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September 2011 Archives

September 1, 2011

Export Demand Slows and So Does Corn

Thursday, September 1, 2011

Corn continues to have strong fundamentals going into the fall harvest. Crop health has continued to worsen as the growing season has progressed and weaker yields could result in another significant cut in USDA estimates. In the short-term, however, technical resistance, overbought conditions and lower demand could have a negative impact on prices. Many traders may look for a pullback to the 725-730 level. At that time, some traders may ng into a bullish strategy, such as a bull call spread or long futures powant to re-evaluate the technical outlook and possibly consider enterisition. If the market does show bottoming at these levels or a breakout for technical resistance from current levels, some traders may wish to consider a bull call spread, for example, buying the Dec Corn 800 calls and selling the 825 calls.

Fundamentals

Corn futures have rallied almost $1.75 since the beginning of July due to deteriorating growing conditions and faster-than-expected maturation of the crop. The quickening maturity of the Corn crop does alleviate some concerns that the harvest will be pushed back because of the late start to the growing season. However, there is concern that yields could be significantly reduced as a result. The US growing region has been plagued with extremely dry conditions, and there is little chance of significant rain over the course of the week. There has been a significant reduction in the percentage of crop rated good-to-excellent as a result of the dry conditions. The supply side certainly suggests that prices will be supported. The current price of Corn may lessen demand from importers, who may opt to go with South American suppliers instead. Corn could see some selling pressure in the near-term, but fundamentals rest squarely with the bull camp over the longer-term.

Technical Notes

Turning to the chart, we see the December Corn contract running into resistance at the 775 level and failing to initially break through. In addition to resistance at 775, significant resistance can be seen at 800 -- a level that the market briefly flirted with in June --but failed to break through. In addition to running into technical resistance, the RSI is at overbought levels, which could give longs a reason to take profits. If prices correct, fairly significant support comes near 725-730.

Rob Kurzatkowski, Senior Commodity Analyst


September 2, 2011

Bond Traders Await Friday's Non-Farm Payrolls Report

Friday, September 2, 2011

The current price consolidation seen in Bond futures may not last long, especially with current prices near all-time highs. Traders looking for a breakout from the current price consolidation may wish to explore the purchase of a strangle in Bond futures options. For example, with December Bonds trading at 136-15 as of this writing, the October Bond 138 calls and the 133 puts could be bought for about 2-28, or $2,437.50, not including commissions. The premium paid would be the maximum potential risk on the trade, which would be profitable at option expiration in late September should the December futures be trading above 140-14 or below 130-18.

Fundamentals

Bond traders will not be extending their Labor Day holiday, as it will be all hands on deck today with the highly anticipated August Non-Farm Payrolls Report due out this morning. Employment rolls are expected to have increased by 75,000 jobs in August, with private sector employment expected to have risen by 110,000, making up for the continued job losses in the government sector. Going into the report, traders had a slew of data to digest, including a lower than expected increase in personal income which rose by only 0.3% in July, as well as a slightly disappointing report from ADP showing a private employment increase of 91,000 jobs. On the positive side, July factory orders rose by a higher than expected 2.4% in July, with strong demand seen in the transportation sector. The Chicago purchasing managers index for August came in much better than expected at 56.5, with the employment index rising in July. Given the mixed economic signals, it is no surprise that Treasury bond prices have moved into a consolidation pattern during the past several trading sessions, although at a much higher price level than we saw at the start of August. Today's report could tip the Fed's hand either for another round of some sort of QE3 if employment is once again below expectations, or allow the Fed to keep the status quo and eventually begin serious discussions to finally unwind the current accommodative monetary policies that have been in place for nearly 3 years.

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we first notice what appears to be a symmetrical triangle technical pattern forming. This is considered a consolidation pattern; traders would need to wait for a breakout from the pattern to help determine the probable direction of the market's next move. Prices are currently hovering near the top end of the consolidation, but this morning's payrolls report could be the catalyst to move the market out of its range. The 14-day RSI is well off its highest readings, but has stabilized at a supportive level of 59.57. Support is seen at the August 11th lows of 133-24, with resistance seen at the contract highs of 139-28.

Mike Zarembski, Senior Commodity Analyst


September 6, 2011

Large Brazilian Crop Looms, but is it Enough to Sour Coffee Bulls?

Tuesday, September 6, 2011

The fundamental outlook for Coffee remains bullish, despite the expectation for a large crop in Brazil. The spot market remains extremely tight presently, and it may be foolhardy to make trading decisions based on what could be instead of present reality. That being said, traders should keep the immanent Brazilian crop in the back of their minds, and some traders may choose to use options instead of futures. Given the overbought technical outlook, some traders may wish to consider waiting for a pullback in prices to near support in the 275.00 area and enter into a bull call spread. An example of such a spread to consider would be the December 275/300 call spread, limiting traders' risk to the initial cost and reaching maximum profit if the December futures contract closes above $3.

Fundamentals

Coffee futures have rallied straight up since early August, fueled by a very tight physical market. Many traders are beginning to look toward next year's Brazilian crop for forward guidance. If weather conditions hold up, Brazil is expected to produce a record crop in the upcoming year of somewhere just north of 3.75 million metric tons. Traders will closely monitor the flowering over the next month and a half to give them a leg-up on crop health, as the La Nina weather pattern can have a negative impact on flowering. The spot market remains extremely tight, which has been the main catalyst for the sharp rise in prices. Given these high price levels, many producers may be inclined to sell some of their stockpiles, which would alleviate short- term supply pressure. This could, however, be bullish for prices until the new crop comes to harvest.

Technical Notes

Turning to the chart, we see the December Coffee contract moving vertically throughout most of August. The market has not had a meaningful consolidation or correction in that timeframe, suggesting the market could be overbought. The RSI indicator is also giving overbought readings, which could be seen as negative over the short-term. Given the overbought conditions and resistance at 300.00 and 311.60, prices may come back to test support near the 275.00 level. Failure to hold 275.00 may result in a test of the 250.00 level.

Rob Kurzatkowski, Senior Commodity Analyst


September 8, 2011

Swiss Franc No Longer a "Safe Haven"!

Wednesday, September 7, 2011

Some traders who believe that the SNB will be successful in its attempts to weaken the Swiss Franc may wish to explore the purchase of a put spread in Swiss Franc futures options. For example, with the December Swiss Franc futures trading at 1.1660 as of this writing, the October 1.16 puts could be purchased and the October 1.13 puts sold for about 0.115, or $1437.50 per spread, not including commissions. The total cost of the investment would be the maximum potential risk on the trade which has a potential profit of $3,750 minus the premium paid, which would be realized at option expiration in early October should the December futures be trading below 1.1300.

Fundamentals

Currency traders certainly got a rude awakening Tuesday morning, as the Swiss National Bank (SNB) announced that it would set a floor for the value of the Euro vs. the Franc (EUR/CHF) of 1.2000 and would buy foreign currencies in "unlimited" amounts to enforce this minimum rate. The news sent the value of the Swiss Franc plunging against the major currencies, with the Swiss franc futures breaking 1000 pips and the EUR/CHF cross moving from a rate of 1.1000 to just above 1.2000 after the announcement was released. This drastic action was taken due to the upward pressure on the Franc due to the continued financial uncertainties in the Euro zone, with investors fleeing the Euro and moving into the Franc despite negative yields. There is no timeframe as to how long the SNB plans to keep this policy in place, and it would require the bank to accumulate huge amounts of Euro in order to fulfill its intent. This is especially problematic for the SNB, as it is already carrying huge losses on its Euro holdings from previous intervention attempts to keep the Franc from rising vs. the Euro. The question now turns to market participants regarding whether investors and traders will continue to move into long positions in the Franc to test the SNB's resolve at defending the 1.2000 level, as the current global financial issues that drove funds into the Franc have not changed. In order to be successful, the SNB will need to see some resolve for the European debt situation, which started the run into the Franc in the first place. The SNB also risks rising inflation, as the bank may need to flood the market with currency in order to keep up with its promise to buy foreign currencies to defend the peg, although rising inflation is not the highest of the Bank's' immediate concerns, but could be a potential side effect should liquidity not be withdrawn in a timely matter once the fears of a recessionary environment subside.

Technical Notes

Looking at the daily continuation chart for the Swiss Franc futures, we notice how the SNB took the steam out of the recovery rally seen late last week that attempted a test at 1.3000 before closing well off the day's highs. The nearly 9% sell-off took the Swissy through near-term support around the 1.2150 level and now sets up a test of the 200-day moving average currently near the 1.1300 level. Resistance is now found at the previous support level of 1.2143.

Mike Zarembski, Senior Commodity Analyst


Wacky World of Petroleum

Thursday, September 8, 2011

The petroleum market has seen a series of imbalances for some time. The correlative bonds between markets have been broken in the WTI vs. Brent, WTI vs. RBOB, and so on. This gives traders a variety of spread strategies to consider, with the expectation that the correlation in these markets may come back in-line. Some traders may wish to consider entering into a long WTI-short Brent Crude Oil spread, for example, looking for the spread between contracts to narrow to the low 20's. This spread can be considered extremely risky, since it trades on different exchanges and has extremely high volatility. Also, there is no stop/loss mechanism. Some traders may also possibly want to consider entering into a Crude Oil/RBOB crack spread, buying Crude and selling Gasoline with a target price of 0.50/gallon for the spread.

Fundamentals

The correlation between WTI Crude Oil and several other markets has been broken, most notably with Brent Crude Oil and RBOB Gasoline. The WTI/Brent Crude Oil spread widening to epic proportions has been well documented, but there are also widening imbalances between multiple varieties and grades of Crude Oil. Dubai and Light Louisiana Sweet varieties are still trading north of the $100 level, which has translated to high Gasoline prices relative to the benchmark NYMEX Crude Oil contract. There are a variety of reasons for the price discrepancy between the various grades. The Light Louisiana contract is impacted by the hurricane season, Brent supplies are tight when compared to demand, and there is a supply glut at Cushing, the NYMEX delivery point. There is also the hedger/speculator effect impacting the WTI contract. Many large traders have been using Oil futures as a hedge for their long stock positions, since Crude Oil is a universally used commodity, and it can be used to hedge both domestic and international equity positions. Speculatively, Crude Oil can be used as a macro-economic play by traders who do not wish to trade individual stocks, sectors or indexes. The reasons for the deviation in petroleum and products are great in number and offer traders a variety of trading scenarios.

Technical Notes

Turning to the chart, we see the October Crude Oil chart once again testing the 90.00 mark after rallying late in yesterday's session. Failure to close below the 20-day moving average suggests that a near-term low may be in place.

Rob Kurzatkowski, Senior Commodity Analyst

September 9, 2011

Will High Prices Help to Ration Soybean Supplies?

Friday, September 9, 2011

It does appear that US Soybean supplies will remain tight going into 2012, even if average yields do not fall significantly from current estimates. Some traders who expect Soybean futures prices to remain stable or move higher in the coming weeks may wish to consider exploring selling put spreads in Soybean futures options. For example, with November Soybeans trading at 1413.00 as of this writing, the October 1360 puts could be sold and the October 1310 puts purchased for a credit of about 5 cents, or $250 per spread, not including commissions. The premium received would be the maximum potential profit and would be realized at option expiration in late September should November Soybeans be trading above 1360.00.

Fundamentals

Uncertainty surrounds the US Soybean crop this year, as analysts and traders struggle to determine if beneficial temperatures and rainfall in August helped the maturing crop recover from above average temperatures in July. Many traders are anticipating that the USDA will lower average Soybean yield estimates in the upcoming USDA September Crop Production report from the 41.4 bushels per acre seen in the August report. Even a slight cut in average yields could make a big difference in US carryout totals in 2012. A drop of only 1 bushel per acre could put ending stocks/usage ratio to record lows! In this case, Soybean prices would need to rise to help ration demand. However, Chinese demand for Soybeans is expected to increase, with some analysts expecting Chinese Soybean imports could near 60 million tons, as demand for Soy meal for livestock feed is expected to increase by just under 10% next year. In the US, Soy meal demand may decrease, as poultry production is expected to decrease due to high feed prices. It now appears that Mother Nature may get the final say as to whether US Soybean supplies will be "extremely tight" and force prices sharply higher, or merely "tight" and prompt a return to choppy trading conditions going into 2012.

Technical Notes

Looking at the daily chart for November Soybeans, we notice prices have "corrected" from the contract highs made last week, but they seem to have found some support near the 1408.00 to 1412.00 area. Even with the correction, prices remain above the 20-day moving average, which is currently residing just below 1400.00. The current sell-off may be part of a "bear flag" chart formation, which would be confirmed should we see an upside price breakout on higher than average trading volume. The 14-day RSI has moved to a more neutral level, with a current reading of 55.99. Support for November Soybeans is seen at the August 25th low of 1384.00, with resistance found at the contract high of 1465.00.

Mike Zarembski, Senior Commodity Analyst


September 12, 2011

Update for USDA September Crop Report

Monday, September 12, 2011

The biggest potential surprise from Monday's report could involve the Corn market, where filed reports of disappointing yields could show up in a lower than anticipated final production number. Given the recent "correction" in Corn prices, longer-term traders may wish to explore the purchase of a bull call spread. For example, with March 2012 Corn trading at 749.75 as of this writing, the March 750 call could be bought and the March 850 call sold for about 35 cents, or $1,750 per spread, not including commissions. The risk on the trade would be the entire investment on the spread, with a potential profit of $5,000 minus the premium paid which would be realized at option expiration in February should March Corn be trading above 850.00.

Fundamentals

Once again, grain traders will likely be setting their alarm clocks to go off early on Monday, as the USDA releases its Crop Production & Supply/Demand report for September.

Soybeans: Many traders are looking for a moderate decline in average yields to 41 bushels per acre, which is down 0.4 bushels per acre from the August report. The drop in yields is expected to lower this season's production to around 3.025 billion bushels, down from 3.056 billion bushels last month. 2011-12 ending stocks could slip to 150 million bushels, which though tight, should be sufficient to get us through the year, as both export demand and domestic feed demand is expected to be lowered due to high domestic prices for Soybeans and competition from South American Soybeans in the export market. Some traders believe we would have to see average yields fall below 40 bushels per acre to get commercial buyers nervous and spark a potentially significant rally in new-crop beans.

Corn: It does appear that the hot and dry conditions in July did have an effect on the Corn crop, as traders are looking for sub 150 bushels per acre average yields, with the average estimates calling for 148.5 bushels per acre, which is well below the 153 bushels estimated in the August report. The cut in yields should lower production estimates to somewhere near 12.5 billion bushels, or over 400 million bushels below the August totals. Ending stocks for 2011-12 should fall to around 640 million bushels, or about 300 million bushels below last year. Here, Corn demand for livestock feed is expected to be challenged by potentially cheaper feed wheat in some areas. However, US ethanol production is expected to increase and may take the lead from feed users for US Corn demand this coming year.

Wheat: Increased Wheat usage for feed and potentially lower Spring Wheat production estimates are expected to lower the USDA's Wheat supply estimate ,with analysts looking for total Wheat supplies to fall to 667 million bushels for the 2011-12 season. This translates to only a 4 million bushel decline from the August report, as competition from the Baltic region suppliers such as Russia and Ukraine should hamper US Wheat export totals.

Cotton: Many traders are looking for US Cotton production to come in around 16 million bales, after a severe drought decimated the Texas Cotton crop. Though the USDA expects to see increased Cotton production out of India, recent flooding in Pakistan could cut nearly 2 million bales from the country's production totals. The key here will be Chinese demand, and the recent sell-off in Cotton prices has spurred some fresh commercial buying.

Technical Notes

Looking at the daily chart for December Corn, we notice that similar to the Soybean chart we looked at on Friday, the daily Corn chart is showing what appears to be a "bull flag" formation. This is considered a consolidation pattern in the midst of a bull market move. In order to "confirm the formation" we would need to see prices break out to the upside on ideally higher than average volume. Prices have fallen below the 20-day moving average, giving some support for the Corn bears. The 14-day RSI has moved to neutral territory, with a current reading of 51.93. Support for December Corn is found at 706.25, with resistance seen at the contract highs of 779.00

Mike Zarembski, Senior Commodity Analyst


September 13, 2011

Australia Adds to Wheat Woes

Tuesday, September 13th 2011

The fundamental outlook for Wheat seems to favor the bear camp at the moment, as the large Australian crop may increase global ending stocks. Corn's impact on the Wheat market, however, cannot be discounted. Higher moves in Corn could not only shift overall grain sentiment, but also drive substitution demand for Wheat. Technically, Dec Wheat is at a fairly significant support level near 720. Traders may look to see how the market behaves in the coming sessions. If the December contract closes below the 720 mark, some traders may wish to possibly consider shorting the futures, with a downside target near 650. If the market bounces from 720, some traders may choose to think about going long the futures, with an upside target of 800.

Fundamentals

Wheat prices have come under pressure lately, due to a large US crop and steady rains in Australia. The bumper crop in Australia may reach record levels, increasing world supplies of the grain. This has largely been priced-in to the market, and many traders are now waiting on the USDA's ending stocks figures to determine the longer-term direction of the market. The high price of Corn and relatively low price of Wheat could lower the ending stocks figure due to feed substitution. While the bumper crop in Australia is expected to be large, there are still many skeptics that suggest the Australian crop estimate of 26.2 tons may be a little bit too high and could only be achieved if conditions remain ideal. The stronger US Dollar could also have a negative impact on prices, as it could lessen demand for US grain.

Technical Notes

Turning to the chart, we see the December Wheat contract falling rather dramatically after testing the 800 level. Prices are now at support at the 720 mark. Failure to hold this support suggests that prices may break down to the 650 mark. If, however prices do hold here, the 800 level could be tested once again, as there is no significant resistance level between 720 and 800. Prices have broken the 20 and 100-day moving averages, and the 50-day is within the market's sights. Failure to hold the average could have a negative impact on prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


September 14, 2011

Has the Natural Gas Market Been Tamed?

Wednesday, September 14, 2011

With the Natural Gas market remaining quiet and a bias to the upside should any issues occur, some traders may wish to explore a position that will benefit if prices go up, stay neutral or go down slightly. An example of one such position would be a long ratio put spread. For example, with December Natural Gas trading at 4.247 as of this writing, the December 4.000 put could be bought and 2 December 3.800 puts sold for a net credit of 0.008, or $80 per spread, not including commissions. This type of trade is best done for a net-credit, as it increases the range of prices that will still allow the trade to be profitable at expiration.

Fundamentals

Once one of the most volatile of all markets, Natural Gas futures have taken on a new persona, as prices have been range bound for the past 18 months. Since February of 2010, lead month futures have been stuck in a relatively narrow $2 price range, as new supplies from shale formations and weak industrial demand have kept prices at levels not seen since 2003. 2011 may be the first year where there is little weather premium seen in the fall contract months, which normally would see a price rise due to fears of a potential production shutdown should a tropical storm or hurricane reach the Gulf of Mexico. However, with increasing Gas production and importance seen in shale formations, such as the Marcellus, Barnett and Bakken formations, many traders are less fearful of a production outage in the Gulf, because they believe that output can be increased from these alternative production areas. Natty bulls do note that US Gas in storage levels are 2% below the 5-year average for this time period, but with industrial demand remaining weak, there is currently little fear of tight supplies going into the winter withdrawal season, which traditionally begins on November 1st. Current weather forecasts are mixed, with below normal temperatures seen in the Midwest and East Coast later this week, but a warmer temperature outlook in the 6 to 10-day forecasts. Any increase in heating or cooling demand could put a bid under Natural Gas prices if a prolonged period of above or below normal temperatures occurs, however current forecasts are not calling for any extended periods of extreme temperatures, which could make any weather rallies short-lived. The most recent Commitment of Traders report shows large non-commercial traders still hold aa large net-short position in Natural Gas totaling 171,695 contracts as of September 6th. Though a large short position, it is nowhere near the nearly 300,000 contract short positron seen back in the summer of 2008. Though it appears that there is little in the way of current fundaments to break the market out of its recent range, one does get the feeling that the current low volatility environment will not last, and traders should be prepared for when this sleeping giant reawakes!

Technical Notes

Looking at the daily chart for October Natural Gas, we notice that prices are butting up against the downtrend-line drawn from the June 9th highs. The past few tests of this trend-line have failed, with lower prices following shortly thereafter. Prices are now hovering on both sides of the 20-day moving average which is confusing the short-term trend. The 14-day RSI has moved into neutral territory, with a current reading of 49.33. The contract low of 3.780 should be strong support for the October contract, with resistance found at the recent high of 4.130 made on September 1st.

Mike Zarembski, Senior Commodity Analyst

September 15, 2011

Can European Leaders Restore Confidence?

Thursday, September 15, 2011

The Eurozone is in disarray due to the sovereign debt concerns, which have plagued the market for some time, and the banking crisis. Leaders are fighting to keep member states solvent and part of the EU, which has shaken investor confidence. The focus on avoiding the worst case scenario has distracted larger, healthier member states from focusing on economic growth. Technically, the Euro has broken out of a large wedge formation to the downside, after crossing through and remaining below the 1.4000 level. This bounce in prices does not appear to be a reversal pattern and could give bearish traders an opportunity to enter into bearish strategies more cheaply. Some traders may wish to consider exploring the idea of entering into a bear put spread, for example, buying the December Euro 1.35 put and selling the 1.30 put for a debit of 0.0150, or $1,875. The trade risks the initial cost and has a maximum profit of $4,375 if the Euro closes below 1.3000 at expiration.

Fundamentals

The Euro has had a pair of positive days, after falling 10 handles over a two-week period, but is this a sign of a reversal in the currency, or simply profit-taking? The currency has been battered as a result of the banking and sovereign debt crisis facing the continent. The recent actions to stave off sovereign debt defaults are seen as simply delaying the inevitable, and there is serious doubt as to whether the confederation of nations can remain intact down the road. Many traders and market observers do not believe that Greece can avoid a default and remain in the union, despite assurances from French President Sarkozy and German Chancellor Merkel. Even in the event that Greece is able to stay solvent and remain in the EU, the banking crisis threatens to derail economic growth, which may lead to further devaluation of the Euro. Thus far, large Eurozone banks have avoided a Lehman-like meltdown, but just as the US banking fiasco, there is no telling if this is just the tip of the iceberg.

Technical Notes

Turning to the chart, we see the December Euro dropping below the critical 1.4000 support level. This breakout can be seen as especially significant given the fact that the market has been consolidating in a wedge formation for the past four months. After the breakout, prices came down to test support near 1.3500 and then bounced. In addition to 1.3500, minor support comes in at 1.3385, and more significant support at 1.3000. The RSI indicator had been oversold, which may have helped to trigger some of the profit-taking the market has seen. It is also interesting to note that the 20-day momentum indicator is diverging from both price and RSI, which hints at near-term weakness.

Rob Kurzatkowski, Senior Commodity Analyst


September 16, 2011

Are Bulls Losing Their "Golden" Touch?

Friday, September 16, 2011

With Gold prices possibility setting up for a much needed major correction in prices, some traders with a bearish bent may wish to explore the purchase of a bear put spread in Gold futures options. For example, with October Gold trading at 1780.70 as of this writing, the October 1780 puts could be bought and the October 1750 puts sold for 13.00, or $1300.00, not including commissions. The risk on this trade would be the entire amount of the investment in the spread, which has a potential profit of $3,000 minus the premium paid which would be realized at option expiration in late September should the October futures be trading below $1750.00.

Fundamentals

September is proving to be a rough month for Gold bulls, as prices are trading near 3-week lows despite continued uncertainty regarding the European debt situation. The most recent sell-off in Gold prices seems to be tied to a move by several Central Banks, including the Federal Reserve, to help alleviate Dollar liquidity concerns by providing 3-month Dollar loans to many leading European banks that were having difficulty finding US Dollar funding due to concerns about their distressed sovereign debt holdings. This news is taking away some of the immediate concerns of a global credit crunch, similar to what was seen following the demise of Lehman Brothers. Gold traders also note that technically, Gold prices have started to look weak, failing to make new highs, which may be scaring some weak longs from the market and preventing short-term momentum traders from adding to long positions on market strength. Though the short-term trend has turned lower, longer-term there is still optimism for higher Gold prices, including an annual Gold price forecast from HSBC, which has raised its price outlook for Gold in 2012 to $2,025 per ounce, which they have upped 25% from their previous price forecast, citing heightened macroeconomic concerns and few so called "safe haven" investment options. Speculators continue to hold a large net-long position in Gold, with the most recent Commitment of Traders report showing large and small speculators holding a net-long position of over 285,000 contracts as of September 6th. However, many analysts expect to see a rather significant decline in this long position in the next report, as long liquidation selling should have been a heavy part of the recent price declines. Going forward, bulls will likely need to see some signs that the recent price sell-off is near an end, especially as some key technical price levels are coming into play. If fresh buying is not found soon, chart conditions may be signaling a rather significant price decline may be on the horizon.

Technical Notes

Looking at the daily chart for December Gold, we are seeing the formation of some interesting but conflicting chart patterns. First, we have what appears to be a double-top formation, as the market made a new high on September 6th, taking out the old highs from August 23rd by a few dollars before selling off the past several sessions. Prices are also testing the uptrend line drawn from the major low of 1481.00 made on July 1st, which was the lowest level Gold reached since the latest leg of the bull run. Prices are now solidly below the 20-day moving average, which is triggering some short-term momentum selling. There is a bearish divergence in the 14-day RSI, and the index has fallen below the 50 level for the first time since July. Gold bulls will counter that the recent price decline was on diminished trading volume, which may signal the sell-off was more long liquidation and not new short positions being established. Also, the recent sell-off in prices has some resemblance to a "bull flag" formation, which would normally be considered a "consolidation" pattern in a bull market. The next major support level for December Gold is seen at the August 25th low of 1705.40, with resistance found at the contract high of 1923.70

Mike Zarembski, Senior Commodity Analyst


September 19, 2011

Bull Market in Sugar Starting to Sour?

Monday September 19, 2011

With chart patterns seeming to suggest the recent highs for March Sugar may be in place, some traders may wish to consider exploring bearish trading strategies using Sugar futures options. An example of one such strategy would be to sell bear call spreads. For instance, with March Sugar trading at 26.73 as of this writing, the November 28.50 call could be sold and the November 30.50 call bought for a credit of 0.30, or $336.00, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in mid-October should the March Sugar futures be trading below 28.50.

Fundamentals

Sugar bears certainly had a long wait, but it appears that there may finally be cracks in the Sugar bull market, as prices have fallen to one-month lows. Sugar prices have been elevated on concerns of lower than expected production out of Brazil, who is the words largest Sugar producer. However, a report from Unica, the country's largest Sugar industry organization, announced that production levels have started to increase in August. Though it appears that Brazil's production will still be about 10% lower than last year, it is unlikely that we will see any further reductions in the crop estimate. In addition, many traders are still predicting larger production totals in the Northern Hemisphere that may more than offset the lower Brazilian harvest. Indian Sugar mills are expected to export an additional 213,250 metric tons of Sugar, having already exported 2.6 million tons this marketing year. Also weighing on prices was the announcement that 110,000 tons of Brazilian origin Sugar was delivered against the expired October Liffe White Sugar futures contract. This is leading some traders to believe that the current tight cash market supply situation might be coming to an end. Going into the last quarter of 2011, many traders will turn their focus to the demand side of the equation and what effects the European debt situation will have on demand for commodities in general, especially if we return to a global recessionary environment.

Technical Notes

Looking at the daily chart for March Sugar, we notice that a bearish descending triangle formation was confirmed as prices broke below the support line. There also appears to be a double-top formation on the daily chart, adding to the potential that the near-term highs are in. The 14-day RSI has turned weak, with a current reading of 38.23. Though prices are now well below the 20-day moving average, longer-term traders may not turn bearish until we see a move below the 200-day moving average, currently residing just below the 25.00 level. The next support area for March Sugar is seen at the August 8th low of 25.38, with resistance found at the 20-day moving average currently near the 28.50 level.

Mike Zarembski, Senior Commodity Analyst


September 20, 2011

Gold Bulls' Grip Slipping

Tuesday, September 20, 2011

Gold bulls appear to have lost their grip on the market, which is likely largely due to the fact that much of the panic from Europe has been priced into the market. Many traders are, instead, focused on Gold as a growth and inflation play. With the dim market outlook, inflation prospects do not look good at the moment. Technically, Gold remains in the 1745-1900 trading range. Momentum seems to be moving toward the bear camp, and the downside appears to be more vulnerable at this time. Some traders may want to hold-off at the moment and wait for a possible breakdown below 1745. Some traders may possibly wish to consider entering into a short futures position on consecutive closes below 1745. Which Gold contract traders may choose would depend on their risk tolerance.

Fundamentals

Gold futures have certainly cooled off from their high-flying mid-summer form, which is likely largely due to the lack of any bombshell news reports. On one hand, the Fed and other central banks have made conditions ripe for inflation, favoring Gold. On the flip-side, slower economic growth forecasts suggest that the global economy may result in lower inflation. The weakness in US energy prices has made a significant impact on Gold prices, as many metal traders have priced-in price softness. A slow march toward a global recession may result in precious metals losing their luster as an investment vehicle. Long-term, a case can be made for Gold as part of a balanced portfolio, but the lack of shock news could result in stagnation or, possibly, a more meaningful correction. To get the Gold bulls running again, the market may need a major event, such as a Lehman-like crisis in Europe or Greece finally defaulting and leaving the EU.

Technical Notes

Turning to the December Gold chart, we see prices mired in a consolidation pattern/mini correction at the present time. Thus far, the market has stayed above the 38.2% Fibonacci retracement level at 1744.00, which can be seen as especially critical given the fact that there is chart support in the area and very little additional support until the sub-1600 level. A breakdown below this level could also be viewed as the confirmation of a double-top pattern, which would make a breakout to the downside a sort of trifecta of bearish indicators. For the bulls to regain some of the market momentum, the price will have to take-out the 1900 level to the upside. The recent closes below the 20-day moving average suggests that a near-term high may be in place. It is also interesting to note that the momentum indicator is showing sharp divergence from both price and RSI.

Rob Kurzatkowski, Senior Commodity Analyst

September 21, 2011

Bears on a Chocolate Buzz!

Wednesday, September 21, 2011

Although the Cocoa market does appear to be oversold, at least in the short-run, the overall trend does appear to favor the bears. Those looking to initiate a short position in Cocoa may wish to wait for a short-covering rally to explore selling out-of-the-money call options in Cocoa futures options. There appears to be good resistance in the December contract near the 2900 level, and selling calls above this resistance may be explored. Currently, with December Cocoa trading at 2726 as of this writing, the December Cocoa 3000 calls could be sold for about 20, or $200 per option. Given the risks involved in selling naked options, traders may wish to have an exit strategy in place should the trade move against them. An example of one such strategy would be to buy back the short options prior to expiration in November should December Cocoa close above resistance at 2900.

Fundamentals

The bull market in Cocoa futures evidenced earlier this year has certainly melted away, as prices are now hovering near one-year lows. Higher than expected production from the key Cocoa producing nations of the Ivory Coast and Ghana are weighing on prices at the same time that economic "austerity" programs in Europe are helping to curb demand. Though the 2011-12 Cocoa harvest is expected to fall short of the record crop we saw last season, many traders expect continued movement of old crop Cocoa supplies to move to market from this past year, which is keeping pressure on prices. The combination of large supplies and curtailed demand should move the Cocoa market into a surplus situation, with the International Cocoa Organization (ICCO) raising its estimate to a 325,000 ton surplus this coming season. In addition, when the National Confectioners Association releases its next Cocoa grindings report on October 20th, grindings are expected to have slowed. Speculators have begun to lighten-up on their net-long positions in Cocoa futures, with the most recent Commitment of Traders report showing both large and small speculators shedding just over 7,000 net long positions during the week ending September 13th. Even with this sharp liquidation, speculators still remain net-long Cocoa, and any rally attempts may draw in additional selling as stubborn Cocoa bulls finally throw in the towel. Though it does appear that the recent steep sell-off may be a bit overdone, it may be difficult for Cocoa prices to rally sharply unless the economic malaise we are in subsides.

Technical Notes

Looking at the daily chart for December Cocoa, we notice very few up days so far this month, as prices have fallen over $400 per ton since the end of August. The 14-day RSI has moved to oversold levels, with a current reading of 29.50. The sharp sell-off to start the week on Monday had the signs of a capitulation move by bulls, and we may start to see some sort of a bear-market rally the next several sessions that could bring about a test of chart resistance near the 2900 level. Support for December Cocoa is found near the 2650 level.

Mike Zarembski, Senior Commodity Analyst


September 22, 2011

QE2.5 Lifts Treasuries

Thursday, September 22, 2011

The Fed's decision to purchase longer-dated T-Notes and Bonds may have a positive impact on Note prices for an extended period of time, as the purchases are slated to last into June. Weak economic conditions may also prompt some traders to head toward higher ground and seek the safety of treasuries. Technically, the Dec 10-Year is still trading in the sideways consolidation pattern between 129-16 and 131-10. Given the fact that the scope of a potential upside breakout is unknown, some traders may possibly wish to explore selling a put option. For example, some traders may want to consider selling an Oct T-Note 129.5 put (TYV1129.5P) for 0-32, or $500. The maximum profit would be the premium received and this trade would have unlimited loss potential. Some traders may look to exit the position on a close below 129-16 to mitigate this risk.

Fundamentals

10-Year Notes are not at record low yields after yesterday's FOMC announcement. The rate decision was once again a non-event, but the statement had a fairly grim assessment of economic conditions. The Fed also stated that they would purchase longer-term treasuries over short-term bills, which is going to provide additional support for T-Note and Bond prices. The move will also have a negative impact on longer-dated interest rates, causing the yield curve to flatten further. Treasuries may have an advantage over physical commodities in the near-term in light of the heightened economic concerns. The Fed is taking a big gamble by lowering long-term rates to stimulate economic conditions. The low interest rate environment puts the economy at significant inflation risk long-term. Yields may also rise quickly once the Fed purchases end in June.

Technical Notes

Turning to the chart, we see the June 10-Year Note trading toward the upper end of the sideways consolidation pattern between 129-16 and 131-10. Closes above 131-10 may signal a new breakout. The upside potential for Notes remains unknown, given that we are in uncharted territory. It is also of interest to note that the RSI indicator has been diverging from prices since early to mid-August. This can be seen as bearish longer-term, and the pattern may take an extended period of time to play out.

Rob Kurzatkowski, Senior Commodity Analyst


September 23, 2011

"Operation Twist" Begins with a Thud!

Friday, September 23, 2011

Equity futures have sold-off sharply since the Fed announcement of the beginning of "Operation Twist", setting a test of major support near the 1100.00 area. Volatility as measured by the VIX has moved above 40.00 once again, which is the fifth time we have been above this key level since August. The spike in volatility makes option premiums rather rich, which could make short-option strategies attractive to more aggressive traders. Some aggressive traders who believe that the S&P 500 will either rally, stay neutral, or fall moderately in the next month may wish to explore a put ratio spread in out-of-the-money options in the E-mini S&P 500 futures. For example, with the December E-mini S&P trading at 1129.00 as of this writing, the October 1000 puts could be bought and 2 October 950 puts sold for a 3.00 credit, or $150 per spread, not including commissions. This trade is best done for a net credit, as it expands the price levels at which the trade would be profitable at expiration.

Fundamentals

The Federal Reserve has put a new "twist" in its arsenal to try to stimulate the economy by announcing that it would purchase 400 billion of longer-dated Treasuries in an attempt to lower longer-term interest rates. In addition, the Fed will re-invest proceeds from maturing agency debt into mortgage backed securities to help keep mortgage rates low. The Fed's actions were not supported by all voting members, as there were three dissenters to the new efforts. The increase of longer-term maturities will be offset by a decrease in shorter-term maturities in the Fed's portfolio, which will lengthen the average maturity of the Fed's portfolio to eight years by 2012. The effect of the Fed's action should be a flatter yield curve in hopes that lower longer-term rates will spur an increase in borrowing for mortgages, as well as by businesses to meet funding needs. The big losers in this policy could be regional banks, who benefit from a steep yield curve, as they normally borrow short-term and lend long-term, locking-in the interest rate differential. The market's reaction to the Fed's announcement was for longer-term Treasury futures prices to rise sharply, while the short end of the curve saw declines. Equity markets sold-off sharply, and commodity prices -- especially Gold and Oil -- tumbled. What market participants seemed to get out of the Fed's post meeting comments was that there were still very real down-side risks to the economy, and that any action by the Fed may not only take some time, but also may still be ineffective in reviving the economy. That seems to have been the catalyst that sparked the renewed flight to less risky assets occurring since the Fed's announcement.

Technical Notes

Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice that Thursday's steep sell-off seems to have confirmed the "bear flag" formation that has been developing since early August. The pattern began once prices broke downward from the "consolidation pattern that the E-mini's have been in for most of 2011. Notice how volume has declined during the formation of this "flag", which is a hallmark of this pattern. Traders would likely want to see volume increase once the lower "uptrend line" is taken-out, which adds to the validity of the pattern. There is support near the 1100.00 area on the cash S&P chart, and major support for the futures at the "spike" lows of 1077.00. If 1077.00 gives way, there is not any chart support until the 1000.00 level. Upside resistance is found at the 20-day moving average, which is currently near the 1180.00 area. Major chart resistance is found at the lows of the 2011 consolidation near the 1241.00 area.

Mike Zarembski, Senior Commodity Analyst