1500.00 area. Longer-term support is seen at the 200-day moving average currently near the 1170.00 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Natural Gas futures have been mired in an over two-year-long bear market, as it appears that this commodity has been impacted by lower industrial demand tied to the economic slowdown as well as increased production out of shale rock formations. This double-whammy has sent prices down over three-fold since highs were made back in July of 2008. However, there are some signs that prices may be ready to at least stabilize just above the 4.000 area. Recent weather forecasts calling for above normal temperatures in the eastern half of the U.S. have lent some support to cash prices, as warmer weather can contribute to increased Natural Gas demand from electric utilities to meet expected increases in cooling demand. In addition, the month of September is traditionally the peak of the Atlantic storm season, when many traders normally try to build a "risk premium" into Natural Gas prices, should a tropical storm threaten Gas production in the Gulf of Mexico. Prices got a bit of a boost on Thursday, as the Energy Information Administration reported that Natural Gas injections totaled 73 billion cubic feet (bcf) last week, which is slightly below the 78 bcf most analysts were anticipating. Although prices have stabilized, large speculative accounts continue to hold a very large net-short position, with the most recent Commitment of Traders report showing large non-commercial traders holding a net-short position of 118,355 contracts as of September 14th. Although this large net-short position has been trimmed a bit, it appears that there is little fresh buying occurring, and that any recent price gains have been due to short-covering. With current Gas inventories over 6% above the 5-year average, unless we see Gas drillers curtail production or real growth in industrial demand, it may be difficult for prices to sustain a rally and finally put an end to this historic bear market.

Trading Ideas

Traders looking for Natural Gas futures prices to begin stabilizing but who don't expect a major price move upward may wish to explore trading strategies that would take advantage of steady or slightly rising prices. One such trading strategy would be to sell puts using Natural Gas futures options. An example of this trade would be selling the November Natural Gas 3.500 puts. With November Gas trading at 4.158 as of this writing, the 3.500 puts could be sold for about0.030, or $300 per option, not including commissions. The premium received would be the maximum potential profit on the trade and would be realized at option expiration in late October should the November futures be trading above 3.500. Given the potential risk involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such strategy might be to buy back the short options before expiration should the November futures trade below recent lows at 3.971.

Technicals

Looking at the daily chart for November Natural Gas, we notice prices hovering near the 20-day moving average. It appears that several attempts by Gas bears to send prices below 4.000 have been stymied and might be behind the small bouts of short-covering buying seen by weak bears. There is a bullish divergence forming in the 14-day RSI, which may be a sign that downward momentum is beginning to wane. Now that prices seem to be range bound, technical traders would likely want to see a close above recent highs at 4.298 to become short-term bullish, and a close below support at 3.971 to lead towards a bearish stance.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Not just the lyrics to a children's nursery rhyme, but the call from sugar cane growers in India, after flooding rains have hit the key sugar production state of Uttar Pradesh. This has put into question the size of the Indian crop, which was expected to rebound after two consecutive years of below average production. It was the lower production out of India the past couple of years that contributed to the world sugar supply deficit which caused sugar prices to rise above 30 cents per pound for the first time since 1981 last year. However, prospects for increased sugar production out of India and Brazil in 2010 sent sugar price tumbling over 50% this spring as analysts expected a return to a world sugar surplus for the 2010-11 season. Brazilian sugar producers have faced the opposite problem as dry growing conditions have put a damper on production estimates, although some of the sugar production areas have recently received some much needed rainfall. Currently, world sugar cane production is expected to be around 325 million tons, up nearly 17% from last year. If true and demand estimates come in as expected, we should see a world sugar surplus of around 5 million tons. However, should weather conditions not improve in these two leading sugar cane producing countries, we may not see the surplus materialize and a production deficit for a third year in a row could send sugar prices to another test of the 30 cent level in 2011.

Trading Ideas

Those traders bullish of sugar prices but wish to limit their potential risk especially in a "weather" market, where prices and rice or fall sharply should weather forecasts change, may wish to investigate trading strategies using sugar futures options. One such trading strategy is the purchase of a bull call spread. For example, a trader can purchase the March sugar 25.00 calls and sell the March sugar 30.00 calls for about 1.25 points or $1,400 per spread not including commissions. The premium received is the maximum potential risk on the trade, with a potential profit of $5,600 minus the premium paid, which would be realized at option expiration in February should March sugar be trading above 30.00.

Technicals

Looking at the daily chart for March sugar, we notice prices surging to contract highs on Friday, as bullish weather fundamentals as well as a surge in commodity prices in general have sent bullish traders rushing into the market, especially once key resistance at 24.00 was taken out. This up move out of a nearly 2 week long consolidation phase should give sugar bulls some confidence as we now find a strong area of support all the way down to the 22.30 area. Sugar bears can take some solace in an overbought reading in the 14-day RSI as well as a potential bearish divergence forming in this momentum indicator. The next resistance area is seen at the psychologically important 25.00 area. Support is seen at the lows of the recent consolidation at 22.33.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

The bullish stampede in Cotton futures is hitting all strides, as prices have soared above the 100.00 level once again. News that China has released some Cotton from its domestic reserves has sparked fresh buying, as traders interpreted this as a sign that supplies are tight. Chinese Cotton production is expected to decline this season, which should help to stimulate cotton imports once again as domestic demand is expected to increase despite near record high prices. The recent weakness in the U.S. Dollar coupled with increased Chinese demand should help boost U.S. Cotton exports. Many traders will be keenly watching weather forecasts for the Cotton growing areas in the Southeast and Texas as the crop moves towards harvest. Any forecasts for heavy rains would be deemed bullish, especially if it causes lengthy delays to the harvest. Given the relatively high prices seen in the grain futures this year, some analysts expect Cotton prices to remain at these lofty levels, as Cotton fights for acreage from both corn and soybeans. Speculators, both large and small, are net-long Cotton futures, with the most recent Commitment of Traders report showing non-commercial traders net long 90,471 contracts as of September 21st. Although this is a relatively large combined net-long position, it is well below the record 132.098 contracts seen in the commodity bull market of 2008. This may give bulls the room for a possible test of the 110.00 area last seen in the Cotton bull market of 1995.

Trading Ideas

Cotton prices above 100.00 are a rarity last seen in 1995. Given these lofty price levels, Cotton prices could become volatile, especially if we test the 1995 highs. Some traders who are expecting an increase in Cotton volatility may wish to explore the purchase of a strangle in Cotton options. For example, with December Cotton trading at 102.42 as of this writing, the December 110/95 strangle could be purchased for about 4.40 points, or $2,200 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade. The trade is profitable at option expiration in November should December Cotton be trading above 114.40 or below 90.60.

Technicals

Looking at the daily chart for December Cotton, we notice the orderly bullish move has reached an end, as heightened volatility entered the market when prices moved above 100.00. In the last few sessions alone, prices have traded in a nearly 7-cent range, as some weak longs exited their positions only to be met with new buying by trend-following systems traders. Bulls would want to see last week's contract high of 103.34 taken-out on a closing basis soon, or we may see renewed selling, especially by commercial hedgers, if it appears that prices may have peaked at least in the near-term. The 14-day RSI remains in overbought territory, but well off its recent highs, with a current reading of 77.43. 105.00 is seen as the next major resistance point for December Cotton, with support seen at last week's low of 96.53.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

The petroleum product futures, i.e. Heating Oil and Gasoline, have been mired in a month-long consolidation pattern, as lackluster domestic demand and ample supplies in storage have kept bullish momentum at bay. Bearish traders may be gaining the upper hand in the Gasoline market, as refineries begin the switchover to winter blends of Gasoline, which can be used throughout the U.S., as opposed to "custom" summer blends required by environmental regulations in some of the most populous areas of the country. These summer blends trade at premium prices and can only serve niche markets. U.S. motorists have certainly curtailed their gasoline usage, as the weekly SpendingPulse report shows U.S. gasoline usage falling by 0.3% to 8.978 million barrels per day for the week ending September 24th. This drop in Gasoline demand was reflected in the American Petroleum Institute (API) weekly energy stock report which showed that U.S. Gasoline inventories grew by 3 million barrels last week. Gasoline bulls will note that a French workers' strike affecting key oil shipping ports could curtail Gasoline imports into the U.S. However, given the high supplies of Gasoline in the U.S., it would take a sharp increase in Gasoline demand to eat through the current surplus and exert bullish pressures on prices.

Trading Ideas

With winter approaching the northern hemisphere, energy traders and refiners will likely begin to turn their focus towards the Heating Oil market, which is an important heating fuel in the Northeast. Many traders who are expecting Heating Oil prices to gain relative to those of Gasoline may wish to investigate buying winter month Heating Oil futures and selling winter month Gasoline futures. For example, January Heating Oil is trading at 2.1935, while January Gasoline is trading at 1.9665, or a difference of 0.2270 in favor of Heating Oil as of this writing. Traders who are long Heating Oil and short Gasoline would want to see the difference continue to widen in Heating Oil's favor.

Technicals

Looking at the daily chart for December RBOB Gasoline, we notice prices appear to have been caught within a 30-cent trading range since the middle of May. The moving averages paint a mixed picture, with prices currently above the short-term 20-day moving average, but still well below the longer-term 200-day moving average. The 14-day RSI neither favors bears nor bulls, with a current reading of 51.23. Bulls will seemingly gain control should December RBOB trade above the recent highs near the 2.1000 area, and bearish traders will likely flex their muscles should prices close below recent lows just below the 1.8000 area.

Mike Zarembski, Senior Commodity Analyst

Fundamentals

Wheat bulls have been getting a bit nervous lately, as prices have fallen through key support on a change in the weather forecasts, which are now calling for rainfall in the much needed grain growing area of Russia and the Ukraine. This rainfall is too late to benefit this year's crops, but can aid in the planting of the 2011 winter wheat crop. Since contract highs were recorded back in August on concerns about the grain exports out of Russia due to severe drought, Wheat prices have fallen over 20%, as high prices have curtailed Wheat exports because buyers are starting to hold back on purchases awaiting lower prices, after a buying frenzy hit the cash market when the Russian export ban was announced in late summer. Many traders also expect India to re-enter the Wheat export market, especially if it appears that world Wheat supplies will rebound next year. Speculators have started move to a short position in Chicago soft red Wheat futures, with the most recent Commitment of Traders report showing combined large and small speculators holding a net-short position of 8,945 contracts as of September 21st. This was before this week's steep sell-off, and it would come as little surprise to see large non-commercial traders finally becoming net-short Wheat for the first time in several weeks. Wheat bulls will counter that Wheat growing areas in the U.S. could use more moisture to get the crop off to a good start, especially in the western parts of the Great Plains, but so far U.S. Wheat plantings are only slightly behind average, and any forecasts for moisture could spur additional selling as traders look for increased Wheat production in 2011

Trading Ideas

Although Wheat prices have corrected sharply since August, December Wheat futures remain above the 200-day moving average, which many technical traders look to in order to determine if a market is in a bullish or bearish mode. Traders who are expecting Wheat prices to continue to correct may choose to explore trading strategies using Wheat options that would benefit from lower Wheat prices in the near-term. One such strategy would be the purchase of a calendar spread in Wheat futures options. An example of this trade would be to buy the December Wheat 700 calls and sell the November Wheat 700 calls. With December futures trading at 673.00 as of this writing, this calendar spread could be purchased for about 13 cents, or $650 per spread. The trade should benefit if Wheat prices hold steady, or even rise or fall moderately before option expiration on the November options in October.

Technicals

Looking at the daily chart for December Wheat, what sticks out is the large descending triangle pattern that formed from the spike highs in August. Although this bearish formation is normally found as a consolidation pattern in a downtrend, it can also be viewed as a reversal formation at the end of a major uptrend! Wednesday's attempted break below the lower leg of the triangle was negated a bit, as prices failed to close below this support point when a late session rally pulled prices back above support at 677.50. Also notice the declining trading volume as prices entered the consolidation pattern. Momentum has turned negative, with the 14-day RSI trending lower, with a current reading of 42.89. A close below support at 663.25 could set-up a test of the 200-day moving average, currently near the 585.00 area. Resistance is seen at the recent highs of 757.00 reached on September 20th.

Mike Zarembski, Senior Commodity Analyst