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
