« May 2011 | Main | July 2011 »

June 2011 Archives

June 1, 2011

Pipeline Shutdown Trumps Weak Economic Data as Oil Prices Hold Above $100

Today's Idea

A look at the daily chart for July Crude Oil shows continued support for prices near the 95.00 area. Some traders bullish on Oil or at least neutral as to the direction of prices may wish to explore selling puts on Crude Oil futures options with strike prices below the 95.00 support level. For example, with the July Crude Oil futures trading at 102.87 as of this writing, the July 90.00 puts could be sold for about 0.25, or $250 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in mid-June should the July Oil futures be trading above 90.00. Given the risks involved in selling naked options, some traders may wish to close out the trade prior to expiration should July Crude close below support at 95.00.

Fundamentals

Crude Oil futures continue to rebound from the commodity complex liquidation of early May, and should start the month of June back above the $100 per barrel level. The recent price recovery can be attributed to a weaker US Dollar, as well as continued political unrest in the Middle East. However, a new wrinkle has occurred, as the operator of the Keystone Pipeline had to shut down the system due to a small Oil spill at a pumping station in Kansas. This pipeline transports Oil from the tar sand fields in Alberta Canada to the major Oil hub in Cushing Oklahoma. This is a major Oil pipeline capable of transporting just over 590,000 barrels of Oil per day, and should the outage last longer than anticipated, it could help elevate the storage glut seen in Cushing, which is the delivery point for the NYMEX WTI futures contract. In addition, continued government protests in Yemen have some traders fearful that some of the tension could spread to the Oil behemoth Saudi Arabia. The Oil rally has been tempered somewhat by weaker than expected economic data in the U.S. Most recently, less than expected readings from the Chicago Purchasing Managers report and lower Consumer Confidence readings in May could be showing that the US economic recovery is struggling, with high energy prices a contributor to the recent disappointing data. This data may be used by OPEC officials as a sign that the Oil market is well supplied, possibly resulting in their decision not to increase Oil output at their next meeting on June 8th in Vienna.

Technical Notes

Looking at the daily chart for July Crude Oil, we notice prices breaking to the upside out of the descending triangle formation, which negated this normally bearish technical formation. Tuesday's sharp rally moved prices above the 20-day moving average once again, spurring renewed short-term momentum buying. The 14-day RSI has moved back into neutral territory, with a current reading of 49.89. The May 11th high of 105.16 looks to be the next resistance point for July Crude, with support found at the May sell-off low of 95.18.

Mike Zarembski, Senior Commodity Analyst

June 2, 2011

Bonds Stretched Like a Rubber Band

Today's Idea

Bonds have found strength in the weakness of troubled EU debt and economic doubts. The Bond market has several potential problems working against it. There is the high likelihood that the debt ceiling will be raised to stave off a default, which will likely create high supply. Also, the success of treasuries has been its own worst enemy, due to yields falling to levels that many investors feel is inadequate. Technically, the chart does not show any signs of a letup, but the oscillators are beginning to hint toward a reversal in the future. Some traders may wish to consider entering into a bear put spread with a bit of time in the event that the market does turn. One such strategy would involve buying the August Bond 123 puts and selling the August 120 puts for a debit if 0-32, or $500. The trade risks the initial cost and has a maximum profit of $2,500 if the underlying September contract closes below 120 at expiration.

Fundamentals

Bond futures continue to climb, as investors look for high quality assets to add to their portfolios. The EU looks poised to bail-out Greece for a second time, but the bailout is like using a band-aid to cover on a deep gash. There are serious flaws in the Greek financial system, and the government has not, or possibly cannot, put in place enough reforms and spending cuts to meet future obligations. The EU is truly in a "damned if you do, damned if you don't" situation with Greece. Leaving sovereign debt holders holding the bag could cause yields to skyrocket across the Eurozone, but on the other hand, simply throwing more money into a sinking ship does little to enforce investor confidence or encourage responsible government spending in member states. The US is far from being the poster child for sound finance. Economic indicators keep weakening, with the housing market edging closer to a double-dip and the economy failing to create jobs. There has also been the debt ceiling debate and the call for more spending reforms. This has created demand for the relative safety of the Bond market. One major problem with treasuries rallying and yields falling is that yields on long-dated debt have fallen below the expected future rate of inflation. The Bond market has been stretched like a rubberband and something has to give - either treasury prices have to pull back or economic growth around the globe has to fall enough to cool inflation for an extended period of time. Some traders who bought the tail end of the rally could soon be regretting the decision to do so. As strange as it sounds, the strength of the Bond market could spark further advances in equities. With yields being this low, investors may be willing to stomach the economic risk and purchase stocks with either growth potential or high dividend yields.

Technical Notes

Turning to the chart, we have seen the Bond contract advancing to the highest levels this year. The next area of stout resistance can be found near the mid-128's and a close above the November relative high at 128-23 could result in a test of the 130 mark. Near-term support comes in near the 123-16 mark, and more stout support comes in near 122. It is interesting to note that RSI remains near overbought territory, as it has for over a month. RSI, though, is slightly fading despite the rally in prices, suggesting a turning point could be on the horizon. Momentum has also failed to keep up with prices.

Rob Kurzatkowski, Senior Commodity Analyst


June 3, 2011

Weak Economic Data Starting to Weaken Equity Bulls' Resolve?

Today's Idea

A quick look at the chart for the June E-mini S&P futures shows the potential for some consolidation in the next several sessions. Some traders who are looking for prices to start to move sideways may wish to explore selling strangles in E-mini S&P futures options. For example, with the June E-mini S&Ps trading at 1311.00 as of this writing, the June 1355 calls and the June 1270 puts could be sold for about 8.00, or $400 per spread, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in two weeks should the June futures be trading below 1355.00 and above 1270.00. Given the risks involved in selling naked options, traders may wish to close out the trade prior to expiration should the June futures close above 1355.00 or below 1270.00.

Fundamentals

It's been a volatile week for equity index traders this holiday-shortened week, with the E-mini S&P 500 futures rallying to nearly the 1350.00 level, only to see the market collapse on Wednesday, as a continued streak of weak economic data in both the US and Europe has many traders fearful that the economic recovery has perhaps stalled. The continuing slump in the US housing market has carried over to weaker consumer sentiment, with the Conference Board's Consumer Confidence Index falling to a reading of 61 vs. 66 last month. The market also received a disappointing jobs outlook from ADP/Macroeconomic Advisors who estimated that private sector payrolls rose an anemic 38,000 in May, vs. the 190,000 increase most analysts were expecting. The weakening data has some analysts looking for the Federal Reserve to possibly consider a third round of quantitative easing (QE3), though this may only occur if economic conditions turns dire. Next up is the always highly anticipated Non-farm Payrolls report for May due out this morning at 7:30 AM Chicago time. Many economists have begun to revise downward their estimates for the jobs data after the ADP report. Current estimates are for payrolls to have increased by around 160,000 jobs last month, with an unemployment rate of 8.9%. The current stock bull market appears to need some "positive" data soon, or equity bears may start to come out of hibernation.

Technical Notes

Looking at the daily chart for the June E-mini S&P futures, we notice prices moving in a downward channel since the recent highs were made back in early May. Short-term momentum remains in favor of the bears, as prices remain well below the 20-day moving average. However, the longer-term trend is still positive, with the 200-day moving average not coming into play until the 1240.00 area. The 14-day RSI has turned weak, with a current reading of 41.61. The April 18th low of 1290.25 looks to be the next major support point for the June futures, with resistance found at this week's high of 1347.75.

Mike Zarembski, Senior Commodity Analyst

June 6, 2011

Wheat Retreats as Russian Exports Resume

Today's Idea

The recent sell-off in Wheat futures due to the Russian export news could spur an opportunity for traders to initiate bullish positions in either Kansas City or Minneapolis Wheat. For example, with September KC Wheat trading at 924.50 as of this writing, the September KC Wheat 800 puts could be sold for about 17 cents, or $850 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 August should the September futures be trading above 800.00. Given the risks involved in selling naked options, traders may wish to exit the trade prior to expiration should the September futures close below major chart support at 868.00.

Fundamentals

Wheat futures have had a rough start this month, with prices coming under pressure due to the announcement that Russia will lift its grain export restrictions starting July 1st. In addition, much needed rains are starting to occur in Europe, helping to alleviate some of the dry conditions seen in the eastern and central parts of the continent. The Russian agriculture ministry is expecting the country's grain harvest to rebound sharply, with current estimates calling for nearly 90 million tons this coming season. This is up from 60.9 million metric tons last year, as a severe drought forced the country to suspend exports. Russia is expected to be a major competitor in the export market this year, which would potentially hurt US export business. Ironically, the increases in Wheat production from Russia may be offset by the rather poor prospects for the US Winter Wheat crop. The weekly crop conditions report shows that only 33% of the Winter Wheat crop is rated good to excellent, vs. 65% last year. If that weren't enough, the Spring Wheat crop plantings are well behind average, with only 68% of the crop in the ground, vs. nearly 95% one year ago. Wet weather has hampered the spring plantings in North Dakota and Montana, and current weather forecasts are calling for additional rain in the coming days. There is now concern that the Spring Wheat acreage may fall short of expectations, with some analysts looking for a nearly 5% decline from the most recent USDA estimate. So while it appears that world Wheat supplies may be ample this year, we could still see a shortage of higher quality/higher protein content Wheat, which would likely favor the Wheat contracts traded in both Minneapolis and Kansas City.

Technical Notes

Looking at the daily chart for September KC Wheat, we notice prices consolidating in what appears to be a huge symmetrical triangle pattern. Currently prices are trading near the lower end of this chart pattern, and a breakout below the lower trendline could spark further selling pressure. However, prices still remain above the 200-day moving average, which is currently just above the 850.00 area. The 14-day RSI has turned weaker, with a current reading of 48.38. Near-term support is seen near the 900.00 area, with near-term resistance found near the top of the triangle pattern around the 977.00 area.

Mike Zarembski, Senior Commodity Analyst


June 7, 2011

Little for the S&P to Latch Onto

Trading Ideas

Equity prices have been in steady decline for over a month, but it has been a slow grind as opposed to a steep sell-off. Pessimism has begun to set in among equity traders, who have found little positive news to latch onto at the present time. The closes below the 1300 level can be seen as a technical setback. Despite these declines, the VIX index has not moved sharply higher, indicating little volatility premium built into the market. Some traders may wish to consider entering into a trade that would benefit from both price declines and volatility increases, such as a bear put spread. For example, some traders may possibly wish to buy the June S&P 1275 put and sell the 1250 put for a debit of 5.00, or $250. The trade risks the initial cost and has a maximum profit of $1,000 if the June futures settle below 1250. Since this is a quarterly S&P expiration, traders are not subject to exercise risk, as both the futures and options settle to cash.

Fundamentals

S&P futures have rebounded slightly this morning, following rallies in UK stocks. The stock market has been grinding lower at a slow pace since peaking in late April on the heels of weaker economic data. The job market has given investors very little to be confident about in recent reports. Last Friday's Non-Farm Payrolls number only showed the economy adding half of the number of jobs that most traders had expected. Delving deeper into the numbers, it appears that McDonald's restaurants accounted for half of the job increases. The anemic job growth has investors concerned that the housing market may be on even weaker footing that previously expected. This is cause for concern for banks, as well as the economy as a whole. Many economic observers are suggesting that the US is heading towards a double-dip recession. It is a bit early to make that bold of an assessment at this point, but there is enough concern out there to have a negative impact on prices. The economy is, however, more likely to see an extended period of slow or flat economic growth, rather than another recession at this point. It is not all doom and gloom at this time. We have seen a bevy of IPO's of late, many of which are Web 2.0 companies. This shows that some companies are still confident that they will get a fair price on their offering. A devil's advocate could make the argument that new public companies may not be able to fetch a reasonable price if the stock market was to turn negative, so these companies are rushing to go public because they are not confident that they will get the same valuation down the road.

Technical Notes

Turning to the chart, we see the June E-mini S&P trading below key technical and psychological support at the 1300 mark. This suggests that prices could test the 1250 level on the downside. Beyond 1250, additional support comes in near 1225 and, more importantly, 1175. The index is also trading below the 100-day moving average, a significant technical blow for the market. The last time the S&P traded below the 100-day MA was in September of last year.

Rob Kurzatkowski, Senior Commodity Analyst


June 8, 2011

Cotton Surplus Expected This Year Unless Mother Nature has Other Ideas

Today's Idea

Cotton prices could see a spike in volatility this summer, as weather conditions will play an important role in whether global Cotton supplies will return to a surplus this year. The potential volatile trade has made Cotton option prices quite expensive, as market-markers appear unwilling to sell options "cheaply" given the potential for large price swings. Some traders who are looking to take a position in Cotton may wish to explore the sale of credit spreads in December Cotton which would take advantage of some of the large premiums available in the options, but which also limit the potential risk from the long leg of the spread. For those traders desiring to take a short position in December Cotton, an example of such a spread would be selling the December Cotton 180 calls and buying the December Cotton 190 calls. With December Cotton trading at 129.93 as of this writing, this spread could be sold for about 1.00, or $500 per spread, not including commissions. The premium collected would be the maximum potential profit on the trade which would be realized at option expiration in November should the December futures be trading below 180.00 -- or nearly 50.00 points higher than the current market price. Some traders may wish to close out the trade prior to expiration should the spread trade at a premium three times the amount received for selling the spread initially.

Fundamentals

The 2011/2012 crop year is supposed to see global Cotton production finally surpassing consumption levels for the first time in many years, as record high cash prices encouraged increased Cotton planting -- especially in Asia. The USDA is estimating that world production will rise to 125 million bales, which if true could be a record. This increase is desperately needed to keep up with rising demand, with the USDA forecasting global consumption to rise to 119.5 million bales. In the US, Cotton plantings are expected to rise by about 15% to 12.6 million acres, with a projected harvest of 18 million bales this season. However, the current estimates are assuming ideal growing conditions in the key Cotton production areas, and so far this year this has not been the case. Extreme drought conditions are plaguing southwest Texas, with the 6 to 10 day forecast calling for only a slight chance of precipitation in the region. The lack of rainfall and extreme heat is leading some traders to look for the USDA to lower its estimate for the size of the US Cotton crop in its June Crop report due out on Thursday morning. High cash prices have started to crimp demand lately, as buyers looking for potentially large supplies of Cotton reaching the market later this year are holding back on purchases and keeping current inventories lean. This has kept old-crop Cotton prices in check, but the weather concerns have put new-crop December futures within striking distance of contract highs. Though the possibilities of a global Cotton surplus remain in traders' minds, it would only take a continued "weather scare" to keep prices volatile going into the harvest this fall.

Technical Notes

Looking at the daily chart for December Cotton, we notice what might be the formation of a head and shoulders pattern. This "reversal" pattern, if valid, would portend that the April 6th highs (top of the head formation) should not be taken out. The theory holds that if prices fall below the "neckline" (currently near the 113.00 level) we should see an acceleration of the downward move. However, prices are still trading well above the "neckline", and in fact, are still holding above the 20-day moving average. Momentum as measured by the 14-day RSI has moved to a neutral stance, with a current reading of 51.37. Near-term resistance is seen at the June 2rd highs of 140.90, with near-term support found at the 20-day moving average currently near the 127.00 area.

Mike Zarembski, Senior Commodity Analyst

June 10, 2011

Corn and Soybeans Moving in Opposite Directions?

Today's Idea

Front month Corn futures reached a record high on Thursday, as it appears that Corn supplies will remain very tight going into harvest this season, with some concerns that a late harvest could drawdown old-crop supplies to an extreme level. Given this potential scenario, some traders may wish to explore buying September Corn and selling new-crop December Corn. As of this writing, the September Corn futures are trading at a 42 cent premium to the December futures. Traders who choose to buy this spread anticipate that the September Corn differential will continue to increase vs. the December contract.

Fundamentals

US and world Corn supplies are expected to be extremely tight this year, as the USDA lowered its Corn supply estimates in yesterday's June crop report. The USDA estimated that domestic Corn supplies will total 695 million bushels this year, vs. 900 million bushels in the May report. The reduction in carryout was due to a lower than anticipated planted acreage estimate of 90.7 million acres, which is down 1.5 million acres from May's report. Ironically, the USDA left its estimated average yield at 158.7 bushels per acre unchanged, despite the late plantings seen in the northern and eastern parts of the Midwest. Globally, the USDA also lowered ending stocks to 111.9 million metric tons, mostly on expected consumption out of China.

The news was not so good for Soybean bulls, as the USDA raised its estimate for 2011-12 US ending stocks to 190 million bushels, mostly tied to lower US export totals. The USDA cut its export totals due to more business being driven to South America, where a large Soybean harvest in Brazil has made South American beans more attractively priced for foreign buyers. We will get a better estimate of the potential size of the US Soybean crop from the USDA in the Planted Acreage report due out on June 30th.

Technical Notes

Looking at the daily chart for September Corn, we notice prices trading at contract highs, with a spike higher once trading resumed after the "bullishly" construed USDA report. Prices are trading above the 20-day moving average, and Thursday's "spike" moved prices out of the recent consolidation range. The 14-day RSI is strong, with a current reading of 62.37, but it is showing a "bearish divergence", as this momentum indicator has failed to make a new high reading on the move to new contract highs. Support for September Corn is seen at the 20-day moving average, which is currently near the 711.00 area, with resistance found at Thursday's high of 765.00.

Mike Zarembski, Senior Commodity Analyst

June 13, 2011

Natural Gas Rallies, But Stiff Resistance Ahead

Today's Idea

Natural gas prices have been held to a relatively tight price range of just over $1 per mmbtu since the beginning of the year, with front month prices failing to surpass the 5.000 level. Some traders looking for prices to remain below the 5.000 area may wish to explore selling calls in front month Natural Gas options. With the current front month July contract trading at 4.735 as of this writing, the July 5.2 calls could be sold for about 0.021, or $210 per contract, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in late June should the July futures be trading below 5.200. Some traders may wish to close out the trade prior to expiration should the July futures close above 5.200.

Fundamentals

Front-month Natural Gas futures prices continue to hold near their highest levels of the year, mostly on the back of weather forecasts calling for above-normal temperatures in the central and eastern parts of the US. However, a continued gloomy economic outlook may cap any rally attempts above $5, especially if industrial demand begins to wane. The Gas market received a somewhat psychological boost from the negative attention given to nuclear power generation following the earthquake and tsunami in Japan, with Germany going so far as to announce that the country will end all nuclear power generation in the next several years. This potential switch from nuclear power to other power generation sources could expand the demand for Natural Gas sharply in the coming decade. The US is awash in Natural Gas, with the US Energy Department predicting in its monthly Short-term Energy Outlook that US Gas output will increase by 4.5% this year, which should be ample to meet power generation needs through the heat of the summer. The increase in estimated production comes despite a decrease in Gas drilling rigs this year, as production increases coming from shale formations have transformed the industry. The increased supplies of Natural Gas coming from shale drilling may also help to take some of the potential "risk premium" out of the late summer and early fall Gas futures contracts that is usually in place during the heart of the Atlantic hurricane season, as the US dependence on Gas supplies from the Gulf of Mexico region diminishes. So unless we start to see industrial demand increase sharply or a major production outage, it may be difficult for front month Natural Gas prices to move beyond recent price ranges.

Technical Notes

Looking at the daily chart for July Natural Gas, we notice prices rallying this past week and briefly taking-out the 2011 highs made back in late January, before a larger than expected storage build moved prices sharply lower on Thursday. The 14-day RSI is moderately strong, with a current reading of 58.21. This is the third higher-high seen in the daily chart since late March, with only major psychological resistance at 5.000 standing in the way of a potentially strong upside breakout, as bears run for the exits. Support for July Natural Gas is seen at the 20-day moving average currently near the 4.475 area.

Mike Zarembski, Senior Commodity Analyst


June 14, 2011

India Adds to Wheat Woes

Trading Ideas

The news that India may be lifting its export ban on Wheat comes at an inopportune time for Wheat bulls. Outside of mainland Europe, much of the globe has had good growing conditions for the grain, suggesting supplies will remain more than ample. While supplies look to be high, the demand portion of the equation remains unknown, likely giving the market a bearish tilt. Technically, the July Wheat contract remains at a vulnerable level, where a breakdown below 725 could trigger further bearish action. Given that there are only 10 days left for July options, some traders may wish to look to the futures market instead. Some traders may wish to consider a trade like selling the July Wheat futures contract on a close below 725, with a protective stop at 750 and a profit target of 675. The trade risks approximately $1,250 and has a maximum profit of approximately $2,500.

Fundamentals

Wheat futures are under pressure going into the summer, unlike Corn, and to a lesser extent, Soybeans. Ample plantings and good growing conditions for much of the US Wheat growing region have helped put away any fear of a shortfall for the current harvest. Further aiding the declines have been the lifting of Russia's export ban and a very high likelihood that India will follow suit by lifting its own export ban. India is coming off three very good harvests and looks to have a record crop this crop year. There is still the question of the extent of the crop damage in Europe, which has faced weather-related issues. Worse than expected crop damage could aid and stop the bleeding in Wheat prices. As the price of Corn rallies, many traders are left wondering to what degree feed lots will begin substituting Wheat for Corn. Corn prices are currently trading over Wheat, which is a rare occurrence for the two grains and is generally a temporary phenomenon. That being said, current market fundamentals continue to favor Corn, while Wheat supplies seem more than ample at the moment. Traders are now left with the question of whether there is enough outside market support to prevent further price declines in Wheat.

Technical Notes

Turning to the chart, we see the July Wheat contract approaching support near the 725 level, which can be seen as significant. Declines below 725 could fuel further selling pressure and bring about a test of the 665 level on the downside. Depending on interpretation, the chart does appear to be forming a head and shoulders pattern, albeit not a perfectly shaped one, with the 725 level as a neckline. Some traders would ideally like to see the market in an uptrend prior to the formation of the pattern, as it is a reversal pattern, so they may discount the significance of the formation. Currently, most oscillators are giving neutral readings, which is not all that unusual in choppy market conditions.

Rob Kurzatkowski, Senior Commodity Analyst


June 15, 2011

Is a Rally Brewing in Coffee Futures?

Today's Idea

Coffee futures are notorious for volatility; especially should a weather event occur that could potentially harm production out of Brazil, which is the world's largest Coffee producer. Some traders who are expecting an upside breakout in Coffee prices may wish to explore the purchase of a bull call spread in Coffee futures options. For example, with September Coffee trading at 270.55, the September Coffee 285 calls and sell the September Coffee 295 calls could be purchased for about 3.30 points, or $1,237.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $3,750.00 minus the premium paid realized at option expiration in August should September Coffee be trading above 295.00.

Fundamentals

The bull market in Coffee futures has begun to cool a bit, with prices of the September contract consolidation just below the 275.00 area. The rally in early may above the key 300.00 level was triggered by concerns that Coffee production in Brazil would fall sharply, as this is the "down" year in the bi-annual cycle for Arabica production. In addition, the market had started to price-in a "weather" premium going into the South American winter. Current strong demand for Coffee has kept prices high, and concerns that high quality Coffee would be in short supply this year have kept the market from seeing a weakness in prices, even during the recent commodity-wide sell-offs the past couple of weeks. However, Coffee bears have received some supportive news, with the International Coffee Organization (ICO) projection that Coffee production will fall by a meager 3 million bags this coming marketing year, despite a nearly 10% decline in production expected out of Brazil. Increases are expected out of Vietnam, with the ICO expecting the new-crop harvest to total 19.5 million bags this year, vs. 8.5 million bags for the 2010-11 crop year. Many traders will turn their attention to the weather forecasts for any chances of a crop-damaging frost or freeze . In addition, the key Coffee growing region of Minas Gerais could use some rainfall in the coming days, to help the maturing Coffee beans fill out. Should any detrimental weather affect the crop, we could see prices move sharply higher, as many traders will likely be forced to trim their crop estimates.

Technical Notes

Looking at the daily chart for September Coffee, we notice prices forming a consolidation pattern after the nearly 55-cent decline seen from the early May high. Prices have recently begun to trade back near the 20-day moving average, and the 14-day RSI has moved back to a neutral reading of 50.17. Many traders will be keying on the direction of the eventual breakout of the recent consolidation phase as a signal of the probable direction of the next major price move. Support is seen at the June 2nd low of 256.95, with resistance found at the May 18th high of 277.65.

Mike Zarembski, Senior Commodity Analyst


June 16, 2011

Greek Government Change Causes Euro Traders to Lose Faith

Today's Idea

The Euro may very well continue to face challenges as the Greek debt saga carries on. The weakness in the US and other economies also typically results in safe-haven greenback buying. Technically, the Euro is approaching the critical 1.40 level. A close below the 1.40 mark could result in a technical meltdown for the currency, as longs get squeezed out and shorts become emboldened. Some traders may wish to consider entering into a bear put spread by buying the August Euro 1.39 put and selling the August 1.36 put for a debit of 0.0080, or $1,000. The trade risks the initial cost and has a maximum profit of $2,750 if the underlying September futures close below 1.36 at expiration.

Fundamentals

Europe cannot seem to come to an agreement as to how to properly address the Greek debt crisis which is weighing on the Euro. The currency is under direct pressure because of the reshuffling of the Greek prime minister's cabinet and formation of a new government. What has troubled investors the most about the debt challenges facing Greece and other European nations is the indecision. Indecision within the country on how to handle the debt crisis and the avoidance of making the necessary reforms to remain solvent. Indecision among EU member states on how to handle Greece - more capital infusions or sharing the debt burden with bond investors. While European leaders squabble amongst themselves, yields on Greek and Spanish debt have jumped. This is a sign that investors have no taste for EU debt and could make financing more expensive. The Euro may continue to trend lower until some sort of accord is struck, but there is no guarantee that investors will be happy with a potential deal once it is reached. The US Dollar has been stronger in recent sessions, largely due to defensive buying because of falling commodity and equity prices. The US faces its own challenges. In addition to an economic slowdown, many investors are concerned about the debt ceiling debate in Washington and the potential jump in US bond yields once the Fed is done with its QE2 buying.

Technical Notes

Turning to the chart, it appears that the September Euro futures contract is in the midst of forming a potential double-top formation. The 1.4000 level is a crucial downside level for the Euro at the present moment, as a close below this level could send the Euro to the low 1.30's. The September contract settled on the 100-day moving average, and a close below the average would set a bearish tone, medium-term. Prices will likely have to take-out the relative high close of 1.4500 in order to recapture upward momentum.

Rob Kurzatkowski, Senior Commodity Analyst


June 17, 2011

Economic Uncertainty Spurs Traders into Treasuries

Today's Idea

Some traders who are expecting the bull move in 10-year Note futures to continue may wish to explore the purchase of a bull call spread in 10-year options. For example, with the September futures trading at 124-01 as of this writing, the August 124 calls could be bought and the August 125 calls sold for 30/64ths, or $468.75 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade which has a potential profit of $1,000.00 minus the premium paid which would be realized at option expiration in late July should the September futures be trading above 125-00.

Fundamentals

Disappointing economic data in the US combined with the continuing saga surrounding the Greek debt crisis have traders and investors moving to the US Treasury market, despite the ending of QE2 this month. The Empire State Manufacturing index turned negative in June, coming in at a -7.8 reading, which is the lowest level for this indicator since November. This figure shocked analysts who were looking for a reading closer to a +12. In addition to the poor showing for manufacturing in the New York Region, industrial production rose 0.1% in May, which was less than forecasts. The weak economic data is convincing some traders that the Federal Reserve will not be raising interest rates any time in the near future, with some analysts not predicting Fed tightening until the first quarter of 2012. The Treasury market also received a boost from the deeply divided opinions of EU ministers on how to handle the continued bailout of Greece, with increasing concerns that some type of default on Greek debt will eventually occur. All this uncertainty and weak economic data has weighted on US. Equities, as traders fear that a double-dip recession is not out of the cards and are moving assets into "safe-haven" assets such as Treasuries and the US Dollar. Should this trend continue, we may see further buying in Treasury futures where large speculators have only recently moved to a net-long position according to the most recent Commitment of Traders report. This leaves plenty of room for additional buying by commodity and hedge funds should global economic conditions point to a protracted slowdown.

Technical Notes

Looking at the daily continuation chart for the 10-year Note futures, we notice prices chopping on either side of the 20-day moving average. This "pause" in the bull market rally that has taken the lead-month futures contract up over 6 full points since mid-April was overdue, and we could be seeing a "bull flag" forming, which if true, could be signaling that we are in for another move upward. The 14-day RSI has started to pull away from neutral territory, with a current reading of 57.70. The June 1st high of 124-29.5 looks to be the next major resistance point, with support seen at the 200-day moving average, currently near the 122-05 area.

Mike Zarembski, Senior Commodity Analyst


June 20, 2011

Oil Leak!

Today's Idea 6-20-2011

Those traders who are still bullish on Crude Oil may wish to use the current weakness in prices as an opportunity to explore selling out-of-the-money puts in Crude Oil futures options. For example, with August Crude Oil trading at 92.85 as of this writing, the August Crude 76 puts could be sold for about 0.25, or $250 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in mid-July should the August futures be trading above 76.00. Given the risks involved in selling naked options, traders may wish to close out their trades prior to expiration should the option premium trade at three times the amount received for originally selling the option.

Fundamentals

Oil futures have not been above the "risk-off" trade mentality seen recently, as traders concerns over the European debt crisis as well as signs of an economic slowdown in the US sparked long liquidation selling in WTI Oil futures this past week. Front month July Crude Oil broke through technical support at 95.00 per barrel, triggering sell stops below this key price point. The short-term outlook appears to be favoring the bears, as US Oil demand remains lackluster. Concerns that China plans to raise interest rates once again could slow Oil demand from the world's most populous nation. However, in the long run, Oil prices may still have room to move higher. The International Energy Agency warned that the additional Oil output from Saudi Arabia of 1 million barrels per day would not make up for the loss of Libyan Oil, which is higher quality and in demand by European refiners. The agency also expects Oil prices will continue to rise in the next 5-years, with continued increasing long-term demand from both China and India outpacing production and causing average Oil prices to rise by nearly $20 per barrel in the coming years. The IEA also warns of increasingly tight supplies of "lighter and sweeter" grades of Crude Oil in the coming months, mainly tied to the Libyan shutdown, but also due to lower production out of the North Sea and potential disruptions out of Nigeria, where political rebels have caused damage to the Oil infrastructure which has lowered the output if its highly prized "Bonny Light" Crude. A current tight supply of high grade Oil is a major reason why the "Brent" contract has traded at a huge premium to the US "benchmark" WTI contract along with the continued glut of Oil in the NYMEX delivery point in Cushing, Oklahoma. However, even in Cushing, we have started to see supplies being drawn down a bit, as the recent shutdown of the Keystone Pipeline from Canada had refineries with access to Oil from Cushing begin to drawdown inventories. So unless we see the global economy move back into a recessionary phase where global Oil demand decreased sharply, any major declines in Oil prices may turn out to be short-lived.

Technical Notes

Looking at the daily chart for August Crude Oil, we notice prices moving well below the 200-day moving average for the first time this year. The 14-day RSI is approaching oversold levels with a current reading of 33.94, as long liquidation selling due to fears of an economic slowdown keep pressure on prices. 90.00 is now seen as the next support level for August Crude, with resistance found at the 20-day moving average currently near the 99.50 area.

Mike Zarembski, Senior Commodity Analyst


June 21, 2011

Confounding Copper

Today's Idea 6/21/2011

Copper futures have been trading non-directionally for the past month, as many traders try to make sense of current economic data and formulate projections of what the future may bring. Fundamentally, it seems as though the market is well supplied, largely due to previous stockpiling in China. This brings about questions regarding when China will restock and to what degree. Some traders have discounted anemic US and European growth, making Chinese data even more important. Technically, the picture remains just as murky as the fundamental outlook. The tightening of the chart hints at an imminent breakout, but the direction of the breakout is what is eluding traders. Some traders may wish to consider sitting back in the wings to wait for a direction to go long or short the market. The chart can be used for guidance to set objective and stop levels once a breakout occurs. Traders not wishing to trade Copper itself may also look for the breakout to help formulate opinions in other markets, as the price of the metal can oftentimes be seen as a better leading indicator of economic growth than government reports.

Fundamentals

Copper futures have been trading just north of the $4 level for roughly a month, lacking a consensus among traders as to where the global economy is heading. It seems as though traders have found a "fair price" for the time being, given the lack of clarity over the state of European and US debt and questions about China's Copper market. Chinese imports in May were down 47% over the same period a year ago. This indicates that the large stockpiles that the industrial giant has built up are being destocked in order to provide cheaper metal to local users and making it non-cost effective to buy the red metal overseas. China will eventually have to restock these inventories, but questions remain as to the size of domestic stocks, since they are not reported with the same level of transparency as LME inventories. China posted a stellar economic quarter, with metrics being better than expected virtually across the board. However, the cloud of inevitable interest rate action by the People's Bank of China (PBoC) has many traders concerned that eventually the central bank will act too harshly and hamper growth. The interest rate hikes already undertaken and the increase in bank capital requirements have done little to slow Chinese commodity demand, much to the government's displeasure. In the West, the European debt crisis, most notably in Greece, threatens to bring EU growth to a grinding halt. In the worst case scenario, we can see contagion of Greece's problems to other member states, which would drive borrowing costs upward. The US housing market, which is the next most important Copper market mover behind China, may be on the brink of a double-dip, which could result in further weakness in US Copper demand. The mix of data and opinions has resulted in choppy, sideways trading in Copper. Historically, Copper has been one of the most volatile commodities, and the recent lack of direction could be the calm before the storm.

Technical Notes

Turing to the chart, we see the September Copper contract trading in a relatively tight range north of 4.00. The range has been tightening, resulting in what appears to be a wedge formation on the daily chart. The market is entering the narrow end of the wedge, indicating that a breakout to either direction may be on the horizon. Prices are well south of the 100-day moving average, but are trading near the 20 and 50-day averages. Momentum, RSI and the stochastics are all giving neutral readings, offering no hint to future market direction.

Rob Kurzatkowski, Senior Commodity Analyst


June 22, 2011

The Pause that Refreshes

Today's Idea 6-22-2011

A quick look at the chart for August Gold shows prices once again attempting to test resistance at 1555.00, which if taken out, could set-up a run at the all-time highs. Some traders who look for Gold prices to rally but who expect stiff resistance at the 1600 level may wish to explore ratio spreads in Gold futures options. For example, with August Gold trading at 1544.50 as of this writing, the August Gold 1560 calls could be bought and 2 August Gold 1600 calls sold for about a 3.00 debit, or $300 per spread, not including commissions. Ideally the August futures will settle at 1600.00 at option expiration in late July for the maximum potential profit on the trade. Since more options are being sold than have been bought, the potential risk is technically unlimited and traders should have an exit strategy in place in the event Gold prices move sharply higher. For example, traders may wish to exit the trade prior to expiration should August Gold trade above 1620.00.

Fundamentals

Gold futures have been rather quiet lately, with prices of the lead month August contract becoming range-bound the past few weeks. Is it a case of the summer doldrums hitting the precious metals market, or is the bull market getting a well-needed rest before its next move to test all-time highs? The global economic turmoil has not settled down, especially in Europe, as continued concerns over the Greek debt crisis, as well as that of Ireland, Portugal, Italy and Spain, continues to weigh on traders' minds. In addition, comments from Fitch ratings that it will be forced to put the U.S. on negative ratings watch should the debt ceiling not be raised by August 2nd should also add some support to Gold prices, as the Dollar is weakening on the news. Wednesday is also the end of the FOMC two-day meeting, and Gold bulls may be buoyed by any statement that would lead to speculation that the Fed will keep interest rates low for the foreseeable future and remain in an accommodative monetary stance. Speculative traders have been curtailing their net-long position in Gold futures, with the most recent Commitment of Traders report showing that the combined non-commercial and non-reportable long positions in Gold were cut by nearly 12,000 contracts as of June 14th. This reduction in the bullish sentiment for Gold leaves plenty of room for additional buying to emerge should the market break-out if its summer slump.

Technical Notes

Looking at the daily chart for August Gold, we notice an ascending triangle technical formation. This continuation pattern is considered resolved in the direction of the previous trend should we see a close above the upper line of the triangle currently at 1555.00. Momentum, as measured by the 14-day RSI has turned positive, with a current reading of 60.90. 1555.00 remains near-term resistance for August Gold, with near-term support found at the June 13th low of 1511.40.

Mike Zarembski, Senior Commodity Analyst


June 23, 2011

Fast Brazilian Harvest has Coffee Facing the Cold Press

Today's Idea 6-23-2011

The recent sharp pullback in Coffee prices can likely be attributed to a shift in market fundamentals, but it may also be a sign that the run-up in prices to over $3 was excessive. Coffee not only faces the possibility of a larger and higher quality Brazilian crop, but also the outside challenges due to currency concerns and commodities, as a whole, losing some of their appeal. Technically, the chart shows Coffee suffering a technical setback by breaking out of consolidation. The consolidation after the breakout also has a negative bias for the market. Some traders may wish to consider entering into a bear put spread, like buying the September Coffee 235 puts and selling the September 220 puts for a debit of 4.50, or $1687.50. The trade risks the initial cost and has a maximum profit of $3937.50 if the price of the September futures closes below 220.00 at expiration.

Fundamentals

Coffee futures have had several quiet sessions, after tumbling more than 25 cents over the course of four trading sessions. The quick pace of the Brazilian harvest was a major driving force behind the sell-off. The recent dry weather in Brazil is a sharp contrast to the wet weather that delayed the start of the harvest and drove the price of the futures over the $3 mark in early May. The Robusta Coffee harvest is over 70% complete, while the Arabica crop is 20% complete. At this pace, the Brazilian Coffee harvest could be complete by the end of August, bucking the trend of late harvests. The USDA projected that Vietnam's Coffee crop will be 10% larger than the previous crop, further adding bearish pressure to the market. In addition to the potential large supply, traders also have to come to grips with several outside market forces. The slowdown in economic activity has many traders' opinions of commodities tilted to the bear camp. The Fed has followed private sector analysts in cutting growth forecasts for the US, citing "stronger headwinds." Slower growth may also mean tamer inflation. The US Dollar has also firmed lately, as a result of concerns over Greek debt and potential contagion of the problem across the EU. Commodity-based currencies have also lost favor with investors due to soft commodity prices. Coffee will likely have to see the previously mentioned factors reverse course to regain its momentum, so many traders will be closely watching the Brazilian weather situation unfold.

Technical Notes

Turning to the chart, we see the September Coffee contract breaking out below the month-long consolidation on the daily chart. Prices are now once again beginning to consolidate just south of the 250.00 level. We see an area of chart support between 235-240. Failure to hold here could result in prices retreating below the $2 mark. On the upside, resistance can be found at 259.20 and 274.15, the relative low and high closes in the aforementioned price band the September contract broke out of. RSI is continuing to moving lower into oversold territory, even as prices have stabilized over the past two sessions. This could result in a slowdown in selling pressure over the short-term.

Rob Kurzatkowski, Senior Commodity Analyst


June 24, 2011

"Risk" Off

Today's Idea

The long liquidation selling in Gold futures may provide those looking to go long Gold on a price-break an opportunity to get back into the market once the dust settles. A trading strategy to consider might be selling puts in Gold future options. For example, with August Gold selling at 1519.30 as of this writing, the August Gold 1245 puts could be sold for about 3.30, or $330 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 July should August Gold be trading above $1425.00. Given the risks involved in selling naked options, traders should have an exit plan in place should the position move against them. For example, some traders may wish to buy back the options prior to expiration should August Gold close below chart support at 1464.10.

Fundamentals

Thursday was a rough session for commodity bulls, as prices fell in sharply in nearly every sector, with energies and grains leading the flight away from "risk". The reasons for the weakness were numerous, starting with Wednesday's end of the June FOMC meeting when the statement released confirmed what most Americans already knew -- that the economic recovery is moving much slower than the Fed had hoped, and that the Fed does not know how long the economic malaise will last. If this weren't enough, the weekly unemployment claims report showed a larger than expected jump in claims last week, which rose by 9,000 to 429,000. Most analysts were expecting a modest decline of 1,000. Then a surprise announcement made by the International Energy Agency (IEA) that it will make available 60 million barrels of Oil from strategic reserves over the next 30 days starting next week shook the energy markets, sending Oil prices down over 5% and narrowing the Brent vs. WTI Crude spread. All these catalysts combined with a rising US Dollar tied to the continued concerns over the Greek and European debt crisis were the final straw that triggered the "risk off" liquidation of commodity positions. The sharp drop in Gold prices may have come as a bit of a surprise given the economic uncertainly, but long liquidation in Gold may be due more to funds needing to cover losses in other markets rather than investors abandoning their "safe haven" investments. If true, the recent sell-off may lure buyers back into the Gold market should prices fall below $1500.00 in the next few days.

Technical Notes

Looking at the daily chart for August Gold, we notice that prices have moved below the 20-day moving average, which may have spurred some short-term momentum selling. More importantly, the uptrend line drawn from the January lows has been taken-out on the downside, and unless prices move above this line in the next few trading sessions, we cannot rule out a test of the 1500.00 area, or even further selling caused by sell stops being triggered below this psychological support point. The 14-day RSI has moved back into neutral territory with a current reading of 47.80. Major chart support is seen at the May 5th low of 1464.10, with resistance seen at Wednesday's high of 1559.30.

Mike Zarembski, Senior Commodity Analyst

June 27, 2011

Was the IEA's Decision to Release Strategic Oil Supplies Short-sighted?

Today's Idea

Given the increased supplies of high grade Crude that will be placed in the market in the next several weeks, the term structure of the Brent futures has moved from a backwardation to a contango. Some traders looking for the near-tem contract to lose ground vs. a more deferred contract may wish to explore bear spreads in Brent Crude Oil futures. For example, the October 2011 Brent Crude futures could be bought and the August Brent Crude Oil futures sold. Currently August is trading 40 cents below the October futures. Traders initiating a bear spread would want to see this spread differential widen even further.

Fundamentals

Many oil traders were caught by surprise on Thursday, as the International Energy Agency (IEA) announced that member nations would release 60 million barrels of Crude Oil or Oil products into the market through August. The Oil or Oil products released will come from member countries' strategic reserves to help control rising Oil prices following the shut-down of Oil exports out of Libya, which is estimated to have taken 1.3 million barrels per day out of the market. Futures prices tumbled on the news, with the Brent Crude Oil futures leading the charge lower, as at least 30 million barrels of Oil to be released will be of a "light and sweet" grade of crude, which similar to that lost from Libya and is in demand, especially from European refiners. It was the loss of the high grade of Oil from Libya that helped contribute to the historic widening of the spread between the benchmark Brent and WTI Crude Oil futures contracts. In the short-term, the increase of supplies should weigh on Oil prices, especially Brent Crude Oil, which should help to narrow the spread differential with WTI Crude. Longer-term, the affects of this action remain unclear, but may actually turn out to be bullish for Oil. First, the supplies being drawn from the strategic reserves will eventually need to be replaced, which would then add another entity competing for supplies with refiners in the global market. Secondly, it appears that many OPEC members were very unhappy about the IEA's move, as they insist that the market is well supplied with Oil, and we may now have a glut of Oil which could push prices even lower. If true, we may actually see OPEC members begin to discuss cutting Oil production, which could cause inventories to tighten should global economic improvement gain some traction. Thirdly, there are some concerns that the move to release Oil was more of a "political" gesture, rather than action to address a real crisis in Oil supplies, which may have hurt the relationship between Oil consumers and more "dovish" Oil producers such as Saudi Arabia, who had pledged to raise Oil production despite OPEC's decision at their June meeting in Vienna to keep output unchanged. Although it does appear that the IEA's move did achieve its objective in the short-term, consumers should be aware that the IEA's action may ultimately lead to higher Oil prices -- especially if demand begins to recover.

Technical Notes

Looking at the daily continuation chart for Brent Crude Oil futures we notice follow-through selling on Friday, after the sharp drop in prices on Thursday, on record volume, following the IEA's announcement. Oil prices were already starting to slump, and the IEA put pressure on the large speculative accounts to liquidate their net-long positions. Additional selling may have also come from the unwinding of long Brent and short WTI spreads. Though prices are now well below the 20-day moving average, we still are holding above the 200-day moving average, which should be the next support point for the front month futures. Support is seen at the 200-day moving average, currently near the 101.70 area. Resistance is found at the 20-day moving average near the 114.70 area.

Mike Zarembski, Senior Commodity Analyst

June 28, 2011

Euro Enigma Confounds Gold Traders

Today's Idea 6/28/2011

The question of European debt has proved to be an enigma for traders. On one hand, the debt situation makes Gold appealing to traders as a risk aversion tool. On the other hand, it has help fuel the US Dollar versus the Euro, which has made Gold and other commodities unappealing in dollar terms. Ultimately, traders may have to look past the currency situation and look at the bigger picture with Gold. The recent sharp drop in prices could provide value-minded traders with a buying opportunity. Some traders may possibly wish to consider a bull call spread like buying the August Gold 1500 call and selling the August 1525 call for a cost of 7.00, or $700. The trade risks its initial cost and has a maximum profit of $1,800 if the price of the underlying August contract goes up to 1525 by expiration.

Fundamentals

Gold futures have followed riskier commodities lower in recent sessions due to risk aversion. The Greek situation has caused many investors to be more cautious, as there is no guarantee that austerity measures will pass. Investors are now left with the question of how much Gold will fall before prices stabilize. The Gold market still has very strong fundamentals, even with lower growth and inflation forecasts. The sovereign debt concerns in Europe are far from being over, and the possibility that Greek austerity measures will not pass could create safe haven demand. The Euro versus Dollar could, however, continue to plague the Gold market. The US Dollar itself continues to lack strong fundamentals. Mounting US debt, low interest rates and slower growth forecasts are all negative factors for the greenback. Traders have looked past these suspect fundamentals and have been buying US treasuries, which has lifted the Dollar. If Europe sees contagion in the debt situation, it could fuel further buying of US Dollars, which could potentially put a damper on the Gold market.

Technical Notes

Turning to the chart, we see the August Gold contract confirm a double-top formation by taking out the 1515 level. The measure of the move suggests prices could come down to test the 1475 level. The recent negative price action has caused the market to take out the 50-day moving average to the downside, which can be seen as a negative. The 100-day average is near the 1470 mark coming into trading. The market must hold this level in order to prevent a complete technical turnaround.

Rob Kurzatkowski, Senior Commodity Analyst


June 29, 2011

Grain Prices Volatile Ahead of USDA Report

Today's Idea

The recent limit price moves in Corn futures combined with nervous trading conditions ahead of the USDA report have led to increased volatility levels in Corn options. Historically, unless there is a huge surprise in the USDA report, the tendency is for volatility to decrease after the report is released -- especially for near-term options. Some traders who anticipate a decrease in short-term volatility may wish to explore the purchase of a calendar spread in Corn futures options. Interested traders would first need to determine if they have a bullish or bearish bias. So, for example, if they are neutral to bullish on Corn prices, they may wish to explore the purchase of a call calendar spread. For example, with September Corn trading at 669.00 as of this writing, the September Corn 720 calls could be bought and the August Corn 720 calls sold for a premium of about 13 cents, or $650, as of this writing. Traders buying this call spread would want to see the premium differential increase.

Fundamentals

It has been a volatile few days for grain traders, with prices first falling sharply on commodity fund selling tied to improving weather conditions and a "risk off" mentality moving throughout the financial markets, and then rallying on a disappointing crop conditions report and short-covering ahead of a USDA report. Corn futures have been among the most volatile of the grains, falling nearly 20% from all-time highs earlier this month, as traders began to believe that current ideal weather conditions would help to overcome concerns about loss of yield on the rather late planted crop this spring. However, the market got a bit of a surprise on Monday afternoon, when the USDA reported that the Corn crop was rated 68% good to excellent, down 2% from the previous week, with declines noted in the two largest Corn producing states of Illinois and Iowa. Excessive rainfall was to blame for the declines, as increased flooding has been seen -- especially along the Missouri river. With crop condition concerns out of the way, grain traders will likely turn their attention to the USDA's Planted Acreage and Quarterly Grain Stocks report due out at 7:30 am Chicago time on June 30th. Current expectations are for the USDA to raise its estimate for planted acres for Corn to near 90.8 million acres, vs. 88.192 acres planted last year. Higher Corn production is crucial this year, as US Corn inventories have fallen to very tight levels. The USDA is also expected to lower its estimate of US Corn stocks as of June 1st to 3.325 billion bushels. If true, this would be nearly a billion bushels below last year's levels and highlights the need for a huge crop this coming season.

Technical Notes

Looking at the daily chart for September Corn, we notice the year-long uptrend has been put to the test, as prices have fallen below the uptrend line drawn from the June 2010 lows. However, the recent sell-off has failed to move prices below the 200-day moving average, keeping the trend intact. The 14-day RSI moved toward oversold levels before rebounding, and now stands at a still weak 39.86. The 200-day moving average, currently near the 619.00 area, looks to be major support for September Corn, with resistance found at the 20-day moving average near the 705.00 level.

Mike Zarembski, Senior Commodity Analyst


June 30, 2011

Bonds Lose a Safety Net

Today's Idea

Bonds have been a safe haven for investors in recent months, due to dimmer economic forecasts, weaker commodity prices and economic unrest in Europe. Some traders have become a bit more optimistic and may believe that the sell-off in commodities could be a bit overdone. The end of QE2 also removes the safety net and price support for the Bond market. Technically, Bonds have finally showed some chinks in their armor. Some traders may wish to consider entering into a bear put spread, for example, buying the August Bond 123 put and selling the August 121 put, for a cost of 0-35, or $546.88. The trade risks the initial cost and has a maximum profit of $1,453.12 if the price of the Sep Bond closes below 121 at expiration.

Fundamentals

Treasury futures have seen selling pressure over the past several sessions on renewed optimism over Greece and a rebound in equity prices. Stocks have rebounded strongly over the past three trading sessions, after the E-mini S&P came down near the 1250 level. The progress made by passing the Greek austerity measures may prevent a default for now. Many traders view this as a move to buy time for Greece and other distressed European nations, such as Spain, Portugal, Ireland and Italy. Many observers do not see a situation where Greece becomes a functional, solvent economy anytime soon. What the austerity measures and bailout do is prevent skyrocketing interest rates from hitting the EU, and it staves off contagion. Bonds have been extremely strong since April, when many factors were lining up for treasuries. Bond traders now have to come to grips with the fact that the Fed will no longer be there to support the market after the treasury purchases are completed. Commodity prices, most notably Crude Oil, have also rebounded in recent trading sessions. The fact that the worst case scenario did not happen in Greece has many traders looking to higher yielding assets once again at the expense of treasuries.

Technical Notes

Turning to the chart, we see the continuous Bond chart falling below the relative low at 123-28. This relative low was seen as a support level for Bond prices, and the next area of support comes in near the 122-00 level. The close below the 50-day moving average can be seen as a negative technical factor for Bond prices, but the true test will come from the 100-day moving average, which sits at 122-10 coming into trading today. A close below the average and support at 122-00 could be seen as especially bearish.

Rob Kurzatkowski, Senior Commodity Analyst