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August 2011 Archives

August 1, 2011

Is There Some Good News to the US Debt Ceiling Debate?

Monday, August 1, 2011

If we assume that our political leaders will come to an agreement to raise the debt ceiling, we may see a "relief" rally in the equity markets, especially given the recent sell-off. With the VIX having risen to over 25 on Friday, option premiums may be relatively attractive to traders looking for option selling strategies. For example, with the September E-mini S&P trading at 1288.50 as of this writing, the August 1210 puts could be sold for about 10.00, or $500, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration on August 19th should the September E-mini be trading above 1210.00.

Fundamentals

With the August 2nd debt ceiling deadline fast approaching, it appears that our political leaders in Washington, much like a high school student with a term paper coming due, are finally getting serious about coming up with a plan to raise the debt ceiling, as well as finding areas to cut spending to help control our widening national debt. The current talk is of nearly 3 trillion in cuts divided over two stages, with the first stage cutting 1 trillion dollars and the second stage calling for 1.8 trillion dollars in cuts that will be recommended by a special committee of Congress. Should this proposal finally pass both houses of Congress and be signed by the President, the markets can finally breathe a sigh of relief as the US does not do the unthinkable and default on its sovereign debt. It is likely that most traders never really considered that the US would not come to some agreement on raising the debt ceiling, and there is some evidence that played out, as US Treasury securities rallied sharply on Friday. Not the reaction most people would expect if the market believed the US would actually default on its debt payments! What may be a bigger concern for the market is the potential downgrade of the triple-A credit rating by at least one of the major credit agencies. This could occur even with an agreement on raising the debt ceiling if one or more of the ratings agencies believed that not enough has been proposed to actually deal with the rising account deficit. Here is where possible market scenarios become hazy. One guess is that interest rates on the US Government debt would rise to mirror the lower debt rating. However, what major alternative is there to US Treasuries given the enormous size of the debt market? Euro bonds certainly could be considered, but the EU certainly has its hands full with its own debt issues. Japan's economy has a myriad of issues including a Debt to GDP ratio more than double that of the US! If we look at what occurred in the past when the credit ratings were cut to other western nations' debt, such as Canada and Australia, we see that this was actually a wake-up call for these countries' political leaders and actions were finally taken to address their nations' finances. Though it did take some time, both countries finally did receive their triple-A ratings once again, and both countries' finances are now on a much more solid footing. Should the same scenario happen to the US credit rating, we can only hope for a similar outcome!

Technical Notes

Looking at the daily continuation chart for the E-mini S&P futures, we notice prices testing the 200-day moving average but not closing below this key indicator. The 14-day RSI has turned weak, with a current reading of 41.10. Looking longer-term, it appears that the S&P may be in the midst of a consolidation phase, with 1240.00 on the downside and 1375.00 on the upside. The next support point is seen at 1257.00, with resistance found at 1347.75

Mike Zarembski, Senior Commodity Analyst


August 2, 2011

Manufacturing Sinks Crude

Tuesday August 2nd

The indecision over the debt ceiling set the negative tone for Crude Oil over the past week. If a deal is put into law, the weak ISM manufacturing data may have a more lasting impact on the Crude market, as this is clearly a sign of economic regression. Technically, the September Oil contract has broken through the lower end of the tight 95-100 trading range the market found itself in for much of July. Some traders may possibly wish to consider selling a September 102 call for a premium of 0.35, or $350. The trade has unlimited risk, so some traders may want to exit the position on a close above $100 in the September futures contract.

Fundamentals

Crude Oil futures suffered a setback in recent sessions due to the difficult debt ceiling discussions and poor manufacturing data. Even the tentative agreement reached over the weekend left many traders jittery, because every time a deal was seemingly done, it fell apart. The ISM manufacturing data released yesterday quickly quashed any momentum built by the weekend debt deal. The report showed manufacturing slowing to the lowest levels in two years and could be interpreted as possibly being one of the first concrete signs that the economy is heading toward a double-dip recession. Expectations that demand will continue to increase as part of the economic recovery appeared to be the main reason prices snapped out of the 70-80 range late last year. Regression may cool demand considerably, which could suggest a neutral to negative bias for the Crude market. In addition to the demand outlook being on shaky ground, supplies may be set to increase in the US. We saw seven straight weeks of inventory drawdowns before last week's surprise build. We may now see stocks being replenished in coming weeks. It is important to note that there is a tropical storm brewing in the Caribbean, which could strengthen to hurricane levels and target Florida. It is not expected to interrupt supplies, but that could change depending on severity and the route the storm takes.

Technical Notes

Turning to the chart, we see the most recent upswing in prices that began in late June fizzling out as the market approached the 100 level. Yesterday's close took-out the low end of the range that Oil has been in for several weeks at 95.00. This suggests prices may be slated to test relative lows near the $90 level. This is a make or break level for Oil on the downside, as the market must hold here to avoid a significant downside breakout.

Rob Kurzatkowski, Senior Commodity Analyst


August 3, 2011

Aussie Dollar Overvalued?

Wednesday, August 3, 2011

A look at the daily chart for the Australian Dollar futures shows major chart support near the 1.0280 area. Some traders who anticipate that this key level will hold may wish to consider exploring selling puts in Australian Dollar futures options with strike prices below this support level. For example, with the September futures trading at 1.0772 as of this writing, the September 1.0250 puts could be sold for about 0.0040, or $400 per option, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in September should the Australian Dollar be trading above 1.0250.

Fundamentals

Is the Australian Dollar overvalued? That is the opinion of the International Monetary Fund (IMF), which believes that the currency from down under is as much as 20% overvalued. Much of this belief comes from the fact that many traders are flocking to the Aussie due to its much higher benchmark interest rate (currently 4.75%) compared to other major global economies. This makes the Aussie a favorite lending currency in so called "carry trades", where traders borrow funds in a lower yielding currency such as the US Dollar or Japanese Yen, and then lend in a much higher yielding currency such as the Australian Dollar. In addition, Australia also has the benefit of its proximity to China and its ability to supply the world's most populous nation with commodities, which is leading to forecasts calling for between 3 and 3.5% growth rate in 2012. The strong economy in Australia has kept the employment picture robust, with unemployment running just below 5% -- a rate that US political leaders would be envious of. However, the Reserve Bank of Australia (RBA) sees its glass as half empty, as the Central Bank has left its cash rate unchanged at 4.75% in the face of what it believes is slowing global growth prospects. In the statement released after the RBA interest rate decision, RBA Governor Glen Stevens commented on some concerns that the current high exchange rate of the Australian Dollar is starting to hurt some segments of the economy. Some traders interpreted these comments to mean that the RBA would not be raising interest rates in the near-term, which sent the currency down sharply vs. the US Dollar, which has fallen over 250 pips since highs were made last week. In addition, there appears to be a "risk-off" sentiment prevailing in the global markets, tied to continued concerns about slowing global economic growth prospects. If this continues, the Aussie may have further room to fall in the near-term, but longer-term; this may ultimately set-up a buying opportunity once the "fear" trade has subsided.

Technical Notes

Looking at the daily continuation chart for the Australian Dollar futures, we notice, prices failed twice in the past several sessions to take-out the contract highs of 1.1005. Since that time, prices have fallen off sharply. and it appears that a test of the 20-day moving average, currently near the 1.0710 area, is likely. The 14-day RSI has turned lower, and has moved to a more neutral reading of 53.44. There is an uptrend line drawn from the June 27th low that should act as major near-term support near the 1.0650 level, with resistance see at the recent high of 1.1005.

Mike Zarembski, Senior Commodity Analyst


August 4, 2011

Can the Swiss be Stopped?

Thursday, August 4, 2011

The Swiss Franc has become the safe haven currency of choice for many investors, due to Switzerland's isolation from the sovereign debt storm facing Europe. The currency's success could, however, spell doom for Swiss economic growth, and its success could become its undoing. The Swiss National Bank has begun to take action instead of idly sitting by, lowering target rates to zero and expanding its monetary base. Technically, the chart is beginning to show signs that the Franc may be running out of steam, at least in the short-term. Given the recent volatile and explosive nature of the Swiss Franc, options may be a more prudent play over futures. Some traders may possibly wish to consider entering into a bear put spread, buying the September Swiss Franc 1.30 put and selling the September 1.275 put for a debit of 0.0100, or $1,250. The trade risks the initial cost and has a maximum profit of $1,875 if the September futures close below 1.2750 at expiration.

Fundamentals

The Swiss Franc has been the top-performing western currency in 2011, but Zurich is concerned that the currency's meteoric rise will hurt economic growth. Switzerland's political neutrality has resulted in the nation not joining the EU, thus avoiding the debt malaise facing the rest of Europe. The Swiss National Bank decided to be proactive and cut its benchmark interest rate to zero in hopes of cooling off the Franc. Many investors may question whether this will be enough to cool off the currency. After all, it was not favorable interest rate parity that led to the surge in the exchange rate versus the major currencies, but the nation's fiscal responsibility and favorable debt to GDP ratio. The inflows into the Franc are not just short-term defensive or speculative plays. The debt ceiling compromise in the EU and the stop-gap measures to avoid national defaults simply extend problems into the future, without solving core issues. Widening the currency base (essentially quantitative easing) and lowering rates alone may not cool inflows from other currencies, so more proactive measures may have to be undertaken by the SNB to bring the Franc back down to earth.

Technical Notes

Turning to the September Swiss Franc chart, we see prices taking a parabolic shift since the beginning of July. This is a sign that the market could correct sharply, or possibly, enter a period of consolidation. Trying to pick a top, however, can be a very dangerous game to play with an explosive market. Some traders, instead, may wish to look for technical signs of topping followed by confirmation before declaring a top is in place. Yesterday's price action shows what appears to be a hanging-man candle. A hanging-man candle often appears after the market rallies and indicates that the trend may be weakening, or possibly set to reverse in the near-term. A large down candle following the hanging-man could offer confirmation of a reversal. The RSI is in the mid-80's, suggesting that the market is likely overbought. It is interesting to note that the RSI has failed to keep pace with the price of the Franc. The indicator has edged higher while prices moved sharply higher, hinting that the trend could be weakening.

Rob Kurzatkowski, Senior Commodity Analyst

August 5, 2011

Japan Fires the Next Shot in the Currency Intervention War

Friday, August 5, 2011

If history is any guide, the continued intervention in the Forex market by the Bank of Japan ("BOJ") will not be successful in the long run. Some traders who expect the Yen to once again test the highs vs. the US Dollar may wish to explore a diagonal spread in Yen futures options. For example, with the Sep Yen trading at 1.2675 and the December Yen trading at 1.12687 as of this writing, the October Yen 1.3200 call could be bought and the September Yen 1.3000 call sold for about 0.0010, or $125 per spread, not including commissions. The hope of traders holding this spread is for the Yen to slowly move higher but remain below 1.3000 at the September option expiration approximately one month from now. At that point, traders would want the October option to gain on the September option, so they could either close-out the trade or hold onto the October option in hopes that the Yen would continue to increase in value.

Fundamentals

Having been given some cover from the Swiss National Bank, the BOJ intervened in the Forex market overnight, selling an estimated 1-trillion Yen to help stop the currency's surge in value. The strengthening Yen has been a major challenge for the country's struggling economy, as a strong Yen makes the country's exports more expensive for foreign buyers which has dramatically hurt corporate profits. In addition to the currency intervention, the BOJ also announced that it would continue its purchases of financial assets, such as corporate and government debt, to help keep down interest rates. The intervention caused the value of the Japanese Yen vs. the US Dollar to fall by nearly 4% at its peak, with the September Yen futures falling below 1.2500 before rebounding at the start of US trading. Although the BOJ hinted that further action may be taken, many traders still remember the market's reaction to the last BOJ intervention following the devastating earthquake back in March. The Yen fell sharply following the intervention, and then traded lower for the next couple of weeks before moving steadily higher as traders moved funds back into the Yen and the Swiss Franc due to concerns about the viability of the Eurocurrency and the uncontrollable budget deficits in the US, which made these two leading currencies unattractive to global investors. The Yen's decline may be even more short-lived this time around, if this morning's US Non-farm payrolls report does not live-up to traders' expectations. Current estimates are for a gain of 75,000 jobs in July, up from the meager 18,000 jobs gain in June. The unemployment rate is expected to remain steady at 9.2%. Should the payrolls figures come in lower than expected, we may see traders rush back into the Yen and the Swiss Franc, much to the dismay of BOJ and SNB officials.

Technical Notes

Looking at the daily continuation chart for the Japanese Yen futures, we notice the brutal sell-off on Thursday, as the BOJ aggressively sold Yen vs. the USD. However, the session ended with the Yen well off the day's lows, as continued uncertainty in the global economy spurred some buying back into the Yen at much more favorable levels than in prior trading sessions. The 14-day RSI dropped sharply in one session, moving from an overbought reading just over 77 to a neutral level currently just under 50. Even given the 4% decline in the Yen, the market did not touch the uptrend line drawn from the April low, which signals that he current up-move is actually still intact. Major support is seen at the 200-day moving average currently near the 1.2250 area, with resistance seen around the 1.2820 level.

Mike Zarembski, Senior Commodity Analyst

August 8, 2011

Keep Calm and Carry On!

Monday, August 8, 2011

High volatility makes trading futures outright difficult for many traders who wish to avoid the wild price swings that may scare them out of longer-term trades. These traders may possibly wish to consider exploring the options on futures markets for potential strategies that may benefit from catching a longer-term move in a commodity, but which also limit the potential risks should the market move against their position. December Crude Oil futures have fallen over $16.00 per barrel during the past two weeks, trading near the lowest levels recorded in 2011. Longer-term traders who believe that Oil prices have become oversold may wish to consider exploring the purchase of a bull call spread. For example, with December Crude trading at 88.11 as of this writing, the December 95 calls could be bought and the December 105 calls sold for about 2.45, or $2,450 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade with has a potential profit of $10,000 minus the premium paid which would be realized at option expiration in November should the December futures be trading above 105.00.

Fundamentals

This famous phrase from World War II should be reused for investors and traders last week, as a steep sell-off in equities caused a stampede away from the commodity markets. Fears of a global economic slowdown have caused steep losses for commodities in general, but especially for Crude Oil and the industrial metals such as Copper, Platinum and Palladium. Not even a better than expected Non-farm payrolls number could calm the volatility. The VIX futures for August traded as highs as 31.95 on Friday, as a rumor that S& P was going to issue a downgrade of the US Credit rating sent the markets reeling. However, once the rumors were proven unfounded, markets stabilized, although at lower levels on the day. By late morning, the markets received a bit of good news in a report that the European Central Bank would purchase Italian bonds in addition to the Portuguese and Irish bonds it had purchased during the previous few days. This triggered a major rally in equity futures and helped move commodity prices off the session lows. It is doubtful that the rampant volatility will completely die down to start the week, but we should begin to see cooler heads start to prevail, especially if we begin to see some better economic data start to emerge. This could set the stage for a rally in the most beaten down commodity sectors if all the recent gloom and doom does not come to fruition.

Technical Notes

Looking at the daily chart for September Crude Oil, we notice how fast prices plunged once previous support at 90.00 had given way last week. Friday saw prices spike as low as 82.87, until a mid-day rally brought prices to close higher on the very volatile trading session. Prices ended below both the 20 and 200-day moving averages, likely giving bears the advantage. However, the 14-day RSI has moved into oversold territory, with a current reading of 27.69, and we may see a short-covering rally ensue this week -- especially if market volatility begins to wane. Friday's low of 82.87 is now seen as strong support for September Crude, with resistance seen at the June 27th low of 90.17.

Mike Zarembski, Senior Commodity Analyst


August 9, 2011

Copper, Equities Melt Down

Tuesday, August 9, 2011

Copper prices have taken a drubbing in recent trading sessions as a result of the downgrade of US debt and investors being dissatisfied with the government's handling of the debt ceiling. These factors may take a toll on the global economy and come at a time when Europe is already reeling from its own debt problems. Technically, Copper has taken-out several minor support levels and now threatens more critical support at 3.90, and possibly, 3.75. If these levels are violated, prices could continue to slide for an extended period. Some traders may wish to sit on the sidelines of the Copper market, as the moves in the futures market will likely remain violent and the options market is too thin to trade. Traders could instead perhaps use the Copper market as a gauge.

Fundamentals

Copper futures were punished during the stock market malaise this past week, as economic uncertainty took hold. Economically sensitive commodities, most notably Crude Oil and Copper, were under fire, as investors seem not just concerned about a double-dip recession in the US, but a global recession. China, the key driver of the Copper market, finds itself in a unique situation. During the last global recession, the industrial giant put stimulus in place to aid domestic growth, but inflation is now the primary focus. The PBoC has tightened interest rates in hopes of keeping inflation in check, so it is not very likely stimulus will be offered to the economy unless the it shows significant signs of slowing. Instead, the Chinese central bank may view a global recession as a welcome sign, which may do what it could not do itself, i.e., slow commodity prices. The world is also on Fed watch, as the FOMC has a one-day meeting today. Since the Fed cannot go lower with rates, investors will wait to see if they craft some sort of fresh stimulus. The US central bank may be a bit gun-shy with stimulus after previous efforts failed to stimulate the economy and only attracted criticism of the Fed's actions. Copper prices may suffer additional losses if the Fed is too passive or too aggressive with stimulus.

Technical Notes

Turning to the September Copper chart, we see prices completely collapsing since hitting multi-month highs over 4.50. Prices are now on the verge of testing support at the 3.90 level. Failure to hold here suggests declines to 3.75 or lower are possible. The violent price action of the past week has caused the RSI indictor to dip into oversold territory. If the market is able to hold support, prices could rebound in the short-term, possibly testing resistance near 4.15.

Rob Kurzatkowski, Senior Commodity Analyst


August 10, 2011

Gold Goes Parabolic on Safe Haven Buying

Wednesday, August 10, 2011

Some traders who wish to be long Gold for the long-term but who fear a potential correction might be overdue may wish to consider exploring a put ratio spread. For example, with December Gold trading at 1750.00 as of this writing, a December Gold 1680 put could be bought and 2 December Gold 1590 puts sold. Ideally, you would want to initiate a ratio spread at a net-credit which would allow for a profit even if the market moved sharply higher at expiration. Traders should be aware of the risks involved in selling more options than the number of options purchased, and this trade is perhaps better-suited for those looking to get long Gold should the market decline to the strike price of the short puts.

Fundamentals

Gold has certainly been shining bright lately, as prices have moved parabolic, with the most active December Gold futures trading as high as 1782.50 in Tuesday's trade. However, as we write, the equity markets are trading sharply higher, and Gold futures have shed nearly $50.00 off the day's highs, as technically the market appears to be overbought. The sell-off in the global equity markets tied to the rather controversial downgrade of US credit by Standard and Poors (S&P) may have triggered buying of equities by bargain hunters, which may be causing some shifting of funds from Gold and into other investments. In addition, Gold has rallied sharply vs. the more industrial precious metals such as Platinum, sending the Platinum/Gold ratio to a Platinum discount, which in the past was an unsustainable event, as Platinum has traditionally sold at a premium to Gold. Although Gold prices may appear poised for a rather substantial correction, analysts at some of the major investment banks are still calling for higher Gold prices by the end of the year. Ultimately, the rally in Gold is a statement of investors' lack of confidence in the fiscal policies of the major world economies, which have caused investors to move funds out of currencies and sovereign debt and into Gold as a safe haven asset. Until we start to see some signs of a cohesive plan to deal with the mounting debit of western nations and a softening of inflation in China and other Asian economies, it is too early to say that Gold's bullish run is near an end.

Technical Notes

Looking at the daily chart for December Gold, we notice what appears to be a bearish "shooting star" pattern on the Japanese candlestick charts. This pattern can be a sign of a price reversal in an up-trending market. The recent parabolic move in prices increases the chance for a major price correction. The 14-day RSI is vastly overbought, with a current reading of 82.70. Tuesday's high of 1782.50 will now act as resistance in December Gold, with the next support point seen at the 20-day moving average currently near 1631.00.

Mike Zarembski, Senior Commodity Analyst


August 12, 2011

Did the Fed's Comments Trigger a Buy Signal for Commodities?

Friday, August 12, 2011

If food inflation does take hold in the coming months, the price of Corn futures in 2012 may stay at historically elevated levels, especially if US production does come in below current USDA estimates and ending stocks become extremely tight next year. Some more aggressive traders may wish to explore selling fairly deep out-of-the-money puts in Corn futures options going out to 2012, with the expectation that either Corn prices will hold above the strike price sold or they will be comfortable going long Corn futures at the strike price. For example, with July 2012 Corn trading at 738.25 as of this writing, the July Corn 520 puts could be sold for about 13 cents, or $650 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in June of next year should the July futures be trading above 500.00.

Fundamentals

The August Federal Open Market Committee's (FOMC) policy statement seemed to open the door for a potential rise in inflation, despite the Fed's belief that inflationary pressures are moderating. The Fed commented that US economic conditions were weak enough to warrant the Fed Funds rate remaining at "exceptionally low levels" through at least the middle of 2013, which was the first time the Fed actually put a timeframe on its "extended period" reference we have seen in past policy statements. With the potential now for rates to remain exceptionally low for the next 2 years, we may start to see some further pressure on the US Dollar once the current "flight to safety" mentality begins to subside. A weaker Dollar should be a boost to commodity prices, as foreign buyers can purchase "cheaper" Dollar- denominated assets. We started to see signs of this on Wednesday of this week, when commodity futures prices were generally higher across the board, despite another major drop in equity prices. One may argue that the steep sell-offs we saw during the past several sessions set-up a case where commodities were oversold and a relief rally was due. However, if we look at what is occurring globally, with the ECB essentially monetizing the debt of the so called "PIIGS" nations by being the buyer of last resort for the sovereign debt of its troubled member nations, some investors may start to look for alternatives to current low rates of US Government debt. With faith in currencies already shaken, why not look towards hard commodities as a place to move assets. We already see how well Gold has performed in the current turbulent environment, which has made some of its related precious metals, especially Platinum; seem relatively "cheap" when compared to Gold, especially given a historic view on how these assets have traded in the past. One other area that may be of interest is food commodities, as no government would likely want to risk the ire of its populous with the prospects of a food shortage, which should keep demand robust longer-term.

Technical Notes

Looking at the daily chart for December Corn, we notice prices approaching the contract highs on not only the potentially inflationary actions by the Fed, but also by a bullishly construed USDA crop production report which lowered the 2011-12 production estimate to just under 13 billion bushels. Prices are now well above the 20-day moving average, which appears to be keeping the short-term momentum in the bulls' favor. The 14-day RSI has turned-up, with a current reading of 61.49. 750.00 should act as the next psychological resistance level for December Corn, with support found at the lower end of the recent consolidation range near the 653.00 level.

Mike Zarembski, Senior Commodity Analyst


August 15, 2011

USDA Aggressively Lowers Corn and Soybean Yield Estimates

Monday, August 15, 2011

With weather forecasts calling for much needed rain in more moderate temperatures in the northern parts of the Midwest, some traders believe that the USDA may have been too pessimistic on its Soybean yield estimate. Should the weather cooperate, we could see a sell-off in Soybeans, with a test of the March lows possible. Some bearish traders may possibly wish to consider exploring selling November mini-Soybeans futures, with a potential downside price target near 1240.00. Traders may wish to consider placing a protective buy-stop above near-term resistance at 1383.00 should prices move higher.

Fundamentals

It appears that the US will produce less grain than had earlier been anticipated if the most recent USDA crop production estimate holds true. On Thursday of last week, the USDA released its August Crop Production report, which is the first report of the season that uses actual observations. In the report, the USDA lowered its estimate for Corn production to 12.914 billion bushels, which is down over 500 million bushels from July's 13.470 billion bushel estimate, as the hot July weather appears to have taken its toll on the crop, as average yield estimates were lowered by nearly 6 bushels per acre to 153 bushels per acre. The USDA also lowered its projection for the Soybean crop by over 3% to 3.056 billion bushels, which was well below even the most pessimistic pre-report estimates. Yield estimates were lowered by a shocking 2 bushels per acre to 41.4 bushels per acre. Many traders were surprised initially by the USDA's aggressive lowering of estimated yields, especially for Soybeans, as August is usually the key month for Soybean production and weather conditions have improved so far this month. Lower production estimates caused the USDA to lower 2011-12 carryout estimates for Corn to a very tight 714 million bushels, and for Soybeans to 155 million bushels. Both of these carryout levels would be near or at historic lows, and these figures take into account cuts to both domestic demand and exports due to high prices needed to ration demand. Prices rose sharply at the 9:30 am opening on Thursday, with Corn futures up the 30-cent limit and Soybeans trading sharply higher. However, there was a pullback in prices not long after the opening, as weak longs booked profits fearful of the heightened volatility seen in the commodity and equity markets this past week. The growing consensus among traders is that the USDA may have to further reduce Corn yield estimates as we get near harvest, as it appears that the key states of Illinois and Indiana will continue to see lower yields, as the hot and dry weather condition in July wreaked havoc on late-planted fields. Soybeans traders are still holding out hope for a recovery and will need ideal conditions through harvest to make that happen.

Technical Notes

Looking at the daily chart for November Soybeans, we notice prices trading near the mid-level of a nearly 8-month consolidation phase. Prices are also caught between the 20 and 200-day moving averages, leaving the near-term trend in some doubt. The 14-RSI is holding below 50, but has turned up with a current reading of 45.53. The recent low of 1282.00 made on August 9th looks to be support for November Soybeans, with resistance found at the July 19th high of 1409.50.

Mike Zarembski, Senior Commodity Analyst

August 16, 2011

Crude Concerned with Slow Growth in China, West

Tuesday, August 16, 2011

The potential for slower economic growth from China could limit the potential upside for Crude Oil. Slowing in the US and Europe have already cast their dark shadow over the Oil market, so the last thing the bull camp would like to see is China slow as well. Technically, prices have rebounded nicely since trading down to lows in the mid-70's. Stout resistance lies ahead for prices at 90 and 92. Some traders may wish to consider possibly entering into a bear call spread, like selling the October Crude Oil 95 calls and buying the October 97 calls at a credit of 0.50, or $500. The maximum profit would be the initial credit and the trade risks $1,500.

Fundamentals

Crude Oil futures have had a rocky ride since equity prices tumbled, but they have bounced back over 10 dollars from the lows. Many traders are now left with the question of whether or not Oil is poised to make a recovery to pre-correction levels. The fundamental landscape for energies has changed after the S&P downgrade, as some traders have begun to rethink growth forecasts for not only the US, but also other large global players. The Chinese Conference Board has indicated that growth has slowed significantly, but they hedged that statement by stating that the Chinese economy is set for a soft landing. This gives the market something to ponder. On one hand, market observers will likely have to revise down projected Crude Oil demand from China if growth slows. On the other hand, the People's Bank of China could be far less aggressive with tightening policy than many had projected. If China does indeed slow along with Europe and the US, the upside potential of the Crude Oil market could be significantly limited.

Technical Notes

Turning to the chart, we see the September Crude Oil contract forming a bullish hammer Tuesday of last week and reversing. The next levels of resistance for the Oil market come in at 90.00 and, more significantly, at 92.00. Failure to cross through these levels suggests that prices could be setting-up for range-bound trading, or possibly for a retest of near-term lows. The RSI indicator has bounced back from oversold levels and is now in neutral territory. It is also interesting to note that the momentum indicator has not bounced back from its lows to the same degree as price and RSI.

Rob Kurzatkowski, Senior Commodity Analyst


August 17, 2011

Last Gasp for Sugar Bull Market?

Wednesday, August 17, 2011

Some traders who believe the highs in Sugar have already been made may wish to take advantage of the recent price recovery to explore bearish positions in October Sugar. An example of such a trade would be to sell calls in Sugar futures options with strike prices above the contract high of 31.68. With October Sugar trading at 28.25 as of this writing, the October Sugar 33 cent calls could be sold for about 0.22, or $246.40 per option, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in mid-September should the October Sugar contract be trading below 33.00.

Fundamentals

Bulls seem willing to try to stage another rally in the Sugar futures market, despite growing signs of a global Sugar surplus next year. Lower than expected Sugar production out of Brazil sparked the price rise in July, as slow shipments from the world's largest Sugar producer forced end-users to bid-up prices to obtain supplies. However, production totals by northern hemisphere producers appear ample, with Thailand expecting a record crop and India expected to increase exports, as its production levels have improved markedly after several years of below average output. Current analysts' estimates range from between a 4 and 6 million ton Sugar surplus in 2012, which should keep price rallies in check. There is talk that China may be looking to buy Sugar to help replenish its reserves, which were drawn down the past couple of years, but it appears that country is waiting for a price break before entering the market. Commodity funds which were holding a near-record long position in Sugar this summer have been rather aggressively lightening-up their long position, with the most recent Commitment of Traders report showing non-commercial traders shedding just over 27,000 contracts for the week ending August 9th. Though prices are currently trading nearly 2 cents off the recent lows, volume on the current price recovery has been well below the recent average, which may be signaling a bout of short-covering is behind recent gains and not fresh buying. This could be ominous for bulls if the recent highs are not taken out soon.

Technical Notes

Looking at the daily chart for October Sugar, we notice what may be a 'bear flag" forming. This chart pattern is normally formed after a sharp price decline, where the market then moves sideways to higher on lower than average volume. To validate the pattern, we would need to see prices falling below the "bottom" of the flag on heavier than average volume. Prices remain below the 20-day moving average, but are above the 200-day average giving a conflicting directional bias to short and long-term traders. The 14-day RSI has turned up, but remains in neutral territory, with a current reading of 50.97. The August 8th low of 26.38 looks to be near-term support for October Sugar, with resistance seen at the August 11th high of 28.69.

Mike Zarembski, Senior Commodity Analyst


August 19, 2011

When the Going Gets Tough, Traders Turn to Treasuries!

Friday, August 19, 2011

With Bond prices moving parabolic, it's important to be mindful of the so called "gravity effect", when prices can fall fast and far when a sudden price move comes to an end. That being said, trying to pick a top by selling futures could end up being more of a risk then most traders can stomach should the price rise continue. Those traders who think Bond prices may be near a peak may wish to consider exploring the purchase of an out-of-the-money put in Bond futures options. For example, with the December Bonds trading at 138-00 as of this writing, the December Bond 130 puts could be bought for about 1-26, or $1,406.25, not including commissions. The premium paid would be the maximum potential risk on the trade and would be profitable at option expiration in November should the December Bonds be trading below 130-00 plus the amount of the premium paid.

Fundamentals

Yogi Berra may have said it best as it's "déjà vu all over again" for Bond traders, with the lead month Bond futures hovering ever so close to the all-time highs seen back at the height of the 2008-2009 economic crisis. This time, economic concerns generating the "flight" to US Bonds are more widespread, with many investors nervous about the continuing sovereign debt crisis in Europe and the exposure of major European banks to this debt. In the US, we are continuing to see weaker than expected economic data coming out with little in the way of a concrete plan out of Washington to deal with the economic malaise and rising government debt. It is likely this continued uncertainty that is drawing investors to bonds despite low yields. The US ten-year Note actually fell below a 2% yield for the first time in history on Thursday, showing how investors are willing to receive miniscule returns for the assurance of "safety". Gold is the other market that has benefited from the current "risk-off" mentality, with another new all-time high made yesterday. Thursday's session was particularly volatile, as traders digested a slew of disappointing data, including a weaker than expected initial jobless claims figure (408,000 vs. 399,000 last week) and the Philadelphia Fed August Business Index which fell to its lowest reading in two years, plunging to -30.7, vs. expectations of +1.5, and well below the + 3.2 reading in July. If that wasn't enough, existing home sales also fell to their lowest levels of 2011 last month. The rise in Treasury prices does seem to have the earmarks of a "bubble", with prices moving in a parabolic fashion this month. But unless something is done to assure nervous investors and traders that our global political leaders will take the necessary steps to calm the fears of a global economic recession, assets may continue to flow into the US Treasury market. At some point in the future the Bond market "bubble" may also burst, however, especially if the "solution" to the debt crisis is a "monetization" of this debt, which would increase the odds of sharply higher inflation in the future.

Technical Notes

Looking at the daily continuation chart for US Bond futures, we see the latest run-up in prices has come close to the highs made back in December of 2008, but has not moved above this major resistance hurdle. If we do not see a move to new highs shortly, a potential "double-top" formation may be in place, which could signal an end may be near to the bull-market run in Treasury prices. The 14-day RSI has moved into overbought territory, with a current reading of 71.63. The last time Bond prices were at these lofty levels, the correction took the market down nearly 30-full points! The next resistance point for September Bonds is seen at the December 18th 2008 high of 141-28, with support seen at the August 9th low of 132-27.

Mike Zarembski, Senior Commodity Analyst

August 22, 2011

Brent Crude at Record Premium to WTI!

Monday, August 22, 2011

So far this year, trying to pick a top in the Brent/WTI spread has proved difficult, as the trend has moved much farther than many traders believed possible. There are some fundamentals starting to move into the market that may finally cause a much needed correction in this spread, the first of which is the drawdown in inventories from Cushing, which are now about 8 million barrels below levels seen earlier this year. Also, should rebel forces actually succeed in overthrowing Libyan leader Moammar Gadhafi, we may see reactionary selling in Brent Crude outright, which could spark long liquidation selling in the Brent/WTI Spread as well. Some traders may wish to consider exploring either selling October Brent Crude outright should prices close below the 200-day moving average, or consider legging into selling October Brent and buying October WTI should the price differential fall below the 20-day moving average. Given the volatility in this market, traders should have an exit strategy in place should the positions move against them.

Fundamentals

The "tale of two crudes" has moved to its next chapter, as Brent futures moved to a new all-time high premium of over $26.00 to WTI Crude futures on Friday. Among the reasons given for the widening Brent premium are concerns that the US economy may be slipping back into a recession, following the severe drop in the Philadelphia Fed manufacturing index on Thursday. We also saw a surprising build of Crude inventories in the US, with the EIA reporting a storage build of 4.223 million barrels last week. Inventories of Brent remain tight, due to the shut-down of Libyan oil exports and a plague of supply issues from the North Sea, with the latest involving an oil leak on a major oil platform. There are some signs that the spread may see some narrowing in the coming weeks, with oil inventories at Cushing, Oklahoma, the delivery point for the NYMEX WTI futures, well off their highest levels, as refineries with access to oil at Cushing continue to take advantage of this "cheap" Crude, which has caused refining margins to move to very profitable levels. Longer-term, many traders are looking to Libya, where rebel forces are moving towards the Libyan capital of Tripoli, which could be signaling the end of the reign of Colonel Gadhafi, and hopefully the resumption of high quality oil exports, though there is no telling how long that may take. Despite the seemingly rampant gloom and doom relating to economic prospects in both the US and Europe, analysts at the major investment banking houses have not yet cut their estimates for Oil prices going into 2012, despite WTI futures hovering near $80 per barrel currently, citing expectations of rising demand globally and tight supplies outside of the US. Additionally, should Oil prices drop further, there are concerns that OPEC will be more proactive in lowering Oil production to keep prices from plunging, as memories of the economic crisis in 2008/09 remain vivid.

Technical Notes

Looking at the daily chart for the October Brent/WTI Crude Oil Spread, we notice that the spread holding nicely above the 20-day moving average and is widening its distance from the 200-day average, as well. The 14-day RSI is showing a bearish divergence, with the indicator failing to make a new high reading, despite the spread moving to a historic high. The RSI, in general, has just moved into overbought territory, with a current reading of 70.26. Resistance for this spread is seen at 27.00, with support seen at the 20-day moving average currently near the 21.50 area.

Mike Zarembski, Senior Commodity Analyst


August 23, 2011

Dollar Woes as Economy Slows

Tuesday, August 23, 2011

The Dollar finds itself in a vulnerable position due to the high likelihood that the Fed will intervene at any inkling that the economy is heading toward a double-dip recession, leading to further expansion of the monetary base. A full-on banking crisis in Europe could stave off declines in the greenback, but all is quiet after the Sarkozy-Merkel meeting last week. Technically, the Dollar Index may be on the verge of confirming a downside breakout from its recent trading range. Longer-term, this would also be a continuation of a downtrend. Some traders may wish to consider entering into a bear put spread, buying the November Dollar Index 74.00 put and selling the November 71.00 put, for a debit of 0.70, or $700. The spread risks the initial cost and has a maximum profit of $2,300 if the underlying December futures close below 71.00 at expiration.

Fundamentals

The US Dollar Index continues to trade near the lower end of its nearly four-month-old trading range. The US currency has not made a meaningful move versus the basket of major currencies, as traders have had to deal with the Eurozone debt situation and the possible European banking crisis. After the S&P downgrade, the Dollar has been trading in the lower end of the range. The Fed may be pressured into further economic stimulus if the equity markets continue to perform poorly and the economy shows further signs of weakening. This may be a dangerous game for the Fed to play, as further stimulus could weaken the greenback considerably, stoking inflation. The fundamental outlook for the Dollar could improve if the Eurozone is mired in a banking crisis. However, if the EU avoids such a crisis, the greenback could see its exchange rate slip.

Technical Notes

Turning to the September Dollar Index chart, we see prices have been trading in a range between 73.50 and 77.00 since May. Lately, prices have been trading in the lower end of this range, and this tightening could suggest that a breakout is imminent in the near future. Longer-term, this trading range can be seen as a wedge formation, which suggests a downward bias to a potential breakout.

Rob Kurzatkowski, Senior Commodity Analyst


August 24, 2011

Will Cattle Prices Decline as Fall Approaches?

Wednesday, August 24, 2011

Lower Cattle inventories early next year could see Live Cattle futures prices move to new all-time highs, especially if a weak US Dollar keeps Beef exports robust. Some traders who are expecting higher prices for Cattle next year may possibly wish to explore the purchase of a bull call spread in February Live Cattle futures. For example, with February Live Cattle trading at 120.575 as of this writing, the February 124 calls could be purchased and the February 134 calls sold for about 2.55 points, or $1,020 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade and has a potential profit of $4,000 minus the premium paid which would be realized at option expiration in Early February should the February futures be trading above 134.000.

Fundamentals

The historic highs for Live Cattle futures may take a much needed pause this fall, as Labor Day holiday demand begins to wane and the large number of young Cattle currently placed in feedlots finally comes to market. The most recent USDA Cattle on Feed report released this past Friday showed Cattle placements increased by 22% from year ago levels. The reason for the sharp increase in young Cattle placed on feedlots has to do with the severe drought in the Southern plains, which has devastated pasture land and forced producers to reduce the size of Cattle herds by either moving lighter weight Cattle to market or putting them in feedlots despite record high Corn prices. This sets the stage for higher beef supplies this fall, as the Cattle in feedlots comes to market but will result in much fewer head of Cattle being available in 2012. Cash Cattle prices have been holding steady around $114 per hundredweight this past week, as packers obtained supplies for the upcoming Labor Day holiday weekend. However, as we move into September and October, the potential for large supplies of market ready Cattle could keep buyers from aggressively bidding for supplies. One potential bright spot has been in beef exports, which are running well above year ago levels. The USDA reported beef supplies in cold storage fell by 3% in July, which is a sign of good export demand. The real story looks to be in early 2012 when supplies will be down sharply and the market will need to adjust to a tighter beef supply situation.

Technical Notes

Looking at the daily chart for October Live Cattle, we notice prices have broken down below the wedge formation, which may signal the start of a downtrend in prices. Prices are hovering around the 200-day moving average, and a strong close below this widely watched moving average could send prices heading for a test of the June 1st lows near the 108.000 area. The 14-day RSI has turned lower, with a current reading of 40.63. Near-term support is seen at the recent low of 114.200, with resistance found at the 20-day moving average currently near 117.625.

Mike Zarembski, Senior Commodity Analyst


August 25, 2011

Gold Rush Over?

Thursday, August 25, 2011

The relatively benign economic data over the past week appears to have put an end to the doomsday mentality for equity traders, at least for now. Gold still has extremely strong fundamentals and will continue to have a positive outlook as long as the printing presses in Washington and elsewhere keep printing currency. For now, however, Gold may be coming down to levels that are much more attractive for long-term buyers. Where exactly that is remains to be seen. Technically, the scope of the sell-off will be hard to gauge, as it always is when a market goes parabolic. The CBOE Gold Volatility Index, GVZ, is at its highest level in two and a half years. The last time the index was at these levels, the market was coming off the 2008 equity sell-off, which is not likely to repeat itself here. Some traders choose to consider entering into a short volatility strategy, such as a ratio backspread, expecting volatility to drop.

Fundamentals

The Gold market is seeing its third consecutive day of heavy selling pressure after making all-time highs. It is no coincidence that the sell-off comes after the CME Group raised requirements on the metal, but this likely was not the lone reason for the sell-off. Gold prices have rallied since the beginning of July without a meaningful correction or consolidation. Stocks have also seen a reprieve from selling pressure over the past several sessions, lessening Gold's appeal. Now that prices have come back down to earth, many traders are awaiting Fed Chairman Bernanke's speech in Jackson Hole for further guidance. Last year, Bernanke hinted at what ultimately came to be known as QE2. A similar announcement this year could quickly turn this sell-off around. For now, it seems as though some traders have abandoned their rush to safe-haven buying, as evidenced by not only Gold's decline, but the pullback in Bonds and the Swiss Franc. A sustained rally in equity prices could mean further declines, whereas a fresh round of negative economic data could take some of the selling pressure off the Gold market.

Technical Notes

Turning to the chart, we see the December contract pulling back sharply after flirting with the 1900 level. The parabolic move higher and subsequent sell-off in prices could bring prices down to more realistic levels. The sell-off, at least on the surface, does not appear to be a harbinger of the end of the bull market. Since the market has gone virtually straight up since the beginning of July, some traders may look to use Fibonacci retracement levels to gauge support.

Rob Kurzatkowski, Senior Commodity Analyst

August 26, 2011

The "Forgotten" Precious Metal

Friday, August 26, 2011

Platinum normally trades above the price of Gold, and with this premium narrowing considerably lately, some traders with a longer-term prospective may wish to explore buying Platinum and selling Gold. Platinum futures trade in a 50-ounce contract, and the standard Gold contract is 100 ounces, so those trading this spread would want to buy 2 platinum futures and sell 1 standard Gold futures contract. As of this writing, April 2012 Platinum is trading at a 60.70 premium to April 2012 Gold futures. Traders buying Platinum and selling Gold would want to see the premium continue to widen in Platinum's favor.

Fundamentals

The public's and media's fascination with Gold, and to a lesser extent Silver, seems to have reached a fever pitch, with Gold's run to all-time record highs finally being met with a much needed correction as we write. However, one of the members of the precious metals group -- namely Platinum -- seems to have been lost in the frenzy. Platinum prices briefly fell below the price of Gold recently, an event last seen during the height of the US banking crisis. Platinum seems to be plagued by its relative scarcity compared to Gold, which makes it more impractical to obtain large supplies for investment purposes, and also for its main usage as an industrial metal (particularly in the automotive sector for catalytic convertors). It was concerns that the economic recovery was beginning to stall that kept Platinum prices from moving as swiftly as those of Gold. Fundamentally, Platinum supplies have lagged behind demand, with the market in a deficit 7 of the last 10 years, and it would have been deficit all ten years if not for the increasing amounts of Platinum being recycled and put back into the market. In addition, there are numerous concerns about supplies out of South Africa, which is by far the largest producer of Platinum, with potential labor problems at the major mines in the country combined with "talk" about potential nationalization of the country's mining industry. Though this is not expected to occur in the near future, it does put a wild card in place for longer-term supply issues. So here we have a commodity that is in relatively scarce supply with an industrial use trading near the price of Gold, which is in greater supply and lacks the strong industrial demand. So for those with a longer-term perspective, Platinum really does appear to be historically "cheap" when compared to Gold.

Technical Notes

Looking at the daily chart for October Platinum, we notice Platinum prices have fallen sharply during the past couple of sessions, following to a lesser extent the collapse in Gold prices, which had declined over $200 per ounce since making new all-time highs. Prices have rebounded off the session lows, closing above the 20-day moving average. The 14-day RSI went from overbought readings above 75 to a more neutral 52.6 reading in just 3 sessions. Trading volume has been moderate during the past several trading sessions, despite the steep sell-off. The 200-day moving average, currently near the 1776.00 area, looks to be support for October Platinum. Resistance is found near 1850.00.

Mike Zarembski, Senior Commodity Analyst


August 29, 2011

Not All Wheat is Created Equal!

Monday, August 29, 2011

Kansas City Wheat futures are trading well below their yearly highs, but should find support from not only tight supplies, but should also follow the run-up in Corn prices as Wheat could become an alternate for feed usage should Corn prices rise sharply. For short option sellers, this might suggest potential trading ideas for selling puts in Kansas City Wheat options. For example, with chart support in December KC Wheat near the 770.00 area and the December futures trading at 890.25 as of this writing, the December 750 puts could be sold for about 8 cents, or $400 not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in November should the December futures be trading above 750.00. Given the run-up in prices lately, some traders may wish to wait for a short-term correction to initiate a trade in order to try to receive a more advantageous premium.

Fundamentals

Hard vs. Soft! That is the question grain traders are pondering regarding the price outlook for the different types Wheat futures. Bulls are favoring the "Hard" Wheat varieties, such as the Hard Red Winter Wheat (HRW) and Hard Red Spring (HRS) Wheat traded in Kansas City and Minneapolis respectively. A severe drought in the southern plains and portions of the central plains has prompted concerns about the start of the planting season for HRW wheat, with weather forecasts calling for continued hot and dry weather in the next 10 to 14 days. The HRS crop had a difficult time this year, as Wheat growers in the Northern Plains states like North Dakota and Montana had to deal with late plantings due to heavy rainfall and flooding in some areas. Crop conditions of the soon-to-be-harvested crop were reported at 62% good to excellent, which is down 4% from the previous week and well below the 82% seen last year. As of August 21st, only 29% of the Spring Wheat crop had been harvested, versus 49% last year. On the other hand, regarding Soft Red Winter Wheat (SRW), which is traded in Chicago, supplies are ample and US exports face continued competition from the Black Sea region, especially Russia and Ukraine. Going into 2012, it appears that Hard Wheat supplies will be tight, especially with quality concerns in German milling quality Wheat which has seen wet conditions turning a portion of the crop into feed Wheat quality. Should these fundamental factors carry over in to 2012, we should expect to see both Kansas City and Minneapolis Wheat futures outperform Chicago Wheat next year.

Technical Notes

Looking at the daily chart for December KC Wheat, we notice prices closing above the 200-day moving average for the first time since mid-June, which may be signaling the bear market run has ended. There is what appears to be stiff resistance above 900.00, and should prices close above this area on a weekly basis; a test of the 1000.00 level would not be out of the question. The 14-day RSI has turned positive, with a current reading of 65.73. Near-term support is seen at the August 9th low of 769.75.

Mike Zarembski, Senior Commodity Analyst

August 30, 2011

Consumers Overshadow Petroleum Supplies

Tuesday, August 30, 2011

Crude Oil supply-side fundamentals remain bearish; however, the rise in consumer spending could be a sign that the US economy may not be down and out after all. The US consumer has been a driver of not only the US economy, but has also had an impact on the global economy as well. Technically, the Crude Oil chart looks as though it may be at a positive turning point, but no technical confirmation has taken place. Some traders may be a bit more cautious than usual and choose to wait for a technical breakout before springing into action. Given the market's extremely high volatility, some traders may possibly wish to consider entering into an options trade. One example of such a trade would be a bull call spread, buying the October Crude Oil 90 call and selling the October 95 call after a double-top is confirmed.

Fundamentals

Crude Oil futures started off the week on a strong note, despite a less severe than expected Hurricane Irene. Crude Oil stockpiles are expected to jump this week as a result of the build-up to the storm and the sales of Oil from the strategic reserve being almost complete. Despite the bearish supply-side news, many traders are relatively upbeat about the positive consumer spending numbers. Positive economic data has been trickling through amidst the bad news lately, and things remain relatively calm across the Atlantic with regard to sovereign debt and banking. Fed Chairman Bernanke's speech in Jackson Hole was a non-event for Oil traders, as he took QE3 off the table for the time being, but not off the table completely. Since Crude Oil supplies themselves are more than ample, some traders may wish to shift their attention instead to the products, especially with Labor Day and the official end of the driving season approaching.

Technical Notes

Turning to the chart, we see the October Crude Oil contract trading near the recent high close of 87.88. A close above this level could signal a double-bottom formation and may send prices into the mid to high 90's. Failure to close above this level could signal that Crude Oil may continue to trade in a sideways range in the near-term. The rebound in prices has sent the RSI into near-overbought levels, which could result in resistance.

Rob Kurzatkowski, Senior Commodity Analyst


August 31, 2011

Irene a Negative for Natural Gas Prices?

Wednesday, August 31, 2011

The lack of a hurricane "risk premium" has made near-term Natural Gas options appear inexpensive, especially considering the potential for a disruption to Natural Gas production in the Gulf. Some bullish traders may wish to explore the purchase of just-out-of-the-money calls in Natural Gas futures options. With October Natural Gas trading at 3.865 as of this writing, the October Natural Gas 4.000 calls can be bought at 0.098, or $980 per option, not including commissions. The premium paid would be the maximum potential risk on the trade, which has a breakeven point at option expiration of the strike price of the call plus the premium paid.

Fundamentals

Normally a hurricane threat to the US is a bullish influence for Natural Gas prices, but Hurricane Irene, which made its way up the east coast of the US last week, has actually caused prices to fall at the beginning of the week. The huge number of power outages along the coast has caused demand for Natural Gas used for power generation to fall by nearly 2 billion cubic feet during the past several days. The total demand may fall even farther should the outages last into next week. In addition, many of the East Coast refineries preemptively shut down production ahead of the storm, which further curtailed industrial demand. Weather forecasts for the next 7 to 10 days are calling for normal to below normal temperatures for the Midwest and eastern half of the US, which is also cited as a negative factor on prices. As we move into the peak Atlantic hurricane months of September and October, we would normally see many traders factor a "risk premium" into prices due to the fear that a storm could shut down Gas production in the Gulf of Mexico. However, with huge increases in US Gas production out of the Marcellus, which the US government underestimated the size of by 42 times, and Barnett Shale formations, the effects of a temporary production outage out of the Gulf are much more muted than would have occurred only a few years ago, and it appears that many traders no longer fear a spike in Natural Gas prices should a hurricane reach the Gulf. Whether this is shortsighted thinking or not remains to be seen, but it does appear that unless we see stronger industrial demand, Natural Gas prices may continue to hover near current price levels.

Technical Notes

Looking at the daily chart for October Natural Gas, we notice prices rebounding sharply after making new contract lows on Tuesday. There is a bullish divergence forming in the 14-day RSI, that may be signaling that the sell-off has run its course. We would need to see prices close above the 20-day moving average in order to generate some short-term momentum buying. Support is found at Tuesday's low of 3.780, with resistance found at the recent high of 4.159 made back on August 11th.

Mike Zarembski, Senior Commodity Analyst