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March 2011 Archives

March 1, 2011

Gold Pushing Record Highs

Today's Idea

Gold fundamentals have improved in recent weeks on several fronts. Turmoil, erratic currency markets, and economic fears have all aided the precious metal's push higher. However, stabilization in the currency markets and peaceful transition in troubled states could derail the rally. The chart is showing that Gold may be on the verge of breaking out, but overbought conditions may result in an extension of recent choppy trading. Some traders looking to go long may wish to consider waiting for a breakout above 1425.00 to buy an April Mini-Gold contract, with a protective stop at 1395.00 and a target order of 1465.00. The trade risks roughly $1,000 for a maximum profit of $1,328.

Fundamentals

Gold futures are trading near highs from last year, fueled by Middle East unrest and concerns that the economic recovery may be stalling. Many traders are now pondering whether the Gold contract can continue to rise and make new all-time highs. There is uncertainty regarding whether the unrest seen in the Middle East will spread to major Crude Oil producing nations, namely Saudi Arabia. An extremist takeover would almost certainly stall Oil production, which could lead to a steep increase in fuel prices and bolster Gold's appeal. On the economic front, it appears that the rising cost of food and fuel has altered the spending habits of US consumers. The most recent retail sales report surprised many market observers with its strength. However, the personal spending figure released yesterday did show consumers being a bit tighter with their pocketbooks. Investor demand for Gold has increased significantly in recent weeks, and the reportable position has risen to the highest level since early December. This is likely evidence of strong demand from hedge funds and long-only funds. This could also be a sign that the market may be overbought.

Technical Notes

Turning to the chart, we see the April Gold contract trading above the 1400 level. Trading north of 1400 has been somewhat choppy and sideways. Traders are now focused on whether we are seeing consolidation before a breakout. A breakout could send Gold prices into uncharted territory. The measure of such a move suggests that prices could trade into the 1480's. The RSI is showing overbought levels, suggesting prices could face increasing resistance.

Rob Kurzatkowski, Senior Commodity Analyst


March 2, 2011

Swiss Franc: The New Safe Haven Currency?

Today's Idea

Although the Swiss Franc futures have staged a modest correction during the past few sessions, it is doubtful we will see a mass exodus from the currency, especially given the current political and economic climate. A quick look at the daily chart for the June Swiss Franc futures shows solid chart support near the 1.0275 area. Some traders who believe that this support point will not be tested during the next several weeks may wish to explore selling puts in Swiss Franc futures options with a strike price below chart support. For example, with the June Swiss Franc trading at 1.0785 as of this writing, the April 1.0250 puts could be sold for about 0.14, or $175 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 early April, should the June Swiss Franc futures be trading above 1.0250. 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 amount received for selling the option originally.

Fundamentals

With all the uncertainty surrounding the political upheaval in the Middle East and North Africa, many investors would traditionally move their funds to so-called safe havens, such as the U.S. Dollar, Gold, or U.S. Treasuries. However, given the weakness in the Greenback, the "costs" of holding Gold bullion, and fears of inflation hurting bond prices, there appears to be a new player catching traders' eyes -- the Swiss Franc. Swiss Franc futures have been trading near all-time highs since the beginning of currency futures trading, as funds continue to flow to this currency, especially from investors in Europe. This inflow to the "Swissy" should really come as little surprise, particularly given the concerns surrounding the Eurocurrency and the debt problems facing many of the nations in the European Union. The strength of the Franc has been a concern of the Swiss National Bank (SNB), which has made several attempts at intervention in the FX markets to weaken the currency, especially vs. the Euro, in order to make its exports competitive in the world economy. Although these attempts have ultimately been unsuccessful, the fact that the SNB is willing to intervene in the Forex markets may have enough to keep some traders from amassing too large a bullish position in the currency, despite its current upward trajectory. However, should the political and economic difficulties continue, some investors may not fear the SNB in their pursuit of a "safe haven".

Technical Notes

Looking at the daily continuation chart for Swiss Franc futures, we notice that after the huge run-up from June through mid-October of last year, the market has been rather choppy, with some moderate price swings occurring on the way to new highs. Prices are beginning to pull away from the 20-day moving average, and though it appears we may be heading for a bit of a consolidation period after making new highs, we note that volume has fallen-off a bit on the "correction", which may be the beginning of a bull flag formation. There is a bearish divergence forming in the 14-day RSI, but lately, it does not appear to have hampered the overall bullish trend for the currency. Support for the June Swiss Franc is seen at the February 11th low of 1.0268, with resistance seen at the contract high of 1.0836.

Mike Zarembski, Senior Commodity Analyst

March 3, 2011

S&P In a Vulnerable Spot

Today's Idea

Stock market fundamentals have turned a bit sour on disappointing economic figures and uncertainty over the future of the Middle East. Without major earnings looming over the market, economic data will likely be nit-picked by traders. The chart shows the March E-mini S&P in a vulnerable position, and failure to hold the 1300 level could send the market lower. Given the erratic action of the market lately, some traders may wish to consider entering into a bear put spread by buying the March E-mini S&P 1300 puts and selling the March 1275 puts for a debit of 9.00, or $450. The spread risks the initial cost for a maximum profit of $800 if the settlement of the March contract is below 1275.00.

Fundamentals

Equity prices have lacked upward momentum over the past two weeks. Many traders have begun to question economic fundamentals, after reports indicating that consumer spending, housing, and job growth are not progressing as much as many traders would like. The instability in the Oil producing area of the world threatens consumer spending, as US consumers will likely spend less on items other than fuel. It also poses a potential obstacle to job creation, as businesses run leaner to make up for increased material and fuel costs. Technology, which was a major driving force behind the market's rally, is especially vulnerable to rising food and fuel costs. Less discretionary income could have an adverse impact on electronics manufacturers and retailers. Many traders will remain focused on tomorrow's non-farm payroll number, which is expected to show 200k jobs added last month. For the economic recovery to show tangible progress, many traders believe that the non-farm number needs to show at least 150k jobs added a month. While the government can tweak the unemployment rate, it cannot add non-existent jobs to the figure. If tomorrow's non-farm number is able to meet or exceed expectations, many traders will likely breathe a collective sigh of relief.

Technical Notes

Turning to the chart, we see at the March E-mini S&P has found support at the 1300 level. This can also be viewed as the trigger-line on a potential double-top pattern on the daily chart. Prices have been centering near the 20-day moving average, and a breakout below support at 1300 could potentially result in a violation of the 50-day moving average, which may be a bearish sign for the market.

Rob Kurzatkowski, Senior Commodity Analyst

March 4, 2011

Will Corn Ultimately Win the Battle for Acreage this Year?

Today's Idea

A look at the option chain for December Corn futures options will tell you that buying near the money options outright would be a very expensive proposition, as traders likely will not sell these options cheaply due to the huge amount of time to expiration and the potential for wide price swings in the futures that are likely as we move into the growing season. These factors may be the perfect scenario for some traders to want to explore the purchase of debit spreads in December Corn futures options. If a trader is bullish on December Corn, they could consider buying a bull call spread; if bearish, buying a bear put spread might be the ticket. An example of a bullish position would be buying the December Corn 650 calls and selling the December Corn 750 calls. With December Corn futures trading at 611.00 as of this writing, this spread could be bought for about 28 cents, or $1400 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, which has a potential profit of $5000 minus the premium paid, which would be realized at option expiration in late November should December Corn be trading above 750.00.

Fundamentals

Now that the month of March has begun, traders may want to turn their attention back to the grain markets, as producers focus on their spreadsheets in determining what to plant this coming season as the "battle for acreage 2011" begins. Currently, the leading contender appears to be the Corn market. New-crop Corn futures trading above $6.00 per bushel compares favorably to current new-crop Soybean prices. The USDA estimates U.S. producers will plant 92 million acres to Corn this season, up just over 4% from last year's totals. The increased acres given to Corn plantings will be necessary given the USDA's estimation of tight old-crop corn supplies expected before this year's harvest. In February, the USDA cut its U.S. Corn stockpiles estimate to a very tight 675 million bushels by the end of August. If accurate, the supplies as a percent of usage would fall to 5%, which is considered by many analysts to be the minimum needed to prevent temporary shortages. Rising world Corn demand, not only for feed usage but for fuel as well, continues to climb, as emerging markets continue to increase their per capita meat consumption, which in turn increases the need for feed for livestock production. Increased ethanol production is also eating into Corn supplies, and current high oil prices may continue to stoke demand for Corn as a fuel source. Although it appears that Corn is winning the acreage battle, traders should pay close attention to mid-range weather forecasts. Any signs of a wetter or colder than normal spring could throw a curve in not only the number of acres planted to Corn, but potentially in the yield per acre if Corn plantings run well behind schedule.

Technical Notes

Looking at the daily chart for December Corn, we notice that after the steady price climb since the end of November of last year, prices seem to be forming a consolidation pattern. This does make some sense as both bulls and bears jockey for position ahead of the USDA's Prospective Plantings estimate on March 31st. Prices are hovering near the 20-day moving average, but they remain well above the 200-day moving average, which is currently near the 495.00 area. There is a bearish divergence forming in the 14-day RSI, though the overall reading in this indicator remains above the 50 level. Support for December Corn is seen at the recent low of 566.50, with resistance found at the February 22nd high of 623.00

Mike Zarembski, Senior Commodity Analyst


March 7, 2011

Crude Oil Prices at a Crossroads?

Today's Idea

With heightened volatility seen in the Crude Oil markets, option prices have become rather expensive. This increases the allure for short option sellers, but the potential for a large price move may make selling naked options outright too risky for many traders. One strategy that incorporates both buying and selling options is the ratio spread. Here a trader buys a closer to the money option and then sells 2 or more farther out of the money options to help pay for the option purchased. Ideally, one would like to do this trade for a credit, which would expand the profitable range of prices at which the futures could trade and have the option position turn a profit. With May Crude Oil trading at 105.36 as of this writing, a May Crude Oil 115 call could be bought and 2 May Crude Oil 125 calls sold for a credit of about 0.21, or $210 per spread, not including commissions. The trade would be profitable at expiration in April should May Crude Oil futures be trading below 135.00, assuming the trade is done at a credit close to the amount in this example. Given the risks involved in this trade, 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 ratio spread before expiration should the May futures close above the strike price of the options sold.

Fundamentals

Who would have thought that Crude Oil prices would be capable of falling over $100 per barrel from its highs, and then rebound over 60% from the recessionary lows in just over 3 years? That is exactly what has occurred, however, as front month Oil futures are now trading firmly above the $100 per barrel mark, as the political instability that has arisen in North Africa and the Middle East has put a "risk premium"on Oil prices. Currently the biggest concern is the situation in Libya, where violence between supporters of Libyan leader Muammar Qaddafi and opposition forces have curtailed Oil production from this OPEC member. Though it appears that the Crude output lost from Libya is being made up from other OPEC nations who have spare capacity, primarily Saudi Arabia, the grade of Crude Oil is not as high as that from Libya. Ironically, the rising price of Oil comes at a time when the world's largest Oil consumer, the U.S., is experiencing an Oil glut. This is especially true at the delivery point for the NYMEX WTI contract in Cushing Oklahoma, where Oil in storage is at a record level. However, since Oil is truly a global commodity, any distortions in one area will not be enough to keep Oil prices in check, especially as we are seeing some improved economic data out of the U.S. and parts of Europe. Two major questions remain: First, will the political protests spread to the big gun of OPEC-- Saudi Arabia? Secondly, will the U.S. and European economies be able to handle $100 plus Oil prices in the longer term, or will high Oil prices put the brakes on the economic recovery?

Technical Notes

Looking at the daily continuation chart for Crude Oil futures since the record highs were made back in 2008, we notice that the recent rally has sent prices to the 61.8% Fibonacci retracement from the all time-highs to the 2009 lows. This area is seen by many technicians as a significant retracement level, which if violated may portend a potential test of the all-time highs! However, should this key resistance level hold, a pull-back to the 50% retracement near the 90.00 area would not be a surprise. The 14-day RSI has moved sharply into overbought territory, with a current reading of 77.67. The next major chart resistance level above the current price is not found until the 110.50 area, with minor support seen at 100.00 and chart support all the way back towards the 93.00 area.

Mike Zarembski, Senior Commodity Analyst


March 8, 2011

Wheat Loses Spec Love

Today's Idea

Wheat fundamentals remain biased to the bull camp at this time, but the attractive energy prices have lured some longs from the market. Global supplies remain extremely tight, and there is concern that losing acreage to Cotton coupled with bad weather could lead to a disappointing US crop. Technically, the market has tested the 750 level and held its ground. Some traders may wish to consider taking a neutral to bullish position and enter into a bull put spread by selling the April Wheat 750 puts and buying the 725 puts for a credit of 5.00, or $250. The credit is the maximum profit, while the risk of the trade is $1,000. Because of the inverse reward to risk ratio, some traders may wish to exit the trade after two consecutive closes below the 750 level to cut their losses.

Fundamentals

Wheat futures have slumped since hitting multi-year highs in February, largely due to the slowdown in deliveries. While current supplies remain extremely tight, many traders are looking forward to the US plantings figures. It will be interesting to see how the overlap between Wheat and Cotton plays out this year with farmers. With Cotton crossing through the $2 level, many Wheat farmers may be considering planting more Cotton to take advantage of high prices. Russia is also banning the export of Wheat, which is leading to lower planting intensions in that country, squeezing global supplies further. Chinese weather conditions have not improved, and there may not be enough rain/snow to leave any significant moisture in the ground. These factors can all likely be seen as bullish. However, India is expected to have a record crop this year. China has also been strategically stockpiling Wheat, so the world's most populous nation may not be in a rush to take further deliveries at these high levels. Commodity speculators have been leaving the grain and softs markets in favor of metals and energies due the political unrest sweeping the Middle East. Going forward, many traders will be keeping a close watch on weather conditions in Europe, Asia and North America.

Technical Notes

Turning to the chart, we see the May Wheat contract closing near support at the 800 level. The market recently broke through this level, but wasn't able to break through additional support near 750. Failure to close above the 20-day moving average can be seen as negative for the market in the near-term. A close above the average could be a signal that a near-term low is in place. To signal a new downside breakout, the May contract would likely have to close below the 750 level. On the upside, fresh highs above the 900 mark could signal an extension of the uptrend.

Rob Kurzatkowski, Senior Commodity Analyst

March 10, 2011

Solid Auction Boosts Treasuries

Today's Idea

Treasury market fundamentals will likely be influenced heavily by two intertwined factors: turmoil in the Middle East and possible US consumer spending habits. Technically, the T-Note chart does not show the market finding a trend, but the short-term direction may be higher. Some traders may wish to place a bull put spread, buying the April 10-year Note 116.50 puts and selling the 117.50 puts for a credit of 0-10, or $156.25. The maximum profit would be the initial credit and the trade risks $843.75. Some traders may wish to close the spread in the event that the June T-Note contract closes below 117-16.

Fundamentals

Note prices received a boost from a positive auction, which continued the recent trend of strong foreign demand. The $21 billion auction was the largest auction in 11 months. Some traders and foreign banks may find current yields relatively attractive given the current global state of uncertainty. The world is watching the civil war in Libya and the "days of rage" in Saudi Arabia with keen interest. There is concern that rising Oil prices could hamper economic growth and prices could hit $150 a barrel in the event that the Saudi government is overthrown. In that situation, $200 a barrel is not out of the question. Friday's retail sales and University of Michigan sentiment data will likely be more closely scrutinized than usual. Poor showings in these numbers could trigger further defensive buying of treasuries on the assumption that slowing economic conditions would eventually bring food and energy prices back in like. It would also give the Fed a reason to keep the liquidity coming.

Technical Notes

Turning to the continuous 10-year note chart, we see prices trading at resistance at the 119-00 level. This also coincides with the 20-day moving average. A close above the resistance level and 20-day average suggests price could test relative highs at 120-18.5. The relative high may also serve as a trigger line for a double-bottom pattern. With the resistance near the 121-05 level, many traders may not immediately jump on a double-bottom confirmation. On the downside, the 117-16 level has acted as support, with the market holding this level twice. The bullish divergence between the momentum and RSI indicators hints at near-term strength.

Robert Kurzatkowski, Senior Commodity Analyst



March 11, 2011

Will Economic Worries Halt the Rally in Cattle Futures?

Today's Idea

Since it appears that a "correction" is taking place in the commodity markets generally, and that Live Cattle futures are beginning to show some signs of struggling at new contract highs, some short-term traders may wish to explore a short position in June Live Cattle futures (currently trading at 116.475 as of this writing), with a near-term price target at the recent low of 112.725. Some traders may wish to limit the risk on this trade buy buying back the short position should June Live Cattle close above the contract high of 118.000.

Fundamentals

Live Cattle futures "mooved" to new all-time highs on Thursday, but concerns over the global economic recovery could begin to put the brakes on this bullish stampede. A downgrade of Spain's credit ratings by Moody's seems to have triggered a renewed "flight to safety" movement by traders who are liquidating positions in commodities, in general, and moving funds back into the "safe haven" of the U.S. Dollar -- and to a lesser extent, shorter-term U.S. Treasuries. The commodity-wide selling has spilled into the Live Cattle pit, despite rather bullish fundamentals. Cash Cattle traded as high as $118 per hundredweight on Wednesday, as packers rushed to buy Cattle for the week's processing before prices rose even higher. With cash buying out of the way, futures prices are now seeing long hedge buying curtailed and speculative buying pressuring prices off recent highs. A look at the Commitment of Traders report shows large non-commercial traders are the only ones holding a net-long position in Cattle futures, with a total net-long position of 99,110 contracts as of March 1st. This large net-long position could trigger some near-tem weakness as these large specs begin to liquidate if futures prices fail to make new highs soon.

Technical Notes

Looking at the daily chart for June Live Cattle, we notice the huge spike in trading volume on Wednesday, as the futures made new-all time highs. However, the buying failed to materialize the following day, as an early attempt to test the contract highs failed when a commodity-wide sell-off took Cattle futures lower on the session. There has been a bearish divergence forming in the 14-day RSI, and a close below the 20-day moving average, currently near the 115.000 area, could spark further selling, as short-term momentum traders enter on the short-side of the market. A close below 115.000 could spark a test of support at the March 2nd low of 112.725. Resistance for the June futures is seen at the contract high of 118.000.

Mike Zarembski, Senior Commodity Analyst


March 14, 2011

How Will Markets React to the Japanese Earthquake?

Today's Idea

Volatility has returned to the Japanese Yen, as the economic effects of the devastating earthquake are yet to be determined. This uncertainty has caused option volatilities to increase, making the purchase of calls or puts in the Japanese Yen more expensive. This increase in volatility may beckon some traders to explore trading strategies that could benefit should the rise in volatility be short-lived. One such strategy would be selling strangles in Japanese Yen futures options. For example, with the June Yen futures trading at 1.2221 as of this writing, the April Yen 1.28 calls could be sold and the April Yen 1.17 puts could be sold for about 0.0023, or $287.50 per strangle, not in including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in early April should the June Yen futures be trading below 1.2800 and above 1.1700. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. For example, some traders may wish to buy back the short strangle prior to expiration should the June Yen futures trade above 1.2800 or below 1.1700.

Fundamentals

The devastating earthquake that struck Japan on Friday has sent financial markets into a flurry of activity, as traders begin to access the potential fallout to the global economy. It is still too early to gauge the full extent of the damage brought to the world's third largest economy and any spillover effects for the world at large. The initial reaction by the financial markets was a sharp rise in the value of the Japanese Yen. Though this may seem counter-intuitive at first, it does make some sense, as traders believe that funds held overseas by Japanese corporations, individuals, and even the Japanese government, will flow back to Japan to help in the recovery and rebuilding efforts. This could trigger a potentially huge amount of Yen purchases, as funds from overseas are converted back into Yen. The need for liquidity could impact such markets as U.S. Treasuries, as Japan is one of the largest holders of U.S. debt and it is possible we could see some of these holdings sold in order to raise funds to bring back to the country. The Crude Oil market has initially sold-off on the news, as traders believe that Japan's demand for Oil will fall, at least initially, as its refineries are taken off-line and due to lower demand for jet fuel if its airports are shut down for any length of time. Longer-term, rebuilding efforts could trigger additional demand for such commodities as Lumber, and especially Copper, which is already in strong demand.

Technical Notes

Looking at the daily continuation chart for the Japanese Yen futures, we notice that despite the sharp rally on Friday, the front month Yen futures continue to consolidate in a narrower and narrower range. The earthquake may be the catalyst for a breakout, with the current bias favoring a test of the recent highs. We should note that prices are now once again above the 20-day moving average, and the 14-day RSI has started to turn higher, with a current reading of 56.87. The next resistance level for the June Yen is seen at the February 2nd highs of 1.2341, with support found at the February 16th lows of 1.1909.

Mike Zarembski, Senior Commodity Analyst


March 15, 2011

Quake Presents Unique

Today's Idea

The natural disasters in Japan may alleviate supply pressure in the near-term as the country rebuilds. The build in US supplies also sets a negative tone for the market in the near-term, further widening the contango. Technically, Crude Oil has held support at the $100 level, but a close below that mark could bring selling pressure. Some traders may wish to consider entering into a Crude Oil futures spread by buying the June and selling the April contract for 1.50 or lower to the buy side and an objective of 2.25.

Fundamentals

The earthquake, tsunami and subsequent problems with nuclear reactors give energy traders quite a bit to digest. On one hand, the terrible situation in Japan is likely to have a negative impact on economic activity in the world's third largest Crude Oil consumer. Factories and refineries in the northeastern part of the country, which suffered the brunt of the disaster, are expected to remain closed. Refineries in this region alone account for roughly 1.33 million barrels a day of capacity. The diminished demand from Japan will likely overshadow the political turmoil in the Middle East in the near-term. Long-term, however, the demand for fossil fuel could see an increase due to the problems with several nuclear reactors following the natural disasters. Even if a meltdown is averted, anti-nuclear sentiment could mount. The nation is too densely populated to simply rely on alternative energy – the technology is simply not there yet. This could result in an increase in fossil fuel plants to provide a safer means of energy. The result of the difference in near and long-term demand outlooks could result in a steepening of the Crude Oil contango.

Technical Notes

Turning to the chart, we see the April Crude Oil contract holding support near the $100 level. A violation of the $100 mark on the downside would be a technical and psychological setback for Oil bulls. The next area of support would then come in just below the 93.00 level. Despite the recent selling pressure, the RSI remains near overbought levels on the RSI, suggesting the market may find some selling pressure in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


March 16, 2011

Flight to safety buyers ignoring Gold?

Today's Idea

Although the short-term trend for Gold now seems to favor the bears, longer-term, any major price decline could spell a potential buying opportunity. Some traders looking for a short-term decline to buy Gold futures may wish to consider instead a diagonal spread in Gold futures options. A diagonal spread consists of a long and short position in an option of the same type but with different strike prices and different expiration months. For example, with June Gold trading at 1395.50 as of this writing, the May Gold 1370 puts could be bought and the June Gold 1345 puts sold for a credit of 1.10, or $110 per spread, not including commissions. Traders should consult the Trade and Probability Calculator on the optionsXpress website for a profit and loss graph for this trading strategy.

Fundamentals

Is Gold beginning to lose its luster as a "safe haven" investment? That is the question that many traders must be asking, as Gold futures have sold off sharply, despite the continued uncertainty surrounding Japan in the aftermath of the devastating earthquake and tsunami. Lead month April Gold fell below the 1400.00 level for the first time in 2 ½ weeks on Tuesday, as a wave of liquidation in the commodity markets in general appeared to spark a sell-off. Large speculators were holding a rather large long position in Gold, and requests for liquidity may have forced the liquidation of some of this position. In addition, concerns that the global economy might fall back into a recession due to the Japanese crisis are taking some of the inflation "worries" out to the market. Fundamentally, the outlook for Gold looks bullish, with Comex Gold stocks beginning to fall and expectations of a decline in Gold output in Australia, as heavy rains have caused flooding in some of the mining areas of the country. However, as many veteran traders know, the markets hate uncertainty, and until the situation in Japan starts to stabilize, we could continue to see a flow out of Gold and commodities generally, as investors attempt to improve their liquidity.

Technical Notes

Looking at the daily continuation chart for Gold, we notice that the sharp sell-off that occurred on Tuesday took prices back below both the 20-day moving average and psychological support at 1400.00. However, if we look longer-term, we notice that the bull market in Gold would not be challenged until we see a close below both the 200-day moving average, currently near the 1310.00 area, and the uptrend line drawn from the 52-week lows back in March of 2010. This uptrend line does not come into play until the 1290.00 area. After moving into overbought territory just a few sessions ago, the 14-day RSI has now fallen below 50, with a current reading of 46.64. The next major support point is seen at the 200-day moving average near the 1310.00 area, with resistance not found until the contract high of 1445.70.

Mike Zarembski, Senior Commodity Analyst

March 17, 2011

Cocoa Quieted by Ghana Supply, Japan

Today's Idea

Cocoa market fundamentals are a bit unclear at the moment. The healthy Ghana crop has given chocolate makers a fallback. However, these stockpiles may be running thin, which threatens the overall market supply if no resolution is reached soon. Technically, the chart shows a downward bias after support at 3250 was broken. The 3100 mark now becomes an important support level. Some traders may wish to consider buying a May Cocoa futures contract at a limit of 3105, with a stop at 2990 and an upside target of 3275. The trade risks roughly $1,150 and has a profit objective of $1,700.

Fundamentals

Cocoa futures have been on the decline over the past two weeks as a result of economic sanctions against the Ivory Coast. Politicians are hopeful that this could force a transition from the incumbent regime to a more outwardly friendly Ouattara regime. Currently, the Cocoa industry in the embattled nation is at a standstill. Chocolate makers have made up for the shortfall in Ivory Coast exports by stepping-up imports from Ghana, but it may only be a matter of time before supplies start running thin. The excess crop in Ghana has given users of Cocoa a fallback buffer, and commodity markets have been negative since the Japanese earthquakes and subsequent tsunami. However, the Cocoa market will likely ultimately look to the Ivory Coast situation to dictate market direction. If the situation continues to drag on, meaning the current regime refuses to abdicate power, there may be genuine supply concerns. Even with a transition, there is no way of knowing how much spoilage has taken place. A peaceful transition of power and low spoilage rates could send prices sharply lower.

Technical Notes

Turning to the chart, we see the May Cocoa contract breaking several key technical levels on the downside in recent sessions. We have seen two consecutive closes below the 50-day moving average. Also, prices have violated support at the 3250 level on the downside. The next area of support comes in just below the 50-day moving average at 3100. Closes below this level suggest prices could test the 3000 mark and, possibly, the 2750 level. The recent selloff has brought the RSI down to oversold levels, which could result in short-covering and, possibly, some cherry-picking by value buyers.

Rob Kurzatkowski, Senior Commodity Analyst

March 18, 2011

Natural Gas Futures are Starting to Heat Up!

Today's Idea

With the potential of increased demand for Natural Gas looming, some traders who believe that a bottom is in place in the near-term may wish to explore selling puts in Natural Gas futures. For example, with May Natural Gas trading at 4.215 as of this writing, the May Natural Gas 3.80 puts could be sold for 0.044, or $440 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 April should the May futures be trading above 3.800. Given the potential risk associated with 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 should May Natural Gas trade below the contract low of 3.805.

Fundamentals

Natural Gas bulls received new life recently, as concerns over the future of nuclear power generation has triggered fresh interest in this beleaguered commodity. As Japan prepares to recover from the devastating earthquake and tsunami, it is believed that the country will be turning to fossil fuels, such as coal, fuel oil, or Natural Gas to fire their power generators. Japan currently receives Natural Gas in liquefied form, which needs to be shipped in specialized tankers. This method of delivery may limit the amount Japan can rely on Natural Gas to meet its power generating needs, as this is not as efficient as having Gas moved via pipelines. So while it appears that increased Japanese demand may not be enough to spur a price rise, the effects of the "nuclear debate" may cause the U.S. and other nations to re-evaluate their own reliance on nuclear energy for power generation and could trigger increased demands for Natural Gas, particularly here in the U.S. where supplies are plentiful. On Thursday, Natural Gas futures got an additional bullish lift, as the weekly EIA gas storage report showed 56 billion cubic feet of Gas was removed from storage last week, which was well above the 44-bcf draw most analysts were expecting. A look at the most recent Commitment of Traders report shows large non-commercial traders holding a huge short position of 217,250 contracts as of March 8th. This short position may be the ultimate catalyst for higher Natural Gas prices if these large speculative traders begin to lighten-up their positions.

Technical Notes

A quick look at the daily chart for May Natural Gas shows what appears to be a rounded-bottom formation. In addition, the 14-day RSI is showing a bullish divergence going back to August of 2010. Prices are now well above the 20-day moving average, which should spark additional short-term momentum buying. To really put the bulls back in control, we would want to see a close above the 200-day moving average, which is currently near the 4.500 level. Support is seen at the contract low of 3.805, with resistance found at 4.500.

Mike Zarembski, Senior Commodity Analyst


March 21, 2011

Asian Buying Lifts Corn Futures

Today's Idea

The recent purchases by both China and South Korea highlight that there is still good global demand for Corn, despite the relatively high historic price level for old-crop Corn. With U.S. Corn acreage expected to increase this year, this could set up a situation where old-crop Corn trades at a large premium to the new-crop Corn contract. Some traders who are looking for this scenario to play out this coming year may wish to explore buying old-crop Corn and selling new-crop Corn. For example, on Friday, the July Corn futures closed the session at 690.00 and new-crop December Corn closed at 598.50. A trader going long the old crop/new crop spread would buy the July Corn futures and sell the December Corn futures with the hope that the spread would widen even further from the 91.50 cent premium July was trading at over December at the close of trading on Friday.

Fundamentals

The recent sell-off in Corn prices certainly piqued the interest of Corn buyers in Asia, as an unexpected purchase of U.S. Corn by China sent Corn futures prices soaring. Many traders believe that China was the purchaser of 116,000 metric tons of old-crop Corn reported by the USDA on Thursday. Some traders were not expecting China to be in the market for Corn, but the recent price decline was perhaps enough to entice China back into the market. In addition to China, South Korea was also a large buyer of Corn, with just over 450,000 tons purchased the past week. Corn futures also received a boost when the widely watched private forecaster Informa Economics projected that U.S. producers will plant 91.8 million acres to Corn this coming year. This was slightly below the USDA estimate of 92 million acres. Next up for grain traders will be the highly anticipated USDA Prospective Plantings report due out on March 31st. This report could set the tone for Corn prices early in the season, at least until traders turn their focus to growing conditions and the weather once summer begins.

Technical Notes

Taking a look the daily chart for the July/December Corn spread, we first notice that prices seemed to find good support once the spread fell to a 75.00 July premium. The recent rally took the spread back above the 50-day moving average, which currently is near the 96.00 July premium level. The next resistance point in the spread is seen at the 20-day moving average near the 107.00 area.

Mike Zarembski, Senior Commodity Analyst

March 23, 2011

Oil's Bullish Bias Reasserts Itself

Today's Idea

Since it certainly appears that there is a "bullish bias" in the Oil markets lately, it may be prudent to look for trades that will benefit from this bias. One such strategy involves selling puts in Crude Oil futures with strike prices below chart support levels. For example, with May Crude Oil rading at 104.79 as of this writing, and major chart support seen near the 97.00 area, the May Oil 94.00 puts could be sold for about 0.40, or $400 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in mid-April should the May futures be trading above 94.00. Some traders may wish to close out the trade before expiration should May Crude trade below support at 97.02.

Fundamentals

It certainly appears that the Crude Oil bull is alive and well, as the lead month May contract has risen to its highest levels since the devastating earthquake struck Japan. It appears that Oil traders may once again be turning their focus to the Middle East and North Africa, where the fighting continues in Libya, causing Oil shipments from this OPEC member nation to grind to a halt. This has taken nearly 1.3 million barrels per day off the market, and although much of this production is being made-up by increased outputs from Saudi Arabia, the Oil normally being exported out of Libya is of a higher grade, which is highly prized by refineries. Since there's no telling how long Libyan production will be curtailed, it is vital that political unrest not halt production of other Oil producing nations in the region. This morning, some traders will likely turn some of their focus towards the weekly EIA energy stocks report. Many traders expect the EIA to show a rise in U.S Crude Oil inventories of between 1.5 and 2 million barrels last week. Though it appears that domestic supplies of Crude are still ample, the term structure of the NYMEX Crude Oil contract shows the market moving towards a backwardation starting in the late fall contracts of 2011. This likely indicates that the market is beginning to price-in tightening Oil supplies later this year.

Technical Notes

Looking at the daily chart for May Crude Oil, we notice what appears to be a symmetrical triangle formation. This formation is usually considered a continuation pattern in which prices ultimately move in the direction of the previous trend. In the case of Crude Oil, the previous trend was bullish. Prices have once again moved above the 20-day moving average, and momentum as measured by the 14-day RSI has turned positive, with a current reading of 62.73. The next major resistance level for May Crude Oil is not seen until the contract high of 108.25. Support is found at the recent low made back on March 16th at 97.02.

Mike Zarembski, Senior Commodity Analyst


March 24, 2011

Dollar Doldrums

Today's Idea

Given the strength in commodity prices, some traders could continue to shun the US Dollar in favor of higher yielding currencies. The prospect of further increases in liquidity provided by the Fed seems to have scared away any traders that want to be bullish on the US currency. Technically, the Dollar Index chart is in danger of breaking through critical technical levels. There may be some short-covering taking place in upcoming sessions, so some traders may wish to consider entering into a bear put spread below the market price. Some traders may wish to buy the May 74/76 bear put spread at a premium if 0.50. The trade risks the initial cost of $500 for a potential max profit of $1,500.

Fundamentals

The US Dollar Index is trading at its lowest levels since the toxic mortgage debt fallout in the fall of 2008. The US currency has suffered in large part because of the rally in commodity prices stoking inflation fears. Some traders have abandoned ship in favor of higher yielding currencies, most notably the Canadian, New Zealand and Australian Dollars. The loonie has benefited from rising Crude Oil and metal prices. Also, the Euro has rallied versus the greenback due to expectations that the ECB will raise interest rates. The interest rate play has outweighed European sovereign debt concerns for the time being, as the pan-European bank tends to be much more hawkish than the Fed. There has been talk of QE3 here in the US, which is also putting downward pressure on the greenback. Recent home sales numbers have not been up to par with other economic data being released, which has caused increased speculation among investors that the Fed will pump more money into the economy in order to spur home-buying. This seems to be the Fed's answer to all economic problems – simply flood the US with cheap greenbacks.

Technical Notes

Turning to the chart, we see the June Dollar Index trading through the 76.00 support level in recent sessions. The contract has managed to battle back above this level, avoiding a technical breakout to the downside thus far. A violation of 76.00 could bring about a test of 2008 lows in the low 74's. To gain upward momentum, prices would likely have to cross through the 77.50 level.

Rob Kurzatkowski, Senior Commodity Analyst

March 25, 2011

Euro Climbs Despite Portugal Downgrade

Today's Idea

Although the Euro is still in the midst of an uptrend, the uncertainty surrounding the sovereign debt could set the start for increasing volatility in the coming days. Trend-following traders who wish to remain long the Euro but who are concerned about a potential reversal in prices may wish to explore a bull call ratio spread in Euro futures options. For example, with the June futures trading at 1.4164 as of this writing, a May Euro 1.42 call could be bought and 2 May 1.44 calls sold for a credit of 0.0008, or $100 per ratio spread, not including commissions. The ideal scenario for this trade would be for the June Euro to close at 1.4400 at option expiration in early May. The trade would be profitable at expiration as long as the June futures are trading below 1.4600. Some traders may wish to close the trade before expiration should the June Euro futures close above 1.4600.

Fundamentals

Traders continue to buy the Euro despite continued uncertainty over the sovereign debt of several of its member nations. Most recently in the spotlight is Portugal, where an austerity measure was defeated by the Portuguese parliament which caused its Prime Minister, Jose Socrates, to resign. The defeat of this measure caused the ratings agency Fitch to downgrade the country’s debt by two notches and opens of the prospects that the country will also ask for a bail-out from the European Union. Though the sovereign debt issue looks to remain problematic for the near-term, some traders seem to be focusing on the prospects that the European Central Bank will raise interest rates sooner rather than later, as the Central Bank fears that inflationary pressures may become out of hand should the continued low interest rate environment remain in place. Next up for currency traders is the 2-day EU summit in Brussels, where EU leaders are expected to discuss ideas to ultimately resolve the sovereign debt crisis. However, should the parties involved in the discussions fail to come up with an acceptable plan for dealing with the debt, some traders may once again look beyond potentially higher interest rates and pressure the Euro lower once again.

Technical Notes

Looking at the daily continuation chart for the Euro FX futures, we notice the market has been in a rather steady uptrend since the yearly lows were made back in January. Since that time, the Euro has rallied about 1400 pips. Prices continue to hold above both the 20 and 200-day moving averages and momentum, as measured by the 14-day RSI is positive, with a current reading of 63.81. Although bulls still appear to be firmly in control, the potential double-top formation, as highlighted on the daily chart, could be a bit worrisome to Euro bulls, especially if the market cannot make a new intermediate high above resistance at 1.4276.Recent trading volume has been steady, but a bit below the trading volume we saw back in January. Resistance is seen at the November 4th high of 1.4276, with support found at the March 11th low of 1.3751

Mike Zarembski, Senior Commodity Analyst


March 28, 2011

Will Mother Nature's Wrath of Expected Gains in Cotton Acreage?

Today's Idea

Given the prospects of significantly higher global Cotton production this year plus continued solid demand for old crop Cotton, some traders may wish to explore old-crop/new-crop bull spreads in Cotton futures. For example, old-crop July Cotton is currently trading at a 70.45 cent premium to the new-crop December Cotton contract. Traders who decide they would like to trade this strategy could buy July Cotton and sell December Cotton, with the hopes that the price differential would continue to widen.

Fundamentals

Record high prices for Cotton has producers worldwide looking to expand the acreage dedicated to this crop and we shall know more about the intentions of US producers when the USDA releases its widely anticipated Prospective Plantings report on March 31st. Current estimates are for U.S. producers to plant over 13 million acres to Cotton this season, up sharply from the 11.038 million acres planted last season. If we assume average Cotton yields this coming year, the U.S. could produce over 23 million bales. This increase in acreage is necessary to help meet the increasing global demand for Cotton, especially from China, which is the world's largest consumer of Cotton. Though U.S. Cotton prices are still close to all-time highs, U.S. Cotton exports are remarkably strong. The USDA reported U.S. export sales totaled 567,100 bales for the week ending March 17th, of which 353,300 bales were for old crop Cotton. This past week's sales now put U.S. Cotton exports up nearly 40% compared to this time last year and demonstrates how strong global demand really is. Though it appears certain that global Cotton will increase this season, the one thing that is not in the control of producers is the weather. Texas, once of the leading Cotton producing states, has experienced a severe winter drought, which has sparked some concerns that the Cotton crop could be off to a poor start unless much needed moisture returns this spring.

Technical Notes

Looking at the daily chart for December Cotton, we notice that since the highs were made back in February, prices have been in a consolidation phase. This should not be much of a surprise, as many traders begin to position themselves for the USDA Prospective Plantings report later this week. For the past several weeks, December Cotton has traded on both sides of the 20-day moving average, giving neither short-term bulls nor bears the advantage. Longer-term, traders may note prices remaining well above the longer-term moving averages, which likely favors the bulls. Volume has fallen since its spike in early March but we should see increasing interest in the new-crop futures after the USDA report is released. The next major resistance point for the December contract is seen at the contract high of 135.76, with support found at the low of the recent consolidation phase at 113.00.

Mike Zarembski, Senior Commodity Analyst


March 29, 2011

Blue Notes

Today's Idea

Note and Bond fundamentals have been lackluster at best. The eventuality of rate hikes over the long haul has kept prices from breaking out to the upside, while the Fed pumping money into the economy has buffered the downside. Technically, the chart hints at further sideways trading. Some traders may wish to consider entering into a bear call spread, like selling the May Note 122-00 calls and buying the 123-00 calls for a credit of 0-06, or $93.75. Also, some traders may wish to consider selling a bull put spread, for example, selling the May Note 117 puts and buying the May 116 puts for a credit of 16, or $250. The combined spreads risk $1000, less the combined credit.

Fundamentals

T-Note futures have been sliding in recent sessions, after the Fed strongly hinted at further easing. Recent US housing data has been a major concern for many traders, as the FOMC closely monitors home sales as a measure of personal wealth. The prospect of more free money floating around the economy has some speculators coming back to riskier investments. The weak US Dollar has given overseas investors less incentive to purchase Bonds and Notes. Yesterday's 2-year note auction fell well short of expectations on weakness in direct bids, and foreign bank buying was average, but not at the levels seen recently. It also appears that the Fed may have slowed the rate of their purchases and may extend purchases beyond their June target. Many traders will be monitoring the radiation situation in Japan closely, where widespread radiation could lead to panicked and defensive traders.

Technical Notes

Turning to the chart, we see the June 10-Year Note contract coming back down through the 120 level to the downside. Prices had tested 121-05 on the upside, which has been resistance since the beginning of the year. Prices did briefly test the 100-day moving average, and there simply was not enough momentum to push prices higher. Prices are now at intermediate support at 119. Failure to hold here could result in prices testing support at 117-16.

Rob Kurzatkowski, Senior Commodity Analyst



March 30, 2011

Opinions Differ on Rate Increases by the Bank of England

Today's Idea

With little chance of a major change of policy by the Bank of England and the April British Pound options expiring in less than 2 weeks, some traders who are expecting the June British Pound futures to continue to remain range-bound may wish to explore selling strangles in the April options with call strike prices above resistance at 1.6385 and put strikes below support at 1.5734. For example, with the June Pound trading at 1.5995 as of this writing, the April Pound 1.6400 calls and the April Pound 1.5600 puts could be sold for about 0.0020, or $125 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration should the June futures be trading above 1.5600 and below 1.6400. 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. An example of one such strategy would be to buy back the strangle before expiration should the June Pound close above 1.6400 or below 1.5600.

Fundamentals

Will they or won't they? That is the question many traders are asking about any interest rate increases by the Bank of England (BOE) in the near future. There appears to be a difference of opinion among BOE members regarding interest rates. In the first place, Monetary Policy Member Adam Posen is looking for the BOE to increase its quantitative easing policy even further in order to help the private sector rebound from its economic malaise. On the other side of the coin is the view held by Andrew Sentance, who believes that rates should be raised soon in order to fight rising inflation. Mr. Posen's "dovish" stance is based on his belief that government austerity measures will slow consumer spending in the future, which in turn will ease pricing pressures and keep inflation tame going into 2012. This view contrasts with current inflation levels which are running at 4.4%. It is this much higher inflation rate that is causing the "Hawk" on the BOE Monetary Policy Committee to want to increase interest rates to help stem further pricing pressure tied to an overly "accommodative" monetary policy. This division has kept the British Pound trading in a relatively narrow price range for most of 2011, as many traders remain hesitant to take bullish or bearish positions until some clarity of policy is seen from the BOE members. Given the mixed economic data lately, it may not be until later this year before the BOE is forced to seriously consider any rate hikes, unless inflationary winds blow even stronger than current levels.

Technical Notes

Looking at the daily continuation chart for the British Pound futures, we notice prices have moved into a consolidation mode, trading in a relatively narrow 600-pip range since the end of January. The major moving averages also paint a mixed picture, as prices are above the longer-term 200-day moving average, but below the short-term 20-day averages. The 14-day RSI has turned moderately negative, with a current reading of 42.72. Bulls would need to see a close above major resistance at 1.6385 to gain control, while Pound bears would need to see a close below support at 1.5745 to have the upper hand.

Mike Zarembski, Senior Commodity Analyst