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December 2010 Archives

December 1, 2010

Cocoa's Consolidation Continues

Today's Idea

Cocoa's continued sideways movement may have some traders looking for strategies that will benefit from the current consolidation phase. One such strategy would be to sell a strangle in Cocoa futures options, with call strike prices above the recent highs and put strike prices below the recent lows. For example, with March Cocoa trading at 2822 as of this writing, one could sell a February Cocoa 3000 call as well as a February Cocoa 2600 put for about 70 points, or $700 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if March Cocoa is trading below 3000 or above 2600 at option expiration in early January.

Fundamentals

Cocoa's fundamentals have been painting a mixed picture for traders recently, as concerns about potential political unrest following the elections in the Ivory Coast, which is the world's largest Cocoa producer, have offset larger supplies of Cocoa in the world market, as well as a resurgence in the U.S. Dollar. Since October of this year, the price of lead month March Cocoa has been stuck between 2700 on the down side and 3000 on the upside, with neither bulls nor bears willing to take control. The International Cocoa Organization (ICCO) increased its world Cocoa production estimate to 3.613 million tons, however they also raised world cocoa grindings by nearly 5% and still expect a global deficit of 82,000 metric tons. Many traders are also awaiting the results of the presidential election in the Ivory Coast which are expected to be released today. Continued concerns regarding the debt situation in Europe has sparked a rally in the U.S. Dollar, which is typically viewed as bearish for commodity prices. The most recent Commitment of Traders report confirms the sideways trend, with large non-commercial traders net-short only 134 contracts and non-reportable traders (small speculators) holding a net-long position of only 1,737 contracts as of November 23rd.

Technical Notes

Looking at the daily chart for March Cocoa, we notice prices consolidating for the second time in the past several months, although this time well-off the highs made earlier this summer. Prices have been trading on both sides of the 20-day moving average, but below the 200-day moving average, which gives Cocoa bears the edge. The 14-day RSI is in neutral territory, with a current reading of 48.20. It would take a close above the recent high of 2973 for bulls to regain control, with bears looking for a move through support at 2729 to gain the upper hand.

Mike Zarembski , Senior Commodity Analyst

December 2, 2010

Bonds Rise as Defensive Play

Today's Idea

Barring a setback in the EU, T-Note fundamentals remain bearish at the moment. The FOMC has shown no signs that it will make any effort to stop inflation until it becomes a major economic concern. Technically, Notes have broken through support levels, but the extent of any potential downside remains unknown. For this reason, some traders may wish to consider putting on a bear call spread, like selling the Jan Note 125 calls and buying the Jan Note 127 calls for a credit of 0-15, or 234.38. The maximum profit on the trade would be the initial credit, and the spread risks $1,765.63. Some traders may want to exit the trade if the underlying March futures trade at or above 125-00 prior to expiration.

Fundamentals

Treasury Note futures are lower once again this morning, as equity futures are higher for the second consecutive session. Some of the sovereign debt fears that have plagued global equity markets seem to have subsided for the moment. Italy, Spain and Portugal did not follow Ireland's lead and have not reached out to the EU or IMF for aid thus far. Today's ECB meeting is expected to focus on preventing the spread of the sovereign debt crisis. As a result, many traders abandoned the relative safety of treasuries in favor of riskier assets, such as stocks and commodities. Here in the US, the Fed has not shifted from its policy of actually encouraging inflationary conditions, which may plague the Note and Bond market for the foreseeable future. In the short-term, many traders will focus on employment data. 10-Year Note yields are at their highest levels in four months and may continue to rise if claims data this morning and payroll numbers tomorrow are positive

Technical Notes

Turning to the chart, we see the March 10-Year Note dropping below the 123-00 level, which has been the bottom of the recent consolidation pattern. Prices are now testing a relative low close of 122-22. A breakout below this level could result in amped-up selling pressure. March Notes have already seen a bearish crossover of the 20 and 50-day moving averages. The market is now nearing a downward crossover of the 50 and 100-day averages, which could be seen as bearish over the intermediate term.

Rob Kurzatkowski, Senior Commodity Analyst

December 3, 2010

Wheat Prices Rise on Weather Woes

Today's Idea

With Wheat futures now trading in the midst of a "weather" market, volatility may increase and make it more difficult for traders to hold an outright futures position, given the possibility of potentially large daily price ranges in the coming weeks. Some traders who may be considering taking on a bullish position in Wheat but who also wish to limit the potential risk on the trade may wish to explore buying a bull call spread using Wheat futures options. For example, with March Wheat trading at 759.00 as of this writing, the March Wheat 780 calls could be bought and the March Wheat 880 calls could be sold for about 25.00, or $1,250 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5,000 minus the premium paid realized should March Wheat be trading above 880.00 at option expiration in February.

Fundamentals

After trading at lows not seen since late July, lead month March Wheat futures have rallied over 1.00 per bushel, most of it coming the last few sessions, as weather conditions in the leading Wheat producing countries have been less than ideal. Here in the U.S., drier than normal conditions have plagued the central and western plains, where the Winter Wheat needs moisture and snow cover as the crop moves into dormancy. It is an entirely different story in Australia, where heavy rains are playing havoc with the Wheat harvest in the eastern parts of the country. U.S. weekly export sales for Wheat totaled 663,302 metric tons (mt) for the current marketing year. This was down from 745,184 mt last week, but still within analysts' expectations. Although weather issues appear to have been the catalyst for Wheat's strong performance lately, it is likely the relatively large speculative short position that has fueled the price surge, as traders scramble to cover their short positions, triggering buy stops along the way. The most recent Commitment of Traders report shows speculators (both large and small) holding a combined net-short position of 47,885 contracts as of November 23rd. This was nearly a week before the sharp price we have seen the past few sessions, and unless the weather forecasts improve soon, March Wheat may be poised for a test of the recent highs near the 800.00 per bushel level.

Technical Notes

Looking at the daily chart for March Wheat, we notice that despite the recent rally, prices have made significantly lower highs as well as lower lows since the contract highs were made back in August. This would help to explain why speculators were net-short Wheat futures prior to the recent rally attempt. However, even during the pull-back from contract highs, March Wheat never traded below the 200-day moving average. The downtrend line drawn from the contract highs made back in August comes into play near the 780.00 area, and a close above this resistance point sets the market up for a test of major resistance at 800.00. Support is seen at the November 17th low of 565.25.

Mike Zarembski, Senior Commodity Analyst


December 6, 2010

Oil’s Rise to Two-Year Highs

Trading Ideas

Now that Oil prices are trading at 2-year highs and strong chart support is seen at $80.00, some traders may wish to explore selling puts in Crude Oil futures options with strike prices below support levels. For example, with February Crude Oil trading at 89.60 as of this writing, the February Oil 79.00 puts could be sold for about 0.70 points, or $700 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized if February Oil futures are trading above 79.00 at option expiration in January. Given the risk involved in selling naked options, some traders may wish to exit the trade before expiration should February Oil futures close below 80.00.

Fundamentals

Crude Oil futures traders must feel like they are on a roller coaster, with prices rising and falling several dollars per barrel every couple of weeks. However, a look at the larger trend appears to indicate that lead month futures may have found a strong base just above $80 per barrel, and that the overall trend now seems to be made up of higher highs and higher lows. This past Friday’s trade was a perfect example of the current underlying strength in Oil, as an early morning sell-off tied to a much weaker than expected U.S. Non-Farms Payroll report for November was quickly erased as traders started to focus on global oil supplies, which are finally showing signs of declining, as well as a weaker U.S. Dollar, which is viewed as bullish for commodity prices. In addition, the term structure in Brent Crude Oil futures is starting to flatten, and in some cases moving towards a backwardation, where near-term futures trade at a premium to farther out contact months. This change in term structure may signal increased demand for Oil in the near-term and would likely be supportive of prices.

Technical Notes

Looking at the daily chart for January Crude Oil, we notice that since September of this year, Oil prices have higher lows and higher highs despite several downward corrections along the way. If we were to look at a front-month continuation chart, we would be trading at 2-year highs. The 14-day RSI looks strong, with a current reading of 64.65. The next major resistance point is seen at the 90.00 level, with support found at the November 23rd low of 80.28.

Mike Zarembski, Senior Commodity Analyst

December 7, 2010

Ivory Coast Elections Spark Cocoa

Today's Idea

Cocoa supply and demand fundamentals do not support the recent move higher, but the tumultuous political situation in the Ivory Coast remains a wildcard. Technically, the March Cocoa chart shows a breakout, but this could have been driven by short liquidation. For these reasons, some traders expecting a pullback may wish to consider placing a bear put spread, buying the Feb 3000 puts and selling the Feb 2800 puts for a debit of 55, or $550. The trade risks the initial premium for a maximum profit of $1450 if the March futures close below 2800 at expiration.

Fundamentals

Cocoa futures have crossed through the $3000 a ton level on domestic turmoil in the Ivory Coast. The Cocoa growing nation had an ideal growing season, which really kept prices in check. The turmoil surrounding the election seems to have lifted that ceiling, at least for the time being. If there is no resolution to the presidential election anytime soon and the ports remain closed for an extended period of time, spoilage may become a major concern. The bountiful crop year would be all for naught, and it could result in tight supplies. If a quick resolution is reached, prices could fall sharply once ports are reopened. The political situation, which is always dicey, will be the determining factor to the near-term movement of Cocoa and have longer-range supply implications.

Technical Notes

Turning to the chart, the market had a technical breakout from its recent trading range between 2745 and 2955. Prices may soon come up to test the next areas of resistance near 3150 and 3200. The RSI indicator is nearing overbought levels, which could limit the upside potential of the market. From the feverish action of the market yesterday, it appears that quite a few stops were triggered, which could make the breakout suspect in some traders' minds. Traders may be looking for an additional up-day on high volume to confirm the breakout.

Rob Kurzatkowski, Senior Commodity Analyst

December 8, 2010

“Red Metal” Keeps on Rising

Trading Ideas

With Copper supplies expected to remain tight going into 2011, some traders may wish to explore buying bull spreads in Copper futures. An example of this trade would be buying March 2011 Copper and selling September 2011 Copper. Currently, March Copper is trading at a 0.0335 premium to the September contract. Buyers of the bull spread would want to see this March premium widen even further.

Fundamentals

The bull market in Copper appears alive and well, with prices holding near the highs for the year. The recent upward move comes as large traders continue to add to long positions in Copper, particularly at the London Metal Exchange (LME), in anticipation of a physical Copper ETF being launched by JP Morgan. In addition, increased demand out of Asia and continued supply concerns have some analysts calling for a Copper deficit in 2011. Copper stocks on the LME have been falling steadily throughout the year, and the tight exchange warehouse stocks have caused the Copper market to move towards a backwardation where nearby futures are trading at a premium to more deferred contract months, as buyers are willing to pay a premium to obtain Copper for near-term delivery.

Technical Notes

Looking at the daily chart for March Copper, we notice prices making a new yearly high on well above average volume on Tuesday. Prices are significantly above the 200-day moving average and are starting to pull away from the 20-day MA as well, after last week’s price surge ended the 2-week long price correction. 4.2500 is now seen as the next major upside price target, with strong support seen at the November 17th low of 3.6110.

Mike Zarembski, Senior Commodity Analyst

December 9, 2010

Tight Supplies Force the US to be World's Bread Basket

Today's Idea

The Wheat market fundamentals have been extremely strong since the summer months, when drought and poor growing conditions around the globe set-up the current tight supply scenario. Technically, the chart is showing signs that prices may push above the 800 mark after prices broke out of the 650-750 trading range. The fickle and volatile nature of the grain markets may influence some traders to take a conservative approach and enter into a bull call spread with limited risk. Traders considering such a trade may wish to buy the Feb Wheat 800 calls and sell the Feb 825 calls for a debit of 8 cents, or $400. The trade risks the initial cost for a potential profit of $850 if the March futures contract closes above 825 at expiration

Fundamentals

Heavy rains in Australia and Canada have caused expectations relating to the quality of Wheat from these nations to be downgraded, which could create an extremely tight global market. According to the UN, the US may have a difficult time covering the shortfalls of these nations. This comes after a dreadful Russian harvest, where excessive heat and wildfires damaged crops. The US has plenty of supply at the moment, but logistical capabilities may limit how much of the grain actually gets exported. All of these factors have prompted importers to become much more aggressive, which has driven a very strong cash market. Prices have risen to the highest levels since August, when panic over the Russian crop drove near-month futures to over $8 before falling back. Today's export sales numbers will give traders a better idea as to whether some of these fears are overblown, or if supply tightness will take control of the market.

Technical Notes

Turning to the chart, we see the March Wheat contract consolidating just below the 800 level. A breakout above the 800 level would be seen as a technical breakout and could force shorts to cover. It would also mark the first time the near-month Wheat futures have traded above this level in over two years. The RSI is extremely overbought at 92.12, which has contributed to the recent consolidation.

Rob Kurzatkowski, Senior Commodity Analyst

December 10, 2010

Choppy Trade in Soybeans Ahead of USDA Report

Today's Idea

Technically, the bullish trend in Soybeans is still in force, however any signs of slowing Chinese demand or improved weather forecasts in South America could force some significant long liquidation selling -- especially with large non-commercial traders holding a large net-long position, according to the Commitment of Traders report. Some traders who are expecting a potential correction in Soybean prices but who wish to limit the potential risks involved in selling an outright futures position may wish to explore buying a bear put spread in Soybean options. For example, with March Soybeans trading at 1292.00 as of this writing, one could buy the February 1250 puts and sell the February 1200 puts for about 18.00, or $900 per spread, not including commissions. The premium paid is the maximum potential risk on the trade, with a potential profit of $2500 minus the premium paid which would be realized if March Soybeans are trading below 1200.00 at option expiration in late January.

Fundamentals

Since reaching contract highs back in the middle of November, Soybean futures prices have turned choppy, with a nearly $2 per bushel sell-off followed by a moderate recovery, and the March contract currently hovering near the $13 per bushel level. Concerns that Chinese buying of U.S. Soybeans is beginning to wane was given some credence by reports of lower crush margins, which would likely deter Chinese processors from being aggressive buyers of beans. However, Soybean growing conditions in Argentina have been less than ideal so far this season, as dry weather has caused some stress on the crop, causing some analysts to predict a potentially disappointing harvest if dry conditions continue. Many traders are now turning their focus towards this morning's supply/demand report from the USDA, with traders looking for the USDA to lower 2010-11 U.S. Soybean ending stocks by 20 million bushels from November's estimate to 165 million bushels, due to higher export demand.

Technical Notes

Looking at the daily chart for March Soybeans, we notice a few bullish technical indicators such as prices being above both the 20 and 200-day moving averages, prices holding well above the uptrend line drawn from the July lows, and perhaps most importantly, the chart gap at 1161.00 has not been even remotely tested. However, the 14-day RSI has definitely started to trend lower, and unless fresh bullish news hits the market, the large net-long position being held by large speculators could start being liquidated, unless new highs are made soon. 1312.50 is seen as near-term resistance for March Soybeans, with support found at the November 17th low of 1183.00.

Mike Zarembski, Senior Commodity Analyst

December 13, 2010

Are Natural Gas Prices Finally Finding a Bottom?

Today's Idea

With a rounded bottom formation appearing on the daily chart for February Natural Gas, it does appear that the October low of 3.894 should act as a strong support level. Some traders who anticipate that this key price level will hold may wish to explore selling puts in Natural Gas futures options with a strike price below support at 3.894. For example, with February Natural Gas trading at 4.428 as of this writing, the February Natural Gas 3.75 puts could be sold for about 0.050, or $500 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized if February Natural Gas is trading above 3.750 at option expiration in late January. Given the risk involved in selling naked options, some traders may wish to have an exit strategy in place should the position move against them. One such strategy would be to buy back the short option before expiration should February Natural Gas close below support at 3.894.

Fundamentals

After a nearly 2-year bear market, Natural Gas futures prices may finally be trying to put a bottom in place, as prices seem to be on the upswing -- athough talk of a new bull market may be a bit premature. Since contract lows were made back in late October, February Natural Gas futures have rallied nearly 80 cents, as speculators covered short positions going into the peak demand winter heating season. Colder than normal temperatures earlier this month have translated into above average draws of Gas from storage. In the most recent EIA Gas storage report, there was a draw of 89 billion cubic feet (bcf) of Gas from storage last week, well above last year's 55 bcf draw and above the 5-year average draw of 74 bcf. However, total Gas in storage stands at 3725 bcf, or nearly 10% above the 5-year average. A look at the Commitment of Traders report may explain the recent rally, as large non-commercial traders have started to cover a small portion of their large net-short position. With U.S. Natural Gas production continuing to increase despite relatively low cash market prices, it may take a large increase in demand -- particularly industrial demand -- to actually put Natural Gas bulls back in the driver's seat.

Technical Notes

Looking at the daily chart for February Natural Gas, we notice what may turn into a rounded bottom formation. This potentially bullish technical formation has gained some credence from the unsuccessful test of the contract lows of 3.894 on November 15th, when prices fell to 3.913 before fresh buyers entered the market. Since that time, prices have rallied and have now held above the 20-day moving average. Although short-term momentum has turned positive, bulls would likely want to see a daily close above the 200-day moving average, currently near the 5.000 level, to re-gain control of the market for the first time since the middle of 2008. Support for February Natural Gas is seen at contract lows of 3.894, with resistance found at the December 9th highs of 4.635.

Mike Zarembski, Senior Commodity Analyst

December 14, 2010

Land Down Under Lifts Sugar

Today's Idea

Sugar market fundamentals remain extremely strong. Just when the market seems to find buying pressure subsiding, fresh news breaks and adds to the market's already strong fundamentals. For this reason, some traders may be looking to take on a bullish position in the Sugar market. The volatility of the futures market may be a bit much for many traders to stomach, however, and also, option premiums remain high. For these reasons, one could argue that a credit strategy may be what many traders are looking for. Some traders may look to sell the Feb Sugar 28 puts and buy the Feb 27 puts for a credit of 0.50, or $560. The max profit would be the initial credit and the trade risks an equal amount, $560.

Fundamentals

Sugar futures are up for the third consecutive session on the heels of no rate change in China and expectations of new shortfalls. This time it is the land down under that has contributed to the bullishness in Sugar. Production may drop to 19-year lows in Australia, on heavier than average rainfall. While Australia is not a heavyweight in Sugar exports like Brazil and India, the Aussie shortfall could put much unneeded stress on an already tight world crop. The world is bracing for a shortfall in the marketing year ending at the end of September. Previously, many traders were mildly optimistic that the Indian crop would make a comeback this crop year, but the weather was not cooperative. Brazil, which actually upped its plantings, has also been plagued with bad weather. Sugar growers need a bit of good news for prices to back off, but this seems unlikely at this point.

Technical Notes

Turning to the chart, we see the March Sugar contract breaking-out above the 29.50 level and now trading above 30.00. Technically, the market has been able to pick up some momentum since making relative lows in the 25.00. The March contract may now be setting-up to make a run at the 33.00 level, near contract highs. The RSI is a bit overbought at the moment, which could curtail some of the market's buying pressure.

Rob Kurzatkowski, Senior Commodity Analyst

December 15, 2010

Will "Poor Man's Gold" Begin to Tarnish?

Today's Idea

The volatile personality of the Silver futures market has certainly been reflected in the relatively high premiums seen in Silver futures options market! The high volatility levels may cause some traders to choose to explore short option strategies in Silver futures options. An example of one such strategy would be selling out-of-the-money strangles. For example, with March Silver trading at 29.710 as of this writing, one could sell the February Silver 40 calls as well as the February Silver 23 puts for about 16.5 cents, or $825 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized if March Silver is trading above 23.000 and below 40.000 at option expiration in late January. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. An example of one such exit strategy would be to buy back the options before expiration should the option premiums rise to 3 times the premium received for selling the options originally.

Fundamentals

It has been a volatile couple of months for Silver traders, as prices raced to multi-decade highs, only to suffer from steep one or two day sell-offs before resuming their upward movement. Silver has been seen by some investors as a "poor man's Gold," which has drawn interest from speculators looking for a "cheaper" way to play Gold's rise to historic highs. This belief has caused Silver prices to post a much larger percentage gain than Gold this year, with the widely watched Gold/Silver ratio falling to just over 48:1, vs. 65:1 at the start of 2010. In addition, Silver is also viewed as an industrial metal, more so than Gold, and has gained the attention of traders looking for a way to speculate on "industrial" metals such as Copper and Aluminum. Physical stocks of Silver in COMEX approved warehouses has fallen to nearly 4-year lows at nearly 106 million ounces, as it appears that there is an increasing interest by some investors and traders to actually take delivery of the physical metal. This may become more prevalent should the CFTC impose stricter position limits for metal and energy futures.

Technical Notes

Looking at the daily chart for March Silver, we notice how closely prices have held above the 20-day moving average since the market really broke-out to the upside in late August. This key technical indicator will act as the first line of support and only a weekly close below this MA would send a potentially bearish signal to the market. The up-trend line drawn from the August 24th lows, which has held tightly to the 20-day MA for a majority of the rally, is the second line of defense for Silver bulls. If there is a major warning that the up-move may be overdue for a serious price correction, it is the rather impressive bearish divergence seen in the 14-day RSI that has failed to make a new high reading corresponding to the market making new highs since October! The next resistance point for March Silver is seen at the contract high of 30.750. Near-term support is found at the 20-day moving average near the 28.010 area.

Mike Zarembski, Senior Commodity Analyst

December 16, 2010

Crude Confusion

Today's Idea

Crude Oil supply and demand fundamentals remain lackluster due to the large stockpile of petroleum in the US. However, outside factors support the Oil market. It seems that traders want to be bullish on Crude, even when there is no good reason to be bullish. Technically, the chart indicates indecision and traders await a breakout from the tight range seen this month. Some traders may wish to consider buying a February Mini Crude Oil futures contract at 90.50 on a stop, with a protective stop at 89.00 and an upside target of 93.00.

Fundamentals

Crude Oil futures have been trading in a tight range between 87.50 and 90.00 for the past two weeks, likely due to trader indecision. There are a number of supportive factors for the market, including China's decision not to raise its interest rate and lack of traction in the US Dollar lately. However, stockpiles of Crude Oil continue to rise in the US. Yesterday's EIA report showed inventories rising by 982,000 barrels to 35.9 million. The warmer weather expected for the remainder of the month in the Northeast could result in a build in Heating Oil inventories. Further inventory builds could result in Oil bulls exiting the market and waiting for a more opportune time to enter the market. Commodity demand as a whole has been very good of late, which could limit the downside potential of the Crude Oil market.

Technical Notes

Turning to the chart, we see the February futures contract consolidating between 87.50 and 90.00 after rising from the low 80's. Given the preceding move higher, the consolidation may have a bullish bias. Supporting this is the positive divergence between the momentum and RSI indicators. The bullish divergence suggests stronger prices in the near-term. A solid close above 90.00 would be seen as an upside breakout from consolidation, whereas the market falling below 87.50 could result in tests of support at 85.00 and 81.75.

Rob Kurzatkowski, Senior Commodity Analyst

December 17, 2010

Gold Bulls Take a Breather after a Record Year

Today's Idea

Although Gold futures look poised for a potential short-term correction, long-term Gold bulls may wish to use any price correction as an opportunity to sell out-of-the-money puts in Gold options. Looking at the daily chart for lead month February Gold, we note the 200-day moving average currently near the 1250.00 area. Bullish traders who believe that this support point will hold for the next several weeks may wish to explore selling Gold puts with a strike price below this level. For example, with February Gold trading at 1369.10 as of this writing, February Gold 1240 puts could be sold for about 2.10 points, or $210 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized should February Gold be trading above 1240.00 at option expiration in late January, about 6 weeks away. Given the risk involved in selling naked options, some traders may wish to have an exit strategy in place should the position move against them. One such strategy would be to buy back the options sold before expiration should February Gold futures post a weekly close below the recent low of 1317.40 made back on October 22nd.

Fundamentals

After a nearly $300 per ounce rally since the start of 2010, the bull market in Gold looks a bit tired, as prices are beginning to stage a moderate correction as the year comes to an end. Since reaching a new all-time high of $1431.10 in the lead month futures on December 7th, Gold prices have slipped about $70, as a stronger U.S. Dollar and higher long-term bond yields have taken some of the shine off commodities as an investment. Higher interest rates could be the wild card for precious metals prices, as traders weigh the benefits of "attractive yields" vs. the carrying costs associated with owning Gold, which pays no dividends or interest. However, any significant sell-off in Gold could be met with fresh buying -- especially from Asian investors, who may be looking to diversify the risks associated with holding currencies and long-term government debt, particularly in light of the financial turmoil seen in the E.U and the mounting government debt load here in the U.S. Many metals traders are still awaiting any market reaction to a CFTC proposal that would limit the size any one speculator can control in a group of 28 commodities, which includes precious metals. With Gold prices up over 25% for the year, it should come as little surprise that many traders may wish to book profits as 2010 comes to a close and avoid potential volatile trade during the next couple of weeks, as liquidity begins to wane and traders and dealers take time off during the holiday season.

Technical Notes

Looking at the daily chart for February Gold, we notice prices have fallen below the 20-day moving average, which is providing short-term momentum traders a reason to lean on the short-side of the market. However, longer-term traders will note that the 200-day moving average does not come into play until the 1250.00 level. Until prices move below this level, the bull market will remain intact. Like the Silver chart highlighted earlier this week, there appears to be a bearish divergence forming in the 14-day RSI, and the momentum reading has fallen below 50. Most bearish traders would want to see a close below near-term support at the October 22nd low of 1317.40, with Gold bulls regaining the upper hand should prices close above the contract highs of 1432.50.

Mike Zarembski, Senior Commodity Analyst

December 20, 2010

Bulls Don't Mind Re-heated Coffee

Today's Idea

Now that March Coffee has broken out to new yearly highs, some momentum traders may wish to establish a bullish position by using strategies involving Coffee futures options. An example of one such strategy would be the purchase of a bull call spread. For instance, with March Coffee trading at 225.30 as of this writing, the Feb 230 calls could be bought and the Feb 240 calls could be sold for about 3.00, or $1125 per spread, not including commissions. The premium paid is the maximum risk on the trade with a potential gain of $3750 minus the premium paid which would be realized at option expiration in January should March Coffee be trading above 240.00.

Fundamentals

After taking a brief "Coffee Break", many bullish traders have re-embraced the Coffee futures market by sending lead month March futures prices to highs not seen since 1997. The latest up-move was once again triggered by weather concerns in Columbia, the world's 2nd largest exporter of Coffee. Heavy rains are playing havoc with movement of the recently harvested crop, and the unusually wet conditions have the potential to damage the 2011 crop as well. Columbia has produced 7.8 million bags of Coffee through November according to the country's National Federation of Coffee Growers. Current production is below the pace necessary to meet its projection of a 9 million bag harvested by the end of 2010. These concerns are overshadowing the rising U.S. Dollar, which would normally be a bearish catalyst on commodity prices. The Commitment of Traders report shows both large and small speculative accounts are holding net-long positions in Coffee futures totaling a combined 39,206 contracts as of December 7th. Although this is a rather large net-long position, it is well off the record 69,191 contracts that were held back in early 2008 and leaves plenty of room for fresh buying should Coffee supplies remain tight going into 2011.

Technical Notes

Looking at the daily chart for March Coffee, we notice prices surging to new contract highs to end the week. The breakout through the recent consolidation on December 13th was the catalyst for last week's rally, as prices closed definitively through the 20-day moving average, triggering a bullish signal for short-term momentum traders. The 14-day RSI is strong, with a current reading of 68.90. 230.00 is seen as the next psychological resistance level for March Coffee, with support found at the November 3rd low of 195.15.

Mike Zarembski, Senior Commodity Analyst

December 21, 2010

Holding Pattern

Trading Ideas

The Gold market fundamentals remain positive. The rise to record levels of ETF holdings of Gold and a simultaneous decline in Silver holdings could be a sign that investors may not be buying into the recovery. Some traders may wish to consider taking on a bullish position with prices being steady. Some traders may wish to buy the Feb Gold 1400 calls and sell the 1425 calls for a debit of 9.00, or $900. The trade risks the initial cost for a maximum gain of 16.00, or $1,600.

Fundamentals

Gold futures have been in a holding pattern since coming off all-time highs. Many traders have been taking profits ahead of year end, which has kept prices at bay. Outside markets have been just as choppy, and the indecision has spilled over to the precious metals market. The US Dollar Index has been trading sideways, and equities seem to have had their “Santa Rally” earlier this month. Gold fundamentals remain strong. Many traders remain uncertain as to the state of the global economic recovery, and the present state of the sovereign debt market has kept traders on edge. Investment in Gold ETFs remains as strong as ever, with assets at all-time record levels. Traders may have to wait until January, when the year-end machinations of the market subside, to get a clearer picture of where the Gold market may be heading in the intermediate-term.

Technical Notes

Turning to the chart, we see prices grinding it out between 1360 and 1400. Prices have been gravitating toward the 20-day moving average in recent sessions. So far, the market has held the 50-day moving average. A breakdown below the average could signal a negative turn in the market. The RSI indicator is diverging from the price, which hints at possible weakness in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

December 22, 2010

Another One for the Record Books!

Today's Idea

With the current level of heightened volatility seen in the Cotton futures market lately, it should come as no surprise that Cotton option premiums are quite high, especially in the old-crop contract months. Some traders expecting a potentially large increase in Cotton plantings this coming spring may wish to explore a bearish strategy in new-crop December Cotton futures. An example of such a strategy would be buying a bear put spread. The cost to buy a higher strike put is offset somewhat by the premium received by selling a lower strike put. Although the put sold does cap the potential return on the trade if prices fall sharply, the credit received for selling the lower strike put would offer some relief to the relatively expensive cost of just buying a put outright. For example, with December Cotton trading at 98.73 as of this writing, the December Cotton 90 puts could be bought and the December Cotton 80 puts sold for about 3.80 points, or $1,900 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5,000 minus the premium paid which would be realized if December Cotton is trading below 80.00 at option expiration in November.

Fundamentals

With the end of 2010 coming near, the Cotton futures market will likely go down in the record books as a classic demand driven bull market, with lead month futures continuing to make historic highs. The run-up in prices was caused by a "perfect storm" of tight Cotton ending stocks, surging demand out of Asia, and reduced global production totals. The U.S. is the leading Cotton exporter, with China the largest buyer of U.S. Cotton. With economic growth rates in the double digits, Chinese appetite for commodities, including Cotton, has been robust throughout 2010. However, U.S. Cotton ending stocks continue to decline for this marketing year, with the USDA estimating U.S carryover totals could be at their lowest levels in several decades. The current wildcard is India, the world's second largest Cotton exporter. The Indian government has permitted a shipment of 5.5 million bales with an original deadline of December 15th. However, heavy rains in several of the main Cotton growing regions have hampered Cotton arrivals, which have led to only about half of allotted totals to be shipped by the deadline, although it is expected that the government will extend the deadline. With old-crop Cotton futures seemingly moving limit-up or limit-down nearly every day the past few weeks, many traders have turned their focus to the new-crop futures beginning with the December 2011 contract. Here prices are holding just below the $1 per pound level, a price that is very attractive to U.S. Cotton producers, which may lead to a sharp increase in Cotton plantings this spring. However, other factors such as spring planting conditions and prices of competing crops, such as Soybeans, may significantly alter the amount of Cotton that will be planted next year and could set the stage for a very volatile trading environment in 2011.

Technical Notes

Looking at the daily chart for December 2011 Cotton, we notice prices attempting to test the contract highs made on November 9th at 100.62. The previous attempt at closing above the $1 per pound level was met with heavy selling, as producer hedge selling was drawn to this very "attractive" price level for next year's crop. Old crop/new crop bull spreading also has the potential to put selling pressure on the December futures. The 14-dy RSI is strong, with a current reading of 64.20. The December 8th lows of 89.55 looks to be strong near-term support for December Cotton, with resistance seen at the contract highs of 100.62.

Mike Zarembski, Senior Commodity Analyst

December 23, 2010

Sour Crop Year

Today's Idea

Sugar supplies remain tight and will likely remain extremely tight going forward, barring a sharp turnaround in weather conditions. The chart appears as though prices may be breaking out, however there has been no confirmation. For this reason, some traders may wish to take a cautious approach and enter into an options spread with limited risk. Some traders may wish to buy the Feb Sugar 33.50 calls and sell the Feb 34.00 calls for a debit of 0.20, or $224. The trade risks the initial debit for a maximum profit of $336.

Fundamentals

The year 2010 may be known as the year of weather related shortfalls for commodity traders. Weather issues have hit Sugar especially hard, as India, Pakistan and Brazil have all been plagued by poor conditions. Pakistan is looking at a domestic shortage of 900,000 metric tons of the sweetener due to heavy flooding earlier this year. The country has upped their import forecast to 700,000 metric tons, but the figure could, in fact, be much larger. The shortages that food and fiber commodities have experienced this year have created a pack-rat mentality among countries that heavily process goods from those materials. Simply put, nations are preparing for a rainy, or sometimes not rainy, day. Pakistan may be low-balling their import figures to avoid driving already high prices even higher. Several years of supply shortages in the global Sugar supply have taken a toll, and it could take much longer to replenish stockpiles. Corn prices are also on the rise, which makes it uneconomical for Sugar users to substitute Corn-based sweeteners. With tight supplies on the horizon and no alternatives, Sugar prices may continue to push to new record levels.

Technical Notes

Turning to the chart, we see the March Sugar contract moving above the contract high close of 33.11 in early trading. If prices hold these levels, it could signal a new breakout. Traders now have to look back to the 1980 price spike to find the next possible resistance level at 36.58. The overbought conditions on the RSI could result in some selling pressure, but new shorts could get squeezed out if this is a true breakout.

Rob Kurzatkowski, Senior Commodity Analyst

December 27, 2010

Warming up to Heating Oil

Today's Idea

The daily chart for February Heating Oil shows strong support near the 2.4500 area. With the market’s bias favoring the bulls, some traders may wish to explore selling Heating Oil put options with a strike price below the chart support area. For example, with February Heating Oil futures trading at 2.5515 as of this writing, the February Heating Oil 2.35 puts could be sold for about 0.125, or $525 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if February Heating Oil futures are trading above 2.3500 at option expiration in late January. Given the potential risk involved in selling naked options, some traders may wish to buy back the option before expiration should the February futures close below chart support at the 12/15 low of 2.4471.

Fundamentals

Like its Crude Oil cousin, Heating Oil futures have also staged a nice rally to end the year, with prices now trading at highs not seen since the fall of 2008. The market has found some support from the extreme winter weather seen in parts of Europe which has caused fuel demand for heating surge in December. Also supportive was the continued increased demand for all commodities in Asia, especially in China, where the country’s Central Bank has once again raised interest rates for the second time in the last 10 weeks to attempt to control rising inflation in the country. Although there are signs that China’s refineries have begun to significantly increase diesel production lately (Heating Oil futures are commonly used as a proxy for hedging diesel fuel), it will take a significant reduction in demand to prevent possible shortages in the world’s most populous nation. Here in the U.S., the most recent EIA energy stocks report showed that U.S. distillate inventories fell by a smaller than expected 589,000 barrels last week, and that Heating Oil stocks remain ample at nearly 1.6 million barrels above the 5-year average. With Oil prices hovering above $90 per barrel and the entire winter season still ahead, Heating Oil prices look to remain elevated going into the 1st quarter of 2011, unless we start to see a significant decrease in global energy demand or winter weather conditions begin to moderate significantly in Europe or the northeastern sections in the U.S.

Technical Notes

Looking at the daily chart for February Heating Oil futures, we notice that prices have been in a nice, steady up-trend since the August 2010 lows. Prices have started to pull away from the 20-day moving average, adding additional upside momentum. The 14-day RSI is strong, but still remains just below overbought levels, with a current reading of 69.28. The next near-term resistance is seen at the 2.6000 area, with near-term support found at the 12/15 low of 2.4471.

Mike Zarembski, Senior Commodity Analyst

December 28, 2010

Warm Weather Cools Natural Gas

Today's Idea

Large inventories and record high production continue to weigh heavily on the Natural Gas market. Many bulls were holding out hope that the winter months would be colder than initially forecast, and they got their wish earlier this month. However, much of the country will see warmer weather in the New Year, dashing those hopes. Technically, a breakout from consolidation would suggest prices could test levels well south of the $4 level. Some traders may possibly wish to consider entering into a bear put spread, buying the Feb 4 puts and selling the Feb 3.75 puts for a debit of 0.070, or $700. The trade risks the initial debit for a potential profit of $1,800 if the Feb futures close below 3.75 at expiration.

Fundamentals

Natural Gas futures have been trading sideways for the past week and a half, after falling back from 4-month highs made earlier this month. Many traders are now looking past the cold December and have focused on the New Year, which is expected to bring higher than average temperatures. Inventory levels are expected to drop once again this week to 3.368 trillion cubic feet, almost 500 billion cubic feet off record highs made in the first week of November. Some traders may disregard this data in light of the warmer weather and record Natural Gas production. Unlike Crude Oil, Natural Gas does not enjoy the inverse relationship with the US Dollar, so outside markets will probably not help support prices. Commodity funds have also soured on Natural Gas, reducing their net long position by 35%. Colder than expected weather could change the market outlook, but it does not appear that will happen, at least according to forecasts.

Technical Notes

Turning to the chart, we see the Feb Nat Gas contract trading in a narrowing consolidation pattern. This could translate into a triangle pattern on the daily chart. A downward breakout from the triangle suggests that prices could make a run at the 3.75 support level. The lower edge of the pattern coincides with the 50-day moving average, making a downward breakout particularly bearish.

Rob Kurzatkowski, Senior Commodity Analyst

December 29, 2010

Hot Weather in South America has Corn Prices Popping!

Today's Idea

Contrarian traders expecting a near-term price correction in March Corn may wish to consider taking advantage of the relatively high option premiums and explore the sale of out-of-the-money call options in Corn futures. For example, with March Corn trading at 623.25 as of this writing, the February Corn 700 calls could be sold for about 7.50 cents, or $375 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if March Corn is trading below 700.00 at option expiration, which is a little over 3 weeks away. Given the risk involved in selling naked options, some trades may wish to buy back the short calls should the premium on the calls trade at twice the amount received for selling the options originally.

Fundamentals

A winter bull market in Corn futures is unusual, but not unheard of -- especially with the growing importance of South American grain production in the world export market. The current issue is the hot and dry conditions seen in Argentina, which is the world's second largest Corn exporter. The unfavorable weather comes at a most inopportune time, as the Corn crop enters the key pollination period. The Corn growing regions of southern Brazil are also lacking moisture, and unless rain is forecast soon, analysts may begin to lower South American Corn production estimates rather substantially. Reports that Russia is looking to purchase Argentinean Corn and China's huge appetite for commodities, especially grains, are also seen as supporting factors for Corn prices globally. The most recent Commitment of Traders report shows large speculators increasing their already large net-long position in Corn futures and options to nearly 415,000 contracts as of December 21st. This extremely large net-long position will need further bullish news to continue the upward momentum, and a near-term price correction would not come as a big surprise to most traders. However, any near-term weakness in prices may be short-lived, especially if weather conditions do not improve soon in Argentina and Brazil.

Technical Notes

Looking at the daily chart for March Corn, we notice prices moving strongly to the upside since the recent lows were made back on November 23rd. Since that time, March Corn has moved-up over $1 per bushel, without so much as a 25-cent correction. Although the move to 29-month highs has been impressive, there are some technical signs that a correction is long overdue. For starters, trading volume during the recent rally has shown a steady decline. This may be due to the holidays in December, when many traders are away from the trading desks. Additionally, the 14-day RSI has moved into overbought territory and still has not made a higher reading, despite Corn trading at contract highs. 630.00 is seen as the next resistance point for March Corn, with support found at the 20-day moving average currently near the 586.50 area.

Mike Zarembski, Senior Commodity Analyst

December 30, 2010

Signs of Foreign Interest Spur Bonds

Today's Idea

The large sell-off that the Bond market has seen in recent months suggests that some investors could see Bonds as an attractive investment. Yields are at their highest levels since the first half of 2010, and traders could see equities and commodities as being a bit toppy, at least in the near-term. The chart shows large intra-day moves without a direction for much of the month. This could be a sign that the market could turn. Some traders may wish to consider buying a March Bond contract on a stop at 122-16, with a protective stop at 120-16 and an upside objective of 125-00. The trade risks roughly $2,000 for a potential profit of approximately $2,500.

Fundamentals

Bond futures have found recent stability near the 120-00 level, after dropping 15 handles over the past three months. The strength of the 7-year note auction yesterday was fueled by bids from overseas. This is the strongest demand from foreign investors in a year and a half, and the indirect bidders accounted for almost two thirds of purchases. Yields are at their highest levels in months, and traders could be hedging themselves against a possible decline in equity prices in the New Year. The rise of commodity prices has been a major source of selling pressure for the treasury market. Many commodities still face extremely tight supplies because the chaotic weather of 2010, but the rise in prices could begin to hamper economic progress. China has already taken steps to cool the boom of raw material prices, which could make the Bond market an attractive alternative to traders looking to avoid equities. If commodity prices are unable to be contained, then the Bond outlook would likely be negative, as inflation would dictate higher yields.

Technical Notes

Turning to the chart, we see the March Bond contract trading in a wide sideways pattern. There is no indication as to whether this is simply consolidation before making another move lower, or if the market is poised to make a reversal. A move above 122-16 could be seen as a double bottom on the chart and cold signal a move into the mid 120's. A close below the relative low of 119-02 could be a sign that the market is heading toward 115-00. Prices are nearing the 20-day moving average. A close above the average would suggest that a near-term low may be in place. Momentum is showing bullish divergence with price and RSI, hinting at near-term strength.

Rob Kurzatkowski, Senior Commodity Analyst

December 31, 2010

Will $100 Oil be in the Cards for 2011?

Today's Idea

It seems like the Oil market has a bullish bias, with prices continuing to make higher highs and higher lows since the end of May. With this in mind, a quick look at the daily chart for February Crude shows strong support around the 80.00 level, with minor support between 87.00 and 83.00 dollars per barrel. Some traders who are expecting Oil prices to continue higher in the near-term and 80.00 to hold could look to sell puts in Crude Oil futures options with a strike price below this key price level. For example, with February Oil trading at 89.52 as of this writing, the February Oil 79.50 puts could be sold for about 0.14, or $140 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 mid-January should February Oil be trading above $79.50. Some more aggressive traders may wish to wait to see if February Oil pulls back towards support near 87.00 before attempting to sell puts. Given the potential risks involved in selling naked options, some traders may wish to buy back the short puts before expiration should February Oil close below 83.00.

Fundamentals

Crude Oil futures look to end 2010 near the yearly highs, as traders bid-up the price of "black gold" on the belief that improvements in the world economy will increase Oil demand in 2011. The 4th quarter of 2010 has seen U.S. Oil inventories fall from 27-year highs, with over 20 million barrels of Crude taken from storage in December alone. Continued strong demand from China and other Asian nations has kept a floor below Oil prices for most of the year, and now that there are signs that U.S. Oil demand is improving, prices look to close the year near the $90.00 per barrel level. The Oil market rally ran into a bit of a headwind on Thursday, after the EIA Energy Stock report showed that U.S. Crude inventories fell by a lower than expected 1.258 million barrels last month. Many traders were expecting a much larger 2.8 million barrel decline, and this "disappointment" led to a round of profit-taking selling, which sent front month February Crude below $90.00 to end the session. As we move into 2011, many traders will continue to focus on whether Chinese Oil demand will remain robust, despite efforts by the Chinese Government to cool its surging economy, as well as whether the recent decline in U.S. Oil inventories was merely an anomaly tied to "tax strategies" by refiners or the result of actual increases in domestic demand tied to improving economic conditions.

Technical Notes

Looking at the daily chart for February Crude Oil, we notice prices correcting sharply on Thursday, after the EIA report showed a less than expected decline in U.S. Oil inventories last week. This "catalyst" likely caused weak longs to exit the market ahead of the New Year, and given the lower liquidity seen in the market, the sell-off may have been overdone. Prices are now trading near the 20-day moving average, and momentum, as measured by the 14-day RSI, has moved lower to a more neutral reading of 53.85. Support for February Oil is seen at 87.43, with resistance found at the contract high of 91.88.

Mike Zarembski, Senior Commodity Analyst