« April 2011 | Main | June 2011 »

May 2011 Archives

May 2, 2011

Natural Gas Bear Market on its Last Legs?

Today's Idea

Some traders looking to go long Natural Gas may wish to consider exploring long option strategies going out to the late summer or early fall trading months, when the hurricane season is at its peak. Given that Natural Gas options are rather expensive, especially during the storm season, some traders may wish to explore the purchase of bull call spreads in Natural Gas futures options. For example with October Natural Gas trading at 4.721 as of this writing, the October 4.80 calls could be bought and the October 5.80 calls sold for about 0.280, or $2,810 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, which has a potential gain of $10,000 minus the premium paid which would be realized at option expiration in late September should the October futures be trading above 5.800.

Fundamentals

Natural Gas bears have feasted on the bulls for nearly three years, as prices have fallen sharply since the highs were made back in July of 2008. However, it appears that prices may have finally stopped declining, but is this really the beginning of a new bull phase or a basing period where prices may consolidate in a relatively tight range? U.S. Natural Gas inventories are down 11% from year ago levels, standing at 1.685 trillion cubic feet (tcf) as of April 22nd. The weekly EIA gas storage report showed a build of only 31 billion cubic feet (bcf), which is well below the pre-report estimate of a 37 bcf build. By comparison, last year at this time, we saw a build of 81 bcf. The larger declines in storage this year compared to last can be partially attributed to the much colder than normal winter in the U.S., which increased gas consumption for heating. Lower cash prices for Natural Gas have finally caused producers to curtail drilling. The widely watched U.S. rig count from Baker Hughes showed that the U.S. gas rig count fell to 878 this past week. This was nearly 10% lower than last year. Canadian gas rig counts also declined, as oil and gas producers are turning their focus back to oil, which at its current price of over $110 per barrel is a much more profitable venture. The fact that we are seeing some increases in demand at the same time production is being curtailed is a key ingredient in the possible formation of a bull market. The final catalyst may be found in the Commitment of Traders report. Here we see that large non-commercial traders are holding a relatively large net-short position in Natural Gas futures, totaling 177,325 contracts as of April 19th. Though far from a record short position, this large position may be liquidated should prices begin to move higher, or should we see production issues come late summer and early fall during the peak Atlantic hurricane season.

Technical Notes

Looking at the daily chart for June Natural Gas futures, we notice prices breaking-out to the upside, out of the symmetrical triangle formation. The break-out also occurred on much higher than average volume, which gives further validity to the upside move. Prices have now moved above the important 200-day moving average that many longer-term traders use to determine if a market is bullish or bearish. The 14-day RSI has turned positive, with a current reading of 64.87. The next major upside hurdle for the June Gas futures is the yearly high made back in January of 4.850. Support is found at the 20-day moving average, currently near the 4.320 area.

Mike Zarembski, Senior Commodity Analyst

May 3, 2011

Silver Bullet?

Today's Idea

The price move in Silver is a textbook example of a parabolic market, which can collapse very quickly. That being said, there is still outside fundamental support for price in the form of a weaker US Dollar and strong Gold prices. The chart certainly shows signs that there may be chinks in Silver's armor. Given the extreme market volatility in Silver lately, trading the futures may not be suitable for many traders. Even the mini contracts have seen dollar movements akin to the full-sized contract. For this reason, some traders may wish to consider entering into a bear put spread, for example, buying the June Silver 40 put and selling the 37.5 put, for a debit of 0.50, or $2,500. The trade risks the initial cost and has a max profit of $10,000 should the July Silver contract close below 37.50 at expiration.

Fundamentals

Silver futures plummeted yesterday, as traders reacted to increased requirements and profit-taking. Several larger futures commission merchants ("FCMs"), raised their requirements well above exchange minimums due to the extremely high price of the metal and increased daily fluctuations. The CME Group also raised their minimum margin requirements yesterday after the pit session close. Many traders viewed this as an opportunity to take profits after the run-up in prices. Many long-term Silver bulls were shocked at the sharp price movements of late and believed that these moves were not part of a normal, healthy market. Silver had not seen a meaningful correction in some time, and failure to break $50 after testing the level three times in recent sessions gave traders a reason to take profits and sit in the weeds for the time being. Given the number of speculators that have gotten long north of the $40 level, the increased requirements could continue to force longs out of the market.

Technical Notes

Turning to the chart, we see the July Silver contract giving traders hints that the market could be topping, at least in the short-term. Prior to the sharp sell-off, four of the last five sessions showed either a spinning top or gravestone doji. These candlesticks are typically formed prior to a reversal and reflect indecision and failure to reach a consensus sentiment among traders. The $50 level, which was a psychological hurdle, was tested three of the four sessions prior to yesterday. Failure to break through was another hint that prices may either turn or consolidate. Prices broke through the 20-day moving average yesterday, before settling back above the average. Downside levels traders may want to watch include the 38.2% Fibonacci retracement level at 40.23 and the 50% retracement at 37.65.

Rob Kurzatkowski, Senior Commodity Analyst


May 4, 2011

Hot Coffee!

Today's Idea

With Coffee futures prices flirting with all-time highs, some traders leaning towards bullish trading strategies may wish to explore selling bull put spreads in Coffee options. For example, with July Coffee trading at 305.35 as of this writing, the July Coffee 285 puts could be sold and the July Coffee 270 puts bought for about 2.40 points or $900.00 per spread, 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 July Coffee be trading above 285.00. Risk management is essential in any short options strategy, and some traders may wish to close out the trade before expiration should the spread premium trade at 2 ½ times the premium received for selling the spread originally.

Fundamentals

Your daily cup of java is getting more expensive, as Coffee futures prices have eclipsed the $3 per pound level for the first time since the 1997 bull market, when prices peaked at 318.00 per pound before falling over 50% in a few short months. Strong demand for Arabica Coffee and lower expected production this coming year are the main reasons behind the rally. This coming season is the "off" year for Arabica production in Brazil, which is expected to keep supplies tight. In addition, traders are looking for smaller crops out of Central America, which would add further pressure for the end--users to attempt to obtain inventory for later this year. Coffee roasters may get caught short in the months ahead, as many have kept Coffee inventories at lower levels due to high prices. Now that it appears that they may need to bid-up prices to obtain high quality supplies, as producers are holding inventories awaiting even higher prices. Some analysts don't expect the supply tightness to be alleviated anytime soon, with some talk that it will not be until September or October before fresh inventories will be seen. High prices for lower quality Robusta Coffee are keeping some roasters from tapping inventories here as well. The record highs for Arabica Coffee futures were made back in 1977, when prices reached an unthinkable $3.37 per pound. Given the potential for a large Coffee deficit, this record has the potential to be eclipsed in the coming months. If so, the Coffee futures market can take its place alongside of Gold, Cotton and Corn futures as markets reaching all-time high prices in 2011.

Technical Notes

Looking at the daily chart for July Coffee, we notice prices rising on decreasing volume during the past several sessions, even as prices have risen to 14-year highs. The 14-day RSI is nearing, but has not yet reached, overbought territory, with a current reading of 68.92. The most recent Commitment of Traders report shows large non-commercial traders holding a net-long position of 35,379 contracts as of April 26th. Though this is a large long position being held by speculators, it is far from the record of 61,628 contracts held back in early 2008. With the moves to a 14-year high, we may now see additional buying emerge from trend-following traders as each new high is reached. The high of 318.00 made back in 1997 looks to be the next major resistance level for July Coffee, with support found at the recent low of 286.85.

Mike Zarembski, Senior Commodity Analyst


May 5, 2011

Crude Oil Stalled by Silver?

Today's Idea

Crude Oil fundamentals remain strong over the long-term, but the weight of the Silver sell-off is finally beginning to take a toll on energy traders. There has been a domino effect of sorts - Silver selling off has adversely affected Gold, which has, in turn, weighed on commodity markets as a whole and, most notably, on energies. The near-term economic picture for the US is also more clouded than it was earlier in the year, and more doubt has crept into the market. Technically, the recent selling pressure has not done any major chart damage, but the failure to break through 115 could have a negative impact on market momentum. Some traders may wish to consider selling call options above the 115 mark. One example would be selling the June 116 call for a premium of 0.35, or $350. The initial premium would be the maximum profit and the trade has unlimited risk potential. For this reason, some traders may look to exit the position on a close in the futures above 115.

Fundamentals

Crude Oil futures have been lower in recent sessions, largely due to the steep declines in precious metals prices. There is also mounting concern among traders that China's economic growth may begin to slow in the near-term, which could hurt fuel demand. The rising energy prices come at an inopportune time in the US as well, as the labor market seemed to be turning a corner and it seemed that the economy was adding more jobs. Now consumers and businesses alike have seen their budgets squeezed by higher fuel and energy costs. This could slow Crude Oil consumption in the near-tern. The economic data released earlier this week hints at slower economic growth, as the ADP employment data and ISM Services Index both missed analysts' estimates. A confirmation of slowing job growth in the non-farm data due out tomorrow could add to bearish sentiment in the near-term. The rising margin requirements in Silver could also continue to have a negative impact on the market. Traders could lighten their commodity exposure as a whole, either of their own accord or because of margin calls. The downside in Crude Oil seems to be limited due to the tightness in high quality Crude Oil. Because of policy changes brought on by "green" politicians, high quality, low sulfur Crude is at a premium and the market is oversupplied with lower quality Crude Oil. This could prevent a sharp slide in the cash market, which may aid futures.

Technical Notes

Turning to the chart, we see the June Crude Oil contract unable to break through the 115.00 level, which could have triggered some long liquidation and profit-taking. The early price action this morning puts the June Crude Oil contract at the 106 support level on the chart. This level also coincides with the 50-day moving average. A close below the 106 mark could be seen as a negative in the near-term and could result in a test of the 100 level. If the market holds here, prices could be range-bound between 106 and 115 for the immediate future.

Rob Kurzatkowski, Senior Commodity Analyst

May 6, 2011

Price Slide Continues for Sugar

Today's Idea

Although Sugar futures seem poised for further declines, the market may have become a bit oversold in the near-term. On any short-term rally in the July futures, some traders may wish to explore selling call options on Sugar futures. For example, with July Sugar futures trading at 21.08 as of this writing, the July Sugar 24 calls could be sold for about 0.30, or $336.00 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 Sugar futures be trading below 24.00. Given the risk involved in selling naked options, some traders may wish to close out the position prior to expiration should the option premium trade at 2 ½ times the premium received for selling the option originally.

Fundamentals

Sugar futures are bucking the bullish commodity trend, with the lead month July futures falling over 8 cents per pound since the highs were made back in early February. Expectations for increased Sugar production from Brazil, the world's leading Sugar producer as well as the potential for increasing exports out of India this season have started to weigh on prices. Buyers who were caught short and forced to bid-up prices for Sugar the past two years are now starting to hold back on purchases, as prices are falling in hopes of securing supplies at even lower prices in the coming months. Thailand is looking to sell nearly 177,000 metric tons of raw Sugar next week, and many traders will be awaiting the results of the tender to see how aggressive pricing will have to be to attract buyers. Despite the decline in Sugar prices, many long speculators appear to have been slow to liquidate their long positions. The most recent Commitment of Traders Report shows large non-commercial traders holding a net-long position of 118,862 contracts as of April 26th. Though far from the record long positions seen in 2008, this is still a large position overhanging the market, and unless Sugar prices begin to recover soon, these large speculators may eventually throw in the towel and spark further weakness as their long positions are liquidated.

Technical Notes

Looking at the daily chart for July Sugar, we notice prices are now trading below both the 20 and 200-day moving averages, putting both short-term and long-term bears in charge. The 14-day RSI is weak, but has reached oversold levels, with a current reading of 27.02. The November 17th low of 20.22 is the next major support point for July Sugar, with resistance found at 23.96.

Mike Zarembski, Senior Commodity Analyst

May 11, 2011

Loonie Rebound

Today's Idea

The Canadian Dollar has several factors lining up in its favor at this time -- a new, business-friendly government, energy prices supported by the flooding of the Mississippi, and relative economic health compared to the US and Europe. However, some traders may look to tread lightly for the time being, given that the chart shows a potentially ominous signal and the currency could find itself at the mercy of outside commodity markets. For this reason, some traders may wish to consider entering into a bull call spread. For example, some traders may wish to buy the June Canadian Dollar 1.05 calls and sell the June 1.07 calls for a debit of 0.0060, or $600. The trade risks the initial cost and has a maximum profit of $1,400 if the June futures contract closes above 1.0700 at expiration.

Fundamentals

Like the commodity sell-off, the sharp decline in the Canadian Dollar may have been overdone. Profit-taking, as well as the decline in Crude Oil prices, led to selling pressure in the currency. The Loonie is often seen as strictly a commodity currency by many traders, which can explain it symbiotic relationship with the energy and metals markets. However, traders bullish on the Canadian Dollar can also point to the relative fiscal responsibility and improving labor conditions as reasons outside of Oil prices to favor the currency. The recently voted in government vows to cut budget deficits, which are already relatively small when compared with the US and Europe. Also, the Harper government expects to cut taxes for individuals and businesses, which could lead to an increase in consumer spending and job creation. The Bank of Canada also has more leeway than its American and European counterparts to raise rates to fight inflationary pressure because of the way the economy recovery has progressed, which could create a favorable interest rate environment for currency traders. Due to traders' perceptions that the Loonie is strictly a commodity currency, it could find itself at the mercy of outside markets in the event that energy and metals prices decline.

Technical Notes

Turning to the chart, we see the June Canadian Dollar contract finding support near the 1.0300 level. This marks the second time that the futures contract has successful held support at this level. The June contract also dipped below the 50-day moving average, only to rebound above the average, which can be seen as a positive technical sign. To reestablish technical momentum, prices will likely have to take-out the recent high close of 1.0562, while a decline below 1.0300 could trigger selling pressure. It is of interest to note the bearish divergence between price and RSI. RSI peaked in early April, subsequently drifting lower, and prices were on the incline for the remainder of the month. While in and of itself this is not a bearish or selling signal, it could be seen as a hint that prices may take a turn for the worse. A bearish chart breakout would be needed to validate this signal.

Rob Kurzatkowski, Senior Commodity Analyst


May 12, 2011

Dollar Bottom?

Today's Idea

As with most greenback rallies over the past decade, the rebound was triggered by outside market weakness rather than of its own merits. This is why many currency traders are cautious calling a long-term bottom in the Dollar Index. Technically, the greenback has made some progress versus its global counterparts, but some traders would like to see further technical confirmation. At the very least, it does seem that the selling pressure in the greenback has subsided. For this reason, some traders may wish to consider selling a June 73 put at 0.10, or $100. The maximum profit would be the initial credit and the trade has unlimited loss potential, so traders may wish to temper the risk by exiting the trade on a close below 73.50.

Fundamentals

The Dollar Index seems to have found a bottom, at least in the near-term. The EU debt situation has triggered a flight from the Euro and the correction in commodity prices has lessened the appeal of commodity currencies among many traders. The Euro had dropped 7 cents in recent sessions and is swiftly approaching the 1.40 level, which can be seen as critical support versus the greenback. The Euro makes up over 58% of the Dollar Index's weight. Many commodity traders have repositioned themselves in cash due to the recent market volatility and will likely not re-enter the market until some sense of order is restored. The pressure that commodity prices have felt is a bullish force for the greenback due to their inverse relationship. The Bank of England stating that rate increases will be coming sooner rather than later could be seen as Dollar bearish on the surface. However, it could be a sign that central banks around the globe will be tightening their monetary policy, further pressuring commodity prices. Given the indifference to sound fiscal policy by the current and previous administrations, the US has amassed a huge amount of debt. For this reason, the Dollar rally is rather fragile and could suffer setbacks if commodity prices were to rebound and/or the EU finally comes up with a meaningful debt restructuring plan for Greece.

Technical Notes

The Dollar Index chart shows the June contract crossing its first technical hurdle at the 75.00 level. Due to the Dollar's slow, grinding descent, the chart has formed numerous minor resistance levels along the way at the century marks. The next resistance levels can be found at 76.00 and 77.00. Longer-term, traders would ideally like to see the 79.00 level taken-out to offer confirmation of a reversal. The recent rebound in prices has caused the RSI to reach near-overbought levels, which could slow the rally or stall it all together. Prices are trading above the 50-day moving average this morning. If prices are able to hold above the average, it could add to technical momentum.

Rob Kurzatkowski, Senior Commodity Analyst

May 13, 2011

As Good as Gold?

Today's Idea

Although Gold prices have fallen below the $1500 level, the longer-term trend still appears to favor the bull camp. Some traders looking to get long Gold futures may wish to explore buying August mini-Gold futures, which are currently trading at 1497.00 as of this writing. There is chart support at the May 5th low of 1464.10, below which would be an area to explore placing a protective sell-stop. The upside target would be a test of the previous high at 1577.70.

Fundamentals

Gold futures have held-up reasonably well during the recent commodity-wide sell-off, with some of this relatively "strong" performance tied to Gold's unique status as not only a "commodity", but also as a currency alternative. This "safe haven" status that Gold currently holds has muted some of the volatility seen in the precious metals sector, especially in Silver, which many traders see as more speculative in nature. The recent rebound in the U.S. Dollar has been a major catalyst in the commodity-wide sell-off, as a stronger Dollar makes the purchase of commodities priced in Dollars more expensive for non-Dollar users. However, the continued concerns over the state of the Euro have kept a "bid" in place for Gold from investors looking for a store of value outside of paper currencies. Some analysts cite the continued tightening efforts by the Chinese government as a potential negative for Gold as the world's most populous nation continues to try to control inflation. However, the Chinese are also in the process of diversifying their huge foreign exchange reserves, and one of the major investments expected is the purchase of Gold. China currently holds just over 1,160 tons of Gold, which makes the country the 6th largest holder of Gold. Though this is a huge Gold holding, it only accounts for less than 2% of its total reserve holdings. If the country were to only double the amount of Gold it holds, it would amount to a huge amount of buying and has the potential to keep a "bid" in place during any major sell-offs.

Technical Notes

Looking at the daily chart for June Gold, we notice prices holding above last week's close, as prices fell by over $100 per ounce from the contract high made on May 2nd. Though prices remain below the 20-day moving average, which would normally be a short-term bearish indicator, we have seen several failed attempts to take-out the uptrend line drawn from the 2011 low made back on January 28th. This trendline should now act as near-term support for the June contract. After moving to overbought levels last week, the 14-day RSI is now reading a more neutral 51.7. Trading volume has also returned to more normal levels after a huge surge in volume on last week's sell-off. The May 5th low of 1462.50 should act as strong support for June Gold, with near-term resistance found at 1526.80.

Mike Zarembski, Senior Commodity Analyst


May 16, 2011

Wheat on Sale?

Today's Idea

This year's Hard Red Winter (HRW) Wheat crop certainly has been a disappointment, with the current drought certain to cut production. This Wheat variety is traded as a futures contract on the Kansas City Board of Trade (KCBT). A quick look at the chart for September KC Wheat shows good chart support around the 790.00 level. Some traders who are expecting KC Wheat prices to remain stable or move higher may wish to explore selling puts with a strike price below chart support near 790.00. For example, with September KC Wheat trading at 885.00 as of this writing, the September 750 puts could be sold for around 12 cents, or $600 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 August should the September futures be trading above 750.00. Given the risks involved in selling naked options, traders may wish to close out the trade prior to expiration should the September futures close below chart support at 790.75.

Fundamentals

After falling to 8-week lows on the back of a bearish USDA report, importers seem to be returning to the Wheat market, as lower prices seemed to have enticed buyers back to the market. The recent sell-off throughout the grain complex likely was caused mainly by resurgence in the U.S. Dollar and fund liquidation throughout the commodity complex. However, fundamentally, there remains a concern that global production may not be able to keep up with demand. Here in the U.S., there remains some doubt regarding the size of the U.S. Hard Red Winter (HRW) crop, as drought conditions in the southern plains have severely hurt the quality of the soon-to-be-harvested crop. The USDA has estimated all Winter Wheat production at 1.424 billion bushels, which is down just over 60 million bushels from the 2010 crop year. However, many traders were looking for a production figure closer to 1.390 billion bushels due to the poor condition of the HRW crop. Globally, it appears that production should increase in Russia and Ukraine this season. This is important for the global Wheat market, as both countries were forced to severely curtail or completely shut down their export markets last season due to severe drought. U.S export sales last week came in at 320,600 for the current year and 229,900 for next season's crop. This put U.S. exports above the USDA projections for this season. Though increased global Wheat plantings this year should see global Wheat production increase, it is still up to the weather to ensure an adequate crop, and given the difficulties seen so far this year, there is no guarantee that Mother Nature's wrath will be benign this year.

Technical Notes

Looking at the daily chart for September KC Wheat, we notice prices seem to be forming a consolidation pattern, with daily trading activity taking place on both sides of the 20-day moving average. Longer-term, the 200-day moving average remains below the current market price, keeping the longer-term trend firmly in the bull camp. The 14-day RSI has moved to a neutral stance, with a current reading of 46.43. Near-term support is seen at 868.00, with resistance found at 992.00.

Mike Zarembski, Senior Commodity Analyst


May 17, 2011

Euro Woes Continue

Today's Idea

The Euro currency could continue to suffer setbacks due to mounting debt concerns facing multiple nations. The sharp philosophical turn in tackling Greece's debt, along with the IMF potentially being paralyzed due to its head facing criminal proceedings, may shake investor faith rather than restore it. The chart shows prices correcting sharply, with the currency falling over 7 handles, and a breakdown below 1.4000 could potentially shake longs out of the market. Some traders may wish to short the Euro currency future on a solid close below the 1.4000 level, with a downside objective of 1.3600 and a stop loss order at 1.4200. The trade risks roughly $2,500 and the maximum profit is roughly $5,000. Some traders may also consider adjusting their stop loss to 1.4050 in the event that the currency should trade below the 1.3800 level.

Fundamentals

The Euro currency continues to slump versus the US Dollar, largely due to the mounting questions surrounding Greek debt. The bailout has simply not worked to this point. The financial system in Greece has not been restored to healthy conditions at this point, and it is difficult to see a scenario where this would happen without a full overhaul of the nation's debt. For the first time, at least publicly, the EU has floated the idea of renegotiating terms with bondholders. This is a massive shift from prior bailouts, which have relied on simply injecting cash into troubled economies. The exact terms have not been discussed, but a less than favorable restructuring for bondholders could cause an exodus in EU paper by bond traders. While this strategy could be the only long-term solution for Greece, the seeds of doubt could be planted with fixed income traders, shaking investor confidence in the Euro currency. The debt situation could overshadow otherwise improving economic conditions, and also the fact that the ECB will likely begin raising interest rates sooner and more aggressively than the Fed. Currency traders are closely watching the terms of the new Greece plan as a possible blueprint for how it will handle Ireland and Portugal's debt if those nations suffer further setbacks.

Technical Notes

Turning to the chart, we see the June Euro futures contract pushing close to the 1.4000 level, which is a key psychological and technical level for the currency. A close below this level suggests that prices could come down to test support at 1.3500. The contract has also traded below the 50-day moving average for five consecutive sessions, which is a negative technical sign. The 100-day moving average also resides just below the 1.4000 mark. A close below the average could result in further technical selling, as it would suggest the longer-term trend in the Euro has turned negative. The recent selling pressure has brought the RSI down to oversold levels, which can offer some technical support and slow selling pressure for the time being.

Rob Kurzatkowski, Senior Commodity Analyst

May 18, 2011

No Growth in Lumber Prices

Today's Idea

Some traders who are expecting Lumber prices to remain weak in the coming months may wish to explore initiating bear spreads in Lumber futures. An example of one such spread would be buying November Lumber and selling September Lumber. Currently, September Lumber is trading at a 3.00 discount to the November contract, and traders initiating bear spreads would want to see this discount continue to widen, with a potential target of a 20.00 September discount. Chart resistance on this spread is seen at a September 5.00 premium and would be a potential risk level on a closing basis should the trade move against the position.

Fundamentals

Weaker than expected U.S. housing starts in April did little to stall the bearish trend in Lumber futures prices, with the lead month July contract holding near contract lows. The Commerce Department reported that U.S. home construction fell by 10.6% in April, to a seasonally adjusted annual rate of 523,000. This was way below the pre-report estimate for a 2.7% gain last month. Building permit applications in April also fell by 4% from March's total to an annual rate of 551,000. The sharp decline in housing starts comes despite growth in the overall economy, as home buyers seem to be focusing on "cheaper" previously-owned homes -- particularly those in foreclosure. With home builders continuing to struggle, the demand for Lumber has also slumped considerably, with prices falling by nearly $100 per 1000 board feet during the past three months. The low cash market prices for Lumber, currently in the $215.00 to $220.00 per 100 board feet range, have some mills curtailing output, as the cost of production is above current market prices in some cases. Though Lumber prices now appear relatively "cheap" when compared to historic levels, we have seen prices trade well below the $200 level for the past couple of years, as the global recession played havoc on commodity prices. Until we finally see some signs of sustained improvement in the U.S. housing market, it may be difficult for Lumber prices to stage a sustained rally as we move into the summer.

Technical Notes

Looking at the daily continuation chart for Lumber futures, we notice prices have resumed their downward trend, after a brief period of consolidation between roughly the 240.00 to 260.00 area. Prices are now well below both the 20 and 200-day moving averages, and the 14-day RSI is nearing oversold territory, with a current reading of 30.47. Volume has been falling during the recent decline, as it appears that the recent wave of selling has been tied to long liquidation by large speculative accounts. Lumber bulls may wish to note that near-term futures prices are approaching the 61.8% Fibonacci retracement near the 215.00 level, from the 2009 low's to the January 2011 highs. This retracement level is viewed as an important support level by many technical traders, and if it fails to hold, sets up a potential test of the 78.6% retracement near the 183.00 area. Near-term resistance is seen at the April 12th lows of 237.20

Mike Zarembski, Senior Commodity Analyst

May 19, 2011

EIA Boosts Oil

Today's Idea

Yesterday's EIA number was a welcome reprieve for bulls, who have seen a bevy of bearish economic data of late. Fundamentals for the Oil market remain extremely mixed at the moment. Economic indicators have been negative, and the US Dollar has held its ground versus other major currencies. On the other hand, central banks continue pumping-up the money supply, and supplies of higher quality Crude Oil remain tight, despite the relatively high overall supply. Technically, it seems as though the 95 level could provide a base for prices. The chart does show that price could be vulnerable to selling pressure if the $95 level is breached. Given the expensive option premiums at the moment, some traders may look to wait on the sidelines and wait for chart confirmation to enter into a mini Crude Oil contract. Some traders may wish to consider shorting a July Mini Crude Oil contract on a close below 95.00, with a downside objective of 89.00 and a stop at 97.50. The trade risks roughly $1,250 and has a maximum profit of around $3,000.

Fundamentals

Crude Oil prices rebounded yesterday after the EIA showed a surprise decline in inventory levels. The market has seen extremely erratic price action over the past week or so, which is a sign of indecision. Some have seen the sharp drop from recent highs over the $113 level as excessive, which has prevented prices from falling below the $95 level. At the same time, there is not enough bullish activity to solidly bring the contract back above the $100 level. The bullish enthusiasm over the EIA number could be short-lived, as the overall supply of Crude Oil remains relatively high. Also, recent economic indicators have given traders little reason to become optimistic about the economic situation in the US. The housing market in the US looks as though we may be in regression, and the overall economy is still on shaky ground. In Europe, the EU has had to tackle mounting debt, which could result in the greenback stabilizing versus the Euro. Some traders remain optimistic about Oil prices, though, noting that the summer driving season officially kicks off later this month. Also, while supplies of Oil remain high, higher quality low- sulfur Oil remain tight. Given the differing opinions over the Crude Oil market and lack of consensus, price action figures to remain erratic in the near-term.

Technical Notes

Turning to the chart, we see the July Crude Oil finding support near the 95.00 level. Prices traded down to this level three times in recent sessions, but were not able to break through. Price action has gravitated toward the 100-day moving average over the past week. Solid closes below the average would suggest that prices are vulnerable to further declines. The crossover of the 20 and 50-day moving averages can be seen as negative for prices. The RSI remains near oversold levels, suggesting near-term price support.

Rob Kurzatkowski, Senior Commodity Analyst


May 20, 2011

Getting Pounded

Today's Idea

With the prospect of no interest rate hikes until the end of 2011 at the earliest, some traders may begin to liquidate long positions in the British Pound in favor of potentially higher-yielding currencies such as the Australian or Canadian Dollars. Some traders who are expecting the bearish trend to continue for a few weeks may wish to consider exploring buying a bear put spread in British Pound futures options. For example, with the June Pound futures trading at 1.6205 as of this writing, the June Pound 1.60 puts could be bought and the June Pound 1.58 puts sold for 0.0034, or $212.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $1,250 minus the premium paid which would be realized at option expiration in early June should the June futures be trading below 1.5800.

Fundamentals

Officials at the Bank of England (BOE) have a difficult task at hand, trying to keep rising price inflation in check while being careful to not choke-off the fledgling economic recovery. Recent economic data is not helping much. Jobless claims in the UK rose by a larger than expected 12,400 last month, while many analysts were looking for a modest 1,000 claim drop. However, the Consumer Price Index annual rate of inflation for April rose to 4.5%, which is up 0.5% from March's reading. So, the BOE has to decide whether to keep the interest rate at its current low level (0.5%) to help spur the economy or to begin to raise interest rates to try to stem the rising inflation tide. The recently released minutes from the BOE Monetary Policy Committee meeting shows the Bank's officials divided on a course of action, but they are leaning towards continuing accommodative policies. In a vote of 6 to 3, the committee decided to keep rates at 0.5% for the 26th consecutive month and noted that an increase in interest rates given the current economic circumstances would be a major hit on consumer confidence and a determent on the economy. The committee members also noted the rising inflation threat, but believed that there was no sign that it would become entrenched -- especially in wage growth. These rather "dovish" comments have sparked a sell-off in the British Pound vs. the US Dollar (GBP/USD), which is trading at its lowest levels in nearly six weeks. Since reaching its high near the 1.6750 area just over 2 weeks ago, the June Pound futures contract has been in a steady decline and returning back into the consolidation pattern seen on the daily charts for most of 2011. So unless we begin to see some "improvements" in the UK's economic data releases, the June Pond futures may be primed for a test of the psychological support near the 1.6000 level in the coming days.

Technical Notes

Looking at the daily continuation chart for British Pound futures, we notice prices holding below the 20-day moving average for the past several days. The 14-day RSI has started to move sideways, with a current reading of 43.21. There should be some psychological support near the 1.6000 area, but strong support is not found until the 200-day moving average, which is currently near the 1.5920 level. Resistance is seen at the May 11th high of 1.6512.

Mike Zarembski, Senior Commodity Analyst


May 23, 2011

Just How Much Corn Will U.S. Producers Plant?

Today's Idea

We could be in for a volatile summer in the grain complex, and especially in Corn futures, given the market's current fundamentals. Some traders desiring to hold a long position may want to consider the purchase of a bull call spread in Corn futures options. For example, with September Corn trading at 711.50 as of this writing, the September Corn 750 calls could be bought and the September Corn 850 calls sold for about 24 cents, or $1,200 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5,000 minus the premium paid which would be realized at option expiration in August should September Corn be trading above 850.00.

Fundamentals

2011 was supposed to be a near record year for Corn acreage in the US, with the USDA estimating a whopping 92.2 million acres being planted, which if true, would be the second highest total since 1944. Higher planted acreage was also behind the USDA's estimate of a record 13.5 billion bushel harvest this coming season if growing conditions cooperated. However, Mother Nature has not been so kind this spring, as abnormally high precipitation has left Corn planting progress well behind recent averages. This is especially true in North Dakota, Minnesota, Indiana, and Ohio, where producers are way behind in Corn plantings and we are now past the May 15th deadline when, historically, Corn planted after this date may suffer from below average yields. It is still unclear how much potential Corn acreage will end up being planted with other crops, such as Soybeans, or will not get planted at all, but it does appear that the USDA's estimate will end up being unrealistic, with some analysts now calling for at least a 2 million acre decline from what the USDA estimated. This potential cut in acreage could not come at a worse time, as US Corn inventories are expected to be at 15-year lows and every acre will be needed to keep up with rising demand. Not even near record high prices are curtailing US Corn exports, with the USDA reporting weekly Corn exports totaled 1.2 million tons, with nearly 850,000 tons slated for old-crop Corn. Though it is still very early in the growing season to accurately predict Corn production levels, the current supply and demand situation would almost mandate that the US produce a record crop this year, or prices may need to move even higher to help ration supplies.

Technical Notes

Looking at the daily chart for September Corn, we notice the recent up move has begun to stumble as prices neared the 725.00 area. Three prior attempts to rally above this price level were met with renewed selling interest that ultimately culminated in a nearly 75-cent decline. However, prices have rebounded quickly to the upside, and now remain well above both the 20 and 200-day moving averages. Corn bears will also note a bearish divergence in the 14-day RSI. Corn bulls will need to see an up-side breakout soon, or we may start to see weak longs begin to exit positions, which could put pressure on the market. Resistance for September Corn remains at the contract high of 728.75, with support seen at the May 12th low of 638.00.

Mike Zarembski, Senior Commodity Analyst


May 24, 2011

Safe Haven Buying Has Gold Bucking the Commodity Trend

Today's Idea

The EU debt crisis and lackluster US economic data continue to make Gold appealing to many risk averse traders. Investment demand from both sides of the Atlantic has increased physical demand for the metal. Technically, the Gold market seems to have found its footing above the 1475 level, but the upside potential of the market is unknown. For this reason, some traders may wish to consider selling a July Gold 1465 put and buying a July 1440 put for a credit of 6.00, or $600. The initial credit is the maximum profit and the trade risks $1,900. Some traders may wish to exit the position in the event that the August futures contract closes below 1475 for two consecutive sessions to mitigate some of the risk.

Fundamentals

Many traders have turned to Gold as a safe haven during the European debt crisis, making it one of the few commodities to have found its footing recently. Not only has the sovereign debt situation worsened in the EU, but US economic indicators have taken a turn to the downside. Most notably, the US housing market appears that it could be heading toward a double-dip. The Dollar has rallied versus the Euro in recent sessions, which has pressured commodities as a whole. However, the Fed uses the housing market as a gauge of economic health, and a prolonged slowdown in housing could force the central bank's hand in keeping rates lower for a longer period of time than many would like. Physical demand for the metal from investment has also made the cash market for Gold tighter. European and US traders alike have been buying Gold ETFs to lessen their exposure to economic conditions. Last week's news that China has become the largest Gold buyer in the world comes is hardly surprising, but still moved the metal higher. China's push for a world currency has slowed recently, and the Asian giant may take a more traditional approach and replace a large portion of its currency reserves with precious metals to lessen their currency exposure.

Technical Notes

Turning to the chart, we see Gold finding support near the 1475 level, which coincides with minor chart support in the area. Yesterday's close puts the contract back above the 20-day moving average, suggesting that a near-term low may be in place. August Gold is now trading above the relative high at 1516.90, hinting at a possible test of all-time highs. The high at 1557.10 could be seen as major resistance moving forward, and on the downside, support can be seen at 1475. Failure to take-out either level would suggest that Gold could be mired in sideways trading.

Rob Kurzatkowski, Senior Commodity Analyst


May 25, 2011

Cheaper Beef Ahead?

Today's Idea

The current ample supply of Cattle in feedlots and potentially tighter supplies later this year seem to suggest that traders might wish to explore bear spreads in Live Cattle futures. For example, the February 2012 futures could be bought and the October 2011 futures sold. As of this writing, the February contract was trading at a 4.325 premium to the August contract. Traders in this spread would want to see the February premium increase.

Fundamentals

The historic rise in Cattle futures prices is seemingly at an end, as a bearish Cattle on Feed report last week may have been the final piece to cheaper beef prices coming this summer. Last Friday's report showed Cattle placements in April up 10% from year ago levels, as the continued drought in the Southern Plaines forced Cattle to market earlier than normal. In addition, the total number of Cattle in feedlots as of May 1st, was up 7% from the previous month. The potentially increasing supplies of Cattle coming to market in the next few months sent futures prices down sharply to start the week. The most active August contract has already fallen nearly 20 dollars per hundredweight since the highs were made back in early April of this year. The most recent Commitment of Traders report shows non-commercial accounts are trying to liquidate their net-long position in Cattle futures, shedding just over 5,000 contracts for the week ending May 17th. These large speculators are still holding a net-long position of over 70,000 contracts, which may trigger further long liquidation selling should futures prices continue to decline. A stronger U.S. Dollar and weaker cash beef prices were also weighing on Live Cattle futures prices. Though the near-term trend is bearish, the increased placements may spur a much tighter market later in the year, especially with Corn prices trading near record highs. The combination of high feed costs and fewer potential head of cattle in feedlots this fall or winter could send prices back to near-record levels as 2012 approaches, especially if we see signs of continued economic improvement.

Technical Notes

Looking at the daily chart for August Live Cattle, we notice that prices are now approaching the 61.8% Fibonacci retracement level drawn from the contract lows to the contract highs made in April. This support level will need to hold if we expect to see a price recovery. Current momentum is very weak, with the 14-day RSI moving well into oversold territory, with a current reading of 15.47. If the 61.8% retracement at 102.900 does not hold, the next major chart support point is not seen until the 97.500 area. Resistance for August Cattle is found at the 200-day moving average, currently near the 108.400 area.

Mike Zarembski, Senior Commodity Analyst


May 26, 2011

Aussie Whipsawed by Commodities

Today's Idea

The Aussie Dollar has been adversely affected by outside factors which include the commodity sell-off and risk aversion. Commodity prices appear to have stabilized, but the upside may be somewhat limited due to poor economic showings in the US and EU, as well as the mounting debt problems facing the EU. Technically, the June Aussie finds itself in a vulnerable position, teetering above support. The direction of the market is difficult to gauge at this time. Some traders may wish to consider entering into a bear call spread, selling the June Aussie 1.07 call and buying the 1.08 call for a credit of 0.0025, or $250. The maximum profit on the trade would be the initial investment while risking $750.

Fundamentals

Australian Dollar futures continue to slide, after peaking early this month, dragged down by weaker commodity prices. The currency has also suffered due to investors seeking safe haven investments because of shaky commodity prices, concern over the Euro, and slowing economic data from several large economies. The Aussie has been the poster child for growth currencies, offering investors better yields and growth prospects. However, investors have been lessening their risk exposure throughout the month, which has hurt the Aussie. Economic growth may win over the Aussie's critics over the long-term, despite the outside forces working against the currency in the near-term. Australia has been isolated from the mounting debt issues facing most industrialized nations, and the trade relationship with China offers the Australian economy huge upside. Traders may wish to closely monitor Chinese economic statistics and base metal prices to get a better feel as to the direction the Aussie may take.

Technical Notes

Turning to the chart, we see the June Australian Dollar holding near support at the 1.0500 level. A breakdown below support here would suggest that prices could test stout support at 1.0175. The 1.0175 level could be seen as critical support, as a violation of the level could take the currency below parity with the greenback. Currently, prices are trading neat the 50-day moving average. A close below the average could be seen as a negative indicator over the mid-term. It is of interest to note that the momentum and RSI indicators are showing bearish divergence, hinting at near-term weakness.

Rob Kurzatkowski, Senior Commodity Analyst

May 27, 2011

Is the Silver Sell-off Complete?

Today's Idea

Given the wild price swings we have seen in the Silver market lately, it may be difficult for many traders to hold an outright position in Silver, as the potential risk may be greater than most traders can stomach. One option for those who choose to take a position could be to investigate the purchase of debit spreads using options on Silver futures. For those with a bullish slant, exploring the purchase of a bull call spread might be interesting. For example, with September Silver trading at 37.190 as of this writing, the September Silver 43.000 calls could be bought and the September Silver 48.000 calls sold for about 0.720, or $3,600 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, which has a potential profit of $25,000 minus the premium paid which would be realized at option expiration in late August should the September Silver futures be trading above 48.000.

Fundamentals

After a nearly $18.00 plunge in just over a week's time, Silver futures appear to have found some firm footing near the $32 per ounce level, which has sparked some renewed buying in this precious/industrial metal. The entire metals complex got a boost from a Goldman Sachs analyst who once again recommended long positions in commodities. In addition, the continued strength in the price of Gold may be pulling Silver prices along for the ride, especially as the Gold/Silver ratio has returned to a more "reasonable" 40 to 1. The recent strength in the precious metals sector comes despite a rising U.S. Dollar, which has been viewed of late as "bearish " towards commodities in general. One gets the sense that the demand for "safe haven" investments has returned; especially as it seems that the European debt crisis is expanding. It appears that the sharp sell-off combined with much higher exchange margins has taken many speculators out of the Silver market. This has caused open interest to drop sharply and seems to have restored some health to the overall bull market. Although it appears that prices may have formed a near-term bottom, we may not see a huge move of speculators back into the market until we see daily price trading ranges shrink, as well as margin requirements lowered by the exchanges.

Technical Notes

Looking at the daily chart for July Silver, we notice what appears to be a "V-shaped" bottom formation. Prices are now testing the 20-day moving average, and a close above this widely watched indicator could spur some buying by short-term momentum traders. Even the steep sell-off in Silver prices we saw a few weeks ago failed to negate the longer-term bullish trend, as prices failed to come close to testing the 200-day moving average. The 14-day RSI has moved back to neutral territory, with a current reading of 48.39. Support for July Silver is seen at the May 12th low of 32.300, with resistance found at the May 11th high of 39.470.

Mike Zarembski, Senior Commodity Analyst

May 31, 2011

Long-Term Stocks Keep Sugar Traders Busy

Today's Idea

The Sugar market has seen a bullish bias of late, largely due to many traders not trusting the most recent crop projections. This is not because they do not trust that the numbers are accurate if weather projections hold true, but rather, that the weather may not cooperate. Short-term supply concerns have been alleviated, but the world is still in the process of rebuilding its stockpiles. Technically, the market has crossed a hurdle at 22.50, but there is significant risk that this rally could stall quickly. Some traders may wish to take a more conservative approach and enter into a bull put spread instead of a more target-oriented approach. For example, some traders may wish to sell the July Sugar 21.50 puts and buy the July 21.00 puts for a credit of 0.15, or $168. The maximum profit would be the initial credit and the trade risks $392.

Fundamentals

Sugar futures have rebounded over the past several weeks, largely due to rain interfering with the Brazilian harvest. Prices are still well off of this year's highs, after supply tightness eased because of the larger Brazilian and Indian crops. Supplies for this crop year appear to be more than ample, which can be seen as a bearish force. The bullish undercurrent comes from the fact that the world is coming off several disappointing harvests. In the near-term, we are well supplied, but it may take several good harvests to restore stocks to comfortable levels. There is also bullish support coming from the EU, which is expected to allow imports of duty-free cane Sugar to make up for the shortfall in beet Sugar produced by EU nations. While the aforementioned factors all seem to point to higher Sugar prices, the upside of the market may be seen as limited. While Brazil's large harvest was plagued with weather-related issues, Thailand is expected to produce a record Sugar crop. Also, China could put further pressure on the bull camp by selling some of its Sugar reserves. Weather, of course, is the wild card, where poor weather in Thailand and India could quickly tighten the Sugar supply once again.

Technical Notes

Turning to the chart, we see the July Sugar contract comfortably trading above resistance at 22.50 over the past several sessions. This can now be seen as support for the July contract. Ideally, many traders would like to see prices come down and test this support area to confirm support. If prices are unable to hold 22.50, the market may come back to test the 20.50 area. Minor resistance comes in near the 23.80 market, while the next significant area of resistance now comes in at the 25.00 level. This area has a significant amount of congestion and the market will likely have to have significant momentum to cross through this barrier. What may be concerning for some traders is the shape of the recent move. While prices have moved higher very nicely, the shape of the rally that began in early may does look like it could be conducive to forming a bearish wedge on the chart. Normally, traders do not like parabolic moves, but the slow, grinding pace of the rally is not what traders like to see after a reversal. In short, there is a real possibility that the chart may be showing the makings of a "dead cat bounce." Prices are now approaching the 50-day moving average. Closes above the average could be seen as a bullish signal over the intermediate-term. The oscillators are neutral at this time, signaling a continuation of the recent trend.

Rob Kurzatkowski, Senior Commodity Analyst