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April 2011 Archives

April 4, 2011

Will the Silver Rally Begin to Tarnish in the Near-term?

Today's Idea

The recent run-up in Silver prices has certainly spiked option volatility, and with the market appearing a bit overbought, at least in the short-term, a bearish short-term trading strategy may be in order. There appears to be strong psychological resistance at the 40.000 level for the May futures, and some traders may wish to consider selling out-of-the-money calls in May Silver futures options, with strike prices above the $40 resistance level. For example, with May Silver trading at 37.730 as of this writing, one could sell the May Silver 44.00 calls for about 0.065, or $325 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 May Silver be trading below 44.000. Given the risks involved in selling naked options, some traders may wish to buy back the short options before expiration should May Silver close above 40.000.

Fundamentals

Forget Gold -- Silver futures have been the brightest performer of the precious metals sector so far this year, with the lead month May Silver futures up over $6 per ounce since the start of 2011. Among the reasons given for Silver's shining performance has been its dual role as both an industrial and precious metal. This has provided support not just from those buyers looking for a "safe haven" investment, but also from those looking for improvement in the global economy, which would benefit industrial commodities such as Silver and Copper. All the precious metals seem to be dismissing the "hawkish" comments from European Central Bank officials that Interest rates will need to rise to help control inflationary pressures. Though it appears that the bullish trend for Silver is firmly intact, one does have to wonder if we have started to move "too far and too fast". The Gold/ Silver ratio has strongly favored Silver, with the ratio trading below the 38-to-1 ratio for the first time since 1998. This may be a sign that the speculative interest in Silver has become overdone and a price "correction" may be needed to restore health to the bull market after shaking weak longs out of their positions. A look at the most recent Commitment of Traders report shows both large and small speculators holding a net-long position of nearly 60,000 contracts as of March 29th. This was a decline of over 600 contracts for the week, and with prices hovering near their highest levels since the end the great Silver bull market of 1979-80, it would not come as a big surprise if we see prices correct a bit before the bull market resumes its historic climb.

Technical Notes

Looking at the daily chart for May Silver, we notice how well the market has trended upward since prices moved above the 20-day moving average in February. Since that time, the 20-day MA has been a key support level, with prices failing to close below this indicator since that time. We are starting to see a few signs that the bullish momentum might be beginning to wane. Volume is starting to slow some, and down-volume has been higher than up-volume during the past several trading sessions. The 14-day RSI is showing a bearish divergence, as this momentum indicator is holding just below overbought territory with a current reading of 69.46. The contract high of 38.180 remains resistance for May Silver. Support is found at the 20-day moving average currently near the 36.220 area.

Mike Zarembski, Senior Commodity Analyst


April 5, 2011

Copper Questions

Today's Idea

Copper fundamentals are mixed, but may favor the bear camp if miners are able to get back online. The absence of robust Chinese demand may be too bearish of a force for the bull camp to overcome. Technically, Copper is at a fairly important support level of 4.25. Failure to hold this support could result in further long liquidation and fresh shorts entering the market. Due to the lack of Copper option liquidity, some traders may opt to enter the futures market. One must keep in mind that this futures contract is especially volatile and risky. Some traders may wish to consider shorting the May Copper contract on a close below 4.25, with a protective stop at 4.35 and downside objective of 4.05.

Tomorrow, optionsXpress is hosting a webinar presented by one of the most respected commodity analysts in the business. There is still room available for those interested. Mr. Hightower will be presenting his unique view of the inflation scenario for 2011. As we all know, inflation has a major impact on commodity, currency and financial instrument prices, so the material presented is of relevance to all traders, regardless of what product they trade.

Big Events in 2011 That May Enhance Global Inflation Threat:
Presented by David Hightower

Wednesday, April 6, 2011
3:30 pm Eastern Daylight Time

Fundamentals

Copper has performed poorly lately, at a time when other commodities have hit multi-year highs. Traders are now faced with a dilemma after prices have pulled back - will supply or demand drive the market in the near term? On one hand, Chinese demand has slowed considerably, and Japan's economy is at a standstill as the nation recovers from the natural disasters. New home construction in the US is virtually non-existent. All of these factors point to soft demand for the foreseeable future. While the demand side of the equation seems to favor the bear camp, supplies continue to tighten. Copper miners have had their hands full keeping pace with demand. Heavy rains and human error has led to a reduction in Copper production in Chile. Mines fell well behind their first quarter targets, but if they are able to get back to normal operation, demand side fundamentals could win out. If prices do pull back to a large degree, we could see Chinese firms stockpiling once again. On the other hand, a slow descent could result in firms waiting things out.

Technical Notes

The May Copper chart shows prices trading right at the 4.25 support level. Prices are also hovering near the 100-day moving average. A significant breakdown below the 4.25 mark could send prices lower and possibly test the 4.00 mark. The 4.00 level is a critical support level, both technically and psychologically for the Copper market. This was a level that the market had historically tested, but was unable to break through until late last year.

Rob Kurzatkowski, Senior Commodity Analyst

April 6, 2011

Is the Bull Market Re-Heating in Coffee?

Today's Idea

With Tuesday's late session price surge, some traders could be signaling that Coffee prices may have finally reached near-term lows. Some traders looking for the recent low of 256.75 in July Coffee to hold may possibly wish to explore selling puts in Coffee futures options with strike prices below this support level. For example, with July Coffee trading at 270.35 as of this writing, June Coffee 235 puts could be sold for about 1.25, or $468.75 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 mid-May should July Coffee be trading above 235.00.

Don't forget that optionsXpress is hosting a webinar presented by David Hightower this afternoon, April 6th, at 3:30 pm Eastern Time discussing the big events in 2011 that may enhance the global inflation threat.

Fundamentals

After failing to trade above the $3.00 per pound level back in early March, Coffee futures prices have slumped lately, with the lead month May futures falling nearly 40 cents since the contract highs were made. However, there are some signs that the bulls are starting to get their caffeine fix. Supplies out of Guatemala have been lower than expected, as heavy rainfall has hurt the country's Coffee production. Coffee exports for March were 6% lower than last year's totals, although government officials are still optimistic that exports for the entire 2010-11 marketing year will be above last year's totals. Coffee output in Brazil is expected to be lower in the 2011-12 seasons, as the Coffee production cycle moves to its "off" year. Some traders estimate that Brazil's production will fall by nearly 10 million bags this coming season. Not all of the Coffee supply fundamentals are bullish, as traders anticipate a rebound in Coffee supplies coming out of Columbia, which is recovering from multi-decade lows in Coffee production. With the onset of winter in the southern hemisphere just around the corner, many traders may start to price in a "weather premium" in Coffee prices, as the Brazilian crop faces potentially damaging freezing temperatures.

Technical Notes

Looking at the daily chart for July Coffee, we notice a reversal day on Tuesday when prices made a new near-term low, only to close sharply higher on the session, with only the 20-day moving average acting as resistance from further gains. Notice that trading volume surged on the up-move, which may be confirming that a significant low may now be in place. The 14-day RSI has moved up and is now reading a more neutral 51.60. Should prices close above the 20-day moving average, the next resistance level is seen at the March 21st highs of 283.15. Support is found at Tuesday's low of 256.75.

Mike Zarembski, Senior Commodity Analyst

April 7, 2011

Crude Quiet

Today's Idea

Crude Oil demand fundamentals have been and remain lackluster at best. However, Crude Oil traders tend not to look at the present, but rather the future. The lack of follow-through buying could be attributed to overbought technical conditions and Gold, which is at new highs, stealing a bit of Oil's thunder. If and when a new breakout might occur remains a mystery. For this reason, some traders may want to consider selling a put option, which is a neutral to bullish strategy. For example, selling a May 104.50 put at 0.45, or $450. The trade carries with it fairly significant option requirements and risk, so traders may want to consider exiting the trade on a close below 104.75 to mitigate some of that risk.

Fundamentals

Crude Oil futures have seen very choppy trading over the past several sessions, on fears that rising prices may quash demand in China and the US. China has raised the price of fuel due to rising costs. The move is unpopular domestically and looks bad for the government, which is attempting to curb inflation. Raising costs may actually be the best way for China to curb domestic demand and inflation, but would be a very unpopular move. The interest hike by the PBOC has been seen as far too little, far too late to make a significant impact on commodity demand. In the US, the employment situation is beginning to improve, which could be seen as a positive force for Oil prices. However, if fuel prices rise too quickly, the recovery could be quickly derailed. Driving season is just around the corner, which in and of itself is a driver of gasoline prices. The situation in Libya is little changed since the air strikes commenced, and many traders have largely ignored the developments there, instead focusing on Saudi Arabia. Protests in Crude Oil producing nations have quieted down over the past few days, but the prospect of turmoil causing a spike in prices is always there. Unlike equities, which typically only see panic selling, commodities can see panic buying. This is what could happen should Saudi Arabia boil over.

Technical Notes

Turning to the chart, we see sideways trading since the breakout above the 105.75 level. Some traders may view this as a consolidation pattern, barring a close back down below 105.75. The RSI remains at overbought levels, which could help explain the lack of further buying pressure. Momentum and RSI are beginning to show some bullish divergence, which hints at possible further upside.

Rob Kurzatkowski, Senior Commodity Analyst

April 8, 2011

Inflation in the Forefront as ECB Raises Rates

Today's Idea

Now that the ECB interest rate hike has been announced and it appears that this may not be the start of several quick rate hikes in succession, the upward momentum in the Euro may be in jeopardy. Some traders who are expecting Euro futures to be bearish to neutral in the short-term may wish to explore selling calls in Euro futures options. For example, with the June Euro futures trading at 1.4270 as of this writing, the May Euro 1.4700 calls could be sold for 0.0021, or $262.50 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized at option expiration in early May should the June Euro futures be trading below 1.4700. 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 exit strategy could be to buy back the options sold before expiration should the June Euro close above long-term resistance seen at 1.4577.

Fundamentals

The European Central Bank (ECB) has been trying to control inflation ahead of continued liquidity concerns of some if its member nations, after the announcement yesterday that the Central Bank would raise its benchmark interest rates by 0.25% to 1.25%. This was the first increase in interest rates by the ECB since the summer of 2008. In his comments following the rate hike announcement, the ECB President Jean-Claude Trichet commented that the rate increase was intended to help maintain price stability in the face of rising inflation concerns tied to sharply higher commodity prices. President Trichet further acknowledged that interest rates remain historically low despite the rate increase, and that monetary policy still remains accommodative. However, the ECB President was quick to add that market precipitants should not expect a quick series of further rate hikes, as ECB officials will continue to monitor economic conditions and take appropriate actions to maintain price stability. It was this rather "dovish" comment that sent the Euro lower vs. the USD after the rate hike announcement, as traders began to pull back on their expectations that the ECB would raise rates again at their next two meetings. Ironically, while the ECB was raising interest rates, Portugal was asking the European Union (EU) for a financial bail-out, joining Greece and Ireland in looking to its fellow EU member nations for funding to help meet its financial obligations. Now that the first rate hike has gone into effect, the ECB will have to try to juggle continued concerns about rising inflation, with fears that further rate hikes could curtail growth prospects for the EU, which is the last thing member countries that are struggling with their debt loads need, and which could eventually set the stage for further debates as to whether the 17-nation Euro block can hold together, as its member countries' economic conditions diverge.

Technical Notes

Looking at the daily continuation chart for the Euro futures, we notice that since the all-time highs in the Euro were made back in 2008, each successive rally attempt has made lower highs and each sell-off has made lower lows. We are also approaching the downtrend line drawn from the all-time highs and a failure to take out this trendline to the upside could portend a steep sell-off in the coming weeks and months. We also have a bearish divergence forming in the 14-day RSI, and volume on the recent rally has been rather weak. These events seem to be signaling that the bullish momentum may be waning. The next major chart resistance level is not found until the January of 2010 high of 1.4577. Support is seen at the March 28th low of 1.4000.

Mike Zarembski, Senior Commodity Analyst


April 11, 2011

Corn Futures Rally Despite Bearish USDA Report

Today's Idea

With Corn futures trading near all-time highs, traders should be prepared for heightened volatility, especially as we enter the summer growing season, when grain "weather" markets can send prices up or down the limit on changes to weather conditions. Some trend-following traders who wish to be long Corn futures but who want to limit their potential risk may wish to explore buying bull call spreads in Corn futures options. For example, with July Corn trading at 774.00 as of this writing, the July Corn 800 calls could be bought and the July Corn 900 calls sold for about 26 cents per bushel, or $1,300.00 per spread, not including commissions. The premium received would be the maximum potential risk on the trade, with a potential profit of $5,000.00 minus the premium paid which would be realized at option expiration in late June should July Corn be trading above 900.00 per bushel.

Fundamentals

The recent rally to all-time high prices in Corn futures remains intact, despite a surprisingly "bearish" ending stocks figure from the USDA in its April Crop Production and Supply/Demand report. The USDA left U.S. Corn ending stocks unchanged at 675 million bushels for the 2010-11 season. Many traders were expecting a nearly 100 million bushel decline, as demand for US Corn remains strong despite record high prices. The USDA raised the demand for Corn usage by ethanol producers to 5 billion bushels, which is up from 4.95 billion bushels in last month's report. However, the USDA lowered feed usage demand to 5.15 billion bushels, which accounted for the unchanged ending stocks estimate. However, there was much doubt about the USDA figures for Corn from traders on the floor, with several commenting that the USDA may have been too conservative in its forecast, as even at 675 million bushels, carryout would be a 15-year low. Though old-crop Corn futures opened lower on the USDA data, prices rallied to close higher on the session and just off the all-time highs. Some traders believe that old-crop corn will need to trade to over $9 per bushel before we start to see supplies being rationed. Though U.S. producers are expected to plant nearly 93 million acres to Corn this coming season, and if yields come in as expected, we could see a whopping 14 billion bushel Corn crop this season. However, with Corn demand expected to be at or near record levels, the U.S. will need to produce every bushel, and Mother Nature needs to cooperate in order to help replenish inventories.

Technical Notes

Looking at the daily chart for July Corn, we notice that Corn has "minded the gap" left on the charts after the bullish USDA Prospective Plantings report. Prices closed higher to end the week on Friday on extremely heavy volume, which should support the bullish cause. The 14-day RSI is strong and holding just below overbought levels, with a current reading of 66.31. There is a bearish divergence forming in the RSI that is one of the few indicators Corn bears are holding onto. Though chart resistance is seen at the contract highs of 781.00, it appears that 800.00 might be the more important psychological resistance level. Support for July Corn is seen at the March 22nd high of 722.00.

Mike Zarembski, Senior Commodity Analyst


April 12, 2011

Will a Crude Pullback Slow Down the Loonie?

Today's Idea

The Canadian Dollar fundamentals remain bullish, but the currency does risk seeing selling pressure if Crude Oil prices see a correction. The Bank of Canada is likely to keep interest rates unchanged at 1%, so the rate decision will be a non-event. Like FOMC rate decisions in the US, the language used by the central bank will be more important than the decision itself. Technically, the June futures chart shows the market in an uptrend, but near-term indicators hint at possible weakness. Some traders may wish to consider selling a put option given the overall market strength, but uncertainty over the near-term direction. Some traders may look to sell the May 1.02 puts for a premium of 0.25, or $250. The maxium profit is the initial credit and the trade carries with it substantial risk. Traders may wish to mitigate some of this risk my exiting the trade on a close below 1.02.

Fundamentals

Canadian Dollar futures are trading at their highest levels in over three years, buoyed by strong metal and energy prices. The Loonie's most recent rally has ridden the coattails of Oil's surge. The US imports more Crude Oil from Canada than any other nation, which has caused currency traders to flock to the Canadian Dollar in droves. Investors have been drawn to higher yielding currencies because of central bank policy. Banks around the globe have been in expansion mode at the expense of fighting inflation, which has made long-term government bond rates unattractive. Eventually inflation will rear its ugly head, and bond traders will be locked-in at cheap rates while central banks are raising rates at break-neck speed. Even traders that are not especially bullish on the global economy are now almost forced into riskier, growth investments due to fear of being stuck holding underperforming assets. Canada's economic conditions have improved significantly, and the unemployment rate is at 7.7%, below its average rate of 8.53%. However, a strong currency presents challenges for the nation's exporters. The Bank of Canada meets today to discuss its interest rate policy. The consensus opinion is that the BoC will keep interest rates unchanged at 1%, for fear of sparking further advances in the exchange rate of the Loonie.

Technical Notes

Turning to the chart, we see several signs that the June Canadian Dollar may be weakening a bit. The candles from the past several sessions point to indecision. Also the RSI is at overbought levels, suggesting the market could see consolidation or a pullback in prices as investors take profits. While these near-term indicators can be seen as bearish, the chart does not show significant technical resistance until the 1.0694 level. On the downside, 1.0300 and, more importantly, 1.0000 are support levels.

Rob Kurzatkowski, Senior Commodity Analyst

April 14, 2011

Too Much Heat for Wheat?

Today's Idea

The continued dryness seen in the southern and southwestern parts of the Great Plaines is mainly affecting the Hard Red Winter Wheat (HRW) crop traded on the Kansas City Board of Trade (KCBT). A quick look at the daily chart for the July KC Wheat futures shows some chart support near the 835.00 to 840.00 area. Some traders who are considering going long KC Wheat if prices pull back towards this support point may wish to explore selling puts in KC Wheat with a strike price near this support area. For example, with July KC Wheat trading at 898.00 as of this writing, the July 840 puts could be sold for around 30 cents, or $1,500 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 June should the July futures be trading above 840.00. 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 close out the trade before expiration should the July futures close below near-term support at 835.00.

Fundamentals

Wheat futures prices are caught between continued weather woes for the Winter Wheat crop, as dry weather in the southern plains has crop conditions plummeting. However, a "bearish" commodity call by Goldman Sachs has traders fleeing long commodity positions. U.S. Winter Wheat conditions continue to disappoint, with the weekly crop conditions report showing that only 36% of the crop is rated good to excellent, which is down 1% from the previous week. For comparison, last year at this time the crop was rated 65% good to excellent. The U S is not the only country with potential problems with its Wheat crop, as China is also experiencing a severe drought in the northern regions of the country where the bulk of the country's Wheat is grown. Though global Wheat supplies currently remain ample, especially compared to Corn and Soybeans, there is some additional demand found for feed Wheat, as record high corn prices make this an economical option for some. However, traders are currently putting the fundamentals on the back burner, as word spread that Goldman Sachs has started to advise some of its clients to exit a basket of commodity products, because it is believed the markets may have become overbought in the short-term. A look at the most recent Commitment of Traders report shows large non-commercial traders are holding a net-long position of just over 99,000 contracts combined in the three major Wheat futures here in the U.S. Though this is well off the record net-long position, it is still a sizable position. Should the commodity-wide liquidation continue, we could see prices fall further until we start to see late longs taken out of the market and some health restored for the next bull run.

Technical Notes

Looking at the daily chart for July KC Wheat, we notice the sharp sell-off we saw on Tuesday was stopped in its tracks at the 20-day moving average. The price decline the past several sessions may be part of the formation of a bull-flag on the daily chart. Momentum as measured by the 14-day RSI has moved back to a more neutral reading of 50.64. The recent high made on April 5th at 968.00 looks to be the next resistance point for the July futures, with near-term support found at the March 23rd low of 835.00.

Mike Zarembski, Senior Commodity Analyst

Souring on Sugar?

Today's Idea

The Sugar market has been supported by extremely tight supplies over several years, but sizable crops in Brazil, Thailand and India could quickly ease supply concerns. The sizable fund position is also a concern for long spec positions if a fund liquidation ensues. Technically, July Sugar is in a vulnerable position after confirming a bearish breakout from a wedge and approaching a near-term support level. Some traders may wish to consider a bear put spread, buying the June Sugar 23.50 puts and buying the 22.00 puts for a debit of 0.45, or $504. The trade risks the initial cost and has a maximum profit of $1,176 if the July Sugar contract closes below 22.00 at expiration.

Fundamentals

Sugar futures are entering the Brazilian harvest on a sour note, as futures have been unable to garner any traction. While supplies are tight in the near-term, the looming Brazilian harvest along with good growing conditions in Thailand and India could significantly ease supply concerns. The rain that Brazil has seen as it enters the harvest is a mildly bullish force, but conditions are expected to dry quickly. The sizable spec long position also suggests that selling pressure could quickly garner steam if funds and smaller speculators begin to unwind positions. If energy prices begin to falter, Sugar may lose outside market support. The improvement in Coffee fundamentals could result in some portfolio rebalancing by some traders, possibly resulting in a higher allocation to Coffee at the expense of other soft commodities.

Technical Notes

Turning to the chart, we see the July Sugar contract trading near the relative low close of 23.57. The market also recently broke out of a wedge formation to the downside. The measure of the move suggests prices could come down to test support in the 21.10 area. After the 23.57 level, support comes in at 22.50 and 21.10. The 50-day moving average is closing in on the 100-day average. A downward crossover of the two averages could be seen as a bearish signal over the intermediate term. On the upside, the market would have to cross back above the 26.00 level to regain upward momentum.

Rob Kurzatkowski, Senior Commodity Analyst

April 15, 2011

Next Stop $1500?

Today's Idea

Traders looking to get long Gold by buying call options do run into the downside of time decay as option expiration draws near. More aggressive traders may wish to explore the purchase of a call option on Gold futures, with the sale of a Gold put to help offset some of the premium paid for the long call positions. For example, with June Gold trading at 1472.30 as of this writing, the June Gold 1500 calls could be bought and the June Gold 1380 puts sold for about 12.00, or $1200 per spread, not including commissions. The trade would be profitable at option expiration in late May should June Gold futures be trading above 1500 plus the amount of the net debit paid for this trade. Ideally, the strike of the short put should be below a key chart support point, as most traders would not want to see the futures trade below the strike price of the short put.

Fundamentals

After a shaky start to the week, Gold futures have resumed a bullish course, with prices hovering just below the all-time highs, as traders moved back to the "yellow metal" after some disappointing U.S. economic data. On Thursday, the Labor Department reported that U.S. producer prices rose by 0.7% in March which was on top of a 1.6% increase in February. The bulk of the gains were tied to rising energy prices, especially gasoline, which rose by 5.7% last month. The recent sharp increases in producer prices have many analysts concerned that the current accommodative policies by the Federal Reserve may spark even greater increases in both consumer and producer prices later in the year. Gold has historically been seen as a store of value, and concerns about rising inflation -- especially with the U.S. Dollar being as weak as it has been -- can only help to give added support to the Gold market. It should be noted that Gold prices are not only strong vs. the beleaguered greenback, but also near highs against the Pound Sterling and the Japanese Yen. This shows that Gold's strength is not only derived from inflation fears, but that the Gold market is also finding support as an alternative to holding "paper' currency. Given the economic difficulties seen in many Western nations, it should not come as a big surprise that investors are looking towards moving some of their assets towards "hard" investments such as Gold.

Technical Notes

A look at the daily continuation chart for Gold shows that the "commodity wide" selloff we saw early this week had little effect on Gold prices. The recent low just below the 1445.00 level did not even come close to testing the 20-day moving average. If we draw a trendline from the intermediate low made back on January 28th to the recent low, we notice how this uptrend line has acted as support for the past several weeks. If prices close below this line, it may signal an end to the current bull market leg. There is a bearish divergence forming in the 14-day RSI, but the actual reading in this indicator remains strong, with a current reading of 64.80. The contract high of 1476.00 remains resistance for June Gold, with near-term support found at the uptrend line mentioned above, currently near the 1435.00 area.

Mike Zarembski, Senior Commodity Analyst


April 18, 2011

China Backing Away From Soybean Purchases

Today's Idea

The potential for increased volatility in the grain markets this summer have many traders nervous about taking on an outright position in Soybean futures. With the current tight Soybean ending stocks and the potential for reduced Soybean acreage, U.S. yields will have to be superb in order to replenish inventories. This scenario could set the stage for sharply higher Soybean prices should it appear that U.S. production will fall short. Some longer-term traders looking for Soybean prices to rise may wish to explore the purchase of a bull call spread in new-crop November Soybeans. For example, with November Soybeans trading at 1343.00 as of this writing, the November 1400 calls could be bought and the November 1600 calls sold for about 45 cents, or $2,250 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $10,000 minus the premium paid which would be realized at option expiration in October should November Soybeans be trading above 1600.00.

Fundamentals

All of a sudden it appears that China has had its fill of Soybeans, at least in the near-term, as the country has started to cancel some of its import commitments. Rising food prices in the country have caused the Chinese government to consider imposing food price controls in order to try to stem rising consumer inflation. Any price controls have the potential to curtail Soybean demand, especially if Soybean crush margins move lower. In addition, the large supply of Soybeans destined to market from South America may continue to shift business to Brazil and Argentina and away from the U.S., as Brazil is expected to produce a record crop. However, longer-term, the outlook for Soybean prices appears supportive, as U.S. producers are expected to shift acreage over to Corn -- or even Cotton, as the current new-crop futures prices make the latter two commodities more attractive for producers than that of Soybeans. However, with U.S. Soybean ending stocks at very tight levels and the potential for reduced Soybean acreage, new-crop Soybeans may need to price in a "risk premium" in case weather conditions turn unfavorable during the growing season and yields disappoint.

Technical Notes

Looking at the daily chart for November Soybeans, we notice a potential double-top formation, as last Monday's move to new highs was met with heavy selling. Some of the selling may be tied to talk that Goldman Sachs issues a sell signal for commodities in the near-term. Another reason for the sell-off may be tied to the less than ideal weather conditions for Corn planting so far this spring. Failure to get Corn planted by May might cause some producers to switch acreage towards Soybeans, which have a shorter growing season than Corn. Prices are now trading below the 20-day moving average, which is viewed as a sell-signal by short-term momentum traders. The 14-day RSI is also showing a bearish divergence, which does add credence to the potential double-top formation. The recent high made on April 11th at 1411.25 should act as resistance for November Soybeans, with major support not found until the March 15th low of 1238.00.

Mike Zarembski, Senior Commodity Analyst

April 19, 2011

Bonds Rally in the Face of S&P Revision

Today's Idea

Bond market fundamentals remain bearish. The greenback remains relatively weak and the government cannot seem to reign in debt. However, the European debt situation could help avoid a complete market meltdown. Technically, the market is running into resistance, and it is difficult to see prices with enough momentum to cross through the 122-16 level. For this reason, some traders may look to sell a June Bond 124 call for a premium of 0-30, or $468.75. The maximum profit would be the initial credit and the trade has unlimited risk potential. To mitigate risk, some traders may want to close the trade if the underlying futures contract closes above 124-00.

Fundamentals

Bond futures were stronger yesterday, despite the negative economic outlook from Standard & Poor's. Many view this as the initial warning shot and an indication that the ratings firm could strip the US of its AAA credit rating. A downgrade to its debt rating could mean higher borrowing costs, thus lower Bond prices. The showdown in Congress over the federal budget has done little to offer investors encouragement. Both the Fed and Treasury Department have done everything in their power to encourage lawmakers to deal with higher debt, which would result in higher debt supply and could result in a quicker downgrade of government debt. The lone bright spot for the Bond market comes from across the Atlantic in the form of EU bonds. It looks as though Greece and Portugal could both be on the verge of default, and Spanish debt is paying very high yields, which is a sign that a bailout may be needed sooner rather than later. Given the lower default risk in the US, T-Bonds look relatively attractive when compared to their European counterparts. Overall, Bond market fundamentals remain shaky. The move to revise the growth outlook can be seen as a move by S&P to warn investors about a downgrade in order to avoid the panic of a downgrade coming out of left field.

Technical Notes

Turning to the chart, we see the June Bond contract coming up toward a test of resistance near the 122-00 level. If the contract breaks through this level, prices could test 122-16 on the upside. Failure to break through resistance would suggest prices may settle back to their previous trading range. The RSI indicator is approaching overbought levels, which could put some downside pressure on the market.

Rob Kurzatkowski, Senior Commodity Analyst


April 20, 2011

Silver Leads the Precious Metals Bull Market

Today's Idea

With $45 Silver on the doorstep and the potential for $50 plus Silver now on radar screens, we may start to see increasing volatility in Silver prices in the coming weeks. Option prices have become rather expensive, making buying options outright an expensive proposition. Those traders looking for Silver prices to continue to move higher may wish to explore the purchase of a bull call spread in Silver futures options. For example, with July Silver trading at 43.870 as of this writing, the July Silver 48 calls could be bought and the July Silver 52 calls sold for about 0.750, or $3,750 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $20,000 minus the premium paid, which would be realized at option expiration in late June should July Silver be trading above 52.000.

Fundamentals

Though not yet trading at all-time highs like Gold, Silver futures have once again reached a new contract high, with the July Silver futures trading just below the $44 level. This is the highest Silver has traded since the end of the historic Silver bull market back in early 1980. Silver bullion held at COMEX warehouses has been declining lately, which is a sign that investors are not only interested in speculating on Silver prices, but that they also wish to actually take delivery of the metal. Internationally, demand for Silver looks robust, with India, who is normally the world's largest consumer of Gold, also expected to expand its Silver imports in the coming year. Historically, Silver has been the leader in the great precious metals bull markets, and a look at the Gold/Silver ratio shows the ratio heading towards 34 to 1. This is compared to a ratio closer to 65 to 1 just one year ago A ratio below 40 has normally occurred in the past when inflation was expected to rise. With the U.S. Dollar Index hovering near its yearly lows, it should come as little surprise that both Gold and Silver are performing as well as they are, as investors continue to move assets into the precious metals sector in order to divest from currencies -- especially the greenback.

Technical Notes

Looking at the daily chart for July Silver, we notice that prices have been in a nearly perfect uptrend since the yearly lows were made back in late January. Since that time, Silver has rallied nearly 17 cents per ounce, which is a huge amount for such a short period of time. Even though Silver prices have moved sharply higher, the moves have been rather orderly and not like the parabolic moves we saw at the end of the 1979-80 Silver bull market. The 14-day RSI has moved well into overbought territory, with a current reading of 84.79. 45.000 is seen as the next major resistance point for July Silver, with support found at the 20-day moving average, currently near the 39.500 area.

Mike Zarembski, Senior Commodity Analyst


April 21, 2011

Hot Commodities Boot Aussie

Today's Idea

Australian Dollar fundamentals remain very strong at the present time. The currency has benefited from its own economic growth, positive interest rates and the shortcomings of other industrialized currencies. Technically, the Aussie has broken out to new highs, a sign that the rally may continue. Because the currency is in uncharted territory, picking an upside objective may be difficult. For this reason, some traders may wish to sell a May Aussie 1.04 put for a premium of 0.0035, or $350. The initial premium would be the maximum profit and the trade has unlimited risk, so traders may wish to consider closing the option trade on a close in the underlying below the 1.04 level.

Fundamentals

Rising metal and energy prices helped the Australian Dollar vault to new highs versus the US Dollar. The commodity-producing nation has ridden the wave of rising precious metals prices and stout growth in China, a major trade partner. Many currency traders have looked to capitalize on growth currencies, rather than position themselves in US Dollars and Euros. The US currency has fallen out of favor with traders in recent years, due to mounting government debt and slow economic growth. Europe has its own set of debt problems and there are several nations that need bailouts or they may face possible defaults. In addition to the outside market support, the Aussie is supported by favorable interest rates versus other industrialized nations. The government has indicated that it will not take steps to curb its country's currency at the present time, which could offer additional price support.

Technical Notes

Turning to the chart, we see the June Aussie Dollar continue to climb after taking-out resistance at 1.0160 in late March. Today's jump above 1.0500 signals a fresh breakout. The bearish divergence between the RSI and prices could be a sign that prices may retreat a bit. The indicator peaked when prices initially tested 1.0500.

Rob Kurzatkowski, Senior Commodity Analyst


April 25, 2011

The Dollar's Demise Continues

Today's Idea

With the trend for the U.S. Dollar index firmly in the bear camp, it would seem logical that traders may continue to explore trading strategies that would benefit from a continued decline. However with the potential of a sharp counter-trend rally occurring, especially with the large speculative short position seen, some traders may wish to protect their short position should a reversal occur. One such strategy could be a call ratio backspread. A ratio backspread involves selling one option strike and buying a multiple of another option strike. For example, with the June Dollar index trading at 74.155 as of this writing, one could sell the May Dollar Index 74 calls and buy 2 of the May Dollar Index 76 calls for a credit of about 0.35 or $350 per spread, not including commissions. In this instance, the trader would wish to see the June Dollar index price remain steady, decline or make a large move upward by option expiration about 2 weeks away.

Fundamentals

The U.S. Dollar continues in its doldrums, with the Dollar Index futures falling to lows not seen since the summer of 2008, as traders and investors are moving funds into alternative investments. The downtrend seemed to accelerate after Standard and Poors (S&P) lowered its ratings outlook for the U.S. to "negative" from "stable", citing concerns that the U.S. government will not come up with a viable plan to lower the budget deficit before 2013. In addition, some traders have been moving away from Dollars and into alternatives such as Gold and higher yielding "commodity "currencies such as the Australian and Canadian Dollars. Even the Euro has been gaining on the greenback, despite the continued uncertainty surrounding the debt of E.U. members Greece, Portugal, and Ireland. With the general consensus favoring a continued decline in the Dollar, has the market become oversold? A look at the weekly Commitment of Traders report shows speculators continuing to add to their net-short positions in the Dollar vs. a basket of major currencies; however, the net-short positions are still below record levels. Though it appears that the Dollar still has some room to move even lower, the large percentage of traders already short the Dollar could trigger a major short-covering rally should some catalyst occur, such as an announcement of a restructuring of Greek debt or a major spread of political unrest in the Middle East. So while the "trend is still your friend", it is a rather fickle friend that can turn on you quickly!

Looking at the daily chart for the June Dollar Index, we notice the market has been moving downward for nearly all of 2011. Prices are now moving even further away from the 20-day moving average, trading just above the 74.000 area. The 14-day RSI is holding just above oversold territory, with a current reading of 30.614. The next support level is seen around the 73.500 area, with resistance found at the recent high of 76.055 made on April 18th.

Mike Zarembski, Senior Commodity Analyst

April 26, 2011

Platinum, the Forgotten Precious Metal

Today's Idea

Platinum is the rarest of the precious metals, but often forgotten due to lack of US ETF demand and a less liquid futures market. Its use as an industrial metal also makes it more economically sensitive and less likely to be used as a pure inflation hedge. Traders' options are limited because of a lack of options trading and mini products, leaving traders with only the volatile futures market to trade. However, Platinum has gotten cheap relative to Gold, which could set-up a spread opportunity. Some traders may wish to consider buying July Platinum and selling June Gold if the spread between the metals drops to 300. Some traders could choose to look for an upside target of 400 and may wish to exit if the spread falls below the 275 mark. Despite common misconceptions, spread trading in and of itself is not necessarily safer than trading contracts outright, and stop orders are not accepted on spreads.

Fundamentals

Platinum has been the forgotten metal during the run-up in precious metals prices, as investors have instead focused on Gold and Silver. That is understandable, as investors do not see the metal as a pure currency like Gold, and the ETF dynamic has not been there either. Auto sales in the US remain lackluster at best, and Japan has seen its large auto manufacturers close plants after the earthquakes. However, demand for the metal may be set to increase in the second half of the year, as more auto plants come back online and demand for pollution control devices increases. Miners have had a difficult time increasing production of the rare metal to meet demand as it is, suggesting supplies could get even tighter as we move forward. The spread between Gold and Platinum is now near the 320-325 level, which is near the lower end of where the spread has been during the last twelve months. The potential for Platinum to gain on its more popular precious metal counterpart is there.

Technical Notes

Turning to the chart, we see the July Platinum contract rallying toward the 1860 level, which has offered stout resistance the last three times it was tested. A breakout above 1860 could squeeze shorts out of the market and may fuel renewed speculative buying. Recently, the RSI has been diverging from prices, which can be a sign that the market could be topping in the near future. If prices do correct, the market could find support near the 1780 level, and further support near 1735.

Rob Kurzatkowski, Senior Commodity Analyst


April 27, 2011

Copper Rally Starting to Tarnish?

Today's Idea

With Copper prices starting to look a bit toppy, some traders who are looking for prices to start to decline may wish to explore selling July Copper on a stop if prices fall below support at 4.1720, with a potential price target at 3.9500. Some traders perhaps may wish to risk this trade to the 4/25 low of 4.2600.

Fundamentals

After trading to record highs earlier this year, the Copper futures bull market may be stating to waver, despite the continuing weakening of the U.S. Dollar, which has been a catalyst in the current commodity-wide bull market. Keen interest is being paid by Copper traders to the economic conditions China, where continued talk of further interest rate hikes to help slow the country's rising inflation threat could eventually seriously hurt demand for commodities, including Copper. Copper inventories have been building in exchange warehouses lately, with London Metal Exchange (LME) inventories now totaling 460,100 tons, which are the highest inventory levels in nearly11 months. Many traders are also awaiting the outcome of the two-day Federal Open Market Committee meeting (FOMC) for any signs that the Fed will announce their intentions on ending QE2 or will embark on further accommodative policies. Should the Fed start to hint that tighter monetary policies are on the horizon, we could see a sharp increase in the U.S. Dollar, which in turn could send Copper prices tumbling, as many traders begin to liquidate their long positions and momentum shifts back to the bears for the first time in nearly 2 ½ years.

Technical Notes

Looking at the daily continuation chart for Copper futures, we notice prices have begun to consolidate the past couple of months, after reaching new all-time highs back in mid-February. In the short-term, control of the Copper market seems to be passing between both bulls and bears, as prices have been trading on both sides of the 20-day moving average. Longer-term traders will note that the 200-day moving average is still well below current prices levels, which are hovering near the 3.9500 area. There is a bearish divergence in the 14-day RSI that called the recent highs, and now this momentum indicator has moved to a neutral reading just below the 50.00 level. This is now in confirmation with the consolidation currently seen in the daily price chart. The recent low at 4.1920 is seen as near-term support for July Copper, with resistance found at the April 11th high of 4.5500.

Mike Zarembski, Senior Commodity Analyst


April 28, 2011

Cotton Collapse

Today's Idea

Cotton futures have very few fundamental factors that could support the market. Prices moved higher too dramatically relative to supply and demand fundamentals. Now there is concern that Chinese demand, a major driver of prices, could falter at a time when a large crop hits the supply chain. Technically, the Cotton market appears to be in a freefall - a common characteristic for markets that have previously moved higher in a parabolic fashion. Speculators become too long, and the panic selling along with stop cascading and margin liquidations wipe out the buy side of the market. Some traders may possibly wish to test the short side of the market somewhat cautiously by entering into a bear put spread, such as buying the July Cotton 145 put and selling the July 140 put for a debit of 2.00, or $1,000. The spread risks the initial cost and has a maximum profit of $1,500 if the July futures contract were to close below 140.00 at expiration.

Fundamentals

Cotton futures have offered traders the ultimate roller coaster ride, routinely making limit moves. The correction could very well be a sign of a reversal, suggesting prices may continue to plummet. The quick drop in prices after the May first-notice day and the price disparity between months also offered confirmation that a short squeeze and panic buying had a lot to do with Cotton's ascent. Fundamentally, traders have continued to focus across the Pacific on China. There is concern that the Chinese consumer may begin to spend less, alleviating demand. Many traders are also expecting further rate increases from the People's Bank of China in an effort to stem inflation. There is also concern that the upcoming crop year may offer a more than abundant crop, as Brazil and Australia are expected to see a spike in output. The US outlook remains uncertain because of extremely dry conditions, which does offer a ray of hope for bulls.

Technical Notes

Turning to the chart, we see the July Cotton contract breaking out of a wedge formation to the downside. The parabolic move higher in Cotton has resulted in very little technical support. Prices have already moved through the 38.2% Fibonacci retracement level and are quickly approaching the 50% retracement at 139.25, which is an area of technical support. Failure to hold 139.25 suggests that prices could test the 61.8 retracement level at 123.95. Prices have closed below the 100-day moving average yesterday, which can be seen as a bearish technical signal over the longer term.

Rob Kurzatkowski, Senior Commodity Analyst


April 29, 2011

Will the Rain Go Away in May?

Today's Idea

With the entire growing season ahead, traders should prepare for a volatile trading period in the entire grain complex, as we need to see the U.S. produce a bumper Corn and Soybean crop to keep inventories from becoming very tight. New-crop December options are quite expensive, especially given the time to expiration and potential volatility expected. Some traders who are bullish new-crop Corn may wish to explore buying out-of-the-money call spreads in December Corn futures options. For example with December Corn currently trading at 648.00 as of this writing, the December Corn 800 calls could be bought and the December Corn 900 calls sold for 14 cents, or $700 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5,000 minus the premium paid realized at option expiration in November should December Corn be trading above 900.00.

Fundamentals

Grain producers certainly hope that the relentless rain that has occurred throughout most of the month of April will finally subside, as much of this year's U.S. Corn crop still needs to be planted. So far, the USDA estimates that only 9% of the Corn crop has been planted, vs. the 5-year average of 23% and well below last season's 43%. The major Corn producing states of Illinois and Iowa are only 10% and 3% planted respectively. Many traders are anticipating a huge increase in Corn acreage (nearly 4 million more acres) this season, with a large portion of the added acreage expected to come from the Dakotas. However, Mother Nature has not been kind to producers in these states, as the USDA estimates that little to no Corn has yet to be planted. The weather forecasts are calling for some relief for moisture in the western Corn Belt the next few days, which could get some planting done in Nebraska and western Iowa. Producers generally have until the middle of May to get the crop in and still have potentially good yields, so many traders will intently watch the USDA weekly crop progress reports over the next few weeks to see if we can get the majority of the crop in the ground by then. If so, then we can still see a huge Corn crop this year, which will be desperately needed to bring U.S. inventories up from 15-year lows.

Technical Notes

Looking at the daily chart for December Corn, we notice Thursday's sharp sell-off took prices well below not only the up-trend line drawn from the March 16th low, but also below the 20-day moving average, triggering additional selling by short-term momentum traders. We also note the 14-day RSI moving back to a more neutral level, with a current reading of 47.27. The next significant support level is not seen until the April 12th low of 627.25. Resistance remains at the contract high of 684.00.

Mike Zarembski, Senior Commodity Analyst