Today's Idea

Just like the Crude Oil futures market we discussed in a recent edition of XPRESSO, February Gold seems to have solid chart support at the recent lows near the 1360.00 area. Some traders who are expecting these lows to hold in the near-term may wish to sell Gold puts with a strike price below chart support. For example, with February Gold trading at 1419.20 as of this writing, the February Gold 1340 puts could be sold for about 3.80 points, or $380 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 late January should February Gold be trading above 1340.00. Given the potential risk involved in selling naked options, some traders may wish to buy back the short puts before expiration should February Gold close below support at 1361.60.

Fundamentals

Traders were certainly "going for the Gold" in 2010, as prices of the "yellow metal" rose over $300 per ounce last year. It appears that Gold's emergence as an "alternative" currency, which many traders now embrace, has been among the key catalysts in Gold's run to new historic highs. Worries about inflation, especially in the era of "quantitative easing", has also put a bid into Gold prices, with many investors buying Gold as a hedge against rising inflation. Although high Gold prices hav curtailed physical buying by jewelry manufactures, especially in India, the market appears to be looking past this and focusing on the potential for increased Central Bank buying, particularly by Chinese and Russian banks, as these countries look to further diversify their currency surplus holdings. Though Gold prices have had quite the run-up this past year, the market may still find continued support, especially if the forex markets remain volatile in the upcoming year.

Technical Notes

Looking at the daily chart for February Gold, we notice how volatile trading has been since October of 2010, as prices zigzagged to new all-time highs. Prices have traded on both sides of the 20-day moving average during that time, leading to choppy trading activity. Though the bull market appears to be well intact, there is a bearish divergence in the 14-day RSI. Support for February Gold is seen at 1361.60, with resistance found at the contract high of 1432.50.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

Crude Oil fundamentals are still hampered to some extent by inventory builds and excess capacity. However, economic optimism along with the potential for inflation to run this year has traders optimistic that inventories can be worked down. It will be interesting to see longs resolve tested if we get several poor economic reports. Technically, the chart has not given any new signals since crossing the 90 level. Some traders who are expecting the Oil market to move and not consolidate may wish to consider executing a call back spread by selling 1 Feb Crude Oil 91 call at $2,200 and buying the Feb 93 calls for 0.90. The credit for the spread would be $400, which is the maximum profit if the price of Feb Crude Oil closes at or below $90 at expiration. The maximum risk on the spread is $1,600 at 93.00 at expiration. The breakeven point would be 94.60 on the upside, and there is unlimited profit potential above this level.

Fundamentals

Crude Oil futures began the New Year on a positive note, closing up on the session. The rally in equity prices played a role in higher Oil prices, as traders have become more upbeat about the economy. Bulls are hoping that a pickup in economic activity will be able to work down excess inventories. The high inventory levels and excess production capacity have been holding back prices to this point. Funds have increased their net long position, which could be viewed as either positive or negative. On the positive side, there is "smart money" entering the long side of the market. However, others can view this as a contra-indicator and a signal that the market may be getting a bit top-heavy. Given the fact that the market is not trading based on its own supply and demand fundamentals, many traders may look to outside markets for guidance. The two major markets that will likely have an impact on Oil are stocks and the US Dollar. A correction in equities could translate to a stronger greenback and weaker energy prices, while a sustained rally would be seen as supportive.

Technical Notes

Turning to the chart, we see the February Crude Oil contract holding the $90 level in recent sessions. A close below $90 suggests that an M-top may be in place. Yesterday's gravestone doji can be a negative signal in the short-term. The RSI remains at high levels near overbought territory, which could weigh on the market. Momentum is also showing some bearish divergence from prices, which is a negative signal in the short-term.

Rob Kurzatkowski, Senior Commodity Analyst

Today's Idea

The concerns over the potential global supplies of high quality milling Wheat would seem to favor the Hard Red Wheat futures contracts traded in Minneapolis and Kansas City over the Soft Red Wheat traded in Chicago. Given the potential volatility increase we could see in this Wheat "weather" market, some bullish traders may wish to explore the purchase of a bull call spread in either Kansas City or Minneapolis Wheat futures options. For example, with March Kansas City Wheat futures trading at 850.50 as of this writing, the March KC Wheat 880 calls could be bought and the 980 calls sold for about 26 cents, or $1,300 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential gain of $5,000 per spread minus the premium paid realized at option expiration in February should March KC Wheat be trading above 980.00.

Fundamentals

Sometimes numbers can be deceiving. This is certainly the case in the Wheat futures market, where prices have soared to 28-month highs, as record-setting rainfall in parts of Australia, which is the world's fourth largest Wheat exporter, has traders concerned about the quality of the Hard Red Wheat being produced. The inopportune rains have severely affected the quality of the Wheat crop in Queensland, with some analysts expecting nearly half the harvest will not be of milling quality and will end up as feed Wheat. Additionally, the Hard Red Winter Wheat crop in the U.S. has struggled so far this year, with dry weather in the western plains preventing the crop from receiving adequate snow cover to help protect it from the potential of "winterkill" due to below freezing temperatures. The importance of an ample harvest of milling quality Wheat out of Australia and the U.S is even more important this year, because Russian Wheat was taken off the export market due to the severe drought this past season. This has set the stage for potentially very tight global milling quality Wheat inventories, as buyers scramble to obtain supplies early in the year to prevent potentially being caught short should the U.S. and Australian crops fall below estimates.

Technical Notes

Looking at the daily chart for March KC Wheat, we notice the market putting in a major price floor around the 700.00 level. Since the sharp rally on December 1st, prices have not closed below the 20-day moving average, which has kept many short-term momentum traders firmly in the bullish camp. However, those looking for a short-term correction in prices will note the drop in volume since the December 1st upside breakout. Also, there is a large bearish divergence in the 14-day RSI that has been in place since the August highs, but it has failed to halt the rally so far. The contract high of 881.50 is the next resistance area for the March futures, with support seen at the recent low of 798.50 made back on December 17th.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

The fundamentals for the Euro continue to hold a neutral to slightly bearish bias. Logic would say that inflationary pressure could lead to higher rates, but the sovereign debt concerns supersede inflation concerns at the present. The chart also holds the same neutral to slightly bearish bias, given the fact that the market was coming down prior to consolidating. For these reasons, some traders may wish to consider entering into a bear call spread by selling the Feb Euro 1.36 call and buying the Feb 1.38 call for a credit of 0.0020, or $250. The maximum profit on the trade would be the initial premium, and the trade risks $2,250. Some traders may look to exit the trade on a close above 1.35 in the underlying March futures contract.

Fundamentals

The Euro continues to trade in a range between the 1.30 and 1.35 levels, on indecision among currency traders. The market has been in this range since late November, as traders have been entrapped in a tug-of-war between bulls that see inflation taking hold in the Eurozone and skeptics concerned over the sovereign debt situation. The news out of Europe over the past two days has done little to help the situation. Yesterday, indicators showed higher than expected inflation. Eurostat, the EU's statistics office, reported than inflation was at 2.2%, which is above the ECB's 2% target. This morning, the Eurozone's services index dropped to 54.2 from 55.4 the prior month. When one breaks down the numbers, Germany's services index actually rose, but both Ireland and Italy saw declines. This may be alarming for some traders, as Ireland has already been bailed out and Italy is rumored to be one of the candidates for a bailout due to rising budget deficits. The fact that the US and Japan also have rising government debt has put traders in a very awkward position, as there is little faith in the EU, US and Japan at the present time. Unless economic metrics offer more clarity, the market may continue to be trapped in its current trading range.

Technical Notes

Turning to the chart, we see the March Euro contract continuing to consolidate. The 1.3009 level, a relative low close, will be a pivotal level on the downside. A solid close below this level could be a sign of a downside breakout, whereas a rebound could be a sign of further range-bound trading. The markets continue to trade below the 50-day moving average, which happens to coincide with the upper level of the range at the moment. A breakout above the 50-day could be seen as bullish over the medium-term.

Rob Kurzatkowski, Senior Commodity Analyst

Today's Idea

The pace of the sell-off in Bond prices has started to slow the past several trading sessions, as prices have moved into a consolidation phase to start 2011. With Bond prices currently near the low end of the recent price range, traders looking for a "correction" to the bearish trend may wish to investigate the purchase of a bull call spread. For example, with March Bonds trading at 120-05 as of this writing, the March Bond 121 calls could be bought and the March Bond 124 calls sold for about 1-02, or $1,031.25 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential profit of $3,000 minus the premium paid realized should March Bonds be trading above 124-00 at option expiration in February.

Fundamentals

Positive economic data has not been kind to Bond bulls, as traders have fled their "safe haven" purchases in Treasuries and have moved into less "risk averse" trades such as equities and commodities. Since the recent highs were made back in late August of last year, lead month Treasury Bond futures have fallen by nearly 18 full points, as current yields have soared to over 4.50% for the long bond. Recent weakness in Bond prices was triggered by a hugely optimistic estimate on private sector jobs created last month from ADP, which said that 297,000 jobs were created last month. This was well above the gain of 100,000 jobs most traders were expecting and has raised the bar for this morning's monthly Non-farm Payrolls report. Some analysts are now expecting an increase of over 200,000 jobs, and any short-fall could spark some short-covering buying in Treasuries, as traders' expectations for employment have risen sharply. The improved economic data has triggered some talk that the Federal Reserve (Fed) will possibly curtail some of its purchases of Treasuries in its latest program of quantitative easing, though a perusal of the recently released Fed minutes shows little indication that the Fed will not fulfill its $600 billion purchase of Treasuries by June.

Technical Notes

Looking at the daily continuous chart for the lead month Bond futures, we notice prices finally moving into a consolidation pattern after a sharp 3-month-long decline in prices. Volume has also dropped off during this consolidation, which might be setting the stage for a sharp breakout once volume increases. The 14-day RSI has rallied off oversold readings and currently stands at a more neutral reading of 41.99. The December 15th low of 118-21 is seen as strong support for the March contract, with resistance found at the recent high of 123-00.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

Traders concerned about the potential volatility in price swings after the USDA crop production report is released have a tendency to bid-up option premiums days before the report is released. This tendency can make short option strategies "attractive" to more aggressive traders who hope to benefit from a decrease in option volatility once the figures are out. One such trading strategy would be to sell out-of-the-money strangles in Soybean futures options. For example, with March Soybeans trading at 1363.50 as of this writing, the February Soybean 1500 calls and the February Soybean 1250 puts could be sold for about 10 cents, or $500 per strangle, not including commission. The premium received would be the maximum potential gain on the trade and would be realized at expiration should March Soybeans be trading above 1250.00 and below 1500.00 at option expiration about 2 weeks away. Given the potential risk on selling naked options, traders should have an exit strategy in place should the trade move against them. One such strategy would be to buy back the options sold should the strangle trade at more than three times the premium received for selling the strangle originally.

Fundamentals

Like many commodity markets at the start of the New Year, Soybean prices have slumped a bit, as commodity index fund re-balancing and signs of improving weather conditions in Argentina have traders lightening up on their long positions. Long-only commodity index funds are expected to be net-sellers in Soybeans to start the year, as strong price gains in 2010 have these funds "overweighed" in the grain complex. In addition, some weather forecasts are now calling for the potential for increased rainfall in the parched Soybean growing areas of Argentina, the world's third largest Soybean exporter. However, not all the news for Soybeans is bearish, as Chinese Soybean demand is still robust, which is keeping U.S. Soybean exports well above the USDA estimate. Also, any rainfall seen in Argentina in the coming days may not be timely enough to prevent severe crop losses this season, with some private forecasts calling for as much as a 15 million metric ton decline in Soybean production from earlier estimates of nearly 55 million metric tons. The most recent Commitment of Traders report shows large speculators are holding a very large net-long position in Soybeans (over 186,000 contracts) as of December 28th, and the chances of further long liquidation selling are enhanced, at least in the near-term, as traders begin to pare their positions ahead of the USDA Crop production report on January 12th. This report will announce the final production figures for the 2010 crop and has the potential to trigger extreme price moves should the government's figures differ sharply from pre-report estimates.

Technical Notes

Looking at the daily chart for March Soybeans, we notice that since prices broke-out to the upside back in August of last year, there have been two "bull flag" formations on the daily charts. These chart patterns resolved themselves in the direction of the major trend, which in the case of Soybeans was up. Prices are now forming what could be a third "bull flag", which if true, could signal even higher prices are ahead. On the downside, the 14-day RSI is showing a bearish divergence, as the recent high in Soybean prices was not accompanied by a new high reading in the RSI. The next support level for March Soybeans is seen at 1269.00, with resistance found at the contract high of 1409.00.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

Gold fundamentals remain unclear at the moment. The Eurozone debt mess in and of itself is supportive for Gold prices, but this may only be in Euro terms. It could cause the Dollar to appreciate, which may actually cause a decline in Dollar-termed Gold. Technically, the Feb. futures contract continues to trade near support around 1365. For this reason, some traders may wish to enter into a short position on the Feb. Mini Gold futures on a stop at 1350, with a downside objective of 1300 and a protective stop at 1370. The trade risks roughly $664, with a maximum profit of roughly $1660.

Fundamentals

Just when Gold futures seemed to be headed for a correction, Portugal's debt situation has led to renewed safe haven buying pressure. Many traders have been ignoring the 800 lb. gorilla in the form of debt from Portugal, Spain and Italy, but eventually, they will have to step back to reality. The news that some Eurozone nations had been encouraging Portugal to take aid behind closed doors has been a sign that maybe things are worse than previously expected. The stronger Eurozone nations can only support nations with debt issues for so long. Several of the nations that are facing debt problems include larger economies, like Spain and Italy, which may require more aid than the smaller economies of Ireland and Greece. This news is mixed for Gold traders in the US. While there may be some flight to quality buying, the US Dollar could rise versus the Euro. The question then becomes how strong demand will be for European Gold ETF's. If the pace of ETF investment in Europe increases at a brisk pace, then physical demand for the metal could cause Gold to strengthen in Dollar terms, even if the greenback strengthens significantly.

Technical Notes

Turning to the chart, we see the Feb. Gold contract trading below the 50-day moving average, which can be seen as a negative. Prices were able to hold support at 1365. A breakout below this level could be seen as a bearish breakdown. If the market is able to hold this support level, we may see more buyers coming in and the contract possibly testing highs near the 1420 level.

Rob Kurzatkowski, Senior Commodity Analyst

Today's Idea

Corn futures prices might be the most vulnerable to a sell-off, as the huge net-long position being held by speculators combined with relatively high Corn prices may trigger long-liquidation selling should the USDA report "disappoint " Corn bulls. There appears to be good support in March Corn at 595.00, and should this level fail to hold, there could be significant stop-loss selling below. Some traders may wish to consider selling March Corn at 594.00 on a stop, with a protection buy-stop at the recent high of 623.50.

Fundamentals

Grain traders set their alarm clocks ahead this morning, as few would want to miss the release of the USDA's Annual Crop Production and Grains Stocks report to be released at 7:30 am Chicago time. Many traders are expecting the USDA to somewhat lower the size of the 2010-11 Corn crop to 12.49 billion bushels, which is down slightly from the 12.54 billion bushel estimate in the December report. The lower crop size should also be reflected in the Corn carryout estimate, which is expected to decline to 780 million bushels. Soybean production is expected to remain at 3.375 billion bushels, but strong export demand is expected to decrease the 2010-11 carryout totals to a tight 158 million bushels. Winter Wheat seedlings are expected to have increased for the 2011 crop year, with expectations that just over 41 million acres were planted this season, which is up from the 37.335 million acres producers seeded in 2010. Wheat carryout totals are expected to have declined to 840 million bushels, down from 858 million bushels in December. Given the fairly robust demand for grains, especially from Asia, and weather concerns affecting the crops in Australia and South America, many speculators have a "bullish bias" in the grains to start the year. However, any major "surprises" from the USDA in their crop estimates could trigger some violent price movements, as traders are forced to reassess their positions.

Technical Notes

Looking at the daily chart for March Corn, we notice that since contract highs were made at 634.00 to start 2011, Corn prices have fallen nearly 40 cents per bushel before the slight rebound the past two trading days. Some of the selling may be tied to the rebalancing by index funds who were net sellers of grains to start 2011. Also, with large speculators holding nearly 400,000 net-long contracts to end 2010, some profit-taking selling may have occurred -- especially ahead of the USDA report. Prices are now trading right around the 20-day moving average, but are still well above the 200-day moving average. The recent sell-off may have formed a "bull flag" formation, and prices need to hold the recent lows to keep this formation intact. The contract high at 634.00 is the next major resistance point for March Corn, with support seen at the recent low of 595.00.

Mike Zarembski, Senior Commodity Analyst

Trading Ideas

Currently, Wheat fundamentals likely can be seen as bullish. However, many traders may have already priced-in global supply tightness, which could make the market vulnerable to selling pressure. Likewise, the chart does show the Wheat market in a vulnerable position, but no downside breakout has been confirmed. Aggressive traders that may be looking to enter into a bearish position, despite the lack of technical confirmation, may want to consider taking a more cautious approach by entering into a bear put spread. An example of such a spread could be buying the March 750 put and selling the March 730 put for a debit of 7 cents, or $350. The trade risks the initial cost and has a maximum profit of $650 if the March Wheat contract closes below 730 at expiration.

Fundamentals

Wheat prices gained on the heels of Corn, as the USDA reported a widening deficit in this year’s Corn crop. While Wheat moved higher in sympathy with Corn, the report likely would not be seen as bullish for the grain. The production deficit for the current crop year was forecast to drop to 19.4 million tons from 20 million tons in last month’s report. Wheat may actually be vulnerable to selling pressure, as many traders have already priced-in the large shortfall and the impact of the heavy rains in Australia. However, the downside potential for prices may be limited due to concern among traders that 2011 may face the same type of food shortages seen in 2008.

Technical Notes

Turning to the chart, we see the March Wheat contract holding above support at 750. A close below this level could be seen as a downside breakout and a confirmation of a double-top pattern on the daily chart. If the double-top is confirmed, prices could possibly trade down into the low 700’s. Recent closes below the 20-day moving average indicate that a relative high may be in place. The 50-day moving average comes in just below support at 750, and a close below the average could further validate a downside breakout if it were to happen.

Rob Kurzatkowski, Senior Commodity Analyst

Today's Idea

Although it is an old trading adage not to sell into a short-covering rally, some traders who believe that any rally in the Eurocurrency is an opportunity to get short the market may wish to explore option trading strategies to help limit the potential risk should the short-covering buying continue. Some traders with a longer-term bearish slant may wish to investigate the purchase of a bear put spread in Eurocurrency options. For example, with the March Euro trading at 1.3353 as of this writing, the March Euro 1.3350 put could be purchased and the March Euro 1.2750 put sold for about 0.0187, or $2,337.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $7,500 minus the premium paid which would be realized at option expiration in early March should the March Euro be trading below 1.2750.

Fundamentals

Just when it looked like the Euro was poised to test recent lows, all of a sudden many traders cannot get enough of the beleaguered currency, as its value vs. the U.S. Dollar has climbed nearly 5 full handles in the past 3 trading sessions. Among the factors behind this sudden turnaround was the "successful" auction of government debt by Portugal on Wednesday, as well as by Spain and Italy yesterday. Although all three of these countries have to pay several hundred basis points higher in yields than that of Germany for investors to be interested in its debt, pre-auction expectations were so low that even these high yields were seen as a pleasant surprise by many traders. However, there is some discussion as to who the buyers of this debt are, with some talk that the European Central Bank or possibly several Central Banks in Asia and South America were the largest participants in the recent debt auctions. In addition, after the announcement that the European Central Bank (ECB) left interest rates unchanged at 1%, comments from ECB President Jean-Claude Trichet that the bank would continue to monitor inflation and would not be opposed to raising rates if conditions warranted also added a bid to the Euro, as these "hawkish" comments sparked additional short-covering buying. Though it is too soon to tell if the Euro will be able to continue its recovery vs. the Dollar, it may behoove traders to remain skeptical that all is well once again in the EU and that the Euro's woes have all been solved.

Technical Notes

Looking at the daily continuation chart for Eurocurrency futures, we notice prices have now moved above both the 20 and 200-day moving averages. The 14-day RSI has formed a bullish divergence, as this momentum technical indicator failed to make a new low reading when the recent lows were made on January 10th. For the up-move to continue, prices have to move through rather strong resistance around the 1.3440 area. If we do get a daily close above this level, this could set-up a test of the November 22nd high of 1.3785. Support is found at the January 10th low of 1.2870.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

The fundamentals driving the Nasdaq are unique to the companies that comprise the index. Consumers have been stingy with the exception of technology. However, the S&P and Nasdaq may converge. For this reason, some traders may wish to consider legging into a Nasdaq-S&P spread, selling the March E-mini Nasdaq and buying the March E-mini S&P. Traders may possibly want to look for this spread to narrow to 950 points.

Fundamentals

Nasdaq futures are lower this morning on the news that Steve Jobs is taking a medical leave at Apple (AAPL). Given the weight given to large caps in the index, the lower price of the stock is pushing the entire index lower. Because of the way the index is weighted, the stock accounts for roughly 21% of the Nasdaq 100. Technology stocks have been outperforming the general market during the past few months, so a pullback is not out of the question and could actually be healthy. For the first time in a long time, tech companies are bringing new, innovative devices that change the everyday consumers' lives. Smartphones, tablets, internet TV and 3D television are affecting the consumer in the same way personal computers did in the late 80's and early 90's and the internet did at the turn of 21st century. Sales of these devices have been extremely strong in the face of a fragile economy. Many traders may now question whether Nasdaq stock valuations got a bit ahead of themselves. The index has outperformed the S&P since September, and there could possibly be some convergence between the two indices unless technology sales keep exceeding expectations by a wide margin.

Technical Notes

Turning to the chart, we see the March Mini Nasdaq trending higher. Prices have traded above the 20-day moving average since the end of November, and above the 50-day since early September. If the futures begin to correct, these two averages are likely to come into play. Support comes in at 2230 and 2200. The 2200 level can be seen as a critical level to maintain the uptrend in the near to intermediate-term.

Rob Kurzatkowski, Senior Commodity Analyst

Today's Idea

Some traders who are looking for the recent rally in Cocoa prices to falter but who fear selling futures outright given the uncertainty surrounding the political climate in the Ivory Coast, may wish to explore the purchase of a bear put spread in Cocoa options. For example, with March Cocoa trading at 3020 as of this writing, the March Cocoa 3000 puts could be bought and the March Cocoa 2800 puts sold for about 55 points, or $550 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $2000 minus the premium paid, which would be realized if March Cocoa is trading below 2800 at option expiration on February 4th.

Fundamentals

Cocoa prices have rallied sharply the past several sessions, as traders fear the continued un-rest in the Ivory Coast could hamper Cocoa shipments out of the world's largest Cocoa producing nation. The unrest stems from a disputed election back in November and t he fact that current president Laurent Gbagbo has refused to step down. This dispute has caused the European Union (EU) to impose sanctions, including baring EU ships from the main ports in the Ivory Coast. Although any further escalation of violence could hamper supplies, other Cocoa producing nations could make up for any shortfall. Ghana is expected to produce a bumper crop, and other West African nations are still moving recently-harvested Cocoa to ports for shipment. The recent weakness in the U.S. Dollar is also seen as supportive for Cocoa prices, but has been offset somewhat by weaker than expected Cocoa grinding in Europe. Increased hedge selling has been seen as March Cocoa reaches the $3000 per ton level, and prices may be vulnerable to a sharp sell-off should a resolution occur in the Ivory Coast in the next several days.

Technical Notes

Looking at the daily chart for March Cocoa, we notice that after prices broke-out to the upside in early December, bullish momentum has failed to take prices higher, with the market making a series of lower highs and lower lows in a rather volatile trading environment. Cocoa bulls will argue that prices are now above both the 20 and 200-day moving averages, and the 20-day MA has crossed above the 200-day MA, which is viewed by many technical traders as a bullish signal. The 14-day RSI has moved to a neutral/bullish reading of 57.50. The December 7th high of 3140 remains strong resistance for March Cocoa, with support found at the recent low of 2821 made back on January 7th.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

Since August of 2010, Crude Oil futures have made a series of higher highs and higher lows, although the path higher has been marked by moderate "corrections" that have put Oil bulls' resolve to the test. A look at the daily chart for March Crude shows solid chart support located between 85.00 and 82.00, which if violated to the downside may be the signal that the up-trend has run its course. Some traders who believe that the support area will hold may wish to explore selling puts in March Crude Oil with a strike price below the lower level of support near 82.00. For example, with March Crude Oil trading at 89.57 as of this writing, the March Oil 78 puts could be sold for about 0.15, or $150 per option, not including commissions. The premium paid would be the maximum potential gain on the trade and would be realized if March Oil is trading above 78.00 at option expiration in mid-February. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. An example of one such strategy would be to buy back the puts sold before expiration should March Crude close below the 200-day moving average (currently near 84.10).

Fundamentals

Today's headline may seem a bit conflicting at first, but traders fear a red hot Chinese economy may lead to further tightening measures that may potentially put the brakes on the premiere growth engine in Asia. The latest data on 4th quarter GDP showed a growth rate of 9.8%, which is well above the 9.4% rate most analysts were expecting. With China's inflation rate running above government target levels, many traders fear the Chinese Central Bank will be forced to take stronger measures to help tame its robust economy. Due to this "perceived" possibility of a slowdown, commodity futures prices have fallen during the past few trading session, with March Crude Oil falling over $4 per barrel from highs made just a few days ago. Many traders have been in a bullish mode regarding Oil until recently, as strong Asian demand combined with some signs of economic improvement in the U.S. had some prominent analysts targeting Oil for another run at $100 per barrel. Oil bulls got no help from this week's EIA energy stocks report, which reported a gain of 2.617 million barrels of Crude last week, vs. the pre-report estimate of a draw of about 1.4 million barrels. With speculators holding a near-record net-long position in Crude Oil, a decent price correction may be necessary to restore health to the bull market, as late and weak longs are taken out of their positions. It may be after this "washout" that prices may once again resume their upward climb, unless we finally see some "actual" evidence of a slowing Chinese economy and not just the fear of such an occurrence in the coming months.

Technical Notes

Looking at the daily chart for March Crude Oil, we notice yesterday's sharp sell-off sent prices below the 20-day moving average at the close for the first time in several sessions. Despite this weak performance, prices failed to reach the recent low of 88.45, which is the nearest support level. It certainly is possible that March Crude prices might be looking to consolidate between the recent high of 93.46 and the December 15th low of 88.07 for a bit until the market determines its next move. There is a bearish divergence forming in the 14-day RSI which would be confirmed should March Oil close below the bottom end of the aforementioned price range.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

Some traders bullish on the Canadian Dollar longer term who wish to minimize some of the day-to-day volatility that can be seen in the FX markets may wish to explore the purchase of a bull call spread in the deferred contract months. For example, with June Canadian Dollar futures trading at 1.0022 as of this writing, the June 1.0100 calls could be bought and the June 1.0600 calls sold for about 0.0155, or $1,550 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 June Canadian Dollar futures are trading above 1.0600 at option expiration in early June.

Fundamentals

The days of the "discounted" dollars of our neighbors to the north may become a thing of the past, as the Canadian Dollar continued to make its way above "par" vs. the U.S. Dollar. The reasons for the strength in the "Loonie" are many, including the rise in commodity prices, a much stronger banking system, and higher short-term interest rates. All these factors have Canadian economic growth prospects looking bright. On Friday, Statistics Canada reported that Canadian retail sales rose by 1.3%, following up from a 1% gain in October and the 6th consecutive monthly increase reported. This news has offset, for the time being, some "dovish" comments from the Bank of Canada (BOC) earlier last week, after the BOC left its overnight interest rates unchanged at 1%, citing continued uncertainty in the global economic recovery. These comments sent the C$ lower, as traders feared that the BOC would not be raising interest rates for the foreseeable future. However, as Canada is a major producer and exporter of commodities, including oil, grains, and metals – all "stuff" that the emerging economies of the world will need -- it certainly appears that the economic outlook is bright for Canada and, in turn, for the Canadian Dollar.

Technical Notes

Looking at the daily continuation chart for Canadian Dollar futures, we notice the bull market that began in March of 2009 is stall in force, with prices starting to pull away from the 200-day moving average. I have drawn a trend-line from the March 2009 lows, and prices would currently have to fall below 0.9790 before most bulls would start to get nervous. The 14-day RSI has moved to a neutral level, with a current reading of 54.73. The recent high made on January 18th of 1.0153 looks to be the next resistance point for the March futures, with support found at the December 21st low of 0.9766.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

The recent sell-off in April Platinum has prices holding just above the 20-day moving average. Should prices close below this short-term indicator, the next major support area looks to be near the 1710.00 area. This is also the 61.8% retracement from the October 2010 low to the recent contract high. Some bullish traders may wish to go long April Platinum should the market reach support around the 1710.60 area, with a protective sell stop at the 78.6% retracement at 1680.00.

Fundamentals

The long awaited price "correction" in the precious metals group (PMG) has finally come to fruition, with Gold futures off well over $100 from its highs, Silver down about 5 cents, and Platinum plunging $70 in the past few sessions. The entire PMG complex may be a victim of its own success, as large speculative long positions are now being liquidated as sell-stops are triggered and longs late to the market are exiting their trades and licking their wounds. Gold may be the weakest of the complex, with prices falling nearly 7% so far this year, as investors seem to have regained some confidence in the global economic recovery efforts and are now switching some assets from the "safe haven" of Gold and into equities and bonds. Silver has historically been a favorite trading vehicle for "smaller" speculators and investors, and although it has outperformed Gold lately, this much less liquid market can produce wide daily price swings, especially during a bout of liquidation selling. Ironically, the most expensive of the PMG's, Platinum, may end up being the best performer, as its prices have not reached all-time highs like Gold's -- plus its use in the production of catalytic convertors has a built-in demand component, especially as automobile demand continues to increase in Asia, and especially in China. In fact, Chinese demand for Platinum rose by 40% in 2010 due to the surge in auto production. Though long liquidation selling may continue for the near future, some traders may wish to investigate the Platinum market as a potential upside play in the precious metals sector this year.

Technical Notes

Looking at the daily chart for April Platinum, we notice that Tuesday's sharp sell-off was halted right at the 20-day moving average. However, given the record long position being held by speculators, it may take further long liquidation selling, possibly to the 61.8% Fibonacci retracement level just above 1710.00, before health can be restored to the bull market. The 14-day RSI has moved back to a more neutral reading of 53.70. Volume on the recent sell-off was moderate to heavy, but not at an extreme level. Support for April Platinum is seen at 1710.60, with resistance seen at the recent high of 1851.10.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

Bonds may continue to trade range bound due to mixed economic indicators. There does seem to be a slight bias toward the downside, given the fact that many commodities continue to push higher. Some traders may wish to consider taking on a bear call spread by buying the March Bond 124 calls and selling the March 123 calls for a 0-16, or $250, premium to the sell side. The max profit on the trade would be the initial credit, and the total risk would be $1,750.

Fundamentals

The Fed's language did little to help the Bond market, as the March contract shed almost a full point following the FOMC statement. Bonds have had lack direction for over a month due to mixed economic indicators, as well as interest rate uncertainty. The current low interest environment and rising commodity prices indicate that the US central bank will likely have to step in and eventually raise interest rates. The FOMC statement indicated, however, that this may not take place for some time. Basically, you have low rates supporting prices on one hand, and on the other hand, high commodity prices along with the inevitability of higher rates in the futures weighing on the market. Investors have also shown an increased appetite for risk, as evidenced by lackluster demand in treasuries and sagging precious metals prices. The five-year note auction had better than expected results, which helped to stabilize prices. Much of the demand came from overseas investors who are shunning European debt.

Technical Notes

Turning to the chart, we see the March Bond contract continuing to trade in a range between 119 and 122. The failed double-bottom pattern earlier this month may have caused bulls to lose faith. Trading ranges have been tightening, which may be an indication that the market may be poised to finally find some direction. The market has found support at 119-18, as there has not been a weekly close below this level. A weekly close below 119-18 would suggest prices may come down to test 115-00.

Rob Kurzatkowski, Senior Commodity Analyst

Today's Idea

Although Lean Hog futures prices are at record highs, the potential increase in export business, primarily to South Korea, is expected to be completed in the first half of the year. Some traders looking for Hog prices to stay robust in early 2011 may wish to consider the purchase of a bull spread in Lean Hog futures. One example of this trade would be buying April Lean Hogs and selling October Lean Hogs. As of this writing, April Lean Hogs are trading at a 4.75 point premium to the October. Traders buying the bull spread would want to see the premium widen even further, but they should remember that trading futures spreads may not be less risky than trading an outright futures position and that there is a possibility that one side of the spread could be trading higher for the day while the other leg of the spread could be trading lower for the day.

Fundamentals

Well maybe not pigs, but lean hog futures prices are certainly flying high, with the lead month April contract surpassing the $90 per hundredweight level for the first time in the contract's history. So what is behind the stampede into pork? One of the biggest factors is likely the occurrence of foot and mouth disease in South Korea. This outbreak has forced the government to order the slaughter of at least 25% of the country's hogs in order to prevent the disease from spreading. Many traders expect the U.S.to receive increased export business from pork due to the South Korean issue. In addition, pork production is expected to continue to decline, as cold temperatures in the Midwest keep hogs from gaining weight. Hog slaughter this week is estimated at 1.268 million, which is well above the 1.192 million slaughtered at this time last year. Many large speculative traders are starting to embrace the "bull" market in Lean Hogs, as the most recent Commitment of Traders report shows large non-commercial traders added an additional 3,278 net-long contracts to their positions, which now stand at 42,881 contracts as of January 18th. Taking the other side of this trade are commercial traders and even small speculators, who are trying to pick a top in this historic market.

Technical Notes

Looking at the daily chart for April Lean Hogs, we notice a potential reversal day occurred on Thursday, as prices soared to new highs, only to close nearly unchanged on the session. This could be a signal that a much needed correction may be looming. Weak long liquidation selling could cause prices to move back towards support levels found between 87.500 and 85.000. Longer-term, we likely should remain in a bullish mode as long as the market remains above the 200-day moving average, which is currently located just above the 77.500 area. The 14-day RSI has moved into overbought territory, with a current reading of 75.445. Thursday's contract high of 92.100 will now act as resistance for the April futures, with support found at the recent consolidation low of 85.050.

Mike Zarembski, Senior Commodity Analyst

Today's Idea

A quick look at the daily chart for April Live Cattle shows good chart support at 110.00, and even stronger support around the 107.50 area. Traders expecting these support points to hold may look into selling puts in Live Cattle options with strike prices below these support points. For example, with April Live Cattle trading at 112.975 as of this writing, the April 107 puts could be sold for about 1.000, or $400 per option, not including commissions. Given the neutral to bearish view from the USDA cattle inventory report, some traders may be able to receive a better price for selling these puts if prices decline this week. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in April should the April futures be trading above 107.000. Given the risks 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 buy back the short option if the option premium trades at 3 times the amount received for selling the option originally.

Fundamentals

Not to be outdone by its porcine brethren, Live Cattle futures have been stampeding higher, rising over $23 per hundredweight since June of last year. Good demand for beef and the potential for additional exports to South Korea, which has destroyed about 10% of its cattle due to the spread of hoof and mouth disease, have futures prices trading at a premium to the cash market price. Prices have moved of their contract highs the past few sessions, as traders evened-up their positions ahead of this past Friday's release of the USDA's semi-annual cattle inventory report, which showed 99.582 million head as of Jan 1st. This was 1% below last year's totals, and slightly higher than the average pre-report estimate of a 1.4% decline. Although the numbers were above expectations, this is the fourth year in a row where cattle inventories have fallen. The report is expected to have a bullish influence on deferred Feeder Cattle futures, but may initially pressure near-term Live Cattle futures. However, with the U.S. cattle herd now at 52-year lows, any significant price weakness this week may be met with fresh buying, as the supply outlook appears like it will remain tight again in 2011.

Technical Notes

Looking at the daily chart for April Live Cattle, we notice the market moving steadily upward since June of last year, as a smaller cattle herd and improving beef demand kept prices moving higher. However, the price spike to contract highs of 116.600 may have been too strong of a move, especially as cash market prices failed to move swiftly higher and a much needed correction took prices back towards the 111.000 level prior the USDA report. The most recent Commitment of Traders report shows large speculators liquidated almost 4,000 net long positions for the week ending January 25th. However, the large speculative long position still remains at a robust 99,907 contracts. This could be the catalyst form some near-term price weakness, as the USDA report was not as "bullish" as most traders expected. Prices should find some chart support at the recent low of 109.900 made back on January 5th. Resistance remains at the contract high of 116.600

Mike Zarembski, Senior Commodity Analyst