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February 2011 Archives

February 1, 2011

Egyptian Unrest Lifts Oil

Today's Idea

The situation in Egypt presents an interesting situation for traders. Trading news events can be a very high-risk proposition. For this reason, some traders may wish to take on a trade with predefined risk – for example, buying a March Crude Oil 92 call and selling a March 94 call for a debit of 0.85, or $850. The trade risks the initial cost for a possible maximum profit of $1,150.

Fundamentals

Crude Oil futures have surged over the past two sessions, largely due to the unrest in Egypt. The nation itself produces very little Crude Oil, but the nation's Suez Canal is a major transportation route linking the Middle East to Europe. A shutdown of the canal could disrupt the transport of several million barrels of Oil per day. Currently, ships are running through the waterway at a normal rate, and OPEC has stated that the cartel will up production in the event of shortages. Like any geopolitical situation, it is difficult to tell when the conflict will end and the incumbent control of the military tends to prolong such situations. Many political observers are also concerned that turmoil could spread east to Saudi Arabia and other Gulf Oil producers. Even in the even that tensions subside and a peaceful resolution is reached, there is no guarantee that the price of petroleum will pull back sharply. Consumer spending in the US was at its highest pace in four years, a strong positive indicator for the US economy. This comes on the heels of a favorable GDP report. Also, the relationship between West Texas Intermediate (WTI) and Brent Crude Oil is narrowing. It looks as though Brent is trying to pull WTI up to its level.

Technical Notes

Turning to the chart, we see the price of the March Crude Oil contract closing at new contract highs. Prices seem to be poised to test the 100-day moving average, but the market bounced before prices were able to touch the average. The move higher may have also invalidated the double-top formation confirmed last week. The next area of resistance may be found near 94.50, but this can be seen as a relatively minor resistance level. Stout resistance may be found near the 100 level.

Rob Kurzatkowski, Senior Commodity Analyst

February 2, 2011

Euro Revival Continues

Today's Idea

Once a currency begins to trend, it is difficult to reverse the momentum, baring a major shift in the fundamentals. That being said, the March Euro is up against some technical resistance near the1.4250 area that could be difficult to overcome. Some traders who are moderately bullish on the Euro but believe that the 1.4250 area may hold in the near-term may wish to explore buying a bull call ratio spread. In this-type scenario, a trader would buy a near-the-money call and then sell multiple out-of-the-money calls using the proceeds from the short options to help defer the cost of the option purchased. An example of this trade would be buying 1 March Euro 1.39 call and selling 3 March Euro 1.43 calls. With the March futures trading at 1.3821 as of this writing, this ratio spread could be purchased for about 0.0056, or $700 per spread, not including commissions. The maximum gain would occur at expiration during the first week of March should the March Euro futures close at 1.4300. Here the profit would be $5,000 minus the premium paid for the spread. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such strategy would be to close out the trade before expiration should the March Euro futures close above 1.4400.

Fundamentals

The demise of the Euro has once again been put on the back burner, as it appears traders now believe that “all is right” again in Europe, as the Eurocurrency has risen to 2 ½ month highs vs. the U.S. Dollar. Much of the recent gains can be tied to the belief that the European Central Bank (ECB) will eventually raise interest rates this year, as fears of rising prices will force the central bank to focus on curbing inflation. In addition, the lack of major turmoil in Egypt, as protests have been fairly peaceful so far, have traders focusing on “riskier assets” once again, which is viewed as supportive for the Euro. Some good economic data out of Germany, where the unemployment rate is near 20-year lows, has also supported the Euro and has overshadowed, for now, the continuing debt crisis in some of its member countries. Recent economic data seems to suggest that the U.S. economy is also beginning to show some meaningful signs of improvement. However, the fact that the Federal Reserve is steadfastly determined to keep interest rates low for the foreseeable future -- or at least until we start to see the U.S. unemployment rate start to show some meaningful declines -- has traders looking towards the Euro and the potential to earn higher rates of return if the interest rate differentials begin to widen in the Euro’s favor.

Technical Notes

Looking at the daily chart for March Euro Currency futures, we notice that prices broke out of the recent consolidation range once the downtrend line, drawn from the November 4th highs of 1.4250, was broken. We also notice a bullish divergence had formed in the 14-day RSI when this momentum indicator failed to make a lower reading at the recent lows of 1.2870. Though prices have climbed steadily for the past few weeks, trading volume has started to wane a bit, which may be signaling a bout of short-covering buying instead of new longs being initiated. The 14-day RSI has also moved above the 70.00 level, which historically has signaled a market has become overbought. The next major resistance point is not seen until the 1.4250 area, with support seen at the recent low of 1.2870.

Mike Zarembski, Senior Commodity Analyst

February 3, 2011

Appetite for Risk Hurts Gold

Today's Idea

While the fundamentals on Gold seem to be quite mixed, the momentum of the market indicates that prices could move lower. Many traders seem to favor equities and economically sensitive commodities at the present time. Technically, the Gold chart shows signs of near-term support, but prices remain at vulnerable levels. Some traders with a bearish predisposition on the Gold market may wish to look into trading a bear put spread, buying the March Gold 1325 puts and selling the March 1310 puts for a debit of 6.00, or $600. The trade risks the initial cost and has a potential maximum profit of $900 if the underlying April futures contract closes below 1310 at expiration.

Fundamentals

Gold futures seem to have everything lining up for them, but have continued to trend lower lately. Indian imports jumped 18% over last year, and the People's Bank of China is likely looking to bolster its reserves of the metal. In addition to the increased demand from the two Asian heavyweights, the Egyptian unrest has the potential to drag on for an extended period of time. The increase in Crude Oil prices has had a negative impact on Gold trading as well. While it may seem counter-intuitive, many traders that participate in the Gold market also trade Oil. It seems that a good portion of the trading capital normally allocated to Gold has been diverted to petroleum instead. Traders' appetites for risk have also increased, fueling gains in equities, base metals and petroleum at the expense of safehaven investments. Interest rate expectations have also decreased, which has been somewhat supportive of debt and could help precious metals in the long run. In the near-term, however, it looks as though Gold may play second fiddle to riskier investments.

Technical Notes

Turning to the chart, we see the April Gold contract breaking down below support near the 1365 level. Also, prices are now trading below the 100-day moving average, which can be seen as a negative in the intermediate-term. Failure to hold the 1322 level could result in further selling pressure, and prices may come down to test support near the 1250 mark. In the near-term, it looks as though the bullish divergence and RSI could be positive signs. The RSI is now at oversold levels, also hinting at near-term support.


Rob Kurzatkowski, Senior Commodity Analyst

February 4, 2011

Are We Getting Close to a Top in Cotton Futures?

Today's Idea

Although it appears that global Cotton production may rebound sharply in 2011, that will not likely help near-term demand, as Cotton supplies look to be very tight in the near-term. Trader's looking to try to pick a top in Cotton prices may want to focus on the new-crop Cotton contracts, starting with the December 2011 contract. Given the potential for extreme volatility in outright futures positions, especially as we approach the widely anticipated USDA prospective plantings report at the end of March, longer-term bearish traders may wish to explore the purchase of a bear put spread in December 2011 Cotton futures options. For example, with December Cotton futures trading at 115.24 as of this writing, a December Cotton 105 put could be bought and a December Cotton 95 put sold for about 4.50 points, or $2,250 per spread, not including commissions. The premium paid for the spread 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 95.00 at option expiration in November.

Fundamentals

Any commodity market where one has to go back in time to the U.S. Civil War to find higher prices has to be considered one of the classic bull markets in recent history. The market in question is the Cotton futures market, where prices are now trading at highs not seen since the 1860"s! The Cotton bull market was a "perfect storm" of lower than expected supplies, as production from the U.S., Pakistan and Australia was not sufficient to meet the surging demand from Asia, and particularly from China. Though the "bullish" supply/demand equation is likely the major reason for sharply higher Cotton prices, the most recent price surge may be tied to buying by cotton mills who have been holding back on purchases in hopes of lower prices, but who are now being forced to "pay up" to obtain needed inventory. In addition, first notice day for March Cotton is fast approaching, with few willing sellers among commercial interests. Those caught short March Cotton may be forced to aggressively bid-up prices to draw out sellers as delivery approaches. With Cotton demand expected to remain robust this year, new-crop December Cotton prices have also moved steadily above the $1 per pound level, as prices must be competitive to compete for acreage with Soybeans and Wheat. Internationally, Cotton production is expected to increase this year, with sharply higher Cotton planting estimates coming in from China and Brazil, and potentially the U.S. ,The Cotton market is once again validating the old trading adage that "the cure for high prices is high prices,," meaning that if there is an economic incentive to do so, producers will increase production sufficiently to meet demand. So unless Mother Nature has other plans, we should see sharply higher Cotton production later this year, which may finally put an end to this historic bull market.

Technical Notes

Looking at the daily chart for December Cotton, we first notice what appears to be a potential reversal day on Thursday, as the market made a new-contract high only to close lower on the day. Though the near-term March futures did close below the previous day's lows and at the low of the day, December Cotton staged a moderate late session rally, most likely due to liquidation of bull spreads that kept prices above the day's lows. Should we see long-liquidation selling begin to occur, we could see the December futures test major support at the 20-day moving average, currently near the 108.00 area. The 14-day RSI also failed to make a new high reading on Thursday, setting-up a potential bearish divergence in this momentum indicator. Thursday's high of 120.48 will now act as resistance for the December futures.

Mike Zarembski, Senior Commodity Analyst



February 7, 2011

Is Punxsutawney Phil a Natural Gas Trader?

Today's Idea

A glance at the daily chart for April Natural Gas shows what may be a significant top put in place back on January 24th, when prices rose to nearly 6-month highs, but then fell sharply to close near the lows of the day. Since that time, the April futures have been range-bound, with prices holding within a narrow band between 4.500 and 4.250. Some traders looking for the 4.800 highs to hold for the next few weeks may wish to explore selling calls in April Natural Gas options with a strike price above 4.800. For example, with April Natural Gas trading at 4.342 as of this writing, the April Natural Gas 5.000 calls could be sold for about 0.035, or $350 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 March should the April futures be trading below 5.000. Given the risks 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 calls before expiration should the April Natural Gas futures close above 4.8000.

Fundamentals

Although there are over 20 inches of snow outside my window here in the suburbs of Chicago, Punxsutawney Phil and Natural Gas traders are already seeing signs of Spring, as April Natural Gas futures closed at 1-week lows on Friday, as gas bears focus on weather forecasts calling for a warm-up in parts of the U.S. next week. Not even a larger than expected draw from storage last week could spark a rally in prices. On Thursday, prices fell sharply after the Energy Information Administration reported that 189 billion cubic feet (bcf) of gas were drawn from storage last week. Although this was a slightly larger draw from storage than the pre-report estimate, many traders seemed disappointed that the draw was not even larger, given the cold temperatures seen in January. Total gas in storage is near the 5-year average for this time of year, standing at 2,353 bcf. Weather forecasting models seem to be calling for above-normal temperatures in the eastern and southern regions of the U.S. by mid-February, which if accurate could start a trend of lower than expected draws of gas from storage as the calendar moves closer towards Spring. Given the amount of Gas currently in storage as well as expected increases in Gas production, it appears that unless we experience another major outbreak of cold weather this winter, the U.S. should have more then adequate supplies of Gas in storage, which may thaw any rally attempts as spring approaches.

Technical Notes

Looking at the daily chart for April Natural Gas, we notice that despite the sharp decline in prices since the January 24th highs, Natural Gas futures have made a series of higher highs and higher lows. This technical action is normally viewed as bullish for prices, but some traders will need to see the 4.800 high taken out soon or Natural Gas bears will begin to gain some confidence. Also notice haw quickly prices fell back below the 200-day moving average in late January and that since that time, they have also fallen back below the 20-day MA as well. Momentum as measured b the 14-day RSI has moved to a bearish/neutral reading of 46.02. 4.800 looks to be major resistance for the April futures, with support seen at last week's low of 4.274.

Mike Zarembski, Senior Commodity Analyst



February 8, 2011

Prices Fail to Stall Corn Demand

Today's Idea

Corn fundamentals remain strong and may remain strong for the foreseeable future. The US has had the good fortune of having a bountiful harvest, but much of the world has experienced the polar opposite, including the world's most populated nation, China. However, prices may have gotten a bit ahead of themselves, which could trigger heavy liquidation in the event of a bearish USDA report. Technically, the Corn chart does not seem to have many technical barriers from testing all-time highs made in 2008. However, the lack of a sharp breakout from the recent pennant and divergence of RSI and price can be seen as hints of possible future weakness. Trying to pick tops and trade ahead of USDA reports can be a risky proposition, so only some traders may want to dip their toe in the water, so to speak, and enter into a bearish strategy with predefined risk. Some traders may wish to enter into a bear put spread by buying the March Corn 655 puts and selling the March 640 puts for a debit of 4 cents, or $200. The trade risks the initial cost for a potential gain of $550 per spread if the March contract closes below 640 at expiration.

Fundamentals

Corn futures have rallied to their highest level since mid-2008 on expectations that Wednesday's USDA report will show lower ending stocks. Increasing prices have done little to curb demand, and there is talk that the USDA will increase its ethanol usage forecast. Asian demand, especially from China and Japan, continues to move forward at an extremely brisk pace. Speculation that Chinese imports of the grain will increase to the tune of 9 million metric tons has provided strong support and appears to have shaken detractors out of the market for the time being. This is more than double the previous record Chinese demand of 4.3 million metric tons in 1995. Surprisingly, feedlot demand for grains has remained strong. The pullback in energy prices seems to have little effect on trading ahead of the production and supply and demand reports. In addition to the pullback in energy prices, prices of Corn in the US are higher than prices in China, which could have an adverse impact on prices if the USDA ending stocks figure exceeds expectations. Because of the report's impact on trading activity, some traders may expect to see choppy trading today, as traders fine tune their positions ahead of the USDA data.

Technical Notes

Turning to the chart, we see the March Corn contract continuing to breakout from the pennant on the daily chart. Prices may not meet any significant resistance until they reach 712.50, the close on June 24, 2008. The uptrend that began in July has steepened in recent months, which could be seen as an indication that the market may be getting parabolic. It is interesting to note that the RSI indicator is diverging from prices, which can be seen as a negative. The indicator has come down from overbought levels, despite the strength of Corn.

Rob Kurzatkowski, Senior Commodity Analyst


February 9, 2011

No retreat for Wheat prices!

Trading Ideas

With May Wheat futures climbing above 900.00 for the first time since 2008, Wheat bulls definitely seem to have the upper hand. A quick look at the daily chart shows good chart support just above the 785.00 area. Some traders looking for this support point to hold in the next several weeks may wish to explore the sale of Wheat puts with a strike price below 785.00. For example, with May Wheat trading at 907.25 as of this writing, April Wheat 780 puts could be sold for about 4.50 cents, or $225 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 March should May wheat futures be trading above 780.00. 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 options before expiration should the option premium trade at 3 times the premium originally received for selling the options originally.

Fundamentals

Not even another interest rate hike by the People’s Bank of China, which initially sent many commodity prices tumbling, could spark a sell-off in Wheat futures, with the March contract now trading at new contract highs. Continued strong import demand is likely one of the key drivers behind the rally, as new buying has been seen from Middle Eastern and North African countries. Though most traders are already aware of the damage being done to the Australian wheat crop due to flooding, a recent article in the Wall Street Journal reported the United Nations Food and Agriculture Organization issued a warning about a severe drought occurring Northern China that could severely hamper Wheat production in at least five major production regions. China is the world’s largest Wheat producer, and although it is too early to write-off the crop, the drought situation has the potential to become serious enough to force China to have to import Wheat should emergency reserves become depleted. This morning the USDA will release its February Crop Production and Supply /Demand Report, with many analysts looking for only a minor change in Wheat carryout totals from January’s report. Many analysts are looking for 2010-11 Wheat carryout to total 810 million bushels, which is down slightly from January’s 818 million bushel estimate. However, should the recent increases in Wheat exports continue, we could see a bullish surprise in world Wheat carryout totals in the next few USDA reports.

Technical Notes

Looking at the daily chart for March Wheat, we notice the giant bull flag formation that formed from the “spike” high back in August. Although it took several months for the “correction” to finish, this could be the formation of a strong base for the next move upward. Despite the fact that the 14-day RSI is reading a strong 67.28, there is a bearish divergence forming in this momentum indicator. 900.00 is viewed as the next resistance level for March Wheat, with support found at the recent lows of 758.25 made back on January 11th.

Mike Zarembski, Senior Commodity Analyst


February 10, 2011

T-Note Reprieve

Today's Idea

March Notes have found near-term solace in the demand from foreign central banks, however, traders remain concerned about inflationary pressure. Rising food and energy prices may be a greater risk to the economy than bank lending at this point. The Fed's stubborn stance may cause swift and extreme interest rate intervention down the road, when the central bank cannot ignore the 800 pound inflationary gorilla any longer. The chart also suggests that the Note market is mired in a downtrend in the intermediate-term, but may find near-term support. For this reason, some traders may wish to consider entering into a bear put spread, buying the March T-Note 118.5 puts and selling the 117 puts for a debit of 15 ticks, or $234.38. The spread risks the initial cost for a potential profit of $1,265.62 if the March futures contract closes below 117-00 at expiration.

Fundamentals

Foreign central banks continue to accumulate precious metals and US government debt in an effort to bolster their balance sheets. Yesterday's 10-year Note auction followed the trend of recent auctions that have shown an increase in central bank bids. The yield on the auction was 6 basis points lower than the consensus estimate. Traders are now left questioning whether the central bank demand can slow the selling pressure coming from speculator liquidation. With the FOMC unlikely to raise rates in the near-term, Note prices seem to have limited downside potential. The Fed seems to be in denial that inflation has made an impact on the US economy. Many traders seem to believe that the Fed is painting itself into a corner with its current rate policy, and that aggressive interest rate increases could be in store down the road, as evidenced by increased yields in longer-dated treasuries.

Technical Notes

Turning to the chart, we see that yesterday's gains are the strongest that the March 10-Year Note has seen this month. The breakdown from the ascending wedge on the daily chart suggests that the market is still in a downtrend. The measured move on the daily chart suggests that the contract may come down to test the relative lows from Last April near the 115-00 level. In the near-term, some traders may interpret yesterday's action to be a short-term reversal pattern. The RSI is near oversold levels, suggesting prices may find near-term support.

Rob Kurzatkowski, Senior Commodity Analyst


February 11, 2011

Uncertainty Over Supplies May Keep Sugar Price Volatile

Today's Idea

The potential for world Sugar supplies to move back into a surplus this year could send Sugar futures prices sharply lower and put an end to this historic bull market run. Some traders expecting Sugar prices to fall may wish to explore selling July Sugar futures below the recent lows of 26.65 on a stop, with a potential price target of the major support area at the November 17th low of 20.22. Traders may want to limit the risk on this trade by placing a buy stops above the contract high of 29.75.

Fundamentals

Sugar futures traders need to be a hearty lot, as volatile price swings have been the norm during the past several months. Multiple years of world Sugar supply deficits have been behind Sugar's price rise to over 30 cents per pound, but there is some hope that the market may return to a surplus in 2011. High Sugar prices have been the catalyst for increased production estimates, with analysts expecting increased Sugar output from both India and Brazil this year. However, Mother Nature has not been kind to the Sugar growers in Australia, where devastating floods are expected to sharply lower production from the 3rd largest Sugar exporter. Current estimates are for Australia to produce 3.5 million metric tons the next crop year, which is down over 1 million metric tons from earlier estimates. The demand outlook remains mixed, as high world Sugar prices may curtail demand from some importing countries. Given the tight supplies the past few years, however, even normally price sensitive buyers may be forced to buy, even at current high prices, to guarantee supplies should this year's output fail to meet estimates. However, if Sugar production does live up to expectations, the days of 30 plus cent Sugar may be nothing but a memory later this year.

Technical Notes

Looking at the daily chart for July Sugar, we notice prices moving higher since the intermediate low at 20.22 was recorded back on November 17th. During this time, the 14-day RSI has failed to make a new higher reading, creating a long-term bearish divergence in this momentum indicator. The market staged a major reversal on February 3rd, as prices made a new-contract high but ended the day sharply lower. Since that time, the market has moved sideways, holding close to the 20-day moving average. Prices need to hold above the uptrend line drawn from the November 17th low, and a close below this trendline has the potential to trigger a run of sell stops as weak longs run for the exits. The recent low at 26.65 should act as support for July Sugar, with the contract high of 29.75 the next level of strong resistance.

Mike Zarembski, Senior Commodity Analyst

February 14, 2011

Crude Awakenings!

Today's Idea

A quick look at the April Brent Crude futures chart shows a much more "bullish" picture than the chart of its West Texas Intermediate (WTI) cousin. Some traders who are bullish on Oil may wish to explore buying the April Brent futures with an upside target above the recent highs of 103.70. The bullish bias may be put to a test should the April futures close below the recent low of 98.12.

Fundamentals

Many traders of Crude Oil futures have been shaking their heads in disbelief, as the price spread between Brent Crude Oil and WTI Crude Oil futures has moved to a shocking $16.00 Brent premium over the WTI contract in the lead month contracts. First, a bit of background on the two types of Crude. WTI Crude Oil is viewed as the "benchmark" for the North American Crude Oil market. Brent Crude Oil, or North Sea Brent Crude, is known as the European "benchmark' grade. Normally, WTI Crude should trade at a slight premium to Brent due to its lower sulfur content, which makes this grade more desirable for the refining of gasoline. However, the delivery point for the NYMEX WTI futures in Cushing, Oklahoma is nearing capacity, as oil continues to flow into storage there. This has been the major reason cited by many traders and analysts for the "disconnect" between these similar "benchmark" Oil futures products. The political situation in Egypt has helped Brent Crude Oil trade at over $100 per barrel, as traders fear any possible disruptions of Oil moving through the Suez-Mediterranean or "Sumed" Pipeline, which transports Oil through Egypt en route to ports on the Mediterranean Sea, as well as Oil shipments through the Suez Canal. Though there have been no reported disruptions so far, some traders fear that we may see further political upheaval in other nations in the Middle East and North Africa, where huge amounts of Oil are exported. Given the "supply" issues currently seen in Cushing, Oil traders also may want to watch the Brent Crude Oil futures market along with the WTI futures to get a "clearer" picture of current traders' views on the direction of Crude Oil prices.

Technical Notes

Looking at the daily chart for April Brent Crude Oil, we notice the market has been in a bullish mode since the intermediate lows were made back in August of last year. With only a few exceptions, prices have held above the 20-day moving average since December. However, the 14-day RSI has moved towards a more neutral reading of 56.47, after having briefly moved into overbought territory above 70.00 last week. The recent high of 103.70 remains the next resistance point for the April futures, with support seen at the February 8th low of 98.12.

Mike Zarembski, Senior Commodity Analyst



February 15, 2011

Wheat Rolls

Today's Idea

Given the strong Wheat fundamentals and the fact that the grain is a consumer staple, it is difficult to find reasons to go against the trend. While feed use may suffer, it is hard to imagine consumers cutting bread out of their diets due to rising costs. Wheat is entering into an area of congestion, but if it can cross through the near-term hurdles, most notably resistance near the 1000 level, prices could test all-time highs. Some traders may wish to consider getting into bullish strategy by buying the April Wheat 950 calls and selling the 975 calls for a debit of 6.50, or $325. The trade risks the initial cost for a maximum profit of $925 if the May futures contract closes above 975 at expiration.

Fundamentals

Wheat futures continue to trade at their highest levels since the fall of 2008 on strong demand and the extension of the Chinese drought. The small amount of moisture that China has seen from recent snowfalls is expected to have little to no effect on soil moisture levels. Large Iraqi tenders suggest that the Middle East may be stockpiling due to Egyptian unrest, as well as smaller demonstrations in Yemen and Bahrain. The strong cash demand, along with tight supplies due to weather conditions in Russia, Canada and Australia, has led to fund buying. The net long fund position, including futures and options, of CBOT Wheat has grown to 43,432 contracts. The non-commercial reportable net longs in the three major varieties of US Wheat stands at 122,175 contracts as of February 8th. Unlike other grains, Wheat is not easily substituted and prices are not as elastic as other commodities. For these reasons, consumer demand may continue to rise, despite increased costs.

Technical Notes

Turning to the chart, we see that yesterday, the May Wheat contract took out the relative weekly high close of 890.50 from August of 2008. The next area of resistance may be found at the June 2008 weekly high close of 912.00. Further resistance can be found at the 1000 level. Prices are above the major moving averages. It looks as though momentum and RSI are beginning to show positive divergence, suggesting near-term strength.

Rob Kurzatkowski, Senior Commodity Analyst


February 16, 2011

Gold traders ask "What Have You Done for Me Lately?"

Today's Idea

As mentioned in the Fundamentals section of today's Xpresso, given the sideways action of Gold prices lately, some traders may wish to explore trading strategies that would benefit if prices remain within the approximately $125 trading range. On e such strategy would be selling a strangle using Gold futures options with a call strike price above the recent high of 1434.10 and a put strike price below the recent low of 1309.10. For example, with April Gold trading at 1372.40 as of this writing, the April Gold 1450 calls and the April Gold 1280 puts could be sold for about 6.20 points, or $620 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in late March should April Gold be trading below 1450.00 and above 1280.00. Given the risks involved in selling naked options, traders may wish to have an exit strategy in place should the trade move against them. One such strategy would be to buy back the short options before expiration if the strangle trades at 2.5 times the premium received for selling this strangle originally.

Fundamentals

"What have you done for me lately?" This seems to be the cry from Gold traders, as the "yellow metal" now seems to be favoring neither bulls nor bears and the market appears to be in a consolidation mode. Looking at the daily chart for April Gold, you see that since October of last year, Gold prices have been caught in a $125 trading range, which is a far cry from the price run-up we have seen through most of 2010. Not even the political unrest in Egypt could move Gold prices in either direction, as many traders remain torn regarding whether to focus on "flight to quality" buying or the anti-inflationary measures being taken by countries such as China and India. Rising security markets in the U.S. and an uptick in bond yields may also lure investors away from Gold, especially if prices fail to make new highs soon. However, there is no guarantee that any further political unrest in other parts of the Middle East will be as controlled as what occurred in both Egypt and Tunisia, and if recent history is any guide, increased Gold ownership may occur on any signs of an escalation of violence during these political protests. A look at the most recent Commitment of Traders report shows non-commercial traders adding over 20,000 new net-long positions for the week ended February 8th, increasing their net-long position to 191,281 contracts. This increase occurred just as Gold prices made their near-term lows and put an end to the recent price correction. Although the Specs' long position is rather large, it is still well below the record 283,462 contracts held back in early October of last year. With April Gold currently trading in the middle of the recent price consolidation range, some traders may wish to focus on trading strategies that will benefit from a sideways market -- at least until we see the market tip its hand with either a breakout above the highs or below the lows of the recent trading range.

Technical Notes

Looking at the daily chart for April Gold, we notice prices currently trading near the middle of the now nearly 5-month consolidation phase. Near-term, prices have moved above the 20-day moving average, giving Gold bulls the slight edge. The 14-day RSI has now turned up, with a current reading of 56.70. However, Gold's trading volume has been in a declining trend since the recent low was made back on January 28th, which may signal fewer traders are willing to join the current rally. The Jan 28th low of 1309.10 should act as support for April Gold, with resistance remaining at the contract high of 1434.10 made back on December 7th.

Mike Zarembski, Senior Commodity Analyst



February 17, 2011

Loonie Heading North?

Today's Idea

Given many traders' demands for higher yielding assets, some currency traders may be drawn to growth currencies. While this can be seen as a positive, the outside influence of energy and precious metals prices could threaten to derail a possible rally. Technically, the chart is at a critical resistance level, but no upside breakout has been confirmed. Some traders may wish to consider buying a March Canadian Dollar futures contract on a stop at 1.0160, with an upside target of 1.0300 and a stop at 1.0075. The trade risks roughly $850 for a potential profit of $1,600.

Fundamentals

Canadian Dollar futures continue to trade north of parity with the US Dollar. The rally in the Loonie has stalled since the middle of January due to a poor showing from precious metals and the recent decline in Crude Oil prices. Given the recent positive economic data and relatively tame inflation figures in the US, some currency traders may look to move back into higher yielding currencies. The data suggests that the global economy continues to make progress, and central banks may be able to extend expansionary policy in light of the tame inflationary data. The price of Crude Oil, which is Canada's largest export, may be what decides the near-term direction of the Canadian Dollar. The front month Oil contract has been on the decline for the third consecutive week and has broken through some key downside technical levels, which weigh on the Loonie. Gold prices have been on the rise, which could neutralize the negative effects of softer Oil prices.

Technical Notes

Turning to the chart, we see the March Canadian Dollar trading near resistance near the 1.0150 level. Failure to break through these levels suggests prices may come back down to test parity once again. A breakout above 1.0150 may be met with resistance near the 1.0300 level. The momentum indicator is outpacing RSI to the upside, which can likely be seen as positive in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


February 18, 2011

Bond Prices Bounce From Recent Lows

Today's Idea

After having traded at its lowest levels in 10 months, the lead month Bond futures contract seems to be putting in a near-term bottom, as prices appear poised to re-enter the consolidation area seen on the daily chart. Looking at the June Bond futures which will become the lead month in the next week, we see the market making a near-term low at 115-07. Some traders looking for Treasury bond prices to rally, or at least hold above the recent lows, may wish to explore selling puts with a strike price below support at 115-07. For example, with June Bonds trading at 117-27 as of this writing, the April Bond 114-00 puts could be sold for 22/64ths, or $343.75 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in late March should the June Bond futures be trading above 114-00. Given the potential 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 puts should the June Bond futures close below support at 115-07.

Fundamentals

When the going gets tough, investors and traders still seem to seek the "safety" of the U.S. government bond market. This phenomenon is highlighted by the recent rally in U.S. Treasury futures tied to the increasing political unrest occurring in the Middle East and Northern Africa. The rally in Bond prices is occurring despite the fact that recent economic data was perceived as "bearish "for bond prices by many analysts. On Thursday, the U.S. Labor Department announced that Consumer Prices for January rose by a higher than expected 0.4%, as higher food and energy prices started to show up on the consumer level. In addition, the Philadelphia Fed index of Business Activity rose sharply to 35.9 from 19.3 last month, which was well above the 20.5 reading expected. However, many traders seemed to shrug off this data, and instead focused on the events occurring in the Middle East, where there are conflicting reports that Iran was preparing to send war ships through the Suez Canal. This important area for the shipment of Crude Oil has heightened traders' concerns that the recent political tension in the region could eventually slow, or even halt shipments of Oil through this waterway. With Bond yields rising lately, investors may be ready to jump back into the Bond market to lock in "attractive" yields and have the additional benefit of an investment in a "safe haven" product.

Technical Notes

Looking at the daily chart for March Treasury bond futures, we notice prices moving back into the recent trading range after a recent test of yearly lows was met with fresh buying. Prices are now hovering around the 20-day moving average, and a close above this short-term indicator could set-up a test of the upper end of the recent price range just above the 122-00 area. The 14-day RSI has moved back towards a neutral level, with a current reading of 49.13. Though it appears the short-term momentum may now be favoring the bulls, it would take a close above the 100-day moving average, currently near the 124-16 area, to shift the longer-term momentum away from the Bond bears. The recent lows at 116-26 should act as support for the March Bonds, with resistance seen at the top of the recent trading range near the 122-09 area.

Mike Zarembski, Senior Commodity Analyst



February 22, 2011

WTI/Brent Saga Continues

Today's Idea

Given the extremely volatile political situation in the Oil producing regions of the world, the Oil market is likely to be just as volatile. While it could be tempting for traders to enter into WTI-Brent Crude Oil spreads, there are many factors that could make the spread extremely risky – different markets, different exchanges, different supply dynamics, etc. For this reason, some traders may wish to focus on the US Oil market and consider entering into a futures spread, buying the April and selling the May futures contracts for a difference of 1.75 or greater to the May contract. Some traders may wish to look for the spread to narrow to 1.00, and they may wish to protect the position by exiting on a close of 2.25. The trade risks roughly $500 and has a maximum profit of roughly $750.

Fundamentals

The spread between the Brent and WTI Crude Oil could narrow in light of the rising tide of protests sweeping through Africa and the Middle East. The contango between in the WTI could also find itself flattening, as investors could flock to near-month futures contracts. Currently, the market is in a contango because of large supplies in Cushing, and it could be advantageous for investors to take delivery, store and redeliver against back month contracts. After many had initially thought that the contagion of the Egyptian protests was overblown, the protests in Libya have Europe extremely concerned. Libya is a major supplier of Oil to Europe, and there is no way of knowing how long the violence will last. Furthermore, if Gadaffi's regime is overthrown, there is no telling who will fill the vacuum. At the moment, the US supply of Crude is more than ample, whereas European supplies remain tight. If the protests in Libya and other North African and Middle Eastern countries fizzle out, the spread between Brent and WTI could once again widen-out.

Technical Notes

Turning to the chart, we see the April futures contract trading well above resistance at the 92.25 level. Despite jumping almost $9 higher during the session, the RSI remains below overbought levels. The next area of resistance could be found near the $100, which is both an important technical and psychological level. Failure to hold above 92.25 would likely be seen as a technical setback.

Rob Kurzatkowski, Senior Commodity Analyst



February 23, 2011

Bulls Going Cuckoo for Cocoa Futures


Today's Idea

The potential of an extension of the Cocoa export ban from the Ivory Coast has to be weighed against potentially huge supplies of Cocoa entering the market should the export ban be lifted. These conflicting events seem to spell a potential increase in price volatility until the market can ascertain the extent of Cocoa supplies that will eventually reach the market. Some traders expecting an increase in Cocoa price volatility who are unsure as to the direction of the next major price move may wish to explore trading strategies that would benefit from an increase in price volatility. One such strategy would be the purchase of a strangle in Cocoa futures options. For example, with May Cocoa trading at 3583 as of this writing, one could buy a May Cocoa 3750 call as well as the May Cocoa 3450 put for about 260 points, or $2,600 per strangle, not including commissions. The premium paid would be the maximum potential risk on the trade, which would be profitable at option expiration in early April should May Cocoa futures be trading above 4010 or below 3190. However, given that time decay will work against this position, some traders may wish to exit the trade before expiration should there be less than 10 days until expiration and the option premium has fallen to less than 50% of the original purchase amount.

Fundamentals

Political unrest in northern Africa has certainly been in the news lately, sending Crude Oil futures to 2-year highs. However, another political situation in west Central Africa has sent Cocoa prices to highs not seen in 32 years, as the Ivory Coast, which is the world's largest Cocoa producer, is in the midst of a power struggle as the incumbent President Laurent Gbagbo has refused to relinquish power after losing an election late last year. There has been an export ban in place for Cocoa out of the Ivory Coast that was to have expired this week, but traders are concerned that the ban will remain in place until a leadership change takes place. Going forward, what may be a bigger concern is what will happen to the new-crop Cocoa that is expected to be harvested in April. There is little room for storage of the soon to be harvested crop, as warehouses are already filled with current Cocoa stocks that have not been moved out due to the export ban. There are growing concerns that some of the harvest will be lost to spoilage unless the export ban is lifted soon. However, should the political climate improve in the near future, we could see a flood of Cocoa hit the market, which could finally put an end to this bull market.

Technical Notes

Looking at the daily chart for May Cocoa, we notice prices breaking out to the upside last week after having spent several trading sessions stuck in a trading range between 3200 and 3400. Notice how well prices have held above the 20-day moving average, which acted as support at the recent lows. The 14-day RSI has moved into overbought territory, with a current reading of 74.2. The most recent Commitment of Traders report shows large non-commercial traders added nearly 2000 new net-long positions for the week ending February 15th. The net-long position now stands at 27,726. Although this is a large net-long position, it is still less than half the size of the record long position seen in early 2008, and leaves plenty of room for additional buying should prices continue to move higher. The next major chart support point is seen at the February 7th low of 3199. Resistance is tougher to find, as we are trading at contract highs, but a look at the continuous daily chart shows chart support at 3845, which was the highest price recorded way back in February of 1980!

Mike Zarembski, Senior Commodity Analyst

February 24, 2011

Unrest Boosts Bonds

Today's Idea

Bond fundamentals have quickly turned. Equities suffered their first two-day decline in months, and the unrest in North Africa and the Middle East has many traders thinking defensively rather than offensively, putting a premium on safe haven investments. Technically, the June futures contract is coming up on a very important resistance level. Some traders may wish to enter into a June Bond contract on a close above 120-16, with an upside target of 123-16 and a protective stop at 119-00. The trade risks roughly $1,500 and has a possible maximum profit of $3,000.

Fundamentals

The tumultuous political situations in North Africa and the Middle East have many equity traders on edge. Equity prices suffered their second day of heavy losses in a row yesterday, amid the turmoil. Many traders are now heading to higher ground and have been searching for safer investments in the form of Gold and Bonds. Bond prices have been on the slide since October due to rosier economic outlooks and concern that central banks around the globe may have a difficult time staving-off inflation in the not too distant future. In addition to profit-taking in the form of short-covering, the unrest has provided a much needed reprieve for Bond bulls. There are concerns that further unrest in the region could slow economic activity, thus curbing inflation without central bank intervention. This may be a very short-sighted view in light of the fact that the region produces much of the world's petroleum. Initially, traders had thought that the unrest was isolated to Tunisia and Egypt, but recent events have proven this assessment to be incorrect. There is genuine concern over whether Saudi Arabia's regime can maintain its hold of government, and the Saud family is attempting to quell unrest by increasing government aid and spending. If some semblance of stability materializes, Bond fundamentals once again look bearish, whereas enduring turmoil may continue to support treasury prices.

Technical Notes

Turning to the chart, we see the June Bond contract coming up to test resistance at the 120-16 level. This can be viewed as a tough test for Bonds, as the level was tested repeatedly in December and January without a bullish breakout. A breakout above 120-16 suggests prices could test resistance at the 123-16 level. Failure to take-out the upper end of the price band suggests sideways trading between 117-16 and 123-16.


Rob Kurzatkowski, Senior Commodity Analyst


February 28, 2011

Was the Soybean Sell-off a Buying Opportunity?

Today's Idea

Given the potential for increased volatility in Soybean prices, especially as we head into the spring planting season, Soybean option prices appear relatively expensive. Some traders looking to get long Soybean futures but who wish to limit the potential risk associated with taking a long position may wish to explore buying a bull call spread in Soybean futures options. For example, with May Soybeans trading at 1378.00 as of this writing, the May Soybean 1400 calls could be bought and the May Soybean 1500 calls sold for about 25.50 cents, or $1275 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5000 minus the premium paid which would be realized at option expiration in April, should May Soybeans be trading above 1500.00.

Fundamentals

"Risk off" mentality has hit the grain futures markets lately, with May Soybean futures having shed nearly $1.75 per bushel since earlier this month. The major catalyst for the sell-off has been nervousness over the political turmoil seen in the Middle East and North Africa. The unrest has sent oil prices soaring and sparked fears that higher energy prices will put the brakes on the recovering world economy. This fear has sent many large speculators running to the exits, sparking long-liquidation selling in the entire grain complex. Soybean prices have been particularly hard hit, because in addition to speculative selling pressure, a looming large Soybean harvest out of South America, especially Brazil, could help to elevate tight world inventories. There is also concern that US Soybean exports may begin to slow as buyers, particularly China, may shift their purchases to South America. The USDA expects US producers to plant 78 million acres to Soybeans this year, which is up modestly from the 77.4 million acres planted last year. If baseline yield projections hold, the US is likely to produce a Soybean crop of 3.345 billion bushels. The question still remains, however, whether US producers will actually plant that many acres to Soybeans, especially in light of the fact that new-crop Corn and Cotton futures are trading at very attractive price levels. So unless new-crop November Beans start to gain in price relative to Corn and Cotton, the actual number of acres planted with Soybeans may fail to reach USDA projections.

Technical Notes

Looking at the daily chart for May Soybeans, we notice prices falling sharply on high trading volume, as speculators both large and small headed to the exits. Drawing an uptrend line from the lows made back in July of last year, we can see that Wednesday's sell-off to the year's lows was halted almost exactly at the trend line! This level now seems to be an area of good support and a close below this trend line could set-up a test of the November 17th low of 1138.00. However, should prices hold this key support area, which occurred in earnest on Friday, we could see prices move back toward the 1425.00 area. After turning sharply lower last week, the 14-day RSI has moved back to neutral territory, with a current reading of 47.60. Wednesday's low of 1296.25 will remain as support for May Soybeans, with resistance seen at 1425.00

Mike Zarembski, Senior Commodity Analyst