Tuesday, November 1, 2011

The US Dollar is now left as the lone "safe haven" currency due to the currency intervention from the Swiss and Japanese. This does not necessarily mean that the greenback is slated to move higher, as rising equity and commodity prices could trigger more risk taking from forex traders. However, if traders go on the defensive, the Dollar could potentially benefit more than any other currency. Technically, the reversal pattern suggests that the greenback could find near-term strength. If prices are to mount a sustained rally, the market needs to take out recent highs near the 80.00 level. Some traders may want to bide their time and wait for the December Dollar Index to close above 80.00 before entering into a futures position. Some traders who are convinced that the recent reversal will spill over into a sustained rally may perhaps wish to consider entering into a bull call spread, for example, buying the December Dollar Index 78 calls and selling the December 80 calls for a debit of 0.45, or $450. The trade risks the initial cost and has a maximum profit potential of $1,550 if the December futures contract closes above 80.00 at expiration.

Fundamentals

The Bank of Japan currency intervention caused the Yen to tumble sharply, and in turn, the US Dollar was bolstered. Many traders have been using three currencies as safe havens - the Swiss Franc, the Japanese Yen and the US Dollar. The central banks of Switzerland and Japan have now intervened to slow the appreciation of their respective currencies' exchange rates. It looks as though the greenback will once again be the benefactor of other currencies weakening, either by their own choice or market forces, instead of strengthening on its own merits. The Dollar is still plagued with its own issues, including slow economic growth and federal government budget imbalances. The Dollar will likely find strength when traders are in a defensive mode, avoiding risky assets. If both equity and commodity prices are able catch a sustained bid, the greenback may not be able to find sustained traction, even with the outside currency intervention.

Technical Notes

Turning to the chart, we see the December Dollar Index trading down to 75.00 before rebounding. The market avoided a test of the 74.00 support level, but did break the 20, 50 and 100-day moving averages on the downside before climbing back above the 100-day yesterday. The market has crossed through the 20 and 50-day averages in early trading. This could negate the negative impact of the downward crossover of these two averages. The next upside resistance level comes in at 78.00, and if this level is broken, the chart would suggest that the relative highs near 80.00 could be tested. It is interesting to note that the momentum indicator has severely lagged behind both price and RSI at this point, hinting that the sharp reversal could be an aberration.

Rob Kurzatkowski, Senior Commodity Analyst

Wednesday, November 2, 2011

Severe flooding in Thailand, one of the world's leading Rice exporters, is expected to curtail the amount of Rice that will be made available in the market. In addition, the US is producing a much smaller crop this season, leaving Rice importers to scramble to obtain supplies from other sources. With Rice futures trading nearly a dollar below recent highs and over two dollars below the yearly highs, some bullish traders may perhaps wish to explore the purchase of bull call spreads in Rice futures options. For example, with January Rice trading at 16.720 as of this writing, the January Rice 17.00 calls could be bought and the January 18.00 calls sold for 0.30, or $600 per spread, not including commissions. The risk on the trade would be the total value of the investment, which would be the premium paid for the spread. The potential profit would be $2,000 minus the premium paid, which would be realized at option expiration in December should the January futures be trading above 18.00

Fundamentals

It was sell first, ask questions later in the commodity markets on Tuesday, as a surprising call for a voter referendum on the EU bailout plan by Greek Prime Minister Papandreou sparked fears that the entire structure of the Euro Zone could change. Once again, fears of uncertainly have entered many traders' minds, and the initial reaction has been to lighten-up on "risk" assets and move to so called "safe havens", which lately has been considered to be the US Dollar and both US and German Bonds. Of the major commodity futures, only Sugar futures are "in the green", with prices only moderately higher. Even Gold futures, which were thought of as a "flight to safety" trade, were not immune from posting price declines, though the selloff was more muted on a percentage basis than many of the other commodities. Among the hardest hit sectors were the industrial metals and the energy sector, as fears of a stagnated Europe or possible global recession would especially hurt demand for these commodities. When seemingly all commodity markets move in lock-step, it does set-up potential situations where the specific commodity's fundamentals may not justify the price action. Markets such as Rice, Coffee and Live Cattle are just a few of the products where supply issues may not justify a significant price decline. It behooves traders to study the market fundamentals to be aware of potential trade opportunities that may present themselves on days when commodity prices move in tandem.

Technical Notes

Looking at the daily chart for January Rice, we notice prices caught in a mini-downtrend during the past several sessions, after prices failed to hold gains above 17.500 last week. Rice bulls will counter that the recent declines were on lower volume, which may be a sign of long liquidation selling and not new shorts entering the market. Prices have tested the 20-day moving average during the past two sessions, but rallied above this indicator each day. The 14-day RSI has turned lower, with a current reading of 46.53. The October 25th high of 17.560 is the next major resistance level for January Rice, with support found at the October 12th low of 16.380

Mike Zarembski, Senior Commodity Analyst

Thursday, November 3, 2011

Crude Oil traders have seen a bullish bias return to the market in recent weeks. The ongoing European soap opera over Greek debt had many traders concerned over the EU's growth prospects, which were probably overstated. Technically, Crude Oil is taking a break after jumping almost 20 dollars in a short period of time. The market remains overbought, suggesting the consolidation may continue in the near-term. Some traders may wish to consider looking for a breakout above the 95.00 level to test the long side of the market or to add to their positions if already long.

Fundamentals

Crude Oil futures are modestly higher this morning, as the EU is putting pressure on Greece to accept the most recent bailout package. The package is expected to keep the embattled nation solvent, at least temporarily. Enthusiasm over the aid package has been tempered by the fact that it does not offer long-term solutions, and also because of the build in US Crude Oil inventory levels. Despite the build in petroleum, the weather outlook for the US this winter is expected to bring severe chills. This could stoke the demand for Heating Oil in the Northeast. The large drawdown in distillates could result in a continuation of the trend in the RBOB/Heating Oil spread. Heating Oil recently hit a premium of 45 cents over RBOB. Resistance in this spread is at 50 cents, which if broken, could result in the spread moving to a dollar or more, as was the case in late 2008. This could also result in gains in Crude Oil prices, as refiners would likely have to work down inventories to produce enough distillates to keep up with demand.

Technical Notes

Turning to the chart, we see the December Crude Oil contract continuing to trade sideways between the 90 and 95 levels. This break is not surprising, given the surge in Oil prices in recent weeks, which resulted in the market being a bit overheated. Since the market rallied into the consolidation, there is a bias toward an upside breakout. The upward crossover of the 20 and 50-day moving averages could be seen as a positive for the market near-term.

Rob Kurzatkowski, Senior Commodity Analyst

Friday, November 4, 2011

The European Central Bank surprised the market by lowering the benchmark interest rate by 25 basis points to 1.25%. This would normally be considered bearish for the Eurocurrency, but its value vs. the US Dollar is little changed as of this writing. There is some talk among analysts that if the current Greek government were to dissolve, we may see a surprise rally in the Euro, as the fall of the government may take the Euro referendum off the table. It should come as little surprise that Euro option premiums are quite rich given the uncertainty surrounding Greece. For the year, the Euro futures have traded in a range between 1.4925 on the upside and 1.2870 on the down side. Some more aggressive traders may wish to consider exploring selling deep-out-of-the-money strangles in near-term Eurocurrency futures options. For example, with the December Euro trading at 1.3788 as of this writing, the December 1.495 calls and the December 1.23 puts could be sold for a credit of about 0.26, or $325 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 early December should the December futures be trading above 1.2300 and below 1.4950. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such exit strategy would be to buy back the strangle prior to expiration should the option premium move to 2.5 times the premium received for selling the strangle originally.

Fundamentals

There was certainly no lack of economic events this week, with the conclusion of the FOMC meeting on Wednesday and a vote of confidence vote by the Greek parliament, as well as the monthly Non-Farm Payrolls report for October. Starting first with the comments from the 2-day FOMC meeting, the Fed lowered its growth projections next year to a range of 2.5% to 2.9%, which is nearly 1% below its June forecast. In addition, the Fed's outlook for employment looked tepid, with an estimated unemployment rate of near 8.6% by the end of 2012, down only slightly from the 9.1% currently. However, the mood of the voting members of the FOMC also changed, as former "hawks" in the FOMC did not dissent to the Fed's current accommodative policies. In fact, the one lone dissenter was looking for even more accommodative policies. This may signal that the Fed is not planning on easing policies further this year, which has dashed market participants' hopes for some sort of QE3. If there was a bright spot, it was the ADP private employment report for October, with the firm reporting that 110,000 private sector jobs were created last month. This was 10,000 more jobs than pre-report estimates and may signal some slight optimism on the employment front. For Friday's Non-Farm Payrolls, the average estimate is calling for a net gain of 85,000 last month, though some analysts have upped their estimate to over 100,000 jobs having been created. The unemployment rate is expected to remain steady at 9.1%. The real wildcard remains Greece, where the current government remains in flux, and where the possibility remains that Greece may be the first country to leave the monetary union.

Technical Notes

Looking at the daily continuation chart for the Eurocurrency futures for the past 12 months, we notice how the market turned choppy starting in September, after prices broke below support of the summer-long consolidation pattern. The short and long-term trends are in conflict, as prices remain below the 200-day moving average (MA) but are trying to stay above the 20-day MA. The 14-day RSI is favoring neither bulls nor bears, with a current reading of a very neutral 50.45. Near-term support is found at the 11/1 low of 1.3604, with major support not found until the 10/4 low of 1.3142. Major resistance is found at the 10/27 high of 1.4241.

Mike Zarembski, Senior Commodity Analyst

Monday, November 7, 2011

After a quick rally of nearly 8 full points during the past few sessions, Bond futures were in need of a correction, and that appears to be what has happened during the past two trading sessions. Some longer-term traders who remain bullish on Treasuries may wish to use the recent price correction to explore selling out-of-the-money puts in Treasury bond futures options with strike prices below near-term support near the 137-16 level. For example, with the March Bond futures trading at 140-12 as of this writing, the January 133 puts could be sold for 56/64ths, or $875, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in late December should the March Bond futures be trading above 133-00.

Fundamentals

A slightly worse than expected employment gain for October combined with a lack of a significant plan to deal with the European debt situation from the G-20 summit has traders once again moving to a "risk off" mentality, which is supporting US Treasury prices. Early this morning, the Labor Department announced that US non-farm payrolls increased by 80,000 jobs in October, which is below the 100,000 jobs most analysts were expecting. Jobs in the healthcare industry were among the biggest gainers, adding 12,000 jobs last month. Manufacturing jobs remained steady, and the construction industry reported a loss of 20,000 jobs last month. The public sector continues to see job losses due to tightened budgets on the state and local levels. Not all the news was gloomy, however, as the Labor Department revised upward September payrolls by 55,000 jobs, and the unemployment rate fell by 0.1% to 9.0%. The headline NFP figure combined with a fairly dour economic outlook by Fed Chairman Ben Bernanke on Wednesday gave traders one more reason to bid for US Treasuries. On top of the NFP report, European leaders had little progress to show regarding a plan to deal with the European debt situation from the meeting of G-20 nations that wrapped up on Friday. No non-Euro zone country offered any help to fund the EFSF bail-out fund and there was only talk of exploring an increased role for the International Monetary Fund (IMF) in adding the European situation. So until we see something concrete out of Europe and the employment picture in the US shows meaningful signs of improvement, it appears that Treasuries will continue to see inflows from investors, despite near-record low interest rates.

Technical Notes

Looking at the daily continuation chart for Treasury bond futures, we notice the market holding near the upper end of what may end up being a bull flag formation. Prices are above both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI has been stuck in neutral, with a current reading of 53.11. Major resistance is seen at the October 28th low of 135-05, with resistance found at this past Thursday's high of 143-04.

Mike Zarembski, Senior Commodity Analyst

Tuesday, November 8, 2011

Gold futures have quietly been moving higher in recent weeks. The precious metal has taken a back seat to commodities that have been moving sharply, such as energies and base metals. European concerns seemed to thrust themselves into the spotlight just as traders began diverting their attention to other areas of the world economy. Technically, the December Gold contract appears to be heading into an area of resistance, which could slow prices in the near-term. Gold volatility is lower than it has been recently, but it remains higher than its "normal" range in the teens. Some traders may perhaps want to consider a bull call spread, like buying the Dec Gold 1800 calls and selling the Dec 1850 calls for a debit of 17.00, or $1,700. The trade risks the initial cost and has a maximum profit of $3,300 if the underlying futures close above 1850 at expiration.

Fundamentals

The rebound in Gold futures prices accelerated yesterday amid mounting concerns over the state of Italian government debt. The entire Eurozone has been thrown into a state of confusion. Just as there seemed to be a compromise reached to keep Greece solvent in the near-term, the problems in Italy began to rear their ugly heads once again. There is a sense among traders that the problems facing sovereign debt in Europe could eventually become worse than the US banking crisis of 2008, and could linger even longer. This boosts Gold's appeal as a safe haven for traders. The flip side of the equation, which appears to be holding back sharper rallies, is that diminished growth prospects in Europe also lessen Gold's appeal as an inflation hedge. Slow growth tends to lead to slow inflation. The rush of investors flocking to US treasuries has also stolen some of Gold's thunder. Given the problems at MF Global and Jeffries brought on by bets taken in Eurozone debt, it is not at all surprising to see banks and funds attempting to clean those assets off of their balance sheets in favor of US debt, even with unappealing yields. It is of interest to Gold traders to note that Italy has the fourth largest Gold reserves, behind the US, Germany and the IMF, which amount to just over 2,450 metric tons. Italy may be tempted to sell-off some of these reserves to generate much needed cash, or possibly, loan out some of the metal to other countries attempting to bolster their balance sheets. The US Dollar Index does appear to be consolidating and an upside breakout could have a negative impact on precious metals. The Yen intervention concerns seem to be abating at the moment. Traders with long memories seem to have remembered that the BOJ has not historically been very good at devaluing its currency. If the Yen catches a bid, many traders may be tempted to switch out some of their Dollar holdings in favor of Gold.

Technical Notes

Turning to the chart, we see the December Gold contract continuing to edge higher, after bottoming out in late September. Long-term metal bulls may actually like this sort of slow ascent instead of a series of breakaway rallies and violent corrections. Prices have moved above the 1760 level, which was the trigger line for the double-top pattern confirmed in September. The next area of heavy resistance may be found near the 1840.00 level. Beyond this, relative highs above 1900 could be seen as resistance. On the downside, the market must stay above support near 1685 to maintain its upward momentum. The RSI indicator is nearing overbought levels, which could trigger some consolidation or a pullback in prices.

Rob Kurzatkowski, Senior Commodity Analyst

Wednesday, November 9, 2011

Soybean prices may remain under pressure, as both fundamentals and technicals seem to be favoring the bears. Some traders who are expecting for Soybean prices to fall may wish to consider exploring the purchase of a bear put spread in Soybean futures options. For example, with January Soybeans trading at 1211.00 as of this writing, the January 1200 puts could be bought and the January 1150 puts sold for 16 ½ cents, or $825 per spread, not including commissions. The risk on the trade would be the investment in the spread, with a maximum potential gain of $2500 minus the premium paid, which would be realized at option expiration in December should January Soybeans be trading below 1150.00.

Fundamentals

The November USDA crop report may send mixed signals to traders, as analysts weigh potentially lower production figures vs. a weaker export outlook. These mixed fundamentals have led to sideways trading activity during the past several weeks, as neither bulls nor bears could gain momentum. For grain bulls, Corn futures hold potentially the most promise, as traders expect the USDA to lower its estimate for the US Corn crop once again, with an average estimate of 12.4 billion bushels, which is down just over 0.2% from the October estimate. Higher demand for Corn for the production of Ethanol is expected to offset lower Corn export projections, which is expected to show lower Corn carryout totals next year, with many traders looking for 2012 carryout to fall to 800 million bushels.

For Soybeans, some bears appear ready to flex their muscles, with many traders looking for little change in the production estimate calling for a 2011 crop of 3.06 billion bushels. It is in the demand side of the equation where the price outlook dims. A slowdown in Soybean exports and competition from a large South American Soybean crop may allow US inventories to increase, with analysts looking for the USDA to increase US Soybean carryout to 185 million bushels in 2012.

The Wheat market outlook may vary depending on the type of Wheat, as a difficult season in the Northern Plains may force the USDA to cut its estimate of harvested acreage for Spring Wheat traded in Minneapolis. However, stiff export competition from Russia and Ukraine may cut US Wheat export totals. Russian grain exports for the first quarter of the 2011-12 marketing year totaled nearly 10 million metric tons, with the vast majority of the exports being Wheat. Though relatively high Corn prices are expected to shift more feed demand to Wheat in the coming year, current US and global wheat inventories look to be more than ample to meet demand.

Technical Notes

Looking at the daily chart for January Soybeans, we notice what appears to be a descending triangle technical formation having formed the past few weeks. This formation is usually viewed as a bearish continuation pattern and a potential harbinger of lower prices ahead. Prices are currently below both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI is reading a bearish to neutral 41.69. Major support in January Soybeans is seen at the recent low of 1163.50, with resistance found at the October 14th high of 1283.75.

Mike Zarembski, Senior Commodity Analyst

Thursday, November 10, 2011

The shrinking Corn crop, affected by the hot weather across much of the Midwest, gave traders little reason to rejoice, as the demand outlook for the grain turned sharply south. Strong export sales and higher cattle on feed numbers could give bulls a reason to step back into the market. However, if these figures are disappointing, Corn could see recent gains erased. Technically, Corn has been moving higher, but without any gusto. Some traders may perhaps want to consider entering the long side of the Corn market on a close above 675.00 in the December futures contract.

Fundamentals

Corn futures were unable to move into positive territory, despite a bullish USDA production report. With equity prices falling over 3% and other commodities coming under pressure, Corn bulls were unable to swim against the current of outside market forces. The USDA lowered its Corn crop projection to 12.3 billion bushels from the October estimate of 12.433 billion bushels. The cut in production estimates was larger than the market was expecting, which was 12.402 billion bushels. However, this was offset by a much dimmer demand outlook for the grain. The USDA did revise down the ending stocks figure to 843 million bushels from 866 million bushels last month, but many traders were expecting the ending stocks figure to be slashed more aggressively to 801 million bushels. Global carryout is expected to be 121.57 million metric tons, which is down from last month's guess of 123.19 million metric tons. Given the smaller crop size, many traders will be monitoring export sales figures closely, as upside surprises to exports could attract buyers. Next Friday's Cattle on Feed Report likely also becomes more significant for traders to monitor. From a macro perspective, commodity traders as a whole will be closely watching events unfold in Europe in regard to Greece and Italy. Negative events, such as the failure of either country to form a coalition government that agrees on a path to solvency, could have a largely negative impact on demand estimates for raw goods, and may reverse the strong gains made by commodities in recent weeks.

Technical Notes

Turning to the chart, we see the December Corn contract edging higher after testing the 575 level on the downside. The moves in recent sessions have been more subdued, which is an indication that bulls are being cautious. Prices are trading just below resistance near 675. This level is significant in the short-term, as it also coincides with the 50-day and 100-day moving averages. The 20-day average has acted as support over the past several weeks.

Rob Kurzatkowski, Senior Commodity Analyst

Friday, November 11, 2011

The daily chart for March Cotton shows near-tem support near the 95.00 area and strong support just above the 90.00 area. Some traders who are looking for these support levels to hold may perhaps wish to explore selling a put credit spread in Cotton futures options. For example, with March Cotton trading at 99.15 as of this writing, the March Cotton 95 puts could be sold and the March Cotton 88 puts bought for a credit of 220, or $1000, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in February should the March futures be trading above 95.00.

Fundamentals

A surge in US Cotton exports last week sparked a rally in Cotton futures on Tuesday, sending the March futures near the $1 level. The Cotton market has been quiet lately, as many traders were reluctant to hold any significant position ahead of the USDA crop production and supply/demand reports which were released this past Wednesday. The reports were deemed neutral towards Cotton prices, as the USDA lowered its US Cotton production estimate only moderately to 16.3 million bales, which is down from the 16.608 million bale estimate in the October report. The decline in production was offset by a lowering of the 2011-12 export projection by 200,000 bales. US Cotton ending stocks were estimated at 3.8 million bales, up 1.2 million bales from last year. Though the market's reaction was muted after the report was released, it was a different story on Thursday, as the USDA announced that 998,000 bales of Cotton were sold last week, with China being the largest buyer. Many traders believe that this buying may have come to help restock the Chinese state reserve, and if it has, it may force the USDA to revise upward its US export projections going forward. The large Chinese purchase was the first real positive news on the demand front in quite some time and may help to stabilize prices in a market that is trading on the lower end of its yearly range for the new crop futures. With the current turmoil in Europe expecting to slow economic growth on the "continent" and Chinese economic growth "slowing", demand for commodities in general is expected to slow in 2012. However, should the recent Chinese purchase turn out not to be a "one-off" event, we could start to see signs of a near-tem bottom in Cotton going into the New Year.

Technical Notes

Looking at the daily chart for March Cotton, we notice a symmetrical triangle formation beginning, with prices trading in a narrower range since August. This pattern will eventually resolve itself with a breakout in either direction, usually on larger than average trading volume. Until that time, the market is trying to close above the 20-day moving average (MA) but remains well below the longer-term 200-day MA, which is currently near the 110.00 area. The 14-day RSI has turned neutral, with a current reading of 50.69. Support for March Cotton is seen at the 10/21 low of 95.00, with resistance seen at the recent high of 102.85 made on October 31st.

Mike Zarembski, Senior Commodity Analyst

Monday, November 14, 2011

The bullish bias in Crude Oil futures combined with a relatively high implied volatility make this market a good candidate for the exploration of bullish short option strategies. For example, with January Crude Oil trading at 98.32 as of this writing, the January 80 puts could be sold for a 0.71 cent credit, or $710, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in mid-December should the January futures be trading above $80.00.

Fundamentals

$100 per barrel seems to be a magnet for WTI Oil futures, as prices are moving ever closer to this key psychological price level. The rally in Crude is even more impressive given the turmoil in Europe and the potential for a recessionary environment going into next year. The rally in WTI Crude can most likely be attributed to the following: First, the supplies of Crude in the NYMEX delivery point at Cushing, Oklahoma continue to fall, as refiners with access to Oil in Cushing are taking advantage of the high refining margins attributed to "cheap" Oil at Cushing vs. the other major benchmark grades. This is drawing down supplies in Cushing and causing the term-stricture in the WTI futures to move towards a "backwardation", when the nearby futures contracts trade at a premium to the more deferred months, which is a sign that near-term demand is strong and the market is willing to pay a "premium" near-to draw supplies from storage and into the market. Next, signs of increased Oil production out of Libya following the fall of the Qaddafi regime and the likelihood of lower European Oil demand in the coming year have caused the Brent/WTI Oil spread to begin to narrow. This is causing some short-covering buying in the WTI leg of the spread, which is helping to support prices. In addition, Oil prices may be seeing a "risk premium" being expanded following a report from the International Atomic Energy Agency (IAEA) that Iran's nuclear program may include work on nuclear weapons, despite denials from the Iranian government, This has led to talk of potential economic sanctions that may affect Iran's Oil production output. Finally, any signs that Europe will come up with a meaningful way to deal with its debt crisis may lead to a return to "risk" trades, including the purchases of commodities including Oil.

Technical Notes

Looking at the daily chart for January Crude Oil, we notice prices closing above the 200-day moving average to end the week. This was the first weekly close above this closely watched technical indicator since July. The 14-day RSI is strong, with a current reading of 68.76. Though $100 per barrel is seen as strong psychological resistance, chartwise, resistance is not seen until just over the 102.00 area. Support for January Crude is seen at the November 1st low of 89.05.

Mike Zarembski, Senior Commodity Analyst

Tuesday, November 15, 2011

The recent strength of the US Dollar has curbed some of the enthusiasm for Gold of late. There seems to be an underlying belief that Europe will avoid the worst case scenario, but growth will be negatively impacted. Escalated concerns over Europe could, however, result in renewed enthusiasm for defensive plays, such as Gold. Technically, The December Gold contract needs to cross above the 1800 level to recapture bullish momentum. Otherwise, the market could find itself trapped in a 100+ point trading range between the high 1600's and 1800. Traders may look to go long the appropriate December futures contract (micro, mini or full sized) on a solid breakout above the 1800 level.

Fundamentals

The rally in Gold has stalled in recent sessions, as the safe haven buying of the metal has been largely offset by currency related selling. The US Dollar Index has been firm in recent trading, largely due to the weakness in the Euro, which has the largest weighting in the index. The contagion in the European debt crisis has many analysts expecting a slowdown or recession in Europe, which negatively impacts Gold as an inflation hedge. There have also been some red flags raised as to the health of the Chinese financial sector by the IMF, which has some traders on edge. John Paulson, the hedge fund manager with a massive GLD position, indicated that he had cut his holding in the ETF by more than a third. This can be seen as a negative force in the near-term unless other buyers are able to step in an fill the vacuum created by Mr. Paulson. If this does not happen, the ETF would have to sell some of its holdings, easing the tightness in the physical Gold market. While Gold fundamentals are mixed in the near-term, Europe remains the wild card for metal traders. A slow, downward spiral could be seen as negative for precious metals. If the crisis escalates in severity quickly, safe haven buying could overwhelm currency related selling.

Technical Notes

Turning to the chat, we see the December Gold contract unable to hold rallies above the 1800 level, despite testing the level several times in recent sessions. Failure to break through 1800 could result in sideways trading between the high 1600's and 1800. If the market is able to break through 1800, there is not much in the way of resistance between this level an all time highs north of 1900. The RSI indicator was giving overbought readings, which can partially account for prices not being able to gain upward traction in recent sessions.

Rob Kurzatkowski, Senior Commodity Analyst

Wednesday, November 16, 2011

The term structure of Heating Oil futures has moved to a backwardation through September of 2012, which is likely a sign that the market is willing to pay a premium to obtain supplies in the near-term. Some traders looking for Heating Oil supplies to remain tight may wish to explore buying bull spreads in Heating Oil futures. A bull spread involves buying near-term Heating Oil futures and at the same time selling more deferred trading months. For example, January 2012 Heating Oil can be bought and April Heating Oil sold at approximately a 0.0650 premium to the January futures. Buyers of the bull spread would wish to see the January premium widen vs. the April futures.

Fundamentals

Traders of the energy products have been seeing a mixed market recently, as Gasoline prices continue to fall, as lackluster demand has kept rallies in check. It is another story entirely for Heating Oil, as tight supplies and increasing demand are keeping this market near 6-month highs. Refinery maintenance and closing have greatly affected distillate supplies, as remaining production has favored Gasoline as opposed to the middle distillates. The lower production and increasing demand, especially in the Midwest as the grain harvest progresses, have sent US supplies to 3-year lows. Last week the EIA surprised many traders by reporting that US distillate supplies fell by just over 6 million barrels last week. Normally, distillate supplies in the northeast start to climb, as refineries begin building inventories of Heating Oil going into the winter months. However, this year inventories in the northeast are 11% below the 5-year average, as low refining margins have caused the shut-down of refineries on the East Coast. US International demand has also increased, especially in China, which may be seeing continued tight supplies of Diesel fuel into 2012. Good demand from overseas has sparked an export boom for distillates, with the US exporting an average of 895,000 barrels per day in August. Many traders are looking for another large draw in distillate inventories when the EIA releases its weekly energy stocks report, with the average analyst's estimate calling for a draw of 2.8 million barrels last week -- which if true, would be the 7th consecutive week of inventory draws.

Technical Notes

Looking at the daily chart for January Heating Oil, we notice a mixed technical picture. First, the 20-day moving average is attempting to cross over the 200-day moving average, which is a bullish signal. However, bears will counter that the rally is beginning to lose steam, as trading volume has been light during the past three sessions, as the market made new highs. This could be a sign that recent buying was nothing more than short-covering and that fresh buying has not materialized at current prices. The 14-day RSI has leveled out, but still remains at a strong 65.50 level. Support for January Heating Oil is seen at the 200-day moving average, which is currently just above the 3.0700 level. Resistance is seen at the recent high of 3.1956.

Mike Zarembski, Senior Commodity Analyst

Thursday, November 17, 2011

Soybean fundamentals remain extremely bearish at the present. The large US Soybean crop, a good start to the South American growing season, and concerns over European debt may be obstacles too large for the Bean market to overcome. Technically, the January Soybean chart shows prices lingering above critical support near the 1150 level. Some traders may look to enter into a bearish option strategy, such as a bear put spread, buying the January Soybean 1150 puts and selling the January 1100 puts for a debit of 10.00, or $500. The trade risks the initial cost and has a maximum profit of $2000 if the January futures close below 1100.00 at expiration.

Fundamentals

Soybean futures have been unable to find solid footing amid softer demand and the never ending saga of the European debt crisis. The USDA's soft estimate of demand has been like a black cloud hanging over the market in recent sessions. Prices were firmer yesterday, after rumors about a large purchase of US Soybeans by China had surfaced -- although the rumor had not been confirmed by China. The recent disarray in Europe has many traders concerned over its impact on commodity demand. In addition to creating demand concerns, the European debt crisis has aided the US Dollar and created a secondary problem for US grain demand. Importers may look to other nations, most notably South American grain producers, to fill the void. The USDA's projections for Soybean demand are rather dismal. It may not take much in the form of strong overseas demand to bring the bulls into action. Sustained rallies, however, may be difficult to come by. South America has had ideal growing conditions to kick off the growing season there. Also, fresh demand may be difficult to come by, as many traders view the Soybean purchase by China, if true, to simply be a restocking of reserves.

Technical Notes

Turning to the chart, we see the January Bean futures unable to make much headway after trading down into the 1160's. Support at the 1150 level can be seen as critical, as there is little support between 1150 and 1000. A violation of this support level could bring violent selling action with it. To recapture upward momentum, Bean futures will have to take out recent highs near the 1275 level.

Rob Kurzatkowski, Senior Commodity Analyst

Friday, November 18, 2011

The recent sell-off in deferred Cattle futures may set-up a potential buying opportunity for longer-term traders. Some traders who are considering establishing a long position in 2012 Live Cattle futures may possibly wish to explore buying February Live Cattle futures on price corrections, with the anticipation of a move above the contract high of 127.000. A close below the recent low of 120.300 would be a signal that the up-move may be in jeopardy, as that would negate the trend of higher lows seen in the market since May of this year.

Fundamentals

The bull market in Live Cattle futures has been taking a bit of a breather lately, but the potential for a "mooove" to new all-time highs in 2012 is still alive and well. Cash Cattle prices rose to a record high last week, trading between $125 and $127 per hundredweight in Nebraska, as beef export demand from the US remains robust. In addition, the severe drought that plagued the southern plains forced a large number of Cattle into feedlots earlier than usual, leaving market-ready Cattle inventories tight going into 2012. In the near-term, the tone of the market is more undecided, as Cattle that were placed in feedlots earlier this year are now ready to come to market, which should increase beef supplies heading into December. In addition, meatpacker profit margins are currently negative, despite high beef prices and the potential for higher supplies of Cattle coming to market in the near-term, which may lessen the price that packers may be willing to pay for Cattle in the coming weeks. This afternoon, many traders will be anticipating the release of the monthly USDA Cattle on Feed report, which is expected to show Cattle on feed as of November 1st were up 4% from year ago levels. Cattle marketed in October are expected to have risen by nearly 1.5% from the previous year. However, the number of new Cattle placed in feedlots is expected to have fallen by nearly 1% in October. If true, this should contribute to tighter supplies of Cattle in 2012.

Technical Notes

Looking at the daily chart for February Live Cattle, we notice the string of higher lows and lower highs starting in mid-May of this year. This consolidation pattern has yet to resolve itself, and prices remain towards the upper middle of the recent price range. Prices are currently above both the 20 and 200-day moving averages, which gives some bias to the bulls. The 14-day RSI is neutral, with a current reading of 52.31. Support is seen at the recent low of 120.300 made back on November 1st, with resistance found at the November 4th high of 126.500.

Mike Zarembski, Senior Commodity Analyst

Monday, November 21, 2011

With outside forces such as the repatriation of Euro's by European banks supporting the Euro, it may be difficult for traders to hold an outright short position in the currency based on its current weak fundamentals. Some traders who are anticipating a weaker Euro going into 2012 may perhaps wish to explore the purchase of a bear put spread in Euro futures options. For example, with the March Euro trading at 1.3477 as of this writing, the March 1.34 puts could be bought and the March 1.24 puts sold for 0.0248, or $3100, not including commission. The total investment in the puts would be the maximum risk on the trade, with a potential profit of $12,500 minus the premium paid, which would be realized at option expiration in early March should the March Euro be trading below 1.2400.

Fundamentals

Markets hate uncertainty, and the economic situation in Europe is anything but certain, causing financial markets to turn choppy, as traders have little to grasp onto regarding any solution to deal with the debt crisis. Markets such as US Treasuries, the S&P 500, and even Gold have seen volatile daily trade with little movement in the overall longer-term trend. Even better economic reports out of the US, including the four-week average US jobless claims falling to 7-month lows, and an increase in US single family housing starts are failing to garner any enthusiasm, as all eyes are focused on events across the Atlantic. Though the Eurocurrency has been in a downtrend during the past several weeks, its value vs. the US Dollar have held up relatively well, considering all the turmoil during the past several days. One reason to explain the Euro's resilience could be the repatriation of Euro's by European banks, who may be liquidating investments outside of the Euro zone to help shore-up their weakening balance sheets. This inflow of funds back into the Euro is supporting the currency that would otherwise face the potential for increased investor selling given the current crisis. We saw something similar happen to the Japanese Yen after the devastating earthquake earlier this year, where the Yen actually rose in value due to Japanese businesses bringing back Yen into the country from overseas investments to help pay for the recovery efforts. However, this support for the Euro may not hold for long should investors and traders lose further confidence that EU leaders can eventually come to terms and actually deal with the debt situation and not just kick the issue further down the road.

Technical Notes

Looking at the daily chart for the December Euro, we notice the market starting on its downward move with any rally attempts being met by new sellers. Prices are now below both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI has turned weak, with a current reading of 42.39. The next major support point is not found until the October 4th low of 1.3142, with resistance found at the 20-day moving average currently near the 1.3760 area.

Mike Zarembski, Senior Commodity Analyst

Tuesday, November 22, 2011

The economic woes of the West and uncertainty as to whether China's recent imports of Copper were simply a shift in inventories have Copper traders on edge. Things continue to look worse for Europe the longer the debt situation stretches on. Even strong economies such as Germany face the prospect of increased borrowing costs, which could slow the robust manufacturing sector there. Technically, December Copper must hold the pivotal $3 level or prices could face immense selling pressure. Some traders may wish to continue to simply use Copper as a leading indicator to evaluate trading decisions in outside markets. Some traders with a high tolerance for risk may possibly wish to consider going short the December Copper contract on a breakout below the $3 mark

Fundamentals

Many traders have continued to take risk off the table, as the clock continues to tick for Europe to fix its sovereign debt problem. Many economists have been forecasting a mild recession for Europe from which the continent will recover quickly. Recent events have put the "mild" portion of the assessment into question, as risks mount, and Europe could see a lost decade akin to Japan in the 90's and the US in the 2000's. A prime example of the risk off is the Copper market, which has been unable to build on the momentum in late October. The market subsequently slid throughout November, and the market risks retesting October lows near the $3 level. The recent sell-off could trigger some value buying, as some traders may view the recent declines in prices as excessive. Many traders may also point to the fact that Copper imports by China increased last month. There is question as to whether the imports were simply a shift in inventories between the LME and Shanghai. Ideally, traders would like to see more consistent buying by the industrial giant. If the Chinese import increase is a one-off event, Copper could face significant selling pressure in the coming weeks.

Technical Notes

Turning to the chart, we see the price of the December Copper contract declining below recently established support near the 3.4500 level. Prices are now approaching psychological support at 3.2500, but the real test for the Copper market will come if and when prices test support at the $3 level. A breakout below $3 would be seen as a continuation of the downtrend that began in August and could bring with it significant selling pressure. The RSI indicator remains near oversold levels, which could be supportive for prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

Wednesday, November 23, 2011

Though the longer-term prospects for Natural gas appear brighter, in the near-term, there is still a huge supply of Gas in storage and ample production levels. Some traders who anticipate near-term gas prices to remain weak may possibly wish to explore bear spreads in Natural Gas futures. For example, February 2012 Natural Gas is trading at a 0.015 premium to the January 2012 futures. Traders who choose to implement a bear spread would buy the more deferred contract month, which in this case would be the Feb futures, and sell the nearby futures, i.e., the January futures. Traders who choose to trade this position would want the February premium to January widen.

Fundamentals

The bear market in Natural Gas futures is now well over 3 years old, as large supplies from shale formations and continued weak industrial demand have prices hovering near 2011 lows. Even the upcoming winter season has not helped Gas prices, as above-normal temperatures in the Midwest and Northeast have allowed Gas to continue to enter storage, even as December approaches. Though current fundamentals look bleak for Natural Gas bulls, the long-term picture looks a bit brighter. With spot prices below the breakeven level for many producers, we may start to see gas rig counts decline, as producers shut down rigs due to unprofitable margins. Though US Gas prices are at a very low price level, this is not the case globally. In many countries, Gas prices are currently 2 to 5 times higher than that in the US. Unfortunately for US Gas producers, exporting Natural Gas is much more cumbersome than that of other energy products, such as Crude Oil. Liquefied Natural Gas (LNG) is one way to export Natural Gas, but many more export terminals will need to be built first in order for US producers to be able to move excess Gas supplies to more profitable foreign markets. However, once these export terminals come on-line, we may see US. Gas prices rise, as prices will then be able to trade at closer to "global" levels, similar to how the Crude Oil markets are priced. Domestically, the "cheap" price of Natural Gas may eventually contribute to a change in the US energy policy, as the political will be forced to finally embrace Natural Gas as viable alternative to Oil, especially as the US has already been called the "Saudi Arabia" of Natural Gas production.

Technical Notes

Looking at the daily chart for January Natural Gas, we notice prices making several attempts to move below 3.460 without any luck so far. There appears to be a potential bullish divergence forming in the 14-day RSI, which if true, may signal that a near-term short-covering rally might be near. However, any rally attempt will run into some strong resistance at the 20-day moving average, which is currently just below the 3.780 area, and chart resistance seen near the 3.870 area. Should these price levels fail to hold, a move to the 4.100 to 4.150 area would not be out of the question. Support for January Natural Gas is found at Monday's low of 3.461.

Mike Zarembski, Senior Commodity Analyst

Friday, November 25, 2011

With the fundamentals pointing to a potentially burdensome supply of Sugar in the coming months, it may be difficult for the market to stage any significant rallies, particularly while large speculators continue to hold a net-long position. On rallies, some traders may possibly wish to explore selling out-of-the-money calls on Sugar futures options. For example, there is strong resistance in the March futures between 26 and 28 cents per pound. With the March Sugar futures trading at 23.45 as of this writing, the March 28 calls could be sold for about 0.33, or $369.60, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in February should the March futures be trading below 28.00.

Fundamentals

The Sugar market has soured to high prices seen earlier this year, as prices hover near 5-month lows. The latest bearish news came from India, where a government panel announced an allowance of 1 million metric tons of Sugar to be exported this marketing year. India is expected to produce a 3 to 4 million ton Sugar surplus this coming year, which may spur further exports should global prices remain relatively high. Less than stellar production out of Brazil, the world's largest Sugar producer, allowed prices to remain high, as near-term supplies of Sugar remained tight. However, increased production totals from Europe, Russia and Thailand, combined with a rebound in production from India, should more than make-up any deficits from Brazil. This is especially true given the economic uncertainty surrounding the European debt situation, which some analysts fear will cause a global economic slowdown. With current estimates calling for a global Sugar surplus of nearly 8 million tons in 2012, any signs of slowing demand may force prices to fall below 20 cents per pound, as the market will face the first "glut" of sugar in nearly 3 years.

Technical Notes

Looking at the daily chart for March Sugar, we notice the 20-day moving average has crossed below the 200-day moving average, which is seen as a bearish technical signal. Tuesday's sharp sell-off took out recent support at 24.00 and has set the stage for a potential test of the next major lows just above the 21.00 area. The 14-day RSI is very weak, with a current reading of 28.31. The next support level for March Sugar is seen at the June 1st low of 22.44. Resistance is found at the 20-day moving average, currently near the 25.37 area.

Mike Zarembski, Senior Commodity Analyst

Monday, November 28, 2011

With the bearish bias to the RBOB market showing little signs of abating, some traders may wish to explore trading strategies with a bearish bias. One such strategy would be selling bear call spreads in RBOB futures options. For example, with January RBOB futures trading at 2.5059 as of this writing, the January 2.65 calls could be sold and the January 2.75 calls bought for a credit of around 0.0220, or $924 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 December should the January futures be trading below 2.6500.

Fundamentals

US automobile owners may have something to be thankful for in the coming months, as lower wholesale Gasoline prices should eventually make their way to the pump. Gasoline demand in the US has been anemic, with Gasoline demand falling by 1% last week. For the year, Gasoline demand is down about 5%, with a balance of weaker economic activity and relatively high Gasoline prices accounting for the decline. Last week, US gasoline inventories rose by 4.475 million barrels to 209.634 million barrels, according to the US Energy Information Administration (EIA). This is the highest Gasoline inventory since the end of September, as US supplies are being rebuilt now that several refineries are back online after a period of seasonal maintenance. Chartwise, lead month RBOB futures are now holding just above the upper level of support near the 2.5000 level. This is the area where prices broke-out to the upside in the first quarter of this year and sparked a nearly one-dollar rally going into the summer. With distillate inventories below the 5-year average and Crude Oil prices continuing to hold, and a risk premium due to political events in the Middle-east, RBOB gasoline futures may continue to lag the energy complex until we start to see some real signs of economic growth, not only in the US, but on a global scale as well.

Technical Notes

Looking at the daily continuation chart for RBOB Gasoline futures, we notice what appears to be a descending triangle formation. This chart pattern is normally considered a bearish formation that occurs during a downtrend. Prices are also below both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI has turned lower, with a current reading of 42.27. Support is found near the 2.4450 area, with resistance seen at the recent high of 2.7576 made on November 8th.

Mike Zarembski, Senior Commodity Analyst

Tuesday, November 29, 2011

Equity traders focused on the holiday shopping season and ignored the ugly macro outlook and European debt situation. The question now becomes whether this will be the trend going into year end or if the robust consumer spending will simply provide the market a short-term sugar high. A full week of economic data, capped off by non-farm payrolls on Friday, could also cause traders to refocus their attention on the macro outlook. Technically, the Dec E-mini is heading toward resistance at 1220. Crossing through this level could result in near-term traction for the equity markets. Some traders may possibly wish to consider going long the December E-mini S&P futures on a solid close above the 1220 level, with a protective stop at 1195 and an upside target of 1275.

Fundamentals

Stock index futures rallied sharply yesterday, as equity traders put aside European concerns and focused on extremely strong Black Friday and Cyber Monday sales from retailers. The US consumer, who has spent the US out of recession in the past, has come out wallets blazing. This flies in the face of many analysts' expectations of a dismal Christmas shopping season this year. The million dollar question now becomes whether or not consumers can keep the above-average spending going through the end of the shopping season. While the retail news was upbeat, Fitch, the last ratings agency with a neutral outlook for the US economy, revised its outlook to negative. Also, across the Atlantic, Moody's warned of possible downgrades to multiple European banks based on the ongoing sovereign debt crisis. A late rumor among traders suggests that S&P may take away France's AAA credit rating "within the next 10 days". If this winds up being the case, it would be a significant blow, considering France and Germany have led the bailouts of other EU nations.

Technical Notes

Turning to the chart, we see the December E-mini S&P contract rebounding strongly off the 1150 level. With this morning's activity, the market has crossed through the 20-day moving average. A close above the average would suggest that a near-term low may be in place. Near-term resistance can be found near the 1220 level, and if the market is able to cross through this price point, relative highs at 1282.50 could be tested.

Rob Kurzatkowski, Senior Commodity Analyst

Wednesday, November 30, 2011

With less than three weeks to expiration and good chart support near the 95.00 area basis the January Crude futures, some aggressive traders may perhaps wish to explore selling puts in January Crude options with strike prices below support at 95.00. For example, with the January futures trading at 99.53 as of this writing, the Jan 90.00 puts could be sold for about 0.52, or $520 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in mid-December should the January futures be trading above 90.00.

Fundamentals

Heightening political tensions in Iran have become a focal point on many traders' radar screens, with the potential of economic sanctions including a ban on imports from one of the world's leading Oil exporters appearing to have supported Crude Oil futures prices. Nymex WTI futures continue to hover near the $100 per barrel level, and the Brent Crude premium to WTI has widened to over $10 per barrel on the potential for tighter Oil supplies should any supply curtailment from Iran occur. Iran is the third largest Oil exporter at just over 2 million barrels per day. The European Union would be among the hardest hit by any export ban, as it is the second largest buyer of Oil from Iran. Japan, China, and India are also large buyers of Iranian Oil, and any shortfall will force these nations to look elsewhere for their purchases, potentially pumping up prices in the global market. However, the current turmoil regarding a solution to the European debt crisis might be keeping Oil prices from rising even further, as any major economic slowdown should hurt demand for commodities, including Oil. Here in the U.S., many traders are looking for U.S. Crude inventories to have fallen moderately last week in the weekly EIA energy stocks report to be released later this morning. Current estimates are for a 200,000 barrel draw in U.S. Oil inventories. Large speculators lowered their net-long positions in Crude Oil futures last week according to the weekly Commitment of Traders report. Large speculators lowered their net-long position by just over 12,700 contracts last week to stand at 225,523 contracts as of November 22nd. Though a large net-long position, it is over 100,000 contracts below the record long position seen earlier this year and leaves plenty of room for traders to increase their positions without becoming overbought should we see Oil prices start to hold above the $100 level.

Technical Notes

Looking at the daily chart for January Crude Oil, we notice that the nearly $8 sell-off in prices last week may have been only a short-term correction in the recent bull market phase. Prices are now once again above both the 20 and 200-day moving averages (MA), and the 20-day MA is now poised to cross above the 200-day MA, which can be viewed as a bullish signal. The 14-day RSI looks strong, with a current reading of 60.93. The next resistance point for January Crude is seen at the recent high of 103.37 made on November 17th, with support found at the recent low of 94.99.

Mike Zarembski, Senior Commodity Analyst