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July 1, 2011

Surprises Abound in USDA Planted Acreage Report

Today's Idea

Lower than expected acreage for Soybeans puts additional pressure on weather conditions to be ideal in order to help the US replenish its current tight inventories. The sell-off seen in prices on Thursday was mainly tied into overflow selling caused by Corn's limit down move. Some traders may wish to take advantage of the weakness in Soybean prices to possibly explore buying a November Soybean futures, currently trading at 1294.00 as of this writing, with an upside potential of a move above the June highs just above the 1400.00 level. The risk on the trade would be a close below the 200-day moving average currently near the 1280.00 area.

Fundamentals

Never underestimate the resilience of the American grain producer, who despite a difficult spring planting season, still managed to plant the second highest Corn acreage since 1944, in addition to better than anticipated spring Wheat acreage - i.e., if one is to believe the USDA's planted acreage report released on Thursday. The USDA shocked many traders by reporting that US growers planted 92.3 million acres to Corn this spring, which is way above the pre-report estimate of 90.77 million acres. Government statisticians also raised their estimate for harvested Corn acreage by 1.7 million acres to 84.9 million acres. Quarterly Corn stockpiles were estimated at a higher than expected 3.670 billion bushels, as the USDA believes that high Corn prices are beginning to curtail demand. Spring Wheat acreage was lowered to 13.6 million acres, but that is nearly 300,000 acres above traders' expectations. Given the widespread flooding in North Dakota, many traders still believe that this figure will be revised lower in upcoming reports. The only saving grace for grain bulls was in the Soybean acreage estimate, as the higher than expected Corn acreage took away from Soybean plantings, with the USDA estimating US producers planted 75.2 million acres to Soybeans, down 1.4 million acres from the March estimate. However the government estimated Soybean inventories as of June 1st to be 619 million bushels, which is higher than traders were expecting. The very bearish Corn figures sent prices down the 30-cent limit, as well as causing both Soybean and Wheat prices to tumble. Many traders are questioning the accuracy of the USDA figures, and many are looking for possible revisions in upcoming reports. But for now, market participants will likely begin to focus on the weather forecasts to see if Mother Nature will also aid in helping to replenish tight inventories this coming season.

Technical Notes

Looking at the daily chart for November Soybeans, we notice the market closing well off the session's lows, as buyers emerged below 1300.00, based on the supportive USDA planted acreage report. Notice that prices successfully rebuked a test of the 200-day moving average which supports the longer-term bullish trend. The 14-day RSI has turned down, however, with a current reading of 35.91. There is a chance that November Soybeans might become range-bound for the near future, with major support found at the March 15th low of 1238.00 and major resistance seen at the contract high of 1411.25 made back on April 11th.

Mike Zarembski, Senior Commodity Analyst


July 5, 2011

Pound Gets Outside Help

Today's Idea Tuesday, July 5, 2011

The Pound has found some recent strength on the backs of a weaker US Dollar and the passage of Greek austerity measures. For the market to gain further momentum, the UK must see better economic data. The only other saving grace for the Pound would have to come to an impasse in the US debt ceiling fight through the deadline. Technically, the Pound has to cross through and hold the 1.6125 level to garner further technical momentum. Otherwise, Sterling bears may come out in full force. Given the hefty currency option premiums, some traders may opt to consider trading the futures market instead, for example buying the September British Pound on a stop at 1.6150, or selling the September Pound at a stop at 1.5875.

Fundamentals

The British Pound found a bit of life during the past week, after the Greek austerity packages and loans were approved. Many traders are now wondering whether this bounce in the Sterling is temporary, or if the tide is about to turn. One of the major problems facing the Pound is the UK's economy relative to Euro based neighbors. The British government has been one of the more hawkish governments in the industrialized world in cutting budget deficits, which may be coming at the expense of economic growth. This has led many traders to cut their bets that the UK will raise interest rates as soon and as aggressively as the Euro Zone. The US is in the midst of a major debt ceiling debate, which has had a negative impact on the greenback versus other major currencies recently. The Pound, however, has benefited the least of the majors because of the dim economic outlook. It seems as though the Sterling will need a combination of strong economic data in the UK and further Dollar bearishness to sustain further rallies.

Technical Notes

Turning to the chart, we see the September British Pound contract rebounding at support near the 1.5920 area. Prices are now approaching minor technical resistance at the 1.6125 level. If prices are able to break through 1.6125, the market may find a bit of technical momentum to extend the rally. Prices are below the major moving averages at this point, but are nearing the 20-day moving average. A close above this average could be a signal that a near-term low is in place. Failure to break through resistance and the 20-day, however, could signal that prices could be set to take-out the near-term lows and could be heading toward the mid 1.50's.

Rob Kurzatkowski, Senior Commodity Analyst


July 6, 2011

Oil Rallies Despite IEA Sales

Today's Idea Wednesday, July 6, 2011

It appears that Oil prices have found support just below the 90.00 level in the August futures, as prices have rebounded sharply from the recent lows. However, it may be difficult for the rally to move prices significantly above the 100.00 level, at least in the near-term, unless we see significant signs of improving economic data in both the US and in Asia. This sets the stage for a possible price consolidation in the Crude Oil market. With less than two weeks until expiration, some traders may wish to explore selling strangles in August Crude Oil futures options, with strike prices below support at 90.00 and above 100.00. For example, with August Crude Oil trading at 97.20 as of this writing, the August 105 calls and the August 88 puts could be sold for 0.22, or $220 per spread, not including commissions. The premium received would be the maximum potential profit on the trade, which would be realized at option expiration on July 15th, should the August futures be trading above 88.00 and below 105.00.

Fundamentals

Crude Oil bulls certainly appear to be a resilient bunch, as futures prices have rallied during the past several sessions and are now trading higher than the day the IEA announced the sale of 60 million barrels of Crude from strategic reserves. The US auction of 30 million barrels of "light sweet" Crude from the SPR was well received, with several bidders interested in purchasing this high grade Oil, which could be an indication that global demand remains relatively strong. The recent stock market recovery may also be adding support to the Oil market, as there has been a recent correlation between energy and equity prices. A better than expected report on U.S. factory orders for May, which increased by 0.8%, added to the recent bullish sentiment. We may be seeing short-covering buying emerge, as prices failed to close below support at $90.00 in the August futures, which now should act as major support for lead month contracts. The most recent Commitment of Traders report shows both large and small speculators cut their net-long positions significantly last week, with just over 30,000 contracts closed out for the week ending June 28th. We may be seeing these speculators now buying back these long positions, as prices failed to move lower. Next up for Oil traders will be the weekly EIA energy stocks report due out at 10 am Chicago time on Thursday, due to the 4th of July holiday, as well as the highly anticipated Non-farm Payrolls report for June to be released on Friday. We will need to see positive readings from both reports to keep the bullish momentum going.

Technical Notes

Looking at the daily chart for August Crude Oil, we notice prices closing above the 200-day moving average for the first time since June 14th. Prices have moved back into the previous trading range between 95.00 and 105.00, and the 14-day RSI has turned up with a current reading of 51.36. The move to 2011 lows may have formed a 'V-shaped" bottom and, if true, may set the stage for another run at taking out psychological resistance at 100.00 per barrel. On the charts the next major resistance point is not found until the May 11th high of 105.52, with chart support seen at the June 27th low of 89.61.

Mike Zarembski, Senior Commodity Analyst


July 7, 2011

What's Next for Oil?

Today's Idea Thursday, July 7, 2011

Crude Oil has bounced back, after falling to levels that could be seen as oversold and too low near the 90.00 level. Traders are now left with the question of where prices are heading over the near-term. Fundamentals are a mixed bag for Oil traders, so the inventory report today and the non-farm number tomorrow will be closely watched by many traders to set a near-term direction. Technically, the bull camp has the edge in recent trading, but the bulls' momentum could be fading. Some traders may choose to take on a neutral strategy, such as a short strangle -- for example, selling the August Crude Oil 94 put and selling the August Crude Oil 104 call for a credit of 0.75, or $750. The maximum profit would be the initial credit and the trade has unlimited risk. Traders may choose to mitigate some of this risk by buying double the number of long 89 put/109 call strangles at 0.13, or $260 for every short strangle put on. Another alternative would be to close the short strangle if the market breaks 104 to the upside or 94 to the downside.

Fundamentals

Crude Oil futures are higher this morning ahead of the EIA report, which is expected to show a drawdown for the fifth consecutive week. The Oil market had corrected sharply during the month of June, and it looked as though prices may have been heading below the $90 level. However, stronger equity prices and the belief that lower Oil prices will lead to a quick reversal in demand have caused prices to reverse course. Many traders have also greeted Greece's passage of austerity measures and acquisition of loans by taking on risk once again in stocks and commodities. This reversal from risk aversion to risk-taking, however, could be short-lived. Economic data in the US and Europe has been weaker than many would like. The People's Bank of China once again raised interest rates 25 basis points in an effort to cool commodity demand. Thus far, China has been unsuccessful in cooling commodity demand domestically and may refocus its attention to curbing the cost of non-food commodities, such as Crude Oil and base metals. Tomorrow's release of non-farm payroll data will likely be a market-mover. If the US economy was able to add more jobs than expected, bulls may feel emboldened. However, if the US sees weaker than expected job growth, traders' appetite for risk could quickly fade.

Technical Notes

Turning to the chart, we see the August Crude Oil contract bouncing off of the 90.00 market after several tests. Prices have cleared resistance at the 95.00 mark and are now approaching the 100.00 level. If prices are able to clear the $100 hurdle, the next level of resistance comes in at 103.88. The recent closes above the 20-day moving average suggest that a near-term low may be in place. If prices fail to take-out resistance at 100.00, prices could gravitate between 95.00 and 100.00 in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


July 8, 2011

Good News for Jobs = Bad News for Bonds?

Today's IdeaFriday, July 8, 2011

With Bond futures prices on the defensive and major support hovering less than a point away, traders with a bearish bent may wish to explore futures options strategies that will benefit from a continued decline in prices. An example of one such strategy would be the purchase of a bear put spread. For example, with September Bond futures trading at 123-00 as of this writing, the September Bond 122 puts could be bought and the September Bond 119 puts sold for 56/64ths, or $875 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential gain of $3,000 minus the premium paid which would be realized at option expiration in August should the September Bond futures be trading below 119-00.

Fundamentals

Better than expected data on the jobless front put Bond bulls on the defensive, as Treasury Bond futures prices continue to decline, hovering just above 2-month lows. On Thursday, the Labor Department announced that new jobless claims fell by 14,000 last week to a seasonally adjusted 418,000. This was a larger drop then many analysts expected and was supported by a 43,000 decline in continuing claims, which now stand at 3,681,000. The employment outlook was also buoyed by the forecast from ADP/Macroeconomic Advisers which reported that private sector jobs increased by 157,000 in June, which is well above the 95,000 jobs analysts were expecting. This positive data may up the estimate for this morning's release of the June Non-farm Payrolls report. The current estimate is for an increase of 80,000 jobs last month, which would be up from May's totals and a 54,000 increase. Signs of an improving labor picture are adding support to equities at the expense of Treasuries, as investors move assets towards more "risky" investments. In addition, Oil prices are once again approaching the psychologically important $100 level, which may spark inflation fears, especially if there are signs of improvement in the labor sector. As the" deadline" approaches for Congress to raise the debt ceiling, there are some reports of "compromise" from both sides, which has many traders feeling more confident that a deal to address the budget deficit will be reached. This could translate into more funds being moved into equities, or even commodities, and away from the "safe haven" of Treasuries and the US Dollar.

Technical Notes

Looking at the daily continuous chart for Treasury Bond futures, we notice prices have fallen below both the 20 and 200-day moving averages. In addition, there appears to be a "bear flag" formation occurring during the past few sessions, as prices have moved off the recent lows, but on lower than average volume. This technical pattern will be confirmed should prices move lower and trade below the lower trend-line of the "flag" on high volume. The 14-day RSI has turned lower, with a current reading of 40.93. Support for September Bonds is seen at the June 30th low of 122-05, with resistance found at the June 24th high of 127-01.

Mike Zarembski, Senior Commodity Analyst


July 11, 2011

So Much for a Stronger Jobs Report!

Today's Idea Monday, July 11, 2011

Friday's "reversal" day in the daily chart for the September E-mini S&P futures may have taken the steam out of the nearly 100-point rally we have seen since the end of June. Some traders expecting Friday's high of 1354.50 to hold, at least for the next several days, may wish to explore selling calls in E-mini S&P futures options. For example, with the September futures trading at 1341.50 as of this writing, the July 1360 calls could be sold for about 3.25, or $162.50 per option, not including commissions. The July options expire this Friday, so time decay is working in favor of option sellers. The premium received would be the maximum potential gain on the trade and would be realized at expiration should the September futures be trading below 1360.00. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. For example, some traders may wish to buy back the options sold prior to expiration should the option premium trade at 3 times the amount originally received for selling the option.

Fundamentals

The Labor Department certainly threw a wrench into equity traders' enthusiasm during the past week, as the June Non-farm payrolls report showed a meager 18,000 jobs were created last month. If that was not bad enough, the figures for May were revised downward to show an increase of only 25,000 jobs. The unemployment rate rose to 9.2%, which is the highest level seen so far in 2011. The private workforce climbed by 57,000 jobs in June, vs. 73,000 jobs created in May. Government employment continued to decline, with 39,000 jobs lost in June, as budget concerns at the state and local government level have pared public sector employment for the 8th straight month. Equity futures fell sharply after the report was released, likely resulting from optimism about yesterday's better than expected ADP private sector employment figures as well as a larger than expected decline in Jobless claims last week. Continued uncertainty regarding the government's inaction on the debt ceiling as well as concerns about consumers' reluctance to spend has businesses hesitant to hire new workers. One does have to wonder why the large discrepancy between the ADP figures and that from the Labor Department, with some economists blaming a seasonal adjustment (to account for summer job hiring) for the overly negative report. However, other aspects in the report, such as a drop in average hours worked and average hourly earnings, would be hard to explain away. Not just equity prices fell after the employment report; Oil prices also fell by over 2%, as traders' concerns about the economic recovery heightened concerns about global Oil demand. Ironically, Gold prices rallied despite a rising US Dollar, which may be a sign that Gold is holding its status as a "safe haven" investment.

Technical Notes

Looking at the daily chart for the September E-mini S&P 500 futures, we notice prices rising to new intermediate highs before falling sharply. Only a last 30-minute rally kept prices from forming an "outside day "reversal. Volume was also relatively light on the recent rally, which may also have some traders questioning the validity of the up-move. The 14-day RSI has started to move lower, with a current reading of 59.81. Support for the September E-mini S&P 500 is seen at the 20-day moving average, currently near the 1294.50 level, with resistance seen at Friday's high of 1354.50.

Mike Zarembski, Senior Commodity Analyst


July 12, 2011

Italy Rocks Euro

Today's Idea Tuesday, July 12, 2011

The Euro faces a new set of challenges with Italy's debt problems rising to the surface. The nation has the second highest debt to GDP ratio in the EU behind Greece, and Italy's GDP is over six times that of Greece. A debt compromise in the US could pave the way for further advances by the US Dollar versus the Euro. The close below the 1.40 mark yesterday could signal a technical breakout, but further technical confirmation is needed. Some traders may wish to consider looking for further downside in the Euro by entering into a bear put spread, for example, buying the August 138 puts and selling the August 1.36 puts for a debit of 0.0050, or $625. The trade risks the initial cost and has a maximum profit if $1,875 if the underlying September futures contract closes below 1.36 at expiration.

Fundamentals

The Euro was rocked by new concerns of contagion, after the EU held an emergency meeting to discuss distressed Italian debt. Italy was not in the same spotlight that Greece, Ireland, Portugal and Spain found themselves in recently. In fact, when discussing the Greek bailout, some EU policymakers had actually used Italy as an example of a nation that was making necessary concessions and reforms to other distressed nations. This is why the news of the emergency meeting had rocked the Euro to the extent that it did. The EU realizes that it must quash Italian concerns quickly to prevent yields from exploding, which would slow economic growth and make further bailouts of European states more expensive and difficult. Dragging their heels could result in further declines in the Euro. On the other side of the Atlantic, the US faces its own debt problems in the form of the debt ceiling debate. It appeared that significant progress had been made over the weekend, but both parties ultimately could not come to a compromise. If the US is able to come to an agreement over the debt ceiling, the greenback could extend its gains over the Euro. Failure to compromise would force traders to make extremely tough decisions, which could wreak havoc on the currency markets and cause extreme volatility.

Technical Notes

Turning to the chart, we see the September Euro contract closed below support at 1.4000, although not in very convincing fashion. Many traders will likely be looking for a more significant close below support before accepting a downside breakout has taken place. Friday, the Euro closed below the 100-day moving average, and yesterday's close marked a significant close below the average, which can likely be seen as a negative. The RSI indicator is nearing oversold levels, which may offer some buying support for the market. However, some traders may wish to note that some downside breakouts can be more explosive when the indicator is oversold.

Rob Kurzatkowski, Senior Commodity Analyst


July 13, 2011

Mixed Messages in July USDA Crop Report

Today's Idea Wednesday, July 13, 2011

Among the three major grain contracts, Corn futures appear to have the best upside potential, especially after the recent sell-off in prices spurred renewed buying out of China. In addition, there are still doubts as to the accuracy of the USDA Corn acreage estimate, with many traders believing the USDA overstated the amount of Corn that was planted. Given the potential volatility in the grain markets as the growing season progresses, some traders may wish to explore option strategies to play-out their bullish or bearish biases. For example, those traders who are bullish on Corn may wish to explore buying a bull call spread in new-crop December Corn options. With the December contract trading at 642.00 as of this writing, the December 700 calls could be bought and the December 800 calls sold for about 19 ½ cents, or $975 per spread, not including commissions. The premium paid would be the maximum risk on the trade which has a potential profit of $5,000 minus the premium paid which would be realized if December Corn is trading above 800.00 at option expiration in November. More aggressive trades may wish to sell an out-of-the-money put as well, to help offset the cost of the bull call spread.

Fundamentals

There was something for both bulls and bears in the July USDA Crop Production and Supply/Demand report released on Tuesday morning. For Corn, the USDA raised old crop ending stocks to 868 million bushels, which is up from the June forecast, but nearly 50 million bushels below the average pre-report estimate. New- crop ending stocks were also raised to 870 million bushels, vs. 695 million bushels in the June report. The USDA did raise its estimate for Ethanol usage by 100 million bushels, as well as its estimate for US exports to 1.9 billion bushels, mostly on the assumption that Chinese Corn exports will increase. Average Corn yields were left unchanged at 158.7 bushels per acre, but some analysts believe this average yield estimate may be too high given the hot dry weather forecasts for the Midwest -- especially in areas where the crop is in the pollination phase. The Soybean figures were generally bearish, as the USDA raised its old-crop ending stocks estimate by 20 million bushels from June's report, and it lowered its estimate for US exports by a similar 20 million bushels. New-crop ending stocks were lowered to 175 million bushels, but were still above analysts' estimates. Global Soybean carryout was bearish, rising to 65.8 million tons, as large crops out of Brazil and Argentina aided the global supplies. However, bulls will point to the lower estimate for the US 2011-12 crop, which the USDA estimated at 3.85 billion bushels, which is down 60 million bushels from the June report. Many traders were definitely shaking their heads at the data on Wheat, as the USDA raised their estimate for all Wheat production to 2.106 billion bushels, vs. 2.058 billion bushels in the June report. More surprising was the increase in estimated US Wheat exports by 100 million bushels, as most traders expected US exports to decline now that both Ukraine and Russia are back in the export market. The USDA estimated US Spring Wheat production at 550.7 million bushels.

Technical Notes

Looking at the daily chart for December Corn, we cannot help but notice the "spike" bottom formed on July 1st, the day following the USDA planted acreage report, which sent Corn futures "down-the-limit". Since the lows were made just above the 575.00 area, December Corn has rallied nearly 70 cents per bushel. Prices are now attempting to close above the 20-day moving average, which if successful may trigger additional short-term momentum buying. Prices are also testing the downtrend line drawn from the contract high made back on June 9th. The 14-day RSI is turning up and moving into neutral territory, with a current reading of 49.25. The only negative technical sign is that trading volume has been light on the recent price recovery. Support for December Corn is seen at the "spike" low of 575.50, with the next resistance area found at the June 29th high of 671.75.

Mike Zarembski, Senior Commodity Analyst

July 19, 2011

European Debt has Traders Going for the Gold

Tuesday July 19, 2011

It seems as though the stars have lined up for the Gold market. Economic conditions in the US and debt concerns in Europe have traders on the defensive. Also, these issues have tied the hands of central banks to combat inflationary pressure, as inflation has moved to the back burner. Technically, the breakout to new all-time highs has emboldened market technicians. Because the market is reaching new heights, some traders may prefer entering into an option strategy with limited risk. Some traders may possibly wish to consider buying the September Gold 1610 calls and selling the September Gold 1650 calls for a debit of 15.00, or $1,500. The trade risks the initial cost and has a maximum profit of $2,500 if the underlying October contract closes above 1650 at expiration.

Fundamentals

Gold prices continue to move higher, advancing to new record highs on European debt concerns. Many traders have also taken their cue from Fed Chairman Bernanke's testimony last week, where the prospect of QE3 was not taken off the table. Investors find themselves in a difficult situation, as there are very few places to put their money: sitting in cash is sitting in a depreciating asset, treasury yields have offered very minimal returns and the stock market is a risky venture given the current state of the economy. Gold also has an advantage over other commodities because it is not as elastic and economically sensitive. The concern for Gold traders is slow economic growth leading to slow inflation. A sharp economic regression favors Gold, as does explosive economic growth. Some traders may be a bit concerned that Gold has marched higher for ten consecutive sessions without pulling back. With the new record high taking the price of the metal into uncharted territory, many traders may have a difficult time finding their bearings and may be tempted to take profits as a result.

Technical Notes

Turning to the Gold chart, we see the August contract rallying to take out the 1600 level, which can be seen as a technical milestone. The next logical stop for the Gold market may be the 1650 level, as traders typically see the $50 and $100 marks as technically significant. Given the fact that this is uncharted territory, prices may gravitate toward this level in the near-term. The RSI indicator has crossed into overbought territory, which could result in sluggish trading activity or some profit-taking.

Rob Kurzatkowski, Senior Commodity Analyst


July 20, 2011

Coffee Cools as Frost Fears Abate

Wednesday, July 20, 2011

The potential for Coffee prices to move into a trading range market the next few weeks may spur some traders to explore the sale of strangles in Coffee futures options. For example, with September Coffee trading at 245.35 as of this writing, the September Coffee 280 calls and the September Coffee 225 puts could be sold for about 2.00, or $750 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration during the second week of August should September Coffee be trading above 225.00 and below 280.00. Given the potential risks involved in selling naked options, traders may wish to have a exit strategy in place should the trade move against them. One such strategy could be to buy back the options sold prior to expiration should the option premium trade at 3 times the premium received for selling the options originally.

Fundamentals

The bull market in Coffee prices has turned cold, ironically due to the lack of freezing temperatures in the Coffee growing regions of Brazil. Many traders are starting to remove some of the "risk premium" in Coffee futures prices, as weather forecasters are calling for warmer temperatures through the end of the month. With only about a month to go in the "peak" frost and freeze season, weather conditions appear to be ideal for the upcoming harvest. Also pressuring Coffee prices was the continued move away from so called "risky" assets, such as commodities, due to the continued concerns over the European debit crisis and the lack of definitive plan to deal with the US debt situation. Many bulls continue to hold-on to the fact that Brazilian Coffee production is expected to be lower this season, due to this being the "down" year in the biennial production cycle that affects Arabica Coffee trees. High quality Coffee stocks remain tight, and unless we see a significant improvement in the production totals out of Central America and Columbia, we could see prices rebound later this year, as roasters and other end users may be forced to "pay-up" to obtain high quality beans.

Technical Notes

Looking at the daily chart for September Coffee, we notice prices failed to hold above the 200-day moving average, which is viewed by many technical traders as the indicator of whether a market is bullish or bearish. The 14-day RSI has turned neutral to weak, with a current reading of 40.87. Should prices hold above the recent low just above the 240.00 level, we may start to see prices begin to move sideways until the end of the frost season when traders can get a better picture as to the potential size of the Brazilian Coffee crop. Support for September Coffee is seen at the June 23rd low of 241.45, with resistance found at the July 7th high of 271.90.

Mike Zarembski, Senior Commodity Analyst


July 21, 2011

Mass Confusion for Oil Traders Leads to Consolidation

Thursday, July 21, 2011

The Crude Oil market continues to gyrate between the 95.00 and 100.00 levels, giving traders no definitive sign of a breakout. The bias, if any, would be with the bull camp, as many traders, especially long-sighted traders, are inherently bullish. Inventory levels continue to be a concern for many traders, notching seven consecutive drawdowns, but economic data has lagged. Technically, the chart gives no hints to the future direction of the market. Normally, some traders would look to enter into some sort of non-directional short option strategy based on the present conditions, but the seemingly immanent breakout makes this extremely risky. This risk, coupled with extremely low volatility priced into the options, could make a debit spread strategy seem a bit more logical. Some traders may perhaps wish to consider buying the September Crude Oil 100 call and selling the September 102.5 call for a debit of 0.75, or $750. The spread risks the initial cost and has a max profit of $1,750 if the underlying Sep contract closes above 102.50 at expiration.

Fundamentals

Crude Oil futures have pulled back a bit this morning, after Chinese manufacturing data showed a contraction in activity. The Oil market has been a bit tough for many traders to read lately, as investors have seen softer economic data trickling in from various parts of the world. At the same time, inventory levels continue to drop in the US, falling for the seventh consecutive week. The decline in US inventories has kept the price of Crude in the high 90's, but EU debt concerns, soft economic data in the US, and a mix of opinion on the Chinese economic outlook all have had traders on edge and have kept prices from crossing the century mark. The choppiness of the currency markets, which is often a deciding factor when data is mixed, has done little to offer clarity. Given the tight inventory levels, some traders may want to keep a close eye on upcoming US economic numbers, as even a modest uptick in data could result in a breakout back above the $100 a barrel mark. Further weakening in US economic data, especially employment numbers, coupled with an inventory build, could take prices into the low 90's.

Technical Notes

Turning to the chart, we see the September Crude Oil chart trapped in a sideways range between 95.00 and 100.00 for the entire month of July. Breakouts out of an extended consolidation period like this tend to be on the explosive side, but direction is difficult to predict. That being said, the Crude Oil chart shows quite a bit of congestion immediately outside of this range. On the downside, additional support comes in at 92.00 and 90.00, while resistance comes in at 102.70 and 105.00 on the upside. The 20 and 50-day moving averages have lost their significance because of the choppy sideways trading, but the 100-day average still has relevance near the 102.00 level. The oscillators remain neutral, giving no hint of an imminent breakout.

Rob Kurzatkowski, Senior Commodity Analyst

July 22, 2011

Will Bulls' Sugar Buzz Start to Fade?

Friday, July 22, 2011

Although current Sugar supplies remain tight, there is still potential for a large surplus later this season once the Northern Hemisphere production begins. If true, we could see supplies flood the market, as producers try to capture current high prices. Some traders who anticipate the current supply tightness will be elevated may wish to consider bear spreads in more deferred Sugar futures contract months. An example of one such trade would be selling the May 2012 Sugar futures and buying the July 2012 Sugar futures. Currently, the May contract is trading at a 1.13 cent premium to the July contract and holders of this bear spread would wish to see the May premium narrow, or even move to a discount to the July futures.

Fundamentals

The past few months have been a dream for Sugar bulls, as prices have surged over 10 cents per pound since early May, as near-term tightness tied to disappointing production out of Brazil has buyers scrambling to obtain supplies to meet near-term needs. The 2011-12 season was expecting to see the Sugar market move to a production surplus for the first time in 3 years -- possibly as high as 9 million tons. However, Brazil, who is the world's largest Sugar producer, has had some production difficulties this season, and many traders are expecting Unica, Brazil's sugarcane industry association, to lower its production estimates from the 32.38 million tons reported earlier this year. With Brazilian Sugar production running below expectations, near-term supplies have turned tight, causing the Sugar futures market to move into a backwardation, with the front month October contract trading at a premium to the more deferred contract months. China's June Sugar imports fell sharply, as high prices have started to curtail demand. However, the country is still expected to increase imports later this season, as domestic demand continues to outpace internal production. If we look longer- term, crop condition for northern hemisphere producers is looking good, and we could still see large supplies coming to market starting in the 4th quarter of 2011, especially from India, who appears to have rebounded from several years of poor Sugar production. In addition, there is talk in Brazil of lowering the amount of ethanol used in gasoline from 25% cane ethanol to possibility less than 20%, which could free-up additional cane to go into Sugar production, rather than being used for fuel. Production out of the Philippines is up 21% from year ago levels and may help to elevate some of the near-term tightness.

Technical Notes

Looking at the daily chart for the lead month October Sugar futures, we notice how nicely the recent rally has held prices just above the 20-day moving average. Last week's "reversal" day seems to have kept further price increases in check, with the market starting to show signs of consolidation between the 20 and 30 cent price levels. Volume is starting to decline as prices consolidate, as traders await a breakout or breakdown from the current price zone. The 14-day RSI has dropped below overbought levels (RSI readings above 70 are considered overbought), but is still reading a strong 67.43. The bottom of the recent price range of 28.20 looks to be near-term support for October Sugar, with resistance found at the contract high of 31.33.

Mike Zarembski, Senior Commodity Analyst


July 25, 2011

Why Your Steaks May Cost More Next Year!

Monday, July 25, 2011

Some traders anticipating higher Live Cattle prices in early 2012 may possibly wish to consider buying a bull call spread in Live Cattle futures options. For example, with February Live Cattle trading at 122.425 as of this writing, the February 124 calls could be bought and the February 134 calls sold for about 3.20, or $1,280 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade which has a potential profit of $4,000 minus the premium received, which would be realized at option expiration should February Live Cattle be trading above 134.00.

Fundamentals

The recent heat wave that struck the central portions of the US over the past several days has played havoc with livestock production - and particularly Cattle producers, who are facing the dilemma of both heat-stressed Cattle and drying pasture lands. These issues are forcing young Cattle to market faster than anticipated and at a lighter weight. The upshot of this is that the supply of beef is increasing at the same time that consumer demand is falling due to the high heat, which is hurting the demand for protein for the summer grilling season. High feed prices have also curtailed the size of the US Cattle herd, which was made evident with the release of the USDA's semi-annual Cattle inventory report released this past Friday. The report showed the US Cattle herd totaled 100 million as of July 1st. This is 99% of last year's levels and just over 3% below the 5-year average. The monthly Cattle on Feed report showed the number of Cattle in feed lots increased to 104% of last year's totals in June, and Cattle placements were also up 4% as lack of good grazing land forced Cattle into the feedlots. The report was bearish for front-month futures, according to many traders, as it should assure higher supplies of Cattle to market in the near-term. However, a declining Cattle herd may lead to a potentially tight beef supply situation heading into next year, which could lend support for winter month Cattle futures and, unfortunately, a costlier steak dinner in 2012.

Technical Notes

Looking at the daily chart for October Live Cattle futures, we notice the recent sell-off was stopped in its tracks, as prices met the 200-day moving average. However, the short-term momentum still favors the bears, with prices holding below the 20-day moving average. The 14-day RSI has turned neutral, with a current reading of 46.84. Prices are also hovering near the up-trend line drawn from the June 1st lows, and a close below this trend-line as well as below the 200-day moving average would likely put bears firmly in control. However, should prices hold above both these key levels, a test of the recent highs near the 122.00 level would not be out of the question.

Mike Zarembski, Senior Commodity Analyst


July 26, 2011

Will the Price of Your Morning Joe Drop?

Tuesday, July 26, 2011

Coffee is a prime example of a market that has gotten way ahead of itself, as many traders seem to have taken the idea that new crop Coffee would have the same supply-side issues as old crop Coffee and run with it. The current crop, barring weather issues, will likely alleviate any remaining supply tightness. Technically, it looks as though the December Coffee contract is close to confirming a head and shoulders top pattern. Despite these seemingly ominous signs, the current supply situation could make the bulls spring into action quickly if any crop damage is seen. For this reason, some traders may possible want to take a longer-term approach with limited risk, such as a bear put spread. For example, some traders may wish to consider buying the December Coffee 225 puts and selling the December 200 puts for a debit of 6.00, or $2,250. The trade risks the initial cost and has a maximum profit of $7,125 if the price of the December Coffee futures close below 200.00 at expiration.

Fundamentals

Coffee futures have gone from a high-flying commodity to a laggard over the course of several months. Expectations of tight crops have now given way to what is anticipated to be a record crop in India. This is the tail end of the Coffee frost season in Brazil, and barring the unforeseen, we could see a very large Brazilian crop. While the future looks as though supplies are going to loosen-up considerably, the current cash market in Coffee remains extremely tight. Many exporters could be tempted to take advantage of the relatively high price of Coffee and begin selling their reserve stocks. This could have an extremely bullish effect on the market if current crops see inclement growing weather. The market may find positive price support from a weaker US Dollar, especially if no deal is reached during the current debt ceiling impasse.

Technical Notes

Turning to the chart, we see the price of December Coffee steadily falling since May. It looks as though the December chart is showing the makings of a head and shoulders top with a sloping neckline. A downward breakout from the pattern could result in prices falling well below the 200.00 mark. Currently, there is a band of price support just north of the 225.00 level, but more substantial support does not come in until 190.00. The market is currently trading below the three major moving averages, and prices will likely have to convincingly close above the averages to gain upward momentum. The RSI is currently at oversold levels, which could provide some relief for the Coffee market.

Rob Kurzatkowski, Senior Commodity Analyst

July 27, 2011

No Soft Landing for Cotton!

Wednesday, July 27, 2011

Some traders who are looking to try to pick the low in December Cotton may wish to explore the purchase of a bull call spread in Cotton futures options. For example, with December Cotton trading at 100.25 as of this writing, the December 105 calls could be bought and the December 110 calls sold for about 1.80, or $900 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade and has a potential profit of $2,500 minus the premium paid which would be realized at option expiration in November should December Cotton be trading above 110.00. Some more aggressive traders may wish to explore selling an out-of-the-money put as well, to help offset the premium paid on the bull call spread.

Fundamentals

"What a difference a year makes!" That has to be the refrain of Cotton traders who are witnessing the historic fall from all-time highs at well over $2 per pound to a new crop December contract now trading below $1 per pound. Record high prices have certainly curtailed demand for Cotton, with buyers holding off on purchases awaiting new-crop supplies to come to market and sharply lower prices than a year ago. India is expected to produce a large Cotton crop this year, which would add another competitor to the US for the export market. Given record high prices, many expected to see a US Cotton production increase; however, Mother Nature had other ideas, as a severe drought in Texas has the Cotton crop there in dire straits. The weekly crop progress report released on Monday afternoon had the US Cotton crop rated 29% good to excellent, which is down from 68% this time last year. The ratings in Texas were even worse, with only 13% of the crop rated good to excellent and nearly 60% rated poor to very poor. Only timely rains in the southeastern parts of the Cotton growing region are keeping the good to excellent ratings as high as they are. Long liquidation selling has kept futures prices weak, but there are now some signs that the market may be forming a base just below 100.00 in the December contract. The most recent Commitment of Traders report shows large and small speculators starting to add back to their net long positions after several weeks of liquidation selling. Many traders will also keep a close eye on the weekly export figures to see if fresh buying out of Asia, and particularly China, begins to emerge now that prices have fallen below $1.

Technical Notes

Looking at the daily chart for December Cotton, we notice that the market made a head and shoulders top, and when the "neckline" was broken to the downside, prices plummeted. The 20-day moving average crossed below the 200-day moving average, which is most commonly viewed as a negative indicator for prices. For the bulls, we do see a bullish divergence forming in the 14-day RSI, which has also moved out of oversold territory with a current reading of 32.53. Tuesday, upside reversal in prices after reaching yearly lows may find additional buying by bears covering their short positions after Tuesday's limit-up move. Support for December Cotton is seen at Tuesday's low of 93.20, with resistance found at the 20-day moving average currently near the 107.50 area.

Mike Zarembski, Senior Commodity Analyst


July 28, 2011

In a Bond State of Mind

Thursday, July 28, 2011

Even if a compromise (a word seemingly not part of either party's vocabularies) is reached, Bond market fundamentals may remain mixed. This suggests sideways and choppy trading ahead for Bond prices. It is difficult to see prices test 130-00 without a global economic meltdown. Technically, Bonds remain neutral with a slight downward bias, given the inability of the market to breakout above 127-00. Choosing a direction for the market may be difficult, which is why some traders may perhaps opt to enter into a short call position, like, for example, possibly selling the September Bond 129 calls for a credit of 0-36, or $562.50. The maximum profit would be the initial credit and the trade has unlimited risk. To mitigate this risk, some traders may want to consider exiting the short call position on a close above 128-00. Also, some traders may want to consider a gamma hedge by buying several 133 calls at 0-05.

Fundamentals

Bond futures have been trading sideways to lower over the course of this month, largely due to the debt ceiling debate. The fundamental tug-of-war has been a source of confusion for many traders. On one hand, failure to reach an agreement on a debt ceiling plan would likely be seen as a huge negative for treasuries because of the inevitable downgrade to US debt and concern over coupon payments. On the other hand, the trouble in the US has been overshadowed by European debt concerns. The possibility of default and/or missed interest payments is much greater in Europe than in the US, which could be a boost for Bonds. Also, the current state of the economy has been a major concern for many traders, which could be seen as supportive, but may not necessarily drive prices higher. The current higher price of Bonds (and low yields) suggests that there would have to be a genuine panic similar to 2008 for prices to move much higher.

Technical Notes

Turning to the chart, we see the September Bond contract continue to trade in a tight range between 125-00 and 127-00. The 127-00 mark has been a major hurdle for Bonds, with prices failing to break through, despite numerous attempts to break out. Thus, this likely should be considered critical resistance. A breakout below 125-00 suggests that prices could come down to test 122-16. Failure to hold 122-16 would be a major technical setback for the Bond market, as it would signal a double-top and could result in a full-on meltdown in prices. The 20 and 50-day moving averages are now just north of the 125-00 mark, which would make a downside breakout all the more negative.

Rob Kurzatkowski, Senior Commodity Analyst