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October 2010 Archives

October 1, 2010

Euro Continues to Rally Despite Sovereign Debt Concerns

Fundamentals

It must be difficult to stop a trending market once it gets going, as evidenced by the recent strong performance in the Euro -- especially vs. the U.S. Dollar. December Euro futures are trading at their highest levels since mid-April, despite word that Ireland's government debt is expected to soar to 32% of GDP, as the government continues to struggle to support its banks. In addition, Moody's downgraded the credit rating of Spain to AA1 due to the country's weak economic growth outlook. Normally this news would send traders fleeing the Euro, but traders now seem unfazed by the continued economic difficulties being faced by E.U. countries, and they have instead turned their focus back to the potential of a next round of quantitative easing by the Federal Reserve. However, a slew of positive economic data for the U.S. on Thursday may be the catalyst for an end to the Euro's ascent. The biggest favorable Dollar development was the much better than expected survey of Chicago-area purchasing managers, with the ISM's Chicago Business Barometer coming in at a surprising 60.4 reading for September, which is up from 56.7 in August, and significantly above the 56.0 reading many economists were expecting. This strong reading came on top of the slightly better than expected estimate of second quarter GDP, which came in at an annual growth rate of 1.7%. A look at the most recent Commitment of Traders report shows large speculative accounts moving to a net-long position in the Euro as of September 21st. This data could explain the Euro's recent strength, as short-covering buying looks to be the catalyst for the rally. As prices continued to climb, trend-following traders have jumped on the bullish Euro bandwagon, adding fresh buying despite rather troubling fundamentals.

Trading Ideas

Traders who are anticipating the Euro rally will come to an end may wish to explore selling calls in the Eurocurrency options with strike prices above chart support at the 1.3850 area. An example of such a trade would be selling the November Euro 1.4300 calls. With the December futures trading at 1.3615 as of this writing, the November 1.4300 calls could be sold for about 0.0030, or $375 per contract, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in November should the December futures be trading below 1.4300. Given the potential risk involved in selling naked options, traders should have an exit strategy in place if the trade moves against them. An example of such an exit strategy could be to buy back the short options before expiration if the December Euro futures close above chart resistance at 1.3819.

Technicals

Looking at the daily continuation chart for the Eurocurrency futures, we notice that the value of the Euro has corrected over 50% from the yearly high of 1.5142 to the low of 1.1874. Prices are now above both the 20 and 200-day moving averages, and further gains could cause the 20-day MA to cross above the 200-day MA, which could be interpreted as a bullish technical signal. The 14-day RSI has moved into overbought territory with a current reading of 75.43. The March 17th high of 1.3819 looks to be the next resistance point for the Euro, with support seen at the 200-day moving average currently near the 1.3220 area.

Mike Zarembski, Senior Commodity Analyst

October 4, 2010

Cocoa's Plunge Gave Traders a Wild Ride!

Fundamentals

Last Thursday was a day few Cocoa traders will ever forget, as a mid-day high volume sell-off took cocoa prices down over 7% in one minute before prices recovered. It was estimated that nearly 2000 contracts traded in the one-minute sell-off, triggering stops along the way. Although the market recovered quickly after the plunge, one cannot help but wonder if this was not a signal calling for an end to the recent up-move. Fundamentally, the news looks a bit supportive for Cocoa prices, as heavy rains have affected the flowering of Cocoa trees in Nigeria, which could lead to lower production of the main crop, which producers began to harvest last month. In addition, wet weather could spark the spread of black pod disease, which if widespread could hamper Cocoa production further. The weaker U.S. Dollar has been a boon to commodity prices in general, and Cocoa is no exception. This weakness may have been the real reason for Cocoa's nearly $300 per ton rally the past couple of weeks. The most recent Commitment of Traders report shows speculators are mixed as to the direction of Cocoa prices, with large speculators net-short Cocoa futures and small speculators holding a small net-long position. The so-called "mini-plunge" in prices may have triggered some further liquidation selling by nervous smaller traders who have decided to leave the Cocoa market entirely, fearing potentially heightened volatility if large orders enter the market.

Trading Ideas

Technical traders will notice strong resistance in December Cocoa near the 2900 area. Those looking for this resistance point to hold in the near-term may wish to explore selling calls in Cocoa options with a strike price above resistance. For example, with December Cocoa trading at 2776 as of this writing, the December Cocoa 3000 calls could be sold for about 30 points, 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 November should December Cocoa futures be trading below 3000. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. An example of such as strategy would to buy back the short option before expiration should the option premium trade at 3 times the initial premium received when the option was sold originally.

Technicals

Looking at the daily chart for December Cocoa, we notice the recent rally from the lows near 2600 was stopped in its tracks during Thursday's sudden plunge. Prices are having difficulty moving back into the lower boundaries of the three-month long consolidation pattern we have seen this past summer. The market is still holding above the 20-day moving average, and a close below this short-term momentum indication could spur further selling and set-up a potential test of the September lows. The 14-day RSI has turned neutral, with a current reading of 48.20. 2900 remains strong resistance in December Cocoa, with support found at the 20-day moving average, currently near the 2750 area.

Mike Zarembski, Senior Commodity Analyst

October 5, 2010

The Forgotten Metal

Fundamentals

With all the focus seemingly on Gold these days, many traders seems to have forgotten that Silver has been one of the largest gainers this year. While not a pure defensive play like Gold, Silver can be seen as a hybrid metal. It has value both as a precious metal and an industrial metal, which makes it more sensitive to economic conditions than Gold. If the global economy is truly on its way back to form, the upside potential for Silver could exceed other precious and industrial metals. Industrial growth in the BRIC nations, namely China and India, could result in an uptick in Silver demand. We are moving closer to the Christmas shopping season, which could fuel demand for electronics and, in turn, Silver. The US Dollar has been on the decline for the past several months, and a rebound in economic activity favors emerging and growth currencies over more established nations, further bolstering commodity demand. The price of Silver has moved straight up for over a month now, so some traders may begin to view the market as overbought.

Trading Ideas

Silver fundamentals have improved and will continue to improve, barring a double-dip recession. The chart does show that prices may be overbought and due for a pullback. For these reasons, some traders may wish to consider entering into a bull call spread, for example, buying the Dec Silver 22.25 call (SIZ022.25C) and selling the 22.50 call (SIZ022.5C) below the current market at 0.085. The spread risks the initial cost of $425 for a potential profit of $825 if the price of the December Silver contract closes above 22.50 at expiration.

Technicals

Turning to the chart, we see the December Silver contract moving higher, without any correction or significant consolidation since late August. This type of parabolic move is oftentimes followed by a sharp pullback in prices. In general, the longer a market moves without a correction or consolidation, the more dramatic the pullback tends to be. Some traders may look for a reversal pattern to form on the chart, especially if the run-up accelerates.

Robert Kurzatkowski, Trading Specialist

October 6, 2010

Are Traders Embarking on a New Gold Rush?

Fundamentals

Another day, another new all-time high for Gold prices, with the most active December futures breaching the $1340.00 level for the first time in history, as traders and investors shun paper currencies and turn to Gold as a store of value. The latest fuel to fan the bullish Gold fire came from the Bank of Japan (BOJ), who moved its key interest rate to near 0% in hopes of weakening the Yen. In addition, the Reserve Bank of Australia (RBA) did not hike interest rates as expected, which put pressure on the Aussie Dollar and sparked further investor interest in Gold. With little hope of a quick resolution to the European debt crisis and the potential for a second round of quantitative easing by the Federal Reserve, it should come as little surprise that investors are getting nervous holding currencies, as it appears that governments are willing to take measures to weaken their currencies in hopes of remaining competitive in the export markets, erring on the side of rising inflation in hopes of stimulating the global economy. It is this inflation fear that is keeping Gold in the spotlight, and which could possibly trigger a return of the “commodity” bull market like we saw back in 2008, before the housing market collapse.

Trading Ideas

Although it might be difficult to go long Gold while it is trading at all-time highs, the trend remains solidly in favor of the bulls. Traders looking to go long Gold but who wish to limit their risk should prices begin to correct may wish to explore the purchase of a bull call spread in Gold futures options. An example of such a trade would be buying the December Gold 1350 calls and selling the December Gold 1400 calls. With the December futures trading at 1341.50 as of this writing, this spread could be purchased for 16.00 points, or $1,600 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential profit of $5,000 minus the premium paid which would be realized at option expiration in November should December Gold be trading above 1400.00.

Technicals

If we look at the daily chart for December Gold, we notice that prices have risen over 30% year-on-year, with the market moving further away from the important moving averages. The sharp price rise has sent the 14-day RSI well into overbought territory, with a current reading of 84.80. Although the market does appear overbought and a “correction’ of $100 or more would not be out of the question, it would take a move of just over $200 to even set-up a test of the 200-day moving average that many traders look at to determine if a market is bullish or bearish. The precious metals have a history of making “parabolic” price moves before signaling an end of a major trend, and although Gold is trading at all-time highs, the up-move has been rather orderly by historic standards. 1350.00 is the next resistance point for December Gold, with support seen at the 20-day moving average near the 1285.00 area.

Mike Zarembski, Senior Commodity Analyst

October 7, 2010

Can Crude Finally Break Through?

Fundamentals

Crude Oil futures finished higher yesterday, despite giving back most of its early gains. The EIA report showed a build of 3.1 million barrels of Crude Oil, which was much higher than many had expected. Petroleum products, however, did have drawdowns, neutralizing the bearish Oil number. This is an employment report week, with ADP Employment, Initial Claims and Nonfarm Payrolls all being released this week, which could make trading through the end of the week choppy. Yesterday’s ADP number showed a decline of 39,000 jobs last month versus analyst estimates of an increase of 18,000. Friday’s Nonfarm payroll number is expected to be flat. Disappointing employment data could put a damper on the Crude Oil rally in the near-term, but could provide support over the longer term. Central banks have once again taken steps to increase liquidity. The most recent FOMC policy statement indicated that the Fed was ready to take steps to support the economy. The Bank of Japan surprised many traders by cutting interest rates and stepping up its purchases of Japanese government debt. Aggressive central bank actions could stabilize economic conditions in industrialized nations and cause major currencies to depreciate in value relative to higher yielding currencies from commodity exporting nations, which could bode well for commodities. While the aforementioned factors can be seen as bullish for Crude Oil, the sharp jump in prices, rising stockpiles and economic uncertainty could weigh on the market.

Trading Ideas

Crude Oil fundamentals remain mixed. While inventory levels and economic uncertainty have held the market back for months, the prospect of further declines in the exchange rate of the dollar and swift central bank action could result in traders flocking toward hard assets. The chart shows Oil trading near resistance near 83.50, so this could be make or break time for the market. For this reason, traders may wish to go long a November Mini Crude Oil futures contract on a solid close above 83.50 with a stop at 81.50 and an upside target of 87.00. The trade risks roughly $1,000 for a potential profit of $1,750.

Technicals

We see the November Crude oil contract trading up near resistance at 83.50, which can be seen as a critical level in the near-term. Failure to break out above this level could result in prices falling back into the wide trading range of 72.50-83.50, while a close above this level could signal a new breakout. The RSI has reached overbought levels after the market has moved up over 8.00 in the past two weeks, which could cause some of the buying pressure to abate. The upward crossover of the 50 day and 100 day moving averages is a positive sign, but could be seen as less significant because the averages have been relatively flat the past few months.

Rob Kurzatkowski, Senior Commodity Analyst

October 8, 2010

Speculators Shun Bull Market in Bonds

Fundamentals

Bond market participants are taking a breather, with prices near contract highs, as traders prepare for the highly anticipated non-farm payrolls report for September which is scheduled for release Friday morning at 7:30 am Chicago time. Traders have received mixed data as to the state of the jobs market in the U.S., with the ADP/Macroeconomic Advisers National Employment Report showing that private-sector employment fell by 39,000 jobs in September, which is well below the +20,000 jobs most analysts were expecting. However, Thursday’s release of the weekly U.S. jobless claims figures was more upbeat for employment, with new claims for jobless benefits falling by 11,000 to 445,000 for the week ending October 2nd. This was the lowest total in nearly 3 months, and set a positive tone for Friday’s report. Current market consensus is for a moderate jobs loss last month, with the average estimate near the -10,000 level. The unemployment rate is expected to move up slightly to 9.7%, vs. 9.6% reported for August. Any major deviation for the consensus in tomorrow’s report has the potential to trigger a sharp move in bond prices. Outside of the employment report, bond bulls seem to have an edge in the fundamentals, with continued talk of a second round of quantitative easing by the Fed, keeping a bid in the treasury market. In addition, the continued rise in the value of the Japanese Yen has traders on the lookout for another round of FX intervention by the Bank of Japan (BOJ) to weaken the Yen by entering the forex market to sell Yen and buy U.S. Dollars. The dollars that would be obtained by the BOJ may be used to purchase U.S. treasuries, adding a further bid to the market. A look at the most recent Commitment of Traders report shows large non-commercial traders holding a minuscule net-long position of only 247 contracts as of September 28th. This information can be interpreted that the bond rally may have some room to move higher, as the large speculators have not yet embraced the long side of the market and any run to new highs could spur further buying as momentum trading systems enter the market.

Trading Ideas

As I talked about in Wednesday’s Xpresso, buying a market near its contract highs can be difficult to do, but in a strong trending market, the difficult trade is often the best trade. Some traders looking to take a bullish position in 30-yr bond futures but who wish to limit the potential risk may want to explore the purchase of a bull call spread in bond futures options. For example, with December bond futures trading at 134-21 as of this writing, one could buy the December 135 calls and sell the December 140 calls for about 1-44, or $1,687.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5000 minus the premium paid realized at option expiration in late November should December bonds be trading above 140-00.

Technicals

Looking at the daily continuation chart for 30-year bond futures, we notice prices have rallied over 20 full points since the yearly lows were made back in April. Until the past couple of months, the uptrend has been rather orderly, with increased volatility occurring only after the recent highs were made in late August and early September around the 136-16 area. If we draw a trendline from the April lows, we note that the front-month futures would need to trade below 131-00 to put a serious dent in the bull trend. Below this level, we find strong support at the September 13th lows of 129-05. Major resistance is found at the August 31st highs of 136-20, and should this resistance level be taken out, a potential test of the 2008 highs above 141-00 would not be out of the question.

Mike Zarembski, Senior Commodity Analyst

October 11, 2010

Where Did the Corn Go?

Fundamentals

"Shocking!" That is the term used by some grain traders just after the release of the USDA's yield estimate for this year's U.S. Corn crop. The USDA projected 155.8 bushels per acre yield, which is well below the 162.5 bushels per acre projected in the September crop report. The much lower than expected yields forecast forced the USDA to lower the size of the U.S. Corn crop to 12.664 billion bushels, or nearly 500 million bushels lower than the previous estimate! Even though this looks to be the 3rd largest U.S. Corn crop on record, demand is so strong for Corn -- whether for animal feed or for ethanol production -- that the U.S. ending stocks totals for 2010-11 are estimated to fall to just over 900 million bushels, or nearly half of what we had for the 2009-10 season. Sharply reduced yields in the major Corn producing states of Illinois, Iowa, and Indiana were behind the dramatic drop in the crop size and set up the prospects for higher grain prices to help ration demand. In addition, tight supplies of Corn could influence the government mandate on the amount of ethanol that can be blended into gasoline. There has been discussion that the limit could be raised to 15% from 10%, but no decision has been reached as of yet. Traders took Corn futures up the 30-cent limit all the way out to the July 2012 contract on Thursday after the report was released, and many analysts look for hedge selling to dry-up, as producers may be willing to hold Corn in storage in anticipation of higher prices.

Trading Ideas

Given the expectation of tight Corn stocks this year, we may start to see old crop/ new crop Corn spreads move in favor of the old crop, given the potential for rationing this year's supplies -- especially if yield estimates continue to decline. An example of a trade which might take advantage of this situation would be to buy March 2011 Corn (this year's crop) and sell December 2011 Corn (next year's crop). Currently, March 2011 Corn is trading at 537.50 and December 2011 Corn is trading at 511.25 -- or a difference of 26.25 cents premium to the March. Traders who may choose to be long this spread would want to see this differential continue to widen in March's favor. Traders should remember that spread trading may not necessarily be less risky than having an outright position, and they should have an exit strategy in place for possible protection if the trade moves against them.

Technicals

Looking at the daily chart for December Corn, we notice prices rebounding sharply from steep losses last week, as the USDA crop production report negated any bearish bias from the 300 million bushels of Corn the USDA "found" in the quarterly grain stocks report issued at the end of September. The limit-up move on Friday has prices near recent highs, which possibly will be taken-out handily once the session resumes on Sunday night. Prices are once again above the 20-day moving average, and the 14-day RSI looks strong, with a current reading of 65.82. We have to go back to the fall of 2008 to find the next resistance area for December Corn, which looks to be near the 550.00 area. Support is found at the October 4th low of 454.25.

Mike Zarembski, Senior Commodity Analyst

October 12, 2010

Are Beans Overextended?

Fundamentals

Soybean futures gave back much of yesterday’s gains, as many traders have become somewhat skeptical of the recent surge in prices. The price of the oilseed had risen to 16-month highs after last Friday’s USDA report indicated that ending stocks for the 2010/2011 crop year could fall well short of previous estimates. Bean output is now pegged at 3.408 billion bushels, versus last month’s estimate of 3.483 billion bushels. Also, yields were expected to rise, but instead fell to 44.4 bushels per acre, which is down from last month’s estimate of 44.7 bushels per acre. While these numbers may be considered bullish, they are not staggering by any means. Much of the sharp rise in prices on Friday and Monday could be seen as spillover from the Corn market, which many considered to have a much more bullish report than Beans. The current supply of Soybeans is likely more than ample, but many traders are betting on demand from China to increase, stretching inventories down the road. South American production are expected to remain steady, and there are no foreseeable setbacks at the present moment. The soft US Dollar has been a driving force behind the rise in commodity prices and uptick in demand for US grains. Despite all of the bullish forces behind the grain markets, many traders seem to wonder whether the rally may be overdone at the present time.

Trading Ideas

Given the fact that the market appears to be a bit overbought at the moment, fundamentally, many traders may be inclined to have a somewhat negative bias. Technically, it appears as though the market may turn in the short-term, but the chart has not yet confirmed a bearish reversal. For these reasons, some traders may wish to be a bit more cautious and possibly consider entering into a fixed risk trade, such as a bear put spread. Some traders may wish to explore buying the November Bean 1160 puts (SX01160P) and selling the November 1140 puts (SX01140P), for a debit of 8 cents, or $400. The trade risks its initial cost for a potential profit of $600 if the November contract closes below 1140 at expiration.

Technicals

Turning to the chart, we see a gap-up yesterday to form a gravestone doji. This can be seen as a possible indication that the market may reverse in the near-term. Some traders may be looking for a down day today to offer confirmation of a short-term reversal, preferably with a close below the relative high of 1128.50. Despite the two consecutive strong up-days, the RSI has not yet moved into overbought territory.

Rob Kurzatkowski, Senior Commodity Analyst

October 13, 2010

Speculators Ignore Intervention as the Yen Keeps Rallying!

Fundamentals

Not even FX intervention by the Bank of Japan (BOJ) last month could ultimately stop the strength in the Yen, as the Japanese currency’s value vs. the U.S. Dollar has surpassed the levels that triggered the intervention last month. Although Japanese government officials continue to try to talk the Yen lower, many traders sense that unilateral intervention by the BOJ will ultimately be unsuccessful in the long run, and it may take a concerted effort by several of the major central banks to put speculators on notice. This cooperative intervention is currently unlikely, as few nations are willing to help Japan by strengthening their own currencies vs. the Yen, as this could endanger their exports by making goods denominated in their home more expensive for foreign buyers -- especially given the rhetoric regarding China’s role as a “currency manipulator” to help its country’s export driven economy. The Yen is also “benefitting” from so-called “risk aversion” trades, especially with the market’s belief that the Federal Reserve will eventually commence with round two of quantitative easing. This is keeping a bid in the Yen, as traders unwind so called “carry-trades” in which speculators would buy higher yielding currencies and sell lower yielding currencies such as the Yen. Although Japan remains mired in a deflationary spiral that has lasted over a decade and interest rates are as close to zero as possible, some speculators may try to push the Yen to all-time highs, below 80.00 Yen per Dollar, to test the mettle of the BOJ.

Trading Ideas

The continued rise of the Japanese Yen has befuddled many fundamental traders who look at the country’s dire demographics and huge debt loads and sell the Yen futures only to be stopped out of their trade as we move to recent highs. There is major resistance in Yen futures around the 1995 highs near the 1.2500 area that could be difficult to overcome at least initially. Some traders looking for this resistance point to hold might wish to explore selling Yen calls with a strike price above 1.2500. For example, with the December Yen trading at 1.2222 as of this writing, the November Yen 1.2800 calls could be sold for about 0.0023, or $287.50 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized if the December Yen futures are trading below 1.2800 at option expiration during the first week of November -- less than 4 weeks from today. Given the risk involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such exit strategy would be to buy back the short calls before expiration should the December Yen futures close above resistance at 1.2500.

Technicals

Looking at the daily continuation chart for the Japanese Yen futures, we notice the market in a rather well-formed uptrend since the recent lows were made back in May of this year. Since the BOJ intervention, which occurred about one month ago, the Yen futures have rallied over 500 ticks, as Yen bulls took advantage of the intervention to go long the Yen at “artificially” low levels. The 14-day RSI has moved into overbought territory, with a current reading of 72.11. Near-term resistance is seen at Monday’s contract highs of 1.2287, with major resistance not found until the 1.2500 area. Near-term support is seen at the 20-day moving average near the 1.1935 area, with major support seen at the uptrend line formed from the May lows near the 1.1700 area.

Mike Zarembski, Senior Commodity Analyst

October 14, 2010

Dollar Freefall Continues

Funndamentals

The greenback continues to get battered by traders concerned that the Fed may be injecting too much liquidity into the economy. Many traders also point to more reassuring economic data and strong equity markets as reasons to be short the US Dollar. Commodity prices continue to rise, as demand for Dollar hedges increases. The surge in Gold prices is a prime example of a market that seems to be overbought, yet prices continue to rise due to a seemingly endless flow of new investment. Currencies for developed nations have taken a back seat to growth and commodity based economies, which also happen to have higher yields. When the Fed meets at the beginning of next month, it is possible that the bank may soften its language and move away from the term “quantitative easing,” as the phrase has negative connotations with many traders. Wording aside, the central bank is likely to continue its policy of aggressively buying treasuries and other assets. The question many traders have to ask themselves is when the USD will finally find a bottom. The currency is not likely to find a friend in the form of the US government, as spending continues to balloon out of control. Instead, Dollar bulls could benefit from deteriorating economic conditions, where commodity demand would suffer and traders would use the greenback as a defensive play. So far, economic indicators have improved, which makes this scenario a low probability. A weak Dollar is a major concern for emerging markets, as a strengthening of local currencies could make demand for exports suffer. Several nations have taken steps to limit outside investment to halt the sharp rise in their local currency. Whether this will ultimately have an effect on exchange rates remains to be seen.

Trading Ideas

The Dollar Index seems to have no supporting forces aiding the market out there. The seemingly endless supply of liquidity provided by the Fed has aided the economy at a high cost -- most notably a devaluation of the US currency. The chart does not show the DXZ10 finding any traction. It is difficult to fight the trend and predict if and when the market may bounce. For this reason, some traders may wish to consider buying a put option with limited risk – for example, purchasing a Dec Dollar Index 75 put for 0.45, or $450, with an objective of 1.00, or $1,000.

Technicals

Turning to the chart, we see prices dropping almost vertically and falling below support near the 77.50. The next significant area of support comes in at 75.00, which can be seen as critical. A violation of 75.00 suggests that prices will once again test all-time lows. The RSI indicator is showing that prices are technically oversold, which could offer the market some near-term support.

Rob Kurzatkowski, Senior Commodity Analyst

October 15, 2010

Can’t Keep a Good Bull Market Down

Fundamentals

Despite widespread media attention and a near record long position by speculators, the gold market keeps making new all-time highs. Among the biggest factors being cited for Gold’s continued rise is the lack of investor confidence in currencies. This is especially true given the rhetoric from various governments trying to “jawbone” down the value of their currencies to help exports. The weakness in the US Dollar is especially supportive for Gold, as the sagging value of the “greenback” makes Gold purchases by non-Dollar holders less expensive. However, Gold has also been trading strongly vs. other major currencies, which adds to the bullish sentiment for the yellow metal. Many technical traders believe Gold has become “overbought”, though, and in need of a correction -- especially in light of the fact that Gold has rallied over $200 per ounce since August, with only minimal setbacks along the way. The most recent Commitment of Traders (COT) report shows a combined speculative long position of 323,496 contracts as of October 5th. Since that time, Gold has rallied over $40 per ounce, and we may see a new record long position when the next COT report is issued this afternoon. Traders holding long Gold positions will likely want to see prices break through the important $1,400 level soon, or short-term momentum traders may soon begin to liquidate their long positions which could spark a much needed correction and shake-out weak longs and put the market back into a healthier technical state.

Trading Ideas

Although Gold prices have risen sharply the past few months, we have not seen the heightened volatility that usually accompanies a market that is trading at or near historic highs. This sets up the potential scenario of Gold price volatility increasing sharply in the near future. Some traders expecting a big move in Gold prices or a large increase in volatility may wish to explore the purchase of a strangle in Gold futures options. An example of such a trade would be buying the December Gold 1480 calls and buying the December Gold 1300 puts. With the December futures trading at 1381.10 as of this writing, this strangle could be purchased for about 18.50 points, or $1850 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade. The trade will be profitable at expiration in November if December Gold is trading above 1498.50 or below 1281.50.

Technicals

Looking at the daily chart for December Gold, we notice how few 5% or more up or down moves we have seen during this historic rally. This orderly ascension has been one of the key reasons behind the accumulation of a near-record long position by speculators, as even the corrections have not been severe enough on a percentage basis to shake-out bullish traders -- especially those holding large paper gains. As we have mentioned in the past, the precious metals markets have a history of making parabolic moves before signaling the end of historic bull markets. This has not yet occurred in the recent Gold bull move, and until we see daily moves of over 5% or more it is too early to call a potential market top. Resistance in December Gold is seen at 1400.00, with support found near the 20-day moving average, currently near the 1320.00 area.

Mike Zarembski, Senior Commodity Analyst

October 18, 2010

Does Friday’s Reversal Signal an End to the Cotton Bull Run?

Fundamentals

Cotton traders had to be feeling a bit of whiplash after Friday’s trade saw prices move to historic highs on the opening, only to end the session down the extended 500-point limit, as speculators stampeded to the exits as the U.S. Dollar rallied, causing a sell-off across the commodities sector. Fundamentally, the outlook for stronger Cotton prices remains in force, as crops in both China and Pakistan have been hard hit by excessive rains that have wiped out a significant portion of this season’s Cotton production. Chinese demand has not been curtailed significantly, despite record prices, adding to traders’ fears of possible shortages later in the year. The high prices of Cotton are needed to provide incentives for U.S. producers to expand acreage next season, which will be desperately needed to help meet current demands. However, the expected tight carry-over inventories for both Corn and Soybeans have raised prices in these markets as well, giving producers several options for planting next season. This competition for acreage could force Cotton prices even higher in order to win some of the “swing acreage”. Technically, however, Cotton prices appeared “overbought,” with the widely watched 14-day RSI displaying a potential bearish divergence. Friday’s rally hit a historic high of 119.80 before selling entered the market, triggering a slew of sell-stops resting just below yesterday’s highs of114.87. The selling pressure sent buyers to the sidelines, causing prices to fall by the expanded 500-point limit, which is where prices ended at the close. Although it is still too early to call this a top in the Cotton market, the key reversal seen on Friday definitely dampened the spirits of the bulls, and follow-through long liquidation is likely, as weak longs need to be taken out of the market in order to restore health to the bull market.

Trading Ideas

With a potential key reversal on Friday, it may be very difficult for those holding long positions in Cotton to maintain their holdings should the market be in the midst of a significant price correction, despite continued bullish fundamentals. Those holding long futures positions may wish to explore buying a collar using Cotton options. This strategy involves buying a put and selling a call in the same contract month. For example, with December Cotton trading at 109.87 as of this writing, a trader long December Cotton may choose to purchase a 103 put and sell a 125 call. As of Friday’s close, this trade could have been done for about a 100 points, or $500 per collar. The put leg of the trade can act as a stop should pries continue to plunge. The call option is sold to offset some of the premium paid for the put, but also caps the potential upside gains to the call strike price.

Technicals

Looking at the daily chart for December Cotton, we notice the bearish engulfing pattern formed on Friday. This pattern in Japanese candlestick charting typically signals a continuation of the new bearish trend. This reversal on high volume could spur further selling when long liquidation sell stops are triggered as prices move lower. Although there is some support at the 20-day moving average near the 103.30 area, major chart support is not seen until the 95.00 area. The bull trend will not resume until the Friday highs near 120.00 are taken-out on a closing basis.

Mike Zarembski, Senior Commodity Analyst

October 19, 2010

Bonds and Helicopter Money

Fundamentals

Many Bond traders seem to believe that the Fed will step-up its purchases of Bonds and other assets. The central bank has zero wiggle room with regard to actual interest rate policy, leaving the asset purchase program as one of the only means of injecting liquidity. As a result of these expectations and the fact that not everyone is sold on the sustainability of the current market rally, Bonds have been especially resilient. Given the fact that commodities have rallied so strongly in recent weeks, one would expect the Bond market to give back gains in large chunks. This has not been the case due in large part to the Fed’s aggressive actions. Also, because traders are concerned that the stock market may not be able to sustain its strength, the sharp upward movement in commodity prices has been greeted with some skepticism. Deflation has taken the place of the inflation boogie man, as the FOMC believes deflationary pressures could be much more harmful to economic growth than inflation. The central bank believes that it is cheaper to head-off deflation with helicopter money than fight the battle after deflationary pressure seeps in. Barring a marked improvement in economic conditions, the aforementioned factors could keep Bond prices high and rates low.

Trading Ideas

The Fed’s actions have and may continue to support Bond prices. The bank has created an artificially inflated market, but it may be foolhardy to attempt to pick the top in this market. Technically, the market is flirting with a technically critical level that traders need to be mindful off. Given the fact that the central bank in not likely to change their policy of quantitative easing and may actually become more aggressive, some traders may wish to put on a neutral/bullish strategy, such as a bull put spread. An example of this strategy would be selling the December Bond 129 puts (USZ0129P) and buying the December 127 puts (USZ0127P), for a credit of 0-32, or $500. The maximum loss on this trade would be $2,000, but some traders may wish to cut losses by exiting the trade after three consecutive closes below 130.

Technicals

Turning to the chart, we see the December Bond chart coming back toward support near the 130-00 level. The 130-00 mark can be seen as critical for the Bond market, as a breakdown below this level would confirm a double-top on the daily chart. If confirmed, a double-top could result in prices drifting into the mid to low 120’s. The recent wave of selling pressure has resulted in the RSI bordering on oversold levels, which could be supportive in the near-term. Momentum is showing bullish divergence from both price and RSI, suggesting the market may find near-term strength.

Rob Kurzatkowski, Senior Commodity Analyst

October 20, 2010

Oil Prices Fail Again to Take Out $85 Resistance

Fundamentals

Sometimes it appears that Oil prices are determined to remain range-bound, as the recent test of upside resistance at 85.00 has been unsuccessful. This time it was a surprise move by the Peoples Bank of China (PBOC), which raised the 1-year lending rate by 25 basis points in an attempt to once again put the brakes on the country’s rampant growth. This move sent the U.S. Dollar soaring, adding credence to the “reversal” seen in the value of the greenback this past Friday. A rising Dollar is viewed as a negative to commodity prices, including Oil, and sent the entire complex into the red on Tuesday. Oil bulls were pinning their hopes on strong Oil demand from Asia, and in particular China, in order to help curb the global Oil surplus and keep prices robust. However, the latest interest rate hike by the PBOC is viewed as a message to the market that China is determined to keep growth prospects at sustainable levels, which has the potential to moderately slow the nation’s appetite for commodities. Not all the news is bearish, however, with the labor strike in France at its Fos-Lavera Oil terminal entering its 23rd day. This has disrupted the production at the nation’s refineries, which represent a significant chunk of Europe’s refining capacity. Many traders will also keep an eye on this morning’s release of the weekly EIA energy stocks report. Although Oil and product (Gasoline and Heating Oil) supplies have fallen in recent weeks, Oil inventories in the U.S. are still well above last year’s totals. Some analysts are looking for Oil inventories to have increased by about 2.4 million barrels last week, as U.S. refinery rates have fallen recently due to weak product margins.

Trading Ideas

Once again Oil prices look to remain range-bound, with strong resistance in the December futures near the 85.00 level and strong support just above 70.00. Some trades who are looking for this prices range to continue may wish to explore selling strangles in Crude Oil futures options with the call strike price above resistance at 85.00 and put strike price below support at 70.00. An example of this trade would be selling the December Oil 95.00 calls and selling the December Oil 68.00 puts. With the December futures trading at 81.49 as of this writing, this strangle could be sold for about 0.27 points, or $270 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized should December Oil be trading below 95.00 or above 68.00 at option expiration in mid-November. 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 position prior to expiration should the combined option premium on the options sold trade at 2.5 times the premium received for selling the options originally.

Technicals

Looking at the daily chart for December Crude, we notice the failure once again for the market to close above resistance at 85.00. The 14-day RSI only briefly moved into overbought territory during the recent price run-up before falling sharply to a more neutral reading of 53.37. The failure to move prices through 85.00 also may have prevented the 20-day moving average from crossing above the 200-day moving average -- which would have been a bullish indicator for some technical traders. The next support level is seen at September 14th high of 79.75, with resistance found at the October 7th high of 85.08.

Mike Zarembski, Senior Commodity Analyst

October 21, 2010

Currency War?

Fundamentals

One of the hot button issues the G20 ministers may be discussing at their upcoming meeting is the widespread devaluation of currencies -- a mindset that many believe could lead to a "currency war". The US seems to be talking out of both sides of the mouth on the issue, raising concerns over other nations' attempts to devalue their exchange rate, and at the same time pressing China to bolster the Yuan. Many developing nations are concerned that a drop in the value of the US Dollar could undermine their economies by making exports of their goods more expensive. A joint statement by the G20 could put some pressure on these nations to let their currencies appreciate, which can be seen as Dollar bearish. Due to its inverse relationship with equity prices recently, the US currency could be in for some extremely choppy trading due to earnings season. Barring a major setback in equity prices, the US Dollar could continue to trend lower.

Trading Ideas

Dollar fundamentals may actually worsen after the G20 meeting in Seoul next month. Technically, the December Dollar Index chart is trending lower, without any sign of stabilizing. Some traders may wish to explore the possibility of entering into a short futures contract on a close below 76.88, with a protective stop at 78.50 and a downside target of 75.00.

Technicals

Turning to the chart, we see the December Dollar Index chart continuing to trend lower. The market was unable to gain any momentum after closing above 78.50 on Tuesday, reversing sharply yesterday. This also marked a failure to cross above the 50-day moving average. The RSI indicator has come back from oversold levels and is now neutral.

Rob Kurzatkowski, Senior Commodity Analyst


October 22, 2010

Bulls enjoying some hot coffee

Fundamentals

Your morning cup of java might cost you even more in the coming months, as arabica coffee futures trading on the ICE soared above the $2 per pound level for the first time in 13 years on concerns about the tight supplies of high quality coffee available in the cash market. Coffee production out of Colombia continues to disappoint with 2 consecutive years of below average production. Now some analyst are forecasting even lower coffee output for this leading coffee producer in 2011, which is keeping domestic cash prices high as producers are holding supplies in hopes of even higher prices in the coming months. NY coffee futures also gained some support from the LIFFE robusta coffee futures (OX symbol: LKD) market, on concerns that typhoon Megi, the strongest storm to strike the area in 20 years, will cause damage to the coffee crop in Vietnam:, a leading robusta coffee producer. Current estimates are for Vietnam to produce almost 19.2 million 60-kg bags this coming season, nearly 3 million bags lower than last year. This was before Megi is expected to strike the region and traders are fearful that this powerful storm will further reduce next seasons output. Though a weak U.S. Dollar has been the catalyst behind the rise in prices of many commodities of late, the coffee market also has bullish fundamentals aiding its price move which makes its current run to 13-year highs much more legitimate.

Trading Ideas

The sharp rise in coffee futures has increased the market’s volatility levels, making option premium rather expensive. With the fundamental favoring the bullish cause, more aggressive traders may wish to explore selling out of the money puts in coffee futures options. For example, with near-term support seen around the 180.00 level and the December futures trading at 201.00 as of this writing, one could sell the December 175 puts for about 1.00 points or $375 per option not including commissions. The premium received is the maximum potential profit on the trade, which would be realized if December coffee is trading above 175.00 at option expiration just over 3 weeks away. Given the risk involved in selling naked options, having an exit strategy in place is essential for traders should the position move against them. Once such exit strategy is to buy back the option before expiration should the December futures close below support at 180.00.

Technicals

Looking at the daily chart for December Coffee, we notice the market accelerated to the upside once prices broke out of the “bull flag” formation I have highlighted on the chart. This technical formation is considered a continuation pattern, as prices first consolidate and then resume in the direction of the previous trend. The 14-day RSI has broken the “bearish divergence” that has been seen since June, which adds further momentum to the bullish move. Thursday’s rally was most impressive given the rally in the U.S. Dollar, which would normally act as a bearish influence for commodity prices. The next resistance area for December coffee is seen at Thursday’s highs of 203.50, with near-term support found near the 20 and 50-day moving averages just below 184.00.

Mike Zarembski, Senior Commodity Analyst

October 25, 2010

Bond Rally Takes a Breather Ahead of Mid-term Elections and November FOMC Meeting

Fundamentals

After rising by nearly 20-full points since April of this year, the 30-yr Bond futures rally looks a bit tired lately, and prices seem to have entered a consolidation phase. Many traders have pared back their position in treasuries ahead of the November 2nd mid-term elections here in the U.S., along with the upcoming 2-day Federal Open Market Committee meeting (FOMC) scheduled for November 2nd and 3rd. The FOMC meeting will be highly anticipated by traders looking for comments regarding the possible start of quantitative easing 2 (QE2) and an indication regarding what level of Bond purchases the Fed may undertake. It appears that the futures markets are anticipating a minimum of 500 billion in Bond purchases by the Fed, although there has been some speculation that the Fed will be more "conservative" and stagger the amounts purchased as conditions warrant. With U.S. mid-term elections less than two weeks away, it is possible the Fed may hold off on any announcement of QE2 at the November meeting to avoid the appearance of favoring any one political segment. Any "inaction" may not be favorably viewed by Bond bulls, especially after the market has "priced-in" more aggressive Fed actions. Even if the Fed does announce Bond purchases, the set-up for a "buy the rumor and sell the fact" scenario could emerge and cause further long liquidation selling. It certainly appears that Bond bulls will need "fresh fuel" to keep the Bond rally going, whether it is a larger than expected size of QE2 or even "currency intervention" from the Bank of Japan, which would bring in U.S. dollars and would most likely be funneled into U.S. treasuries. But a catalyst will be needed to break the Bond market out of its current price range.

Trading Ideas

The old saying "the calm before the storm" could apply to the Bond futures market the next couple of weeks, especially after the FOMC meeting and the upcoming elections are over. Some traders looking for a potential price breakout from the current consolidation may wish to explore the purchase of a strangle in Bond futures options. An example of this trade would be buying the December 30-yr Bond 134 calls and buying the December 130 puts. With the December futures trading at 131-20 as of this writing, this strangle could be purchased for about 2-28, or $2,437.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade; with the position profitable at option expiration in late November should the December Bonds be trading above 136-14 or below 127-18.

Technicals

Looking at the daily continuation chart for 30-yr Bond futures, we notice the market quietly moving sideways after the steep run-up at the end of summer. Prices are now below the short-term 20-day moving average, which favors short-term Bond bears, but still above the longer term 100-day moving average, favoring the bullish longer term trend. Momentum has turned down, with the 14-day RSI currently reading 43.97, which is well below the 75.00 plus readings we saw back in August. Support for December Bonds is seen at the 100-day moving average near the 129-26 area, with resistance found at the October 6th high of 135-12.

Mike Zarembski, Senior Commodity Analyst

October 26, 2010

All Eyes on Brazil

Fundamentals

Sugar futures continue to hold near the 28.50 level, as skepticism builds among traders regarding whether the 2010-2011 surpluses will meet current estimates. After two years of deficits, the global supply of the sweetener has been stretched extremely thin. The deficits have also caused both end-users and speculators to become extremely reactionary and plan for the worst. The estimated surplus has already been cut numerous times due to inclement weather conditions in Brazil, Pakistan, Russia, India and Australia. The Brazilian crop is of major concern for many traders, as that nation is the world's largest Sugar producer and has strong domestic demand for the sweetener in ethanol production. The likelihood of the Brazilian harvest being cut short has increased, and will likely continue to increase with the dry weather. On the flipside, solid rains in Brazil could go a long way towards taking some of the pressure off the market. News that the typhoon that hit China did not damage Sugar cane can be seen as slightly bearish. The movement of the US Dollar and the reaffirmation by central banks that they intend to provide economic stimulus have been extremely supportive of commodity markets, suggesting that overall sentiment in economic conditions may have to tilt to the bear camp to sway Sugar market sentiment towards the bear camp.

Trading Ideas

Internal fundamentals are extremely strong at the present moment, after two consecutive deficits. Many traders have become reactionary to any adverse crop news, suggesting that a large-scale shift to the bear camp may be needed to pressure the Sugar market from the outside. Technically, March Sugar is heading toward a level that proved to be a brick wall the last time it was tested. For this reason, some traders may want to focus on how the market behaves near the 30.00 level. Failure to break through could provide the bear camp with an opportunity. Some traders may wish to enter into a bearish strategy with limited risk and relatively low cost, such as a bear put spread, if the market fails to push through.

Technicals

Turning to the chart, we see the March Sugar contract consolidating in a very tight range between the mid 28.00's and low 29.00's. The market may be poised for another test of the 30.00 level. The last time the front-month contract tested 30.00 was at the end of January of this year. The market was unsuccessful and pulled back sharply. A solid confirmation above 30.00 would send the Sugar market into uncharted territory and could squeeze out shorts. Failure to break through 30.00 could trigger profit-taking and long liquidation.

Rob Kurzatkowski, Senior Commodity Analyst

October 27, 2010

Wheat Prices Rebound Despite Dollar's Gains

Fundamentals

Defying the effects of a stronger U.S. Dollar on Tuesday, Wheat futures climbed nearly 3%, as lower than expected crop condition ratings for U.S. Winter Wheat plus continued concerns about Wheat supplies from Eastern Europe and Russia overtook the positive "greenback effect". The USDA announced in its weekly crop progress report that only 47% of the Winter Wheat crop was rated good to excellent, vs. 62% this time last year. The tough start to the U.S. Wheat crop is making some traders nervous, especially after severe drought conditions wreaked havoc on the Wheat crops in Ukraine, Russia, and Eastern Europe earlier this year. In addition, Australia's Wheat production estimates have been cut to 22 million tons, down from 25 million tons, as weather conditions have been less than ideal. However, U.S. Wheat exports have been running below USDA projections, with this week's export inspections totaling 21.5 million bushels, which is below the 25 million bushel average needed to meet the USDA estimate. The biggest wild card will be world Wheat demand, especially from Asia and specifically China, whose appetite for commodities has not seemed to have subsided, despite the Chinese government's efforts to slow the country's growth. Although a weak Dollar should help Wheat exports here in the U.S., even a recovery in the greenback may not dampen Wheat prices should the Winter Wheat crop production totals disappoint, and countries are forced to scramble to meet the ever-growing demand for food -- especially in the emerging economies.

Trading Ideas

A quick look at a daily chart for Chicago Wheat futures causes us to notice a price base being formed, with support seen near the low of 643.50. Some traders looking for this low to hold may wish to explore selling out-of-the-money puts with a strike price below this key support point. For example, with December Wheat trading at 696.50 as of this writing, the December 640 puts could be sold for about 5 cents, or $250 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized at option expiration in late November should December Wheat be trading above 640.00. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such exit strategy might be to buy back the option sold before expiration should December Wheat close below support at 643.50.

Technicals

Looking at the daily chart for December Wheat, we notice a symmetrical triangle formation, which is normally considered a continuation chart pattern. The rule of thumb on these patterns is that prices will eventually resolve themselves in the direction of the previous major trend -- which in this case is up. Tuesday's sharp rally has prices closing once again above the 20-day moving average. The 14-day RSI has moved back into neutral territory, with a current reading of 50.79. The next major resistance level is seen at the October 11th high of 739.75, with major support found at the October 4th low of 643.50.

Mike Zarembski, Senior Commodity Analyst

October 28, 2010

Breakout or Breakdown?

Fundamentals

Crude Oil futures continue to trade between the $80 and $83 levels, seemingly unable to find a direction. The weakness in the US Dollar has supported Oil and other commodities. If you were to compare the Dollar and Oil charts during the month of October, they have an almost perfect inverse relationship. While the greenback's weakness has been supportive for Crude Oil, the failure of the petroleum market to deviate from this relationship indicates that there may be plenty of skepticism regarding whether or not demand will strengthen. At the moment, the US has more than ample supplies of petroleum products heading into what many believe will be a mild winter. In essence, the market is trading almost solely on outside news, rather than supply and demand fundamentals. Like many other markets, including currencies and equities, Crude has been trading sideways lately, as traders wait to digest next week's FOMC announcement. The FOMC is not expected to change rates, but what traders are really looking for is the language in the statement and an indication as to the scale of the Fed's asset buy-back program. Many traders and market observers view the Fed's fixation on deflation as almost disturbing, in that combating deflation now could possibly lead to 70's and early 80's style runaway inflation down the road. These expansionary, deflation-fighting policies may benefit Oil in the long run. If the Fed softens its deflationary rhetoric, it can be seen as negative for Oil and commodities as a whole.

Trading Ideas

The short-term direction of the Oil market is unknown at the moment. Supply and demand fundamentals seem to favor the bear camp, while outside fundamentals (i.e., Dollar movement and commodity market strength) favor the bulls. The chart is also inconclusive. For these reasons, some traders may wish to consider entering into a long strangle – for example, buying the December 83 calls (CLZ083C) and buying the December 80 puts (CLZ080P), for a debit of 3.25, or $3,250. Due to the high cost of the trade, some traders may wish to exit the put on a breakout above 83. Similarly, some traders may wish to close their call on a breakdown below 80.

Technicals

Turning to the chart, we see December Crude Oil continuing to trade in a sideways pattern between the 80 and 83 levels. The fact that prices have not been able to follow-through on closes above the 82.47 level has to be somewhat discouraging for the bull camp. However, prices have also avoided a correction thus far. A breakout above 83.00 or below 80.00 can be seen as significant in the short-term and will likely determine the short to intermediate-term direction of the market.

Rob Kurzatkowski, Senior Commodity Analyst

October 29, 2010

Stock Indices in for a Choppy Ride Ahead of Mid-Term Elections and FOMC Meeting

Fundamentals

S&P 500 futures have been in a bull market run since September, with the December futures having gained just over 140 points the past two months. The rise in equities has correlated with weakness in the U.S. Dollar, which the equities market apparently considers a bullish factor, with the hope being that a weak Dollar will boost exports of U.S. goods. However, the past few trading sessions have seen increased choppiness in the major stock indices, as traders begin to pare back their positions ahead of two major events next week -- the U.S. mid-term elections on Tuesday and the end of the November FOMC meeting on Wednesday. Not even a much better than expected weekly jobless claims report (down 21,000 to 434,000 the week ending October 23rd) could shake the liquidation mode of traders going into the weekend. The biggest concern of stock bulls seems to be pared back expectations for the size of any quantitative easing by the Federal Reserve. Many analysts believe the stock market has already priced-in a huge "easing" attempt by the Fed, which stands to disappoint the market should a more tempered approach be in the cards. In addition, current polls suggest the Republicans are favored to regain control of the House of Representatives, but may fall just short of capturing control of the Senate, and the potential for gridlock in the legislature is high. Those watching the VIX will notice a bit of a spike in the index the past few days, which can be viewed as a sign of investors' nervousness going into next week.

Trading Ideas

With volatility moving higher ahead of next week's important events, a contrary strategy would be to sell into this heightened volatility, with the expectations that it will fall once the election results and the FOMC meeting statements are out. An example of such a trade would be to sell a strangle in E-mini S&P 500 futures options. An example of such a trade would be selling the November E-mini S&P 1240 calls, as well as selling the November 1070 puts. With the December futures trading at 1178.00 as of this writing, the strangle could be sold for about 4.75 points, or $237.50 before commissions. The premium received would be the maximum potential gain on the trade and would be realized if the December futures are trading above 1070.00 or below 1240.00 at option expiration on the third Friday in November. Given the risk involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such exit strategy could be to buy back the short options prior to expiration should the strangle trade at a premium of 2.5 times the amount originally received for selling the strangle originally.

Technicals

Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice prices remaining above the 20-day moving average, but the slope of the current uptrend is starting to turn sideways. The 14-day RSI has moved below overbought levels, with a current reading of 66.27. Bullish traders would need to see a close above resistance at the recent high of 1193.00 to set-up a potential test of the April high of 1216.75. Should support at the 20-day moving average, which is currently near the 1168.00 area fail to hold, this could set-up a test of the 200-day moving average near the 1120.00 area.

Mike Zarembski, Senior Commodity Analyst