« September 2011 | Main | November 2011 »

October 2011 Archives

October 3, 2011

Can Crude Snap Out of Bear Market?

Monday, October 3, 2011

Crude Oil finds itself mired in a bear market, after closing more than 20% off of late April/early May highs. Traders have had little positive economic news to latch onto, especially in housing and employment. This paints a negative demand outlook. Couple this with lower growth forecasts for China, and it is not difficult to see why bulls have left the market. Technically, Crude Oil is in a textbook bear market, but there has not yet been a convincing downward breakout from the 2-month old trading range in which the market finds itself. The possibility of a downside breakout is probably more likely than a reversal at this point. Some traders may possibly wish to consider testing the bearish side of the market with a bear put spread. With implied volatility at high levels, vertical spreads are less costly than they historically have been. An example of such a spread could involve buying the November Crude Oil 80 put and selling the November 75 put, for a debit of 1.25, or $1,250. The trade risks the initial cost and has a maximum profit of $3,750 if the November futures settle below 75.00 at expiration.

Fundamentals

Crude Oil futures remain mired in a slump, unable to gain any sort of traction due to a weak economic outlook. The US supply remains more than adequate at the moment, so many traders may shift their focus to economic data. This week is heavy with employment data, with the ADP Employment Change and Non-Farm Payroll data joining the weekly claims data. Funds have slashed their net long position by over 14,000 contracts, while some smaller specs have cut their net position by over 4,000 contracts. There is little chance of funds or specs changing their net positions ahead of the employment data. Many traders will likely also be focused on the EU meetings in Luxembourg , where the pan-European union will discuss the almost inevitable Greek default. Many speculators spear to have soured on Crude Oil, for the most part, and some net long holders of equities have also shorted the contract as a macro hedge. For Oil traders to regain the zeal seen earlier this year, there likely needs to be a sharp turnaround in economic sentiment.

Technical Notes

Turning to the November Crude Oil chart, we see prices lingering just below the 80.00 level. Thus far, the bears have not been able to push prices convincingly lower to signal a downside breakout from the 80-90 trading range. The recent failure to test the upper end of the trading range could be seen as a negative sign. The RSI is near oversold levels, which can be seen as somewhat supportive of prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


October 5, 2011

Dollar Index Climbs a Wall of Worry

Wednesday, October 5, 2011

One of the biggest beneficiaries of the recent European debt crisis has been the US Dollar, with the Dollar Index futures rallying over 6 full points since the end of August. Should Greece finally be forced to declare some type of default on its obligations, we may see a knee-jerk reversal of the recent trends, as one of the major "concerns" will have finally been settled. Some traders looking for a big move in the Dollar index but with a bearish bias may wish to consider exploring a put back spread. For example, with the December Dollar Index trading at 79.860 as of this writing, the December 78 puts could be sold and 2 December 76 puts bought for a 0.10 credit, or $100 per spread, not including commissions. Ideally, this type of trade should be done as a net-credit, as that increases the potential band of prices where the trade will be profitable at option expiration in December.

Fundamentals

Fear of the unknown is certainly prevailing in the financial markets, as many traders appear to be focusing their concerns on what will occur if/when Greece defaults on its debts. It is this delay of what appears to be inevitable that is spooking the markets and causing a move away from more risky assets and into the so-called safe havens, such as US and German government debt and the US Dollar. If that was not enough, signs of a slowing Chinese economy have sent commodity prices tumbling, and now there are threats of a possible trade war between China and the US should a proposed Senate bill that would require "penalties" against nations deemed to be undervaluing their currency. All this "potential" turmoil is reviving memories of late 2008 and 2009, when the collapse of Lehman Brothers sparked a steep decline in equity and commodity prices and set the stage for a global slowdown/recession. The new "sell first ask questions later" mentality has sent some markets, such as Copper, Platinum, Corn and even some equities, to price levels that seem to be factoring-in a global malaise worse than what occurred in early 2009! What it will take to change the psyche of market is currently unknown, but it usually takes some sort of catalyst to trigger a change in trend, and ironically, it may take an actual "default" on Greek debt to trigger a move back into commodities -- especially if the worst fears of investors do not materialize

Technical Notes

Looking at the daily chart for the December Dollar Index, we notice the rally ran into some overhead resistance once prices moved above 80.00. The 14-day RSI has moved into overbought territory, with a current reading of 70.26. There is also a bit of a bearish divergence beginning to form in the RSI, and coupled with the markets failure above 80.000, we may be overdue for a correction in prices. Resistance is seen at Tuesday's high of 80.430, with support seen at 77.835.

Mike Zarembski, Senior Commodity Analyst


October 6, 2011

Bernanke Fails to Appease Bond Bulls

Thursday, October 6, 2011

Bond bulls were disappointed by Fed Chairman Bernanke's testimony in front of Congress. Some traders were holding out hope of further stimulus, leading to further demand for longer-dated treasuries. Many traders are now focused on economic data, most notably tomorrow's non-farm payroll number, which is expected to show the economy created roughly 60,000 jobs last month. A number meeting or exceeding this target could trigger more aggressive selling of Bonds, while a disappointing number could end the recent slide. From a technical perspective, some traders may wish to consider focusing on the 140-00 level, as a breakout below this number may cause Bonds to fall another five handles or, possibly, more. Some traders may possibly want to enter into a bear put spread in the event that this level is broken. An example of such a trade would be buying the December Bond 140 puts and selling the 135 puts, for a debit of 1-10, or $1,156.35. The trade risks the initial cost and has a maximum profit of $3,843.75 if the December Bond futures close below 135-00 at expiration.

Fundamentals

Bond futures are lower for the third consecutive session, as many investors begin to take on more risk. Yesterday's ADP number showed private payrolls increasing by 91,000 jobs last month, giving equity investors a ray of hope that a double-dip recession can be avoided. Bonds are also lower after Fed Chairman Bernanke gave no indication that the central bank will begin another round of stimulus. The Fed overtook China as the biggest treasury buyer earlier this year. It is difficult to see longer-dated yields remaining this low for an extended period of time, unless the global economy is faced with the worst case scenario - a long, drawn-out period of slow growth. In the short-term, however, the EU's handling of the sovereign debt situation could spark further buying in treasuries, especially if Europe capitulates and cuts-off aid to Greece. This is an unlikely scenario, but the risk of this happening remains as long as Greece fails to meet its targets. Eventually, lawmakers may succumb to political pressure and leave the Mediterranean nation to fend for itself.

Technical Notes

Turning to the chart, we see the December Bond contract failing to break through resistance formed by the September 22 high close of 146-02. The chart may be showing signs of forming a double-top, which would be confirmed by a close below 140-00. If prices are unable to hold this level, support at 135-00 may be tested. Thus far, prices have held above the 20-day moving average, but a close below the average could be a sign that a near-term high has taken place. The momentum indicator hints at possible price weakness in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


October 7, 2011

Heating Oil Supplies May Tighten as East Coast Refineries Shut Production

Friday, October 7, 2011

Current weather forecasts are calling for below-normal temperatures in the northeast this coming winter, which may spur increased demand for Heating Oil. In addition, the New York law requiring the use of very low sulfur Heating Oil in mid-2012 may lessen demand for the No. 2 Heating Oil that is deliverable against the NYMEX futures contract. Some traders anticipating this scenario may wish to explore buying near-term Heating Oil futures and selling deferred contracts. For example, as of this writing, the February 2012 futures could be bought and the September 2012 futures sold for about a 0.1000 premium to the February contract. Traders buying this spread would want to see the February premium over September widen.

Fundamentals

There is a fundamental shift in the refining industry that may be signaling much higher Heating Oil prices for the East Coast of the US in the coming months. East Coast refineries are closing at an alarming rate, as a perfect storm of high input costs, increased environmental regulation, and weakening industrial and consumer demand for refined products has made refining operations an unprofitable endeavor. East Coast refineries are unable to take advantage of the huge supplies of Crude Oil being sent from Canada to the Midwest storage facilities, which has been a main catalyst for the discounted prices for the benchmark WTI futures contract vs. the Brent futures contract, which is the basis for the Crude available to the East Coast market. This pricy feedstock has crimped refining margins on the coast, especially with US Gasoline and distillate demand weak due to the slowdown in economic recovery. If this was not enough bad news for refiners, New York State, which is the largest consumer of Heating Oil, will begin requiring sharply lower sulfur content of 15 ppm, vs. the current 2,000 ppm limit. Most, if not all, of the east coast refinery operations will not be able to produce Heating Oil with sulfur content that low by the July 2012 deadline, which will lead to reduced supplies and potentially sharply higher Heating Oil prices in New York. Gasoline margins on the east coast are running at barely breakeven levels when transportation costs are included. Should we see a continued shut-down of the east coast refining industry, the region will likely become more reliant on supplies from the Colonial pipeline, which supplies refined products from the Gulf of Mexico up through the mid-Atlantic States. This could cause increased volatility in product prices, as dependence on only one major source of fuel leaves the area vulnerable to any issues involving the pipeline.

Technical Notes

Looking at the daily continuation chart for Heating Oil, we notice the market has been in a general down-move since April, when the recent highs were made. Prices are below both the 20and 200-day moving averages, though Thursday's sharp rally in the Oil complex has prices beginning to test the 20-day average. The 14-day RSI has turned up, moving into neutral territory with a current reading of 47.52. There appears to be good support in the lead month futures near the 2.7000 area, with overhead resistance found at the 200-day moving average currently near the 2.9350 area.

Mike Zarembski, Senior Commodity Analyst


October 10, 2011

Stock Index Futures Not Impressed by NFP Report

Monday, October 10, 2011

Failure to sustain the "knee jerk" rally that occurred after the non-farm payroll figures were released may be signaling continued weakness in the E-mini S&P futures. Some traders with a bearish bias may perhaps wish to explore a bear call credit spread. For example, with the December E-mini's trading at 1155.25 as of this writing, the October 1250 calls could be bought and the October 1200 calls sold for a credit of 8.50, or $425 per spread, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration on the third Friday in October should the December futures be trading below 1200.00.

Fundamentals

Stock index trades must have woken up in the wrong side of the bed on Friday, as a better than expected Non-farm Payrolls report for September was met with little enthusiasm. The headline figure was certainty positive, with 103,000 jobs added in September, vs. the 60,000 jobs the consensus was expecting. The prior month's revision was also supportive, with the Labor Department revising August payrolls to a positive 57,000 from unchanged. The average work week rose by 0.1 hours to 34.3 hours. The unemployment rate remained unchanged at 9.1%, as more Americans attempted to re-enter the workforce, which offset the jobs created. However, "the devil was in the details" of the report, as the payroll gains were padded by the ending of the strike by telecom workers at Verizon in September, which accounted for a gain of 45,000 jobs. If we remove this event from the figure, the payrolls figure would have nearly met pre-report estimates. The rate of jobs growth is still well below the amount needed to actually put a dent in the unemployment rate, as economists estimate that we need to add jobs at an average monthly rate of at least 200,000 jobs to lower the rate by about 1%. Private payrolls grew by 137,000, though the key manufacturing payrolls fell by 13,000 jobs. Public sector employment continues to fall, with government payrolls shedding 34,000 jobs last month. If we look at the so-called "underemployment rate", which includes those who are working part-time but wish to work full time, as well as those who are not actively looking for work but would want to work full time, the rate has risen to 16.5%, which is the highest level this year. It appears that many traders will not become bullish on equities until we start to see some form of cooperation from Congress and the executive branch in implementing fiscal policies that will take away much of the uncertainty that is hampering employers from hiring or expanding their payrolls.

Technical Notes

Looking at the daily continuation chart for E-mini S&P 500 futures, we notice that prices have been trading within a consolidation phase, with a bias to the downside. Prices attempted to trade above the 20-day moving average on Friday, but the early recovery was not long-lasting. The 14-day RSI continues to hover in neutral territory, with a current reading of 48.20. Support for December E-mini's is seen at last week's lows of 1068.00, with resistance found at the recent highs of 1214.50.

Mike Zarembski, Senior Commodity Analyst


October 11, 2011

Loonie Looking to Build on Momentum

Tuesday, October 11, 2011

The Canadian Dollar has caught a bid over the past week, largely due to external forces, namely stronger commodity prices. The loonie may be able to build off this momentum on its own merits, given the improved labor market and sound central bank action. Technically, the currency has reversed sharply, after running into a significant support level, but must meet resistance near 0.9750 with equal vigor. Some traders may wish to focus their attention on this resistance level and perhaps consider buying the December futures contract on a close above 0.9750, with an upside target of parity (1.0000) and a stop at 0.9600.

Fundamentals

The Canadian Dollar has followed the rebound in energy prices in recent sessions, as forex traders have taken-on more risk and have tested the long side of growth currencies. Indicators are pointing toward slow growth in the US, versus earlier fears of a double-dip recession, which has caused energy prices to stabilize. An increase in energy usage would be a shot in the arm for the Canadian economy, as the nation is the United States' largest trade partner in petroleum. The contagion fears in Europe also have investors seeking safer places for their money. With the US Bond market overbought, many traders have looked outside the US for those safe havens. The Canadian Dollar may also have an advantage over other commodity currencies, such as the Aussie and Kiwi Dollars', due to the relative health of the economy. Recent job growth has been positive, and the unemployment rate has fallen to 7.1%, which is the lowest level in almost three years.

Technical Notes

Turning to the chart, we see the December Canadian Dollar forming a reversal, after testing support near the 0.9365 mark. The next test comes in the form of resistance at 0.9750. If the loonie is able to push above this level, the currency may test parity with the US Dollar once again. Prices are also nearing the 20-day moving average. A close above the average could be seen as significant in the near-term, as it may signal that a near-term low is in place.

Rob Kurzatkowski, Senior Commodity Analyst


October 12, 2011

Will the USDA Report Help or Hurt Grain Prices?

Wednesday, October 12, 2011

Soybean futures appear to be oversold, with the market showing strong support near the 1160.00 area basis the January contract. Some traders who are expecting this support point to hold may perhaps wish to explore selling out-of-the-money puts in Soybean futures options. For example, with January Soybeans trading at 1250.00 as of this writing, the December Soybean 1100.00 puts could be sold for about 6.25 cents, or $312.50, 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 January futures be trading above 1100.00.

Fundamentals

2011 has been a volatile year for grain futures, with producers seeing record high Corn prices in August, followed by prices falling over $2.00 per bushels in one month's time. Soybeans flirted with the $15.00 per bushel level for only the second time in history, before prices plunged sharply in September. Given this price volatility, many traders remain nervous going into the USDA October Crop Production & Supply/Demand report due out at 7:30 am Chicago time this morning. For Corn, many traders will likely be focusing on the revision to average yield estimates, with many in the trade looking for a 2 to 3 bushel increase in average yield from the 148.1 seen in the September Crop Report. Also of note will be the crop acreage report, with many traders looking for a lower revision to harvested acreage of nearly 500,000 acres. So far, many market participants are looking for a Corn harvest just below 12.5 billion bushels, which is nearly unchanged from September's estimate. The October estimate for next year's carryout totals may be the most widely anticipated of the data, as there is much debate on how much demand will be restored now that prices are well off the historic highs. Current market estimates are for an increase in carryout totals to about 815 million bushels, which is up from 672 million bushels in the September report.

For Soybeans, many traders expect the USDA to raise the average yield by 0.2 bushel per acre to 42.0 bushels per acre. Harvested acreage should show a decrease of nearly 300,000 acres, putting the total production figures closer to 3.1 billion bushels, which is up slightly from the 3.085 billion bushels from the September report. Like Corn, the 2012 carryout totals estimate will be highly anticipated, as traders wait to see the USDA's take on US Soybean export estimates, especially with large supplies of beans available from South America and the uncertainly regarding how strong Soybean demand will be from China as we move into 2012. Many traders are looking for Soybean ending stocks to increase to 185 million bushels, which is up 20 million bushels from the September report.

Looking forward, the recent decline in prices may spur more export business to the US, especially if we start to see the US Dollar begin to decline off its recent highs. Export totals this past week were supportive for Corn, and especially Soybeans, as the latter saw export totals double from the previous week. Speculative accounts have been shedding their long positions aggressively during the past month, and should we see any bullish "surprises" in this morning's report, or should we see some positive news out of the European debt situation, we may see renewed bullish interest in the grain complex going into 2012.

Technical Notes

Looking at the daily chart for January Soybeans, we notice the market appears to be putting in a near-tem bottom just above the 1160.00 area. Tuesday's sharp rally prior to the USDA report likely demonstrated that a large number of shorts were covering their positions. The 14-day RSI had been hovering in oversold territory during the past few sessions, until yesterday's rally took the momentum indicator to a more neural reading of 44.05. Prices now appear poised to test the 20-day moving average, but remain over one dollar below the 200-day moving average. Support for January Soybeans is seen at the recent low of 1163.50, with resistance found at the low of the previous consolidation near the 1292.50 level.

Mike Zarembski, Senior Commodity Analyst


October 13, 2011

Wheat Stuck in Bear Market

Thursday, October 13, 2011

Wheat prices have encountered bearish conditions that may be difficult for the market to overcome. Supplies are expected to be at their highest levels in almost a decade, and demand could continue to slip. There would likely have to be a sharp global economic turnaround combined with inclement growing conditions to spring the bulls into action. Thus far, the market has held technical support at the $6.00 mark, and the oscillators are giving mixed signals. Some traders may possibly wish to consider shorting the futures contract on consecutive closes below the 600 level. This trade should be considered risky, given the market volatility. Some more conservative traders may perhaps want to consider entering into a bear put spread, buying the December Wheat 600 puts and selling the Dec 550 puts for a debit of 14.00, or $700. The trade risks the initial cost and has a maximum profit of $1,800 if the December futures close below 550 at expiration.

Fundamentals

Wheat futures tumbled after yesterday's USDA report, which projected Wheat stockpiles will be at their highest levels since 2002. This year, Wheat prices reached their highest level since hitting record levels in 2008. As a result, many farmers have increased their acreage to capitalize on the high prices levels. This has been the phenomenon not only in the US, but in other countries as well. Record plantings in China and Australia are clear evidence of this. Healthier crops in Russia, the Ukraine and China, combined with a stronger US dollar, are also leading to lower demand for US Wheat. Wheat prices have also been hurt by external forces, as commodity prices have been weaker as a whole lately.

Technical Notes

Turning to the chart, we see the December Wheat contract coming down to test support near the $6 level in recent sessions. This is a critical support level for the Wheat contract, and failure to hold this support could drive prices down to $5, or possibly even the $4.50 mark. It is interesting to note that the RSI indicator bottomed-out on Sep. 23rd, which was over a week before the most recent lows. This can be seen as a potential sign that the market could turn around. Countering this is the bearish divergence seen between the RSI and momentum indicators, where momentum has seen a modest bump, but the RSI has rebounded sharply.

Rob Kurzatkowski, Senior Commodity Analyst


October 17, 2011

Oil Prices Refuse to Hold Below $80

Monday, October 17, 2011

The "spike" low near the $75.00 level in December Crude Oil may be a barrier that will be difficult to take out, at least prior to the expiration of the December contract in November. Some traders who are looking for the recent lows to hold may possibly wish to explore selling puts in December Crude Oil options with strike prices below major support at $75.00. For example, with December Oil trading at 87.00 as of this writing, the December 70 puts could be sold for about 0.60 or $600 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in November should December Crude Oil be trading above 70.00.

Fundamentals

It appears that a bullish bias still exists in Crude Oil prices, as once again not even continued fears of global economic slowdown appear to be able to keep WTI Oil prices from holding below the $80 per barrel level. Granted, there was some better economic data released this past week that may have encouraged some traders to bid Oil prices higher, but there is still no firm resolve to the European debt situation, and political gridlock is hampering policies to encourage job growth in the US, both of which have weighed on commodity prices during the past several months. December WTI futures are currently trading at nearly 4-week highs, despite a much larger than expected build in Crude Oil inventories last week. The weekly EIA energy stocks report, which was released on Thursday due to the Columbus Day holiday on Monday, showed that Crude Oil stocks rose by a larger than expected 1.344 million barrels, due to higher Crude imports and lower refinery utilization as we are entering the refinery maintenance season, because refiners switch over to production of Heating Oil vs. Gasoline going into the winter heating season. US Oil inventories are nearly 23 million barrels below last year's totals, but still are on the higher end when compared to the 5-year average. With some talk of a possible expansion of the European bailout fund and better inflation data out of China that may put an end to some of the monetary tightening policies that the Chinese government has put in place to slow the rate of inflation, we may start to see global demand for Crude Oil begin to stabilize -- or possibly even rise -- especially if we start to see the current sense of "uncertainty" regarding the global economy start to wane.

Technical Notes

Looking at the daily chart for December WTI Crude Oil, we notice once again how prices continue to remain unstable below the $80 level, having spent only a few sessions below this key technical level before good buying emerged, sending prices sharply higher during the past few sessions. Prices now are holding solidly above the 20-day moving average, which is keeping short-term Crude bulls firmly in charge. However, before the market can turn solidly into the bull camp, there are several technical barriers which must be overcome. There is solid chart resistance between the 90.00 and 91.00, basis the December contract, and additionally the 200-day moving average is hovering well above current prices near the 97.50 level. The 14-day RSI has turned neutral to positive, with a current reading of 55.47. The next resistance level for December WTI is seen at 90.00, with support found at the 20-day moving avenge, currently near the 83.00 level.

Mike Zarembski, Senior Commodity Analyst

October 18, 2011

When Will Good News Come for Wheat Bulls?

October 18, 2011

Wheat fundamentals continue to favor the bear camp at the present time. Bulls can only hold out hope for physical buyers to step in or inclement weather for the winter crop. Technically, Wheat continues to teeter just above the critical support level at 600. The divergence between the RSI and price offers bulls some hope that the market may turn around. Some traders may possibly want to consider being short the Wheat market in the event that prices break through critical support at the 600 level.

Fundamentals

Wheat prices have been unable to follow other grain prices higher under the weight of the large crop. Russia had exported a record large crop in the month of August, and Australia is currently saddled with a record crop size. Kansas Wheat plantings were 69% done, and about 35% of the winter crop has already emerged. Nationally, the winter Wheat crop is 59% seeded, which is behind the 5-year average of 67%. Given the already large supply, the slower than expected planting progress is not anticipated to have a positive impact on prices. The problem the Wheat market now faces is finding a buyer to work down the stockpiles.

Technical Notes

Turning to the chart for December Wheat, we see prices continuing to hang around support near the 600 level. Prices were unable to gain momentum above the 650 level, which is a minor, near-term resistance level. It is interesting to note that the RSI indicator has turned higher, while prices remained flat. This can be seen as a positive indicator, but the timing of a potential move higher is unknown.

Rob Kurzatkowski, Senior Commodity Analyst


October 19, 2011

Euro Remains Range Bound Ahead of Euro Zone Summit

Wednesday, October 19, 2011

Going into the EU summit, it should come as no surprise that option premiums in Eurocurrency futures options are running high, as uncertainty is high regarding whether any plan will be forthcoming to deal with the debt crisis. Some traders who may desire to take advantage of the higher volatility levels in the near-term options may perhaps want to explore the sale of a deep out-of-the-money strangle in Eurocurrency options. For example, with the December Eurocurrency trading at 1.3738 as of this writing, the November 1.42 calls and the November 1.31 puts could be sold for a credit of 0.0065, or $812.50, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in early November should the December futures be trading above 1.3100 and below 1.4200.

Fundamentals

The recent rally in the Eurocurrency may have run its course, at least in the near-term, as many traders square their positions ahead of the Eurozone summit this coming weekend. The Euro rallied during the past few trading sessions on investor optimism that European leaders would come to some sort of long-term resolution regarding how to deal with the looming debt crisis. However, comments from German officials seemed to pour cold water on the notion that a major announcement would be forthcoming from the EU summit. Confidence in a meaningful plan has eroded economic expectations in Germany, as the ZEW index fell to its lowest readings in nearly 3 years. Adding fuel to the fire of uncertainty was the fear that Moody's Investors Services may lower the sovereign credit rating of France from its coveted AAA rating, due to the economic reinforcement needed to not only help support weaker members of the EU, but also to help shore-up the balance sheets of the country's major banks. Though we may see some short-covering in the Euro ahead of the EU summit, it may take a definitive plan from the EU leaders to finally get serious about dealing with the debt crisis before the Euro can stage any meaningful rally. However, should the EU summit fail to bring about any significant announcement, or if it appears that European leaders will only "kick the can" further down the road, rather than deal with the tough issues, it is a distinct possibility that we may see the Euro resume its decline and test the recent lows just below 1.3200 basis the December futures.

Technical Notes

Looking at the daily continuation chart for Eurocurrency futures, we notice the recent rally in the Euro has started to wane, as the market attempted to test near-term resistance near the 1.3940 level. The price move seen during the past several weeks has the appearance of a "V-shaped" bottom, and combined with the recent failed test of resistance may portend a new period of price consolidation. Long and short-term price trends remained mixed, with prices holding above the 20-day moving average, but they are still below the longer-term 200 day MA. Volume has been light during the past few sessions, which may be a sign that the recent rally was mostly short-covering and not new buyers coming into the market. Resistance for the December Euro is seen at the September 15th high of 1.3938, with major support found at 1.3142

Mike Zarembski, Senior Commodity Analyst


October 20, 2011

Holding Pattern for the Loonie

Thursday, October 20th

The Canadian Dollar will continue to be influenced by external forces, most notably Crude Oil prices and the EU bailout fund. If Europe is able to reach an accord that satisfies investors, it could be a boon for Crude Oil and the Canadian Dollar. Technically, the December futures contract needs to hold the recently establish support at 0.9750 to avoid a possible meltdown. On the upside, a move above parity could bring out buyers in full force. Some traders may perhaps want to consider going long the Canadian Dollar futures on a close above 1.000, with a protective stop at 0.9850 and an upside target of 1.0250.

Fundamentals

The Canadian Dollar has been trading sideways during the past few sessions, as the EU has been unable to reach an accord on the bailout fund for distressed countries. Commodity prices have also stalled-out over recent sessions, and this has had a negative impact on the Loonie. Many traders also have begun to take off higher yielding assets in favor of more defensive assets, which can be seen as a negative for the Canadian Dollar. Some sort of resolution to the European bailout fund could improve the economic sentiment among traders, which in turn could improve the Loonie's prospects. Crude Oil futures are approaching critical resistance at the $90 level, which is likely going to have currency implications. If Oil futures are able to break-out above $90, the Canadian Dollar may break through parity once again.

Technical Notes

Turning to the December Canadian Dollar chart, we see the December Canadian Dollar consolidating after breaking through resistance at 0.9750. The next test comes in at resistance at 1.0000. If the market is able to break through parity, the next significant resistance level comes in between 1.0250 and 1.300. On the downside, support can be found at 0.9750, and major support can be found at 0.9360. Prices are currently between the 20 and 50-day moving averages. A move above the 50-day moving average could trigger additional momentum.

Rob Kurzatkowski, Senior Commodity Analyst


October 21, 2011

Are Copper Prices Beginning to Tarnish?

Friday, October 21, 2011

The recent sell-off in Copper prices is threatening the "V" bottom that has been in place during the past few weeks. Some traders looking for the recent lows to be taken-out may possibly wish to explore selling December Copper, with a potential price target near the 2.7300. A move above the previous recent low of 3.2060 would appear to halt the current near-tem bearish momentum.

Fundamentals

It has been a difficult few weeks for the base metals sector, as continued uncertainty over a definitive plan to deal with the European debt crisis and signs that the Chinese economy is indeed slowing appears to have put traders in a selling mood. The declines are widespread, with Aluminum prices down over $400 per ton, Nickel prices tumbling over $6,000 per ton and Copper down $1.35 per pound since the beginning of August. The sell-off in the base metals complex corresponds to a commodity-wide price decline, as many traders appear to have moved towards a more risk averse mentality until we start to see some signs of an improving economic environment. It appears that some traders are ignoring some of the fundamentals that would normally be supportive of Copper prices. For example, the International Copper Study group is calling for a global Copper deficit of 250,000 tons in 2012, which is up from the 200,000 deficit expected in 2011. There are also some supply issues for Copper in both Chile and Indonesia, as labor disputes have curtailed production at some of the country's mines. China, who is the 800-pound gorilla in the physical commodity sector, has yet to see end-users buying physical Copper, despite the lowest price levels of the year. Could this be a sign that commercial buyers believe that the country's economic growth levels will continue to decline, as the government's attempts to tighten financial lending may lead to further weakening demand for Copper, and therefore lead to even lower prices as we move into 2012? That may ultimately be on traders' minds as they continue to sell Copper.

Technical Notes

Looking at the daily chart for December Copper, we notice that the "V" bottom has been negated by Thursday's sell-off. Prices have now once again fallen below the 20-day moving average, and momentum, as measured by the 14-day RSI, has turned weak, with a current reading of 32.63. The yearly low of 2.9940 needs to hold, or we could see a test of the major lows made back in 2010 near the 2.7300 area. Resistance for December Copper is seen at the October 17th high of 3.4635.

Mike Zarembski, Senior Commodity Analyst


October 24, 2011

Is a Bullish Price Advance Brewing in Coffee?

Monday, October 24, 2011

Friday's upside breakout may signal that Coffee prices are ready to resume their move higher. The lows of the recent consolidation near 220.00 may be signaling a near-term bottom is in place. Some aggressive traders who are expecting the recent lows to hold may possibly wish to explore selling out-of-the-money puts in Coffee futures options with a strike price below support at 220.00. For example, with December Coffee trading at 244.00 as of this writing, the December Coffee 210 puts could be sold for about 1.00, or $375 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at options expiration in mid-November should December Coffee be trading above 210.00.

Fundamentals

After watching Coffee futures prices consolidate for most of the month of October, it appears that Coffee bulls are beginning to flex their muscles, as prices appear poised to break out to the upside. Coffee, like most commodity markets, was being held captive buy the continued uncertainty regarding a solution, or at least some consensus on a plan to deal with the European debt crisis. This uncertainty has made commodity prices quite volatile, as conflicting reports on progress on the debt plan seemed to trigger movement into or out of the commodity sector without regard to the underlying fundamentals facing any specific market. For the Coffee market, the fundamentals seem to be leaning toward the bullish camp in the near-term, as weather forecasters calling for a "La Nina" event, which could affect Coffee production out of Columbia, which has struggled with its production the past few years due to heavy rains and flooding. Tight Coffee supplies in Asia have been supporting Coffee prices lately, and news of flooding in Vietnam, which is the world's largest Robusta Coffee producer, has affected Coffee shipments out of the country. Central American producers are also seeing heavy rains begin to affect the Coffee harvest, which may keep near-term supplies tight. However, should EU leaders once again fail to come up with an acceptable debt plan, Coffee prices and commodity prices may tumble once again, as traders' fears of a global recession return the forefront.

Technical Notes

Looking at the daily chart for December Coffee, we notice prices trading near the highs of the recent price consolidation. Friday's strong upward move has put prices well above the 20-day moving average, adding to the short-term bullish momentum. The 14-day RSI has turned upward, with a current reading of 53.46. Coffee bulls still face some upward resistance at the September 21st low of 251.35, and again at the 200-day moving average, which is currently near the 262.75 area.

Mike Zarembski, Senior Commodity Analyst

October 25, 2011

Can China Turn Around the Sagging Copper Market?

Tuesday, October 25, 2011

Chinese manufacturers may be entering a restocking phase, as the economy has avoided a hard landing. Inflationary pressure in other areas has moderated, which could create domestic demand for Chinese goods. The bounce in Copper prices could also be a sign that some traders expect Europe to hammer out the details of the EU bailout fund this week. Technically, Copper looks as though it may be forming a double-bottom, but the pattern has yet to be confirmed. Copper is a volatile contract, with very illiquid options. Many traders may monitor the price of the metal as a forward indicator for equity prices or commodity currencies. Some traders that have the risk capital to trade the metal may perhaps wish to consider entering into a long futures contract on a close above 3.4550, with an upside target of 3.8500 and a stop at 3.2400.

Fundamentals

Copper futures are higher for the third consecutive session, after Chinese manufacturing expanded during the month of October. While the expansion is moderate, it does snap a streak of three consecutive months of contraction. With economic activity in much of the world at a standstill, the data suggests that the uptick in manufacturing activity could be attributed to a strong domestic economy. For Copper traders, this means that orders of the red metal could continue to destock LME inventories. This shows the evolution of China from an export economy to a more balanced economy with strong domestic demand. The increased likelihood that there will not be a hard landing for China's economy suggests that manufacturers will be restocking their Copper supplies. LME inventories have already been shifting toward Shanghai, but many traders will be watching to see what happens with Shanghai inventories. The focus will be on whether the Copper stocks simply sit in exchange warehouses or make their way to end users.

Technical Notes

Turning to the chart, we see the December Copper contract making a stand at 3.0000, refusing to go any lower despite two tests of the level. The recent price action suggests that the Copper market may be forming a double-bottom, with the 3.4550 level as the trigger line. A move above this level suggests that Copper may be ready to test the 3.90's, or possibly the $4 mark. Significant resistance can be found near 3.9000. Yesterday's close above the 20-day moving average suggests that a near-term low may be in place.

Rob Kurzatkowski, Senior Commodity Analyst


October 26, 2011

Bonds Look Toppy Ahead of EU Summit Conclusion

Wednesday, October 26, 2011

Despite Bond prices currently being in a consolidation phase, option volatility is on the high side, as traders remain nervous regarding the current global economic climate. There remains good chart support near the 135-00 area, as well as strong resistance at the contract high of 147-00. Some traders who may be considering short option strategies to attempt to take advantage of the current high volatility may wish to explore selling far out-of-the-money strangles in Treasury Bond futures options, preferably using strike prices above resistance and below support. For example, with December Bonds trading at 139-11 as of this writing, the December 148 calls and the December 132 puts could be sold for about 42/64, or $656.25 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in late November should the December Bonds be trading above 132-00 and below 148-00.

Fundamentals

The "flight-to-quality" buyers who propelled US Treasury futures to new all-time highs seem to have moved on to other investments lately, leaving the Bond bull market vulnerable to new selling pressures. The recent break in Bond prices may be tied to an eternal hope that European leaders will finally come to an agreement on how to handle the mounting debt crisis, as well as finding ways to secure the balance sheet of European banks stuck holding the sovereign debt of struggling European nations. If an agreement is reached, it may reduce the possibility of a return to a global recessionary environment, which was one of the major fears that propelled US treasuries to their lofty heights. There are some concerns that Chinese buying of US Government debt is beginning to wane, as one of the largest foreign holders of US treasuries begins to diversify its foreign exchange holdings. Should the Chinese begin to liquidate these holdings, it could put severe pressure on Bond prices, as interest rates would most likely have to increase to entice other buyers into the US debt market. So far, other foreign buyers are taking on any slack from the Chinese, so the effects of reduced Chinese purchases have been mooted. Longer-term, traders will need to focus on what the Federal Reserve will do if the US economy continues to demonstrate anemic growth rates. There has been some talk of a potential QE3 being put into place over and above its current "operation twist", in which the Fed has extended its buying of treasuries further out on the yield curve. If QE3 does materialize, it may further extend the treasury bull market much longer than global economic conditions would suggest.

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we notice what might be a "double-top" technical formation. The recent failure of a move above the all-time highs made back on September 23rd sparked renewed selling, which culminated in a nearly 8-point price break in only 5 trading sessions. Since that time, Bond futures prices have consolidated in a relatively tame 4-point range on lower than average trading volume, as many traders are starting to take a wait-and-see attitude on any announcement from the conclusion of the EU summit. The short-term seems to favor Bond bears, as prices are holding below the 20-day moving average. The 14-day RSI is turning neutral, with a current reading of 47.70. The next major chart support point appears near the 135-00 level, and if this level fails to halt the sell-off, we do not see much support until prices move toward the 200-day moving average, currently near the 127-08 area. Chart resistance is found at the recent high of 141-00, and above this near the 142-00 area.

Mike Zarembski, Senior Commodity Analyst


October 27, 2011

Is WTI Finally Ready to March on Brent?

Thursday, October 27, 2011

It seems as though the NYMEX Light, Sweet Crude Oil contract has captured the near-term momentum, while the Brent contract has remained relatively steady. Recent economic and geopolitical events suggest that the spread between the contracts may narrow. Technically, the Dec NYMEX contract had a breakout above the 90.00 mark, whereas Brent has moved sideways. Some traders may possibly wish to consider buying the December NYMEX Crude Oil contract and selling the December Brent Crude Oil contract at a spread of 17.50 or greater to the Brent. Traders may choose, to exit the spread if the spread narrows to 12.50 or if it widens to 22.50. It is important to note that this spread must be legged, as the contracts trade on different exchanges and there is no margin relief for the spread. This spread can be extremely volatile and may not be suitable for all traders.

Fundamentals

Crude Oil futures have gained on renewed economic optimism and the EU debt agreement. The debt agreement can be seen as a dual boost for Crude Oil futures, as it seems that Europe may not see a hard economic landing and that the Union will also print more Euros, which may stoke inflationary pressure. The recent manufacturing data from China also suggests that the economy there may not be slowing down as much as previously thought. The excessive Crude Oil reserves in the US also may have been worked down lately, due to the slowdown in East Coast refining activity, which could tighten supplies. WTI Crude Oil has made significant gains on Brent Crude Oil in recent sessions. The spread has narrowed to 17.50 from 25.00. This may be evidence that previous suspicions were true and traders were, in fact, using the NYMEX WTI contract as a macroeconomic hedge. The tightening of the spread can also be attributed to the downfall of the Gadhafi regime in Libya, which could result in European Oil supplies loosening.

Technical Notes

The December Crude Oil chart shows the contract making significant technical progress. The market was finally able to cross through resistance at the 90 level and has tested resistance at 95. Prices have also moved above the 20, 50 and 100-day moving averages. The 20-day MA looks as though it is on the verge of crossing the 50-day average to the upside, which could be seen as further technical confirmation of the upside momentum. The market must maintain the 90 level to keep its upside momentum going, as a retreat below the average would likely be seen as a technical defeat. The spread chart between the December Brent Crude and WTI contracts shows a double-bottom pattern forming, suggesting the spread could narrow to 10.00 if confirmed.

Rob Kurzatkowski, Senior Commodity Analyst


October 28, 2011

Oil Prices Hold Near Recent Highs on Euro Debt Agreement

Friday, October 28, 2011

Should WTI futures begin to lose their upward momentum near the 95.00 level, it may signal a return to a trading range environment, with prices spending the majority of their time between 90.00 and 80.00. Crude Oil option premiums look attractive for option selling strategies, and traders looking for a return to choppy trading activity may wish to explore selling out of the money strangles in Crude Oil options. For example, with December Crude trading at 93.00 as of this writing, the December 105 calls and the December 74 puts could be sold for a credit of about 0.50, or $500 per spread, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in the middle of November, less than 4 weeks away, should the December futures be trading below $105 and above $74.00.

Fundamentals

Once again, it appears that there is a bullish bias to the Oil futures market, as WTI Crude futures are trading once again above the 90.00 per barrel level and at the highest levels since August. This rally comes despite continued concerns surrounding the European debt crisis and also whether European leaders will be able to come up with a politically acceptable plan for dealing with its economic issues. Mixed economic data in the US doesn't appear to be sufficient to drive trades back to the bullish side of the Crude market, so we have to dig a bit deeper and see if we can come up with a reason for the recent price rally. One trigger may be the unwinding of long Brent Crude short WTI futures spreads, as the death of Libyan leader Muammar Qaddafi may finally signal a start of improved Libyan Oil exports. This may begin to alleviate the tight supplies of high quality Crude to Europe that was a key factor to Brent's price rise. In addition, the once burdensome supplies of Oil in storage in Cushing, Oklahoma, the delivery point for the NYMEX WTI futures contract, are no more, as inventories in Cushing have fallen nearly 25% from their highest levels, as refineries able to access cheaper Crude from Cushing are doing so at great levels to take advantage of the very favorable margins being offered by the large WTI price discount. Supplies in Cushing have become tight enough that the term price structure has moved back towards a backwardation for the first time since the collapse of the 2008 bull market in commodities. However, this Wednesday's EIA Energy Stocks Report may have put a bit of a damper on the bullish momentum, as US Oil inventories rose by a much larger than expected 4.735 million barrels last week, despite higher refining utilization. In addition, supplies at Cushing rose for the second consecutive week, this time by 419,000 barrels, which is easing some of the backwardation in the WTI contract. Should front month WTI futures fail to hold above 90.00 in the next few trading sessions, we may chalk up the recent rally to position squaring by speculators and not to a change in the fundamentals for the Oil market, especially on the demand side. This could send prices back into the recent consolidation mode, leaving prices to churn in a 10 to 15-dollar range through the end of 2011.

Technical Notes

Looking at the daily chart for December Crude Oil, we notice choppy price action, as the surge to recent highs was offset by a bearish EIA Oil inventories figure. But that was superseded by the agreement on a deal to stabilize the European debt situation. Prices are above the 20-day moving average, but still have a way to go to reach the 200-day moving average, which is currently near the 97.25 level. The 14-day RSI looks strong, with a current reading of 62.30. The next resistance point for December Crude is seen at the 10/25 high of 94.65, with support seen at the 20-day moving average, currently near the 85.50 area

Mike Zarembski, Senior Commodity Analyst


October 31, 2011

Gold Resumes its Bullish Trend but Headwinds Remain

Monday, October 31, 2011

Though Gold prices continue to hover near 1-month highs, there appears to be some strong upside resistance that may be difficult to overcome in the near-term. With Gold option volatilities remaining on the high side, it appears that current conditions may favor short option strategies for more aggressive traders. An example of one such strategy would be selling bear call spreads in Gold futures options. With December Gold trading at 1738.50 as of this writing, the December Gold 1800 calls could be sold and the December 1860 calls bought for about 10 cents, or $1,000 per spread, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in late November should the December Gold futures be trading below 1800.00. Less aggressive traders may wish to cover the trade prior to expiration should the December Gold futures close above 1800.00 on a weekly basis.

Fundamentals

Gold's relatively strong performance in the face of the announcement of an agreement between European leaders of a plan to deal with the debt crisis seems to put bulls back in control on the market, although further price gains may face some headwinds. Gold's reaction is even more impressive given the steep sell-off in the other so-called "flight to quality" investments such as the Dollar Index and US Treasuries. Some of Gold's strength may lie in the price rebound seen from commodities -- especially Crude Oil and Base Metals, this past week -- as many traders looked at signs that the Chinese government may move to a more neutral economic policy after several months of monetary tightening to slow inflation. In addition, improving US GDP growth estimates for the 3rd quarter seem to be improving investor sentiment towards commodities in general. However, to keep Gold's bullish momentum, the yellow metal will have to overcome good chart resistance in the 1765.00 to 1775.00 area, in addition to concerns that the recent price rally occurred on much lower than average trading volume, which may be a sign that a good portion of the recent buying was short-covering and not new buyers entering the market. This week's price action may be critical to determining the direction for Gold near-term, as a slew of economic data is scheduled to be released, culminating with the Non-farm Payrolls report for October due out on Friday. Traders may be wise to heed how the Gold market reacts to this data and see how the market performs near key chart levels to help determine the likely probability of Gold's next price move.

Technical Notes

Looking at the daily chart for December Gold, we notice prices surging over $50 per ounce after the market broke out of its consolidation mode and moved above resistance at 1700.00. Unfortunately for Gold bulls, the upside breakout occurred on lower than average trading volume, which may make it more difficult for further upside momentum to occur as we move towards strong chart resistance above 1765.00. The 14-day RSI is struggling to move above 60.00 and has tuned downward, with a current reading of 57.60. Support for December Gold is seen at 1700.00 with resistance found at the aforementioned 1765.00 level.

Mike Zarembski, Senior Commodity Analyst