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November 2010 Archives

November 1, 2010

Euro Rally Stalls Ahead of FOMC Meeting

Fundamentals

The Euro's nearly 5-month long rally vs. the U.S. Dollar has taken a breather lately, as many traders re-evaluate their positions ahead of next week's FOMC meeting and, perhaps, a potential announcement as to the size and scope of the second round of quantitative easing (QE) by the Federal Reserve. The recent leg of the up-move for the Euro took its value from around 1.2600 to recent highs near the 1.4150 area, as FX traders feared additional debt purchases by the Fed would spark further weakness in the beleaguered greenback. However, comments from Fed governors recently, lowering the possible extent of any QE, have taken some of the luster out of holding long Euro positions -- especially heading into U.S. mid-tem election results and the aforementioned Fed 2-day meeting. A report on German retail sales released on Friday was viewed as a disappointment by many, with September sales down 2.3% vs. August. This data along with a moderately supportive Chicago area purchasing manager's report which posted its 13th straight month of economic expansion gave traders more ammunition to sell the Euro vs. the Dollar. Trading action is expected to remain choppy until traders see the outcomes from next week's events in the U.S., as well Friday's release of the monthly unemployment report for October.

Trading Ideas

With several major events taking place next week, it seems doubtful that the Euro will remain sequestered in its recent 400-pip range, but the question is really, "In which direction will the next major move occur?" Some traders who expect a large move in the Euro could choose to explore the purchase of a strangle in Eurocurrency futures options. An example of such a trade would be buying the December Euro 1.4200 calls and buying the December Euro 1.3700 puts. With the December futures trading at 1.3906 as of this writing, this strangle could be purchased for about 0.0290, or $3,625 per strangle, not including commissions. The premium paid would be the maximum potential loss on the trade; with the position profitable at option expiration in December should the December futures be trading above 1.4490 or below 1.3410.

Technicals

Looking at the daily continuation chart for the Eurocurrency futures, we notice that since the lows were made back in June of this year, the Euro has traded in a pattern of a sharp up-move then a period of consolidation, then another sharp up-move, and now a second period of consolidation. Both consolidation patters appear to be forming "bull flag" patterns, which are usually viewed as continuation patterns that resolve themselves in the direction of the previous trend -- which in the case of the Euro favors another move higher. The 14-day RSI has moved back into neutral territory, with a current reading of 58.14. Support for the December Euro is seen at 1.3688, with resistance found at the recent high of 1.4156.

Mike Zarembski, Senior Commodity Analyst

November 2, 2010

Breakout or Breakdown?

Fundamentals

Ten-Year Notes have bounced ahead of today's mid-term election, as investors hedge against a possible Democratic victory. Most traders have not gotten political, favoring one party over another, but rather they have lost faith in both parties -- in other words, gridlock is good. Normally, most investors have a bias toward the GOP as being good for business, but the failure to regulate effectively has contributed to the current economic situation. On the flipside, some investors may be a bit concerned that the Democratic party may be able to pull-off the upset. This situation could embolden the party and result in over-regulation of the markets, and could add to the soaring federal government deficit. Many investors concerned about one party rule have been buying treasuries to hedge against what could be a negative reaction by the stock market. The election is also followed by the FOMC rate decision tomorrow. The Fed leaving rates unchanged is almost a foregone conclusion, but the main concern that many traders have is the Fed's quantitative easing policy. The treasury markets have been pricing-in a more inflationary environment, as evidenced by rise of the yield curve. With the election, FOMC rate decision and non-farm payrolls on Friday, it figures to be a fairly volatile week for financials.

Trading Ideas

Given the fact that the Fed will likely buy $500 billion or more in treasuries, the T-Note market should find plenty of support from the central banks purchases. The upside is limited, as well, because of inflationary forces picking up. For this reason, some traders may wish to consider putting on a short strangle. Some traders who do not believe the Note market will move outside of its range may want to explore the possibility of shorting a December T-Note 128 call (TYZ0128C) and short a December 124 put, for a credit of 0-45, or $703. The maximum profit would be the initial credit, but the spread carries unlimited risk, so traders may wish to look to exit the trade if it appears the market is going to break out of its range.

Technicals

Turning to the chart, we see the December T-Note contract holding support at the 125-00 level. The December contract failed to gain any momentum after closing below the 50-day moving average, and prices were able to quickly bounce back. Prices have stalled near the 126-15 level for the time being. Crossing through this level could result in a test of recent highs near 127-16.

Rob Kurzatkowski, Senior Commodity Analyst

November 3, 2010

AUD=USD!

Fundamentals

"Parity" is the mantra for FX traders, especially when talking about the beleaguered U.S. Dollar, as several major currencies have passed or are closing in on equal weighting vs. the greenback. The latest member of this "club" comes from the land down under, as the spot Australian Dollar briefly broke above parity after the Reserve Bank of Australia (RBA) surprised many analysts and raised interest rates by 25 basis points to 4.75%. Clearly, the RBA is not concerned about deflation, unlike the Federal Reserve bank here in the states, as its economy is performing quite well, benefitting from its proximity to China as well as its role as an exporter of commodities and grains -- many of which are trading at or near multi-decade highs. This rate hike follows that of Singapore and China and demonstrates that growth prospects for the Pacific-Rim have not been overwhelmed by the shaky recovery seen in the U.S. and Europe. The wide interest rate differential between the Australian Dollar vs. the U.S. Dollar -- and even the Euro -- should make "carry trades" involving these currencies a favorite among large speculative traders such as hedge funds, as interest rate advantage plus a robust economy could propel the "Aussie" well above parity vs. the greenback in the coming months.

Trading Ideas

Given the seemingly bullish fundamentals favoring a further rise in the Australian Dollar futures, some traders may wish to explore bullish trading strategies using options on futures. One example of such a strategy would be the purchase of a bull call spread. For example, with the March Australian Dollar futures trading at 0.9826 as of this writing, one could purchase the January 1.000 calls and sell the January 1.0500 calls for about 0.0134, or $1,340 per spread, not including commissions. Premium paid would be the maximum risk on this trade, with a potential gain of $5,000 minus the premium paid, which would be realized if the March futures are trading above 1.0500 at option expiration in January.

Technicals

Looking at the daily chart for the Australian Dollar futures, we notice the stunning up-move of nearly 4000 pips since the lows were made back in October of 2008. We are now in uncharted territory, as this has been the strongest gain in the currency vs. the USD since the currency was freely floated 27-years ago. The 14-day RSI is strong, with a current reading of 63.61, but still below overbought levels. If there is a negative in the recent rise, it is that volume has been a bit lackluster, as many traders have been hesitant to add to long position with major resistance looming at parity. Support for the December futures is seen at the October 27th low of 0.9595.

Mike Zarembski, Senior Commodity Analyst

November 4, 2010

Bonds Price-in Inflation!

Fundamentals

The FOMC decided to increase the purchases of financial assets to $600 billion, eclipsing the consensus estimate of $500 billion. What on the surface could be seen as bullish for the Bond market actually triggered a sell-off in long-dated treasuries. At the same time, T-Note prices moved very little after the Fed's policy statement. This steepening of the yield curve signals that Bond traders are expecting inflation to balloon, due to the Fed's fixation on stimulating growth and combating deflation. The FOMC decision may have more far-reaching effects than Tuesday's mid-term elections, as the potential inflationary threats to the economy may be far too detrimental for Washington to clean up. The Fed is also targeting medium-term securities, favoring Notes over Bonds. The market sentiment is that the central bank is going for the "sugar high" of short-term growth at the expense of long-term expansion. The Bond market has been propped up by the Fed's purchasing of treasuries, but the size of asset purchases could tip the scales in the favor the bear camp and trigger long liquidation. The move makes commodities far more attractive than fixed income products, barring an economic meltdown.

Trading Ideas

The FOMC's decision to increase the purchases of medium-term assets seems to favor Notes over Bonds. Not only is there going to be demand for Notes, but the long-term inflationary effects of the Fed's policy make longer-dated fixed income products far less attractive. For this reason, some traders may wish to explore taking on a bearish strategy in the December Bond contract, such as a bear put spread. Some traders may wish to consider purchasing a December Bond 128 put (USZ0128P) and selling a December 126 put (USZ0126P) for a debit of 0-14, or $281.25. The spread risks the initial premium for a potential profit of $1,718.75 if the December contract closes below 126 at expiration.

Technicals

Turning to the chart, we see the December Bond contract now trading near support at the 130-00 level. A significant close below support could trigger stops and cause longs to liquidate positions. The market has been forming a wedge on the daily chart since August, and 130-00 is also the lower boundary of this pattern. Prices are also resting on the 100-day moving average. A close above this average can perhaps be viewed as bearish over the mid to long-term.

Rob Kurzatkowski, Senior Commodity Analyst

November 5, 2010

Going for the Gold – Again!

Fundamentals

After a brief downward correction during the past couple of weeks, Gold bulls have re-asserted themselves on Thursday, sending prices up over $50 per ounce to new contract highs, on the aftermath of the Federal Reserve's announcement regarding round two of quantitative easing. The Fed announced that it will purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, and also reinvest the proceeds from maturing mortgage securities, which could bring the total closer to $900 billion. This flooding of Dollars into the financial system has sent the Dollar tumbling and commodities soaring, with the precious metals sector among the biggest gainers. Gold prices are now trading within a hair of the important 1400.00 level. It is this willingness by the Fed to "promote" inflation as a better alternative to deflation that has traders and investors moving into Gold and other assets as a hedge against continued Dollar weakness. In addition, holding Gold, which pays no dividends or interest, is more appealing during a period of exceptionally low interest rates, which appear likely to be around for awhile.

Trading Ideas

With the bull market in Gold futures back on track, some traders who like to sell options to take in premium may wish to explore selling puts in Gold futures with strike prices below chart support levels. For example, there appears to be good chart support in December Gold near the 1315.00 area. With December Gold futures trading at 1381.70 as of this writing, the December Gold 1300 puts could be sold for about 2.30 points, or $230 per contract, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized if December Gold is trading above 1300.00 at option expiration less than 3 weeks away. Risk management is essential for those traders selling naked options, and one protective strategy could be to buy back any options sold before expiration should the December futures close below support at 1315.60.

Technicals

Looking at the daily chart for December Gold, we notice that for the past year, Gold has followed a pattern price consolidation followed by a rise up to new highs. We are in the midst of the third such consolidation so far this year. With prices having moved to new contract highs late in the session, we may see additional buying by trend-following systems entering the market today, which has the potential to move Gold prices to a test of 1400.00. After moving to an extremely overbought reading of 85.9 back in October, the 14-day RSI has moved back to a more reasonable, but still strong reading of 63.40. Support is seen at the recent low made back on October 22nd at 1315.60, with resistance found at the psychologically important 1400.00 level.

Mike Zarembski, Senior Commodity Analyst

November 8, 2010

Is Oil's Upside Breakout for Real?

Fundamentals

After weeks of remaining in a relatively tight trading range, Oil futures have finally broken out to the upside, trading at 2-year highs for the front month futures, following the announcement by the Federal Reserve of $600 billion of treasury purchases over the next several months in its second round of quantitative easing. This news sent the Dollar sharply lower, which spurred traders into a commodity buying frenzy across nearly all sectors, as many trader's looked at the Fed's action as potentially inflationary in the coming months. Oil prices received some additional positive news from the non-farm payrolls report which showed a gain of 151,000 jobs in October, which is well above the 60,000 gain most traders were expected. OPEC last revised upward its global oil consumption forecast for 2014 by 800,000, as it anticipates a quicker pace to the global economic recovery. However, near-term the U.S. still has ample supplies of Crude, as the most recent EIA energy stock report showed U.S. Oil supplies rose by 1.95 million barrels last week, as lackluster demand for refined products caused refinery utilization to fall to 81.8%, vs. 84% last week. It appears that we will need to see continued increases in Oil demand from Asia, and especially China, in order to support Oil prices near $90 per barrel, as it may take some time for both the U.S. and European markets to regain their appetite for "black gold".

Trading Ideas

With Oil futures moving higher and out of its consolidation phase, some momentum traders may wish to explore bullish strategies using Oil futures options. An example of one such strategy would be buying a bull call spread. With January Oil futures trading at 87.22 as of this writing, one could buy the January Oil 90.00 call and sell the January Oil 95.00 call for about 1.34 points, or $1,340 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 realized if January Oil is trading above 95.00 at option expiration in December.

Technicals

Looking at the daily chart for December Oil, we notice prices accelerating through resistance at 85.08, which finally put an end to the nearly 6-month long consolidation phase. The 20-day moving average has crossed above the 200-day moving average, which is also a bullish signal. The 14-day RSI is strong, with a current reading of 66.10. There is some minor resistance near the 88.60 area, but major resistance is seen at the psychologically important 90.00 area. Support is seen at the previous resistance of 85.08.

Mike Zarembski, Senior Commodity Analyst

November 9, 2010

Breakout or Breakdown?

Fundamentals

Cotton continues to move higher at breakneck speed, fueled by export demand. Last week's export sales numbers were six times what they would have needed to be in order to meet the USDA's estimated pace. Today's USDA report figures have to have a sharp upward revision to the exports figure. As of the last report, the agency pegged exports at 15.5 million bales, and the market is looking for an upward revision of between 16.5 and 17.5 million bales. With the US Dollar getting pummeled due to the out of control printing of money and tightness in overseas supplies, it is not difficult to see why the market can expect such a large month-over-month increase in the USDA's estimate. The agency can be conservative at times in its revisions, suggesting the revision could be closer to the 16.5 million bale figure. A number larger than 16.5 could result in further limit moves, whereas a smaller figure could trigger some profit-taking and possibly result in a much needed correction.

Trading Ideas

Markets that have made the extreme move that Cotton has present traders with a unique dilemma. On one hand, fundamentals only continue to strengthen, supporting the explosive move. On the other hand, some traders have to question whether the market has moved too sharply, too quickly and is actually outpacing fundamentals. Trying to pick a top in a market such as this is about as safe as sprinting across a busy highway. For this reason, some traders may wish to take a more cautious approach and trade an options strategy, regardless of their bias.

Technicals

The March Cotton chart is beginning to look parabolic. This type of situation oftentimes has one of two results: the market either corrects even more sharply than it rose or, if the gains are sustainable, an extended period of consolidation can arise. The problem is in the timing. A market can trade parabolic for an extended period of time and it can be difficult to tell, at least initially, whether a sharp down day is the beginning of a correction or consolidation pattern. Some traders may try to spot reversal patterns in the works, such as spinning tops, gravestone dojis or key reversals, and wait for confirmation before acting.

Rob Kurzatkowski, Senior Commodity Analyst

November 10, 2010

When a Record Crop May Not Be Enough!

Fundamentals

Soybean traders got a bullish surprise yesterday morning, when the USDA, in its November crop report, shockingly lowered U.S. Soybean yields to 43.9 bushels per acre, down 0.5 bushels per acre from the October estimate. Most traders were expecting a slight increase in yields due to nearly ideal growing conditions this year. The lower average yield estimate caused the USDA to revise downward its estimate for this year's Soybean crop to 3.375 billion bushels, vs. 3.408 billion bushels in October. Although this would still be a record Soybean crop, huge demand for Soybeans, particularity form China, is expected to send U.S. Bean exports to record levels. In fact, the USDA raised its export estimates by another 50 million bushels to 1.57 billion bushels this marketing year. 2010-11 Soybean carryout totals were lowered by 80 million bushels to a relatively tight 185 million bushels. Although the USDA did raise the Soybean production estimates for Argentina and Brazil, the continued weakness in the U.S. Dollar should continue to help bring export business to the U.S., which if it continues, could help support Soybean prices in 2011.

Trading Ideas

With Soybean prices trading at nearly 2-year highs, it appears the bull market is firmly intact. There is major support in lead month January Beans at the chart gap made on October 11th at 1161.00. Some traders who are expecting this support level to hold may wish to explore selling puts with a strike price below this level. For example, with January Soybeans trading at 1326.00 as of this writing, one could sell the January Soybean 1160 puts for about 4 cents, or $200 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized if January Soybeans are trading above 1160.00 at option expiration in December. Given the risk involved in selling naked options, traders may wish to exit the position before expiration should January Soybeans close below minor support near the 1222.50 area.

Technicals

Looking at the daily chart for January Soybeans, we notice the chart gap that started on October 11th and was never filled. Prices moved steadily higher since that time, culminating with yesterday's sharp price spike higher on very heavy volume after the USDA report was released. Speculators are holding a near record long position in Soybeans, and we will need to see further bullish activity to keep the momentum strong and prevent long liquidation selling by weak longs. The 14-day RSI has moved well into overbought territory, with a current reading of 82.93. Traders should watch the action in the U.S. Dollar, as any major rally in the greenback could trigger commodity-wide selling -- including in Soybeans -- at least in near-term. 1350.00 is seen as the next resistance point for January Beans, with support found at 1222.25.

Mike Zarembski, Senior Commodity Analyst

November 11, 2010

Chinese Inflation Drives Copper to New Highs

Fundamentals

Copper futures have made a new push higher, driven by higher Chinese inflation. The industrial giant reported consumer prices rising by 4.4 percent, which is the highest level for the indicator in over 2 years. Out of control inflation driven by poor economic policy is considered a negative, but in China's case, inflation can be seen as a sign that the economy is strengthening. Industrial production rose 13.1%, and consumer spending rose 18.6% year over year. The boost in industrial production signals that there will likely continue to be healthy growth in Copper demand. The rise in consumer spending is a sign that the population continues to benefit from the transition from rural to urban life and could drive real estate demand, despite the government's efforts to curb speculation in housing. Supplies of the metal may continue to tighten due to the fact that China is producing 1.2% less Copper domestically over the past year. This means that there will be pressure on international supplies. Other emerging market countries are also experiencing economic growth as well, further pressuring supplies. What could derail the Copper market, however, would be government intervention. If policymakers become concerned that inflation is beginning to spiral out of control, the central bank could raise rates to curb inflation. Also, the international community will likely pressure the Chinese government to strengthen the Yuan.

Trading Ideas

The Copper market's fundamentals remain the strongest of the base metals due to tight supplies and China's insatiable appetite. Commodities as a whole continue to benefit from a weaker US Dollar, which may see its exchange rate weaker due to poor economic policy. The chart shows a new breakout above the $4 mark, but many traders would probably like to see prices hold these levels for several sessions to offer confirmation. Due to its volatile nature, only traders with a relatively high risk tolerance may likely wish to test the waters in the Copper market. These traders may want to explore the possibility of buying the December Copper futures contract at 4.05, with a protective stop at 3.90 and an upside objective of 4.25. The trade risks roughly $3,750 for a potential profit of $5,000.

Technicals

Turning to the chart, we see the December contract breaking out to new highs. Prices have now eclipsed the 4.00 level, which had previously been a major stumbling block for the metal. The last two times the level was tested in 2006 and 2008 the market failed to hold, and eventually sold off sharply. If the market is able to build a base above 4.00, Copper prices will now begin trading in uncharted territory. Failure to hold 4.00 could result in prices drifting down to the 3.75 level.

Rob Kurzatkowski, Senior Commodity Analyst

November 12, 2010

Cheap at half the yield?

Fundamentals

The long end of the Treasuries yield curve reminds unloved by speculators despite relatively attractive interest rates when compared to shorter maturities. For example, the yield on 2-year treasuries is a scant 0.42%. The 30-year bond however is currently yielding 4.33%. This huge difference is the product of investors' fears of longer term inflation as well as the Federal Reserve's purchases of U.S. Government debt (QE2). The recent Fed announcement that it would be purchasing $600 billion of U.S. Treasuries is to be centered in the 3 to 7 year maturities, not at the long end of the yield curve. A steepening of the yield curve is considered a boon to banks which can currently borrow at close to zero percent short term rates and purchase longer term treasuries and collect the yield difference. Ironically one of the Fed's reasons for treasury purchases was to help keep interest rates lows, especially mortgage rates which are normally tied to rates on longer term treasuries. But by focusing its purchases on much shorter maturities, it is actually further steepening the curve and not helping to keep longer-term interest rates in check. Looking at the most recent Commitment of traders report we notice large speculators are holding a net-short position in 30-year bond futures of just over 25,000 contracts as of November 2nd. In the 10-year note futures, however, these large specs are net-long over 15,000 contracts. This report shows that these large trades still expect the yield curve to widen even further. Though the December bond futures are trading nearly 8-full points off of recent highs, prices are still holding above the 200-day moving average that many traders look at to determine is a market's trend is bullish or bearish. In addition, there was a "hammer" pattern formed in Japanese Candlestick charting earlier this week which is normally considered a bullish reversal pattern that forms after a decline, and can be viewed as major support point for the market.

Trading Ideas

Traders who believe that the recent sell-off in 30-year bond futures was nothing more than a correction in a bull market may wish to investigate bullish trading strategies(such a purchasing a bull call spread) using bond futures options. For example, with March bonds trading at 127-05 as of this writing, one could buy the January 128 calls and sell the January 132 calls for 1-16/64 or $1,250 not including commissions. The premium paid is the maximum potential risk on the trade, with a potential gain of $4,000 minus the premium paid which would be realized if March bonds are trading above 132-00 at option expiration in late December.

Technicals

Looking at the daily continuation chart for 30-year bond futures, we notice the market is still in the midst of a correction since the recent highs were made back in August of this year. Prices are now below the 20-day moving average which favors short term bond bears but still above the 200-day moving average which still confirms the longer term bullish trend. Those trades who follow Japanese Candlestick charting will notice the "Hammer" that formed from Wednesday's trade, which is considered a "reversal" indicator and may be signaling a near-term bottom. The 14-day RSI has turned weak with a current reading of 38.69. Wednesday's lows of 127-14 need to hold or the market may be set for a test of the 200-day moving average currently near the 125-00 area. Resistance is found at the November 3rd highs of 133-00.

Mike Zarembski, Senior Commodity Analyst

November 15, 2010

"Gravity effect" pummels Sugar futures

Today's Idea

"Never buy a liquidating market" is an old trading adage that warned novice traders not to try to pick a bottom when a market is in the midst of a major long liquidation sell-off. That being said did the Sugar fundamentals change sufficiently enough to justify an over 20% decline in just less than two trading sessions? Traders who believe that Sugar prices have now become oversold, may wish to explore long option strategies to help limit potential risk versus an outright long position in the futures. One such example is buying a call option in Sugar. For example with March Sugar trading at 26.21 as of this writing, One could buy the January Sugar 27 calls for about 1.64 points or $1,836.80 per contract not including commissions. The premium paid is the maximum potential risk on the trade with the trade profitable at option expiration in mid-December should March Sugar be trading above 28.64.

Fundamentals

"Ouch!" That was the reaction of most Sugar bulls on Friday, as lead month March Sugar fell a whopping 3.45 cents per pound, the largest one day loss in 30 years, as reports of a large sugar surplus in India hit the market, as well as a general sell-off in the commodity sector to end the week. In was only this past Thursday when Sugar futures soared to 33.39, a 30-year high, as traders feared that poor growing conditions in Brazil, the world's largest Sugar producer, would curtail world supplies enough that the market could face a third consecutive year of deficits. However, on Thursday, The Farm Minister of India, announced that the country would produce a surplus of 3.5million tons on Sugar this year, much of which could be exported this year. Though the exact amount India may export has not yet been released, this news of a bumper Indian Sugar crop sparked a torrent of selling on Thursday with few buyers willing to step in front of this long liquidation. Then on Friday, concerns that Interest rates in China could be raised sparked a move out of "risk" trades and triggered a commodity wide sell-off that sent Sugar prices down over 11% on the sessions. The Commitment of Traders report showed both large and small speculators added over 8,000 contracts to their net-long positions to total a combined 204,443 contracts as of November 2nd. This was before the over 3 cents per pound rally took place and as much as an additional 10,000 contract may have been added to the net-long position before "the Gravity Effect" wiped out over one month's gains in just two trading sessions. The move demonstrates how volatile trading activity can be when prices are at or near historic highs.

Technicals

Looking at the daily chart for March Sugar, all one can say is "wow". The over 20 % correction from 30-year highs demonstrates what can occur when a long standing bull market finally runs out of steam. These moves can be even more extreme in the age of electronic trading when there is little depth of liquidity without a floor trading population to absorb the selling. Electronic market making makes it too easy to pull bids in the midst of liquidation selling as a rash of sell-stops are triggered. Even with 20% percent decline, the market is still trading above the 200-day moving average, which many technical trades look to determine is a market is in a bull or bear market phase. The next major chart support point is not seen until the 22.50 area, with resistance now found at the October 27th lows of 27.41.

Mike Zarembski, Senior Commodity Analyst

November 17, 2010

China's Fight on Inflation Fuels Soybean Sell-off

Today's Idea

With long liquidation selling taking place, it may be difficult for some traders wishing to be long Soybeans to hold outright positions given the potential volatility seen in the commodity markets lately. A quick look at the daily charts for March Soybeans shows some technical support at the September 27th high of 1161.00. Some traders expecting this support point to hold but who wish to somewhat limit the downside risk if prices continue to fall may wish to explore selling a bull put spread in Soybean options. For example, with March Soybeans trading at 1226.00 as of this writing, one could sell the March Soybean 1160 puts and buy the March Soybean 1060 puts for a credit of about 24 cents, or $1,200 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration should March Soybeans be trading above 1160.00 at option expiration in February. The potential risk on the trade would be the difference between the strike price sold and the strike price bought, minus the premium received for selling the spread originally.

Fundamentals

Bean bulls certainly got a swift kick in the pants the past several days, with the latest blow being provided by the Chinese government, which announced plans to slow food price inflation by raising interest rates, curbing excessive speculation, and putting price controls in place. This news sparked long liquidating selling in the entire grain complex -- but especially in Soybeans -- as Chinese Soybean imports represent a significant amount of sales by U.S. producers. In addition, commodity prices have been hurt by the recent resurgence in the U.S. Dollar, as traders' concerns have turned once again to the E.U. and the potential bail-out of Irish banks. This has put pressure on the Euro currency, which has benefitted the greenback. The most recent Commitment of Traders report shows that as of November 9th, large non-commercial traders were net-long 195,482 contracts. This record long position being held by large speculative traders is adding fuel to the sell-off, as there are few willing large traders waiting to absorb the selling pressure, with commercial concerns waiting for even lower prices before joining the fray. Although U.S. Soybean exports remain ahead of USDA projections, large overhanging speculative long positions are currently pushing fundamental factors to the back of the line, as traders focus on how long the speculative liquidation selling will last.

Technical Notes

Looking at the daily chart for March Soybeans, we notice volatility increased dramatically once prices moved past the 1300.00 area. In the past 6 trading sessions, March Soybeans have traded in a price range of over $1.30. To put this into perspective, in 2006, Soybean's yearly trading range was only about $1.70 per bushel! It appears that a double-top formation occurred last week, but the timeframe between the two recent highs may be too close together to be considered valid by some technicians. The 14-day RSI has moved from overbought levels to a more neutral reading of 47.47. Although prices have fallen below the 20-day moving average, the longer term 200-day average does not come into play until the 1020.00 area. Support is seen at the September 27th high of 1161.00, with resistance seen at 1314.50.

Mike Zarembski, Senior Commodity Analyst

November 18, 2010

Irish Woes Stress Euro

Today's Idea

The European situation remains very unclear at the moment given, which could give investors a reason to convert to Dollars. Traders have been finicky, however, which could result in Euro investment if the market perceives the Irish debt crisis is contained. For this reason, some traders may wish to take on a bearish options position with limited risk. Some traders may wish to enter into a bear put spread, buying the December Euro 1.35 put and selling the December 1.33 put for a debit of 0.0050, or $625. The trade risks the initial cost for a potential gain of $1,875 if the Euro falls below 1.33 at expiration.

Fundamentals

The Euro currency has fallen under duress since the beginning of the month, propelled by the distressed Irish government. The sell-off was initially fueled by profit-taking in the Euro versus the US Dollar after the FOMC announcement. The situation in Ireland could create sovereign debt concerns for the entire Eurozone. The market has found a bit of support over the past two sessions on optimism that the bailout of Ireland could prevent a crisis across Europe. Whether this is wishful thinking or not remains to be seen. The Irish government has altered its initial stance and is now working with both the EU and the IMF to secure loans of tens of billions of Euros. While this may help solve the woes of the Irish, several EU nations could suffer a similar fate, as the global economic turnaround seems to have stalled for developed nations. The Euro could find support versus the US Dollar if the sovereign debt situation stabilizes and the Fed goes ahead with its aggressive QE2 plan. The Dollar has found strength by default. US economic policy is seen as flawed by many, but the rumblings in Europe have caused some investors to flock to the relative safety of the greenback.

Technical Notes

Turning to the chart, we see the December Euro contract finding support at the 1.35 level. The contract is still trading below both the 20 and 50-day moving averages. To make further headway, prices may have to cross back above these levels. Support just below the 1.33 level can be seen as key, as a breakdown below this level could send the contract tumbling into the mid 1.20's. The RSI is very close to reaching oversold levels, which could offer some near-term support.

Rob Kurzatkowski, Senior Commodity Analyst

November 19, 2010

Can't Keep a Good Bull Market Down

Today's Idea

A quick look at the daily chart for December Gold shows strong near-term support near the 1316.00 area. With only a few days till option expiration, bullish traders may wish to explore selling puts with a strike price below this key support level. For example, with December Gold trading at 1353.00 as of this writing, one could sell the December 1315 puts for about 1.00 or $100 per contract, not including commissions. The premium paid would be the maximum potential gain on the trade and would be realized should December Gold be trading above 1315.00 at option expiration on Nov ember 23rd. Given the potential risk on the trade, traders should have an exit strategy in place should the trade move against them. For example, one may wish to buy back the short put prior to expiration should December Gold trade at 1315.00.

Fundamentals

After a nearly $100 sell-off the past few sessions, Gold bulls have regained the upper hand, as traders now believe a bailout package will be agreed upon to deal with the debt situation in Ireland. This speculation sparked a bid into the Euro vs. the Dollar and sent commodity prices higher across the board, including Gold. The yellow metal was also buoyed by yesterday's release of the weekly jobless claims data, which showed that claims jumped by 2,000 to 439,000 for the week ending November 13th. The continued weakness in the U.S. employment sector is supporting the belief that the Federal Reserve will follow-through with its plans to purchase $600 billion of U.S. Treasuries by the end of the second quarter of 2011. Those traders who have followed the Gold market the past few years will note that during this historic bull market, Gold prices have followed a pattern of long up-moves, followed a brief but intense correction which cumulated into a consolidation phase. Although it is still too early to tell, it does appear that Gold may once again be entering the "consolidation phase" of the recent move, and if recent history is any guide, this could be the set-up for the next leg up to test the historic highs once again.

Technical Notes

Looking at the daily continuation chart for December Gold, we notice that despite the nearly $100 correction off the all-time highs, the overall bull market is still firmly intact. The 200-day moving average, which many technical traders look towards to determine if a market is in bullish or bearish hands, does not come into play until the 1220.00 area. The 14-day RSI has moved from vastly overbought readings to a more neutral level, with a current reading of 49.95. 1315.60 is seen as strong support for December Gold, with near-term resistance found at 1376.60.

Mike Zarembski, Senior Commodity Analyst

November 22, 2010

Going Nowhere Fast

Trading Ideas

Traders anticipating a range bound Natural Gas market to end the year may possibly wish to explore trading strategies that could benefit from a sideways market. One such strategy would be selling strangles in Natural Gas options. For example, with January Natural Gas trading at 4.317 as of this writing, the January 3.40 puts and the January 5.40 calls could be sold for about 0.038, or $380 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 December should January Natural Gas be trading above 3.400 and below 5.400. 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 would be to close-out the position before expiration should the option premium for the strangle trade at 2.5 times the amount received for originally selling the strangle.

Fundamentals

Natural Gas futures seem poised to remain range bound to end 2010, as record high storage levels battle against the beginning of the winter heating season. This past Thursday’s EIA Gas Storage report showed 3 billion cubic feet (bcf) of Gas was placed into storage last week, bringing the yearly total in storage up to 3.843 trillion cubic feet (tcf), or just over 9% above the 5-year average for this time of year. Relatively low Natural Gas prices have caused some producers to curtail production, triggering a decline in the U.S. Gas rig count last week. Weather forecasters are calling for below normal temperatures in the eastern U.S. later this week, which has put a bid into front month futures, as increased demand for heating should increase gas usage. So barring a large increase in industrial demand or a much warmer than normal winter, Natural Gas prices seem destined to be struck in a trading range between 3.000 and 5.000.

Technical Notes

Looking at the daily charts for January Natural Gas, we notice prices moving within a relatively narrow 60-cent range since the beginning of October. Since that time, the market has moved on either side of the 20-day moving average, but is now currently near the upper end of the recent price range. The 14-day RSI has turned up, with a current reading of 56.84. Support for January Gas is seen at the contract low of 3.853, with resistance seen at the recent high of 4.411 recorded on November 10th.

Mike Zarembski, Senior Commodity Analyst

November 23, 2010

Bonds Rise as Defensive Play

Today's Idea

It appears that this recent upswing in Bond prices has been driven by short-covering and shorter-term defensive plays, but the prospects of long-term price appreciation do not appear to be great at the moment. Technically, the recent rally has failed to make any impact on the chart. For these reasons, some traders may wish to consider taking on a bearish position, such as a bear put spread. Some traders may wish to buy the January Bond 125 puts and sell the January Bond 123 puts for a debit of 0-28, or $437.50. The trade risks the initial debit for a potential profit of $1,562.50 if the March Bond futures close below 123-00 at expiration.

Fundamentals

Bond futures seem to have found new life after flirting with the mid-125's, as some traders seek the relative safety of US bonds. The Irish financial crisis has stoked fears over the quality of non-US sovereign debt. Also, the artillery fire exchange between the two Koreas has many traders in a more defensive mode, given the rocky relationship between the nations. The equity markets seem to be favoring the bear camp in recent sessions, giving Bonds a boost. With Black Friday and Cyber Monday later this week, many investors are uncertain that retail sales can meet current projections, and these traders have been buying treasuries in order to limit their exposure to equity market gyrations. All of these factors support Bonds over the near-term, but many traders still remain skeptical over the longer-term. The Fed's asset-buying program seems to favor shorter duration treasuries over the Long Bond. Inflation seems to be on the rise, which could pressure the Bond market and cause yields to increase.

Technical Notes

Turning to the chart, we see the Bond continuation chart finding support near the 125-00 level in the near-term. However, prices remain below the major moving averages, indicating the market has not yet shown us that any major strides are being made. The previous major support level at 130-00 could now provide significant resistance for the Bond market. To show upward progress, the market will have to cross through the 128-27 and 130-00 levels. On the downside, a breakout below the 125-00 level could bring back heavy selling pressure.

Rob Kurzatkowski, Senior Commodity Analyst

November 24, 2010

Are the Dollar and Gold Now Becoming Joined at the Hip?

Today's Idea

If the price direction of Gold and the Dollar begin to correlate, and the risk averse trade again becomes popular with traders, a unique strategy using futures options that would benefit if both Gold and the Dollar move higher in the near-term may be a strategy you wish to consider. For example, with February Gold trading at 1375.80 and the March Dollar Index trading at 80.130 as of this writing, the February Gold 1400 calls may be bought and the February Gold 1500 calls may be sold for about 25.00, or $2500 per spread, not including commissions. To partially offset the cost of purchasing this bull call spread, some traders may wish to explore selling the January Dollar Index 80 puts, currently at 1.21, or $1,210 as of this writing. The selling of the DX option can act as a "hedge" should the direction of the Dollar move inversely to Gold, as was the case most of this year.

Fundamentals

It has been the rare occasion recently for both Gold and the U.S. Dollar to be trading higher on the same day, but that is what we have seen this week, as traders fearing the uncertainty regarding hostilities on the Korean Peninsula as well as the debt situation in Ireland, moved assets back to "safe havens" of Gold and the greenback. Gold also received additional support from continued concerns about inflation. This is especially true in Asia, particularly China, where banking reserve requirements have been raised and price controls for food put in place to help cool the robust economy. It does appear that Gold's recent price correction, during which prices fell about $100 per ounce in only a few trading sessions, may be over, as the market has regained about 50% of the sell-off amount. The rally in the Dollar is more pronounced, with the lead month Dollar Index futures trading at highs not seen since late September, with weakness -- especially in the Euro -- accounting for much of the recent strength. The Dollar got an additional boost from German Chancellor Angela Merkel's comments that the Euro is facing "an extraordinarily serious situation," after the 16-member nations agreed to a bail-out for Ireland's debt situation. With both political and economic uncertainly prevailing at the present time, we may start to see Gold and the Dollar move in tandem in the near future, especially if traders begin shun to a greater extent so called "risky" trades.

Technical Notes

Looking at the daily chart for December Dollar Index futures, we notice what appears to be a rounded bottom formation that cumulated with the spike bottom of 75.235 on November 3rd. Since that time, prices have moved above the 20-day moving average, which sparked additional buying by short-term momentum traders. The 14-day RSI has moved positive, with a current reading of 63.11. Although the recent sentiment has turned positive for the Dollar Index, the longer-term 200-day moving average does not come into play until the 82.30 area, and it will take a daily close above this indicator to signal a potential change in the long-term bearish trend for the Dollar. Support is seen at 75.235, with near-term resistance found at the August 6th low of 80.745.

Mike Zarembski, Senior Commodity Analyst

November 29, 2010

Bear Market Brewing in Coffee Futures?

Today's Idea

With Coffee fundamentals starting to favor the bearish camp and a potentially bearish technical formation seen on the daily charts, some traders may possibly wish to explore bearish trading strategies using Coffee futures options. For example, with March Coffee trading at 202.70 as of this writing, one could sell a January Coffee 220.00 call for about 1.50 points, or $562.50 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in December should March Coffee be trading below 220.00. As a risk management strategy, some traders may wish to close out the trade before expiration should March Coffee close above 220.00.

Fundamentals

The bull market in Coffee futures appears to have gotten a bit cold lately, as the market appears to be lacking fresh bullish news to keep the uptrend going. The harvest in Vietnam is progressing well, with analysts expecting the harvest to be nearly complete by the end of the year. In addition, Coffee exports out of India, the 3rd largest producer in Asia, are expected to reach record levels this year. The recent bull-run for Coffee was triggered partially by a second consecutive year of poor crops in Columbia and other Latin American producing countries, but now exports are up sharply compared to last year's totals. The recent revival of the U.S. Dollar has also taken its toll on commodity prices lately, and Coffee futures could see additional selling pressure should the "greenback" continue its climb higher.

Technical Notes

Looking at the daily chart for March Coffee, we notice what appears to be a head and shoulders top forming! A daily close below the “neckline” near the 199.00 area would add credence to this bearish formation. Prices have fallen below the 20-day moving average, triggering some fresh selling by short-term momentum traders. The 14-day RSI has turned neutral, with a current reading of 49.13. 191.25 is seen as the next major support point for March Coffee, with resistance seen at the recent highs near the 213.25 area.

Mike Zarembski, Senior Commodity Analyst

November 30, 2010

Trying to Find a Bottom

Today's Idea

The supply and demand fundamentals for Cotton remain very strong. However, China's tightening may be the wild card, as the inability to get loans could undermine the supportive fundamentals. The chart is hinting that the market could see more downside on a strong close below 110.00. If the market is able to hold here, prices may stabilize or move higher. Some traders may wish to consider shorting the March futures contract on a close below 110.00, with a protective stop at 117.50 and a downside objective of 98.00. The trade risks roughly $3,750 for a potential profit of $6,000. This would be considered a relatively risky trade.

Fundamentals

Cotton futures have found stability in recent sessions, after lending in China has shown some resilience. Some traders may have overreacted and planned for the worst after China raised interest rates earlier this month. The government has not taken further action to stem inflation to this point. Many traders have become cautiously optimistic that the People's Bank of China may take a wait and see approach to inflation. The central bank has historically kept things close to the chest and not given a clear indication of what its future intentions are, which still leaves an air of uncertainty. Some traders may wish to keep a close watch on the broad commodity markets, as the PBC may take further steps to limit lending. Despite the bullish fundamentals, the risk of China cutting their consumption of US Cotton remains a risk for the market.

Technical Notes

Turning to the chart, we see trading in the March Cotton contract centering near the 50-day moving average. The chart also appears to be forming a flag. Given the down move preceding the flagging, the bias seems to be with the bear camp. Failure to hold the lower end of the range at 110.00 could result in a test of the 100.00 level. The RSI is drifting into oversold territory, which could explain the support the market has seen in recent sessions. Momentum is showing bullish divergence from the RSI, which could be a sign that the market may continue to find strength in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst