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December 2011 Archives

December 1, 2011

Is the Risk-off Really Off?

Thursday, December 1, 2011

Bond prices have come under pressure in recent sessions, which is likely due to traders taking on increased risk. This was triggered by a wave of positive retail and economic data, but risks to the economy and Europe have been largely ignored. Technically, the market may have seen some long liquidation due to the Bond market's inability to break through the 145 level. The market is now nearing support at 140, and many traders will be anxiously watching how the market behaves at this level. Some traders may perhaps wish to consider going long the March Bond future if the market does indeed come down to test support at 135-00. The risk associated with undertaking such a trade is considerable, so risk management is essential. Some traders may also possibly consider entering into a bull put spread, selling the Feb 135 put and buying the Feb 130 put for a credit of 0-48, or $750. The maximum profit is the initial credit and the trade risks $4,250, so some traders may look to close out the spread if prices dip below 135-00 to mitigate their losses.

Fundamentals

Bond futures have suffered several consecutive days of setbacks due to stronger equity prices and a weaker US Dollar. Many are looking at the activity and beginning to question whether the Bond market will pull back from its current lofty levels. Equity traders likely have had their blinders on in recent sessions, focused on the strong retail data from the holiday kickoff last weekend, improved consumer sentiment, and promising job data from ADP. However, the focus on these positives may only last so long, as Europe could tailspin out of control. Some firms are already bracing for the possibility of a collapse in the pan-European currency, the Euro, and the ratings agencies have unleashed a new wave of bank downgrades. China's move in decreasing reserve requirements by banks was viewed by many as a positive for equity prices. However, given the conservative nature of the Chinese government, the move could be seen as a possible harbinger of bad things to come. There are already rumblings that the Asian giant may have its own mini housing crisis on the horizon, which could adversely affect both their domestic and global economies. Common sense would tell one that Bonds are overpriced at these levels in normal times, but these are not normal times. Several key markets hit their relative support and resistance levels, most notably the Euro, Dollar Index, and several major equity indexes, which may account for the "exuberance" the market has seen in recent sessions. These markets simply may not have been ready to break out just yet, and some of the recent market activity can likely be viewed as position covering. In the near-term, Bonds may continue to be one of, if not the main defensive plays for traders. This is contingent on how the currency markets behave. If the Euro begins to falter once again, Bonds may be a more sought after investment vehicle over Gold.

Technical Notes

Turning to the chart, we see the March Bond contract nearing a near-term support level at the 140-00 mark. Failure to hold 140 could result in a test of the support at 135-00, which can be seen as critical. There is not much support between 127-00 and 135-00, suggesting that a failure to hold 135-00 could bring about a violent sell-off. This would also confirm a large double-top pattern on the daily chart. The RSI has come off overbought levels, which in addition to the failed test of 145 to the upside, may have contributed to the recent wave of selling pressure.

Rob Kurzatkowski, Senior Commodity Analyst


December 2, 2011

"Santa Claus" Rally in the Cards for 2011?

Friday, December 2, 2011

Some traders who are looking for a stock market rally to be under their trees this year may want to consider exploring bullish trading strategies using E-mini futures options. For example, with the March E-mini trading at 1234.25 as of this writing, the January 1275 calls could be bought and the January 1325 calls sold for a net debit of 16.00, or $800, not including commissions. This bull call spread has a maximum potential risk of the entire investment in the spread, with a maximum potential gain of $2,500 minus the premium paid which would be realized at option expiration in January should the March futures be trading above 1325.00.

Fundamentals

Equity bulls received an early present on Wednesday, as the S&P futures rose by over 4% after a group of major Central Banks, including the Federal Reserve, helped to elevate any potential liquidity issues in the overnight loan market by enacting a temporary currency swap program to help lower borrowing costs for banks and other financial firms. This program will allow the Fed to loan U.S. Dollars to other Central Banks in exchange for collateral in other currencies. This was done to help elevate tight credit conditions, especially for European banks, that needed funding in Dollars, as many participants were hesitant to loan Dollars given the continued saga of the European debt crisis. In addition, the stock market got a boost from China, where the government announced a reduction in the reserve requirements for Chinese banks to 21%, vs. 21.5% prior. The private employment estimate from ADP also was a nice surprise, as the large processer of payroll checks reported that private sector payrolls rose by 206,000 last month - which was well above analysts' estimates of a 130,000 job increase. The increased liquidity entering the global markets combined with what may be an improving employment outlook in the U.S. could help send equity prices higher to end 2011, especially with many fund managers underperforming their benchmarks for the year who may be forced back into the equity markets in force to avoid falling further behind their performance goals. All eyes will be on this morning's Non-farm Payrolls report for November, with the consensus calling for a gain of 123,000 jobs last month. The unemployment rate is expected to remain steady at 9.0%. Should we see another positive surprise in this month's payrolls figure, it may give further support that a "Santa Claus" rally might be under traders' trees this holiday season.

Technical Notes

Looking at the daily continuation chart for the E-mini S&P 500, we notice what may turn out to be a "bull flag" pattern forming. Applying Fibonacci retracement to the chart starting at the major low formed on October 4th, we notice that the rally from this low and the subsequent correction fell to a nearly perfect 61.8% retracement of the rally! Since then, prices have recovered back to just above the 23.6% retracement and are currently testing the top of the bull flag trendline. A close above this trendline sets up a potential test of resistance at the 10/27 high of 1289.25, with support seen at the November 25th low of 1147.50

Mike Zarembski, Senior Commodity Analyst


December 6, 2011

What was Behind the Sharp Drop in the Unemployment Rate?

Monday, December 5, 2011

The recent decline in 10-year note futures prices may be short-lived, as the market appears poised for an upside reversal at least back into the recent trading range between 130-00 and 131-00. Some traders who are expecting a moderate rebound in 10-year note prices may perhaps wish to explore the purchase of a call ratio spread in 10-year Note futures options. For example, with the March 10-year note futures trading at 129-17.0 as of this writing, the February 130 calls could be bought and 2 February 132 calls sold for 0-39, or $609.37 per spread, not including commissions. The ideal situation would be for the March futures to be trading near the upper strike price of the ratio spread at option expiration in late January.

Fundamentals

The monthly release of employment data had a few surprises for traders, with the most notable being the sharp decline in the unemployment rate. First, though, analysts hit a bull's eye on the Non-farm Payrolls (NFP) figure, as the Labor Department reported that 120,000 jobs were created in November, which is nearly spot-on the 123,000 jobs that was the consensus pre-report estimate. Of the jobs created, 140,000 were in the private sector, though public sector payrolls declined by 20,000 last month. On the positive side, the monthly revisions to the NPF were positive, with the October figure revised higher by 20,000 jobs, and the September figure revised higher by a whopping 52,000 jobs! What really caught many traders' attention was the 0.4% drop in the unemployment rate to 8.6%, which is the lowest reading since March of 2009. The consensus estimate was for the unemployment rate to remain unchanged. Given the on-target NFP figures, one must ask what is behind the sharp drop in the unemployment rate. The first thing that is important to note is that the unemployment rate is calculated by using a survey of households in the U.S., which uses a much smaller sample size to calculate the figure than what is used from a survey of establishments as used in the NFP calculations. In addition, the unemployment rate calculations take into account only those who are unemployed and actively seeking employment. So if a large number of potential workers stop actively seeking employment, for whatever reason, they are considered removed from the labor force. This can skew monthly unemployment data, which is calculated by dividing the number of unemployed workers by the size of the labor force. So it could be possible for the unemployment rate to fall if a large number of unemployed workers get so discouraged by the lack of job openings that they stop looking for work, or rise if the jobs picture is actually improving enough that many currently unemployed workers start to seek employment which would add to the labor force total. In the case of this month's report, we saw a mixed picture, with the number of people being considered unemployed falling and the size of the labor force also falling, which appears to have skewed the data more positively than it in reality was. The market's reaction after the report was mixed, with equity prices rising and bond prices initially showing declines, before turning higher later in the session, as traders begun to realize that even at 8.6%, the unemployment rate is still too high and a gain of only 120,000 jobs per month will not be enough to bring the employment picture to where the Federal Reserve will halt any accommodative monetary stance.

Technical Notes

Looking at the daily continuation chart for 10-year Note futures, we notice prices falling below the lows of the recent consolidation pattern, only to rebound sharply on Friday. The long-term trend remains bullish, but prices are struggling to move above the 20-day moving average. The recent consolidation appears to be part of a much bigger trading range pattern that started back in August of this year. Notice also that trading volume has decreased during this time, as market participants struggle to determine the next market move. Momentum is starting to return to more neutral levels, with the 14-day RSI currently reading 46.67. Major support is seen at 127-06.0, with resistance found at 131-30.0.

Mike Zarembski, Senior Commodity Analyst


Is $100 Oil Back to Stay?

Tuesday, December 6, 2011

The price of Crude Oil has risen sharply since prices bottomed out in October, rising more than $25 a barrel from those lows. While encouraging for bulls, many traders have begun to wonder whether a more meaningful correction or period of consolidation may be on the horizon and whether Europe could stall global growth. Technically, 102.50 and 95.00 are two levels for traders to keep a close eye on, as a move outside of these boundaries will likely set the tone for the market in the near-term. That being said, some traders may perhaps wish to consider going long a mini or full-sized Crude Oil contract on a significant close above the 102.59 level. Conversely, on the downside, some traders may want to give some thought to taking a short position in the market on a close below 95.00.

Fundamentals

Crude Oil futures are lower this morning, as possible downgrades to German and French credit ratings hang over the market. Oil has been riding high lately, driven by the resurgence in equity prices. While many equity and commodity traders have been pointing to the positive economic data of late, there are holes in some of those numbers. The unemployment rate unexpectedly dropped to 8.6%, after an increase of 120,000 jobs in November. However, when taking into account that over 300,000 workers were removed from the pool of potential job seekers, the number does not seem all that strong. The strong showing by consumers during the kick-off to the Christmas shopping season needs follow through for traders to take those numbers seriously. S&P is expected to downgrade French debt and the ratings agency may also downgrade German debt as a result of the contagion of European debt problems. The French and German economies themselves are not the cause of the potential downgrades, but rather, it's the fact that the two nations share the same currency unit and have taken it upon themselves to rescue their neighbors that has created the issue. If the US economy can show that it can continue to create jobs and consumers keep spending during the holidays, some of the economic concerns may begin to slip from traders' minds and we could see $100 Oil here to stay. Traders also have to be mindful of the products component of this week's EIA report. While Crude Oil is expected to see a draw of one million barrels, both gasoline and distillates are forecast to show builds of over a million barrels. A surprise draw in either product could support the recent rally in prices.

Technical Notes

Turning to the chart, we see that the price of the January Crude Oil contract shot above the $100 mark in mid-November, only to retreat to the mid-90's before once again moving north of the $100 level. The second move above the century mark was not as rapid as the first and did not trigger overbought conditions. However, the chart shows signs of a possible double-top being in the works if prices do not hold above 95.00. A move above the recent high of 102.59 may ease many traders' concerns that a double-top may be in motion. The 20-day moving average has acted as support for the contract, so some traders may want to keep a close eye on how the contract behaves near the average. The upward crossover of the 50 and 10- day average can be seen as positive for prices.

Rob Kurzatkowski, Senior Commodity Analyst


December 7, 2011

"Pricey" Wheat Hurting U.S. Exports

Wednesday, December 7, 2011

Wheat prices appear to have entered a new period of price consolidation within a range of 650.00 on the upside and 580.00 on the downside. Given the bearish fundamentals currently in play in the Chicago Wheat market, some traders may perhaps wish to explore the sale of calls in Wheat futures options with strike prices above the highs of the recent price range. For example, with March Wheat currently trading at 608.75 as of this writing, the February Wheat 700 calls could be sold for 7 cents, or $350 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 late January should March Wheat futures be trading below 700.00.

Fundamentals

It's getting tough to be a U.S. Wheat exporter lately, as ample world supplies combined with a moderately strong U.S. Dollar are driving global buyers away from U.S. Wheat. Huge Wheat surpluses in Russia and Ukraine have brought both these nations back to the export market in force, undercutting prices and driving some traditional U.S. Wheat buyers such as Egypt and Japan to purchase Wheat from the Black Sea region. In addition, it appears that other U.S. competitors such as Australia and Canada are expecting larger Wheat crops this coming season. Australian Wheat estimates were raised by 8% from the September crop estimate. Stats Canada has raised its Canadian Wheat crop estimate to 25.3 million metric tons, which if accurate, would be 9% above last year's projection. Here is the U.S., weekly Wheat exports came in at just under 14.5 million bushels last week, which is well under the weekly average needed to meet USDA projections. Weakness in Wheat prices has not been lost on speculators, as the most recent Commitment of Traders report shows large and small speculative traders combined are holding a net-short position in Chicago Wheat of nearly 78,000 contracts as of November 29th. Though prices are holding near yearly lows, $6.00-plus Wheat is not historically cheap, and further price declines are not out of the question should U.S. Wheat prices remain uncompetitive in the global export trade.

Technical Notes

Looking at the daily chart for March Chicago Wheat, we notice prices failing to close above the 20-day moving average on the last rally attempt. Volume is starting to be rolled from the December to the March Wheat contract, as first notice day for the December contract approaches. There is a bullish divergence forming in the 14-day RSI, and with speculators net-short Wheat and a USDA report due out on Friday, we may see a short-covering rally occur in the next couple of trading sessions, as weak bears lighten-up their positions ahead of the report. Support for March Wheat is seen at the November 25th low of 586.00, with resistance found at 637.25.

Mike Zarembski, Senior Commodity Analyst


December 8, 2011

Gold Breakout on the Horizon?

Thursday, December 8, 2011

Gold traders are looking to the equity markets and the ECB to help determine the near-term market direction. Volatility in terms of trading ranges as well as implied by option pricing has been falling lately, indicating that neither the bull nor bear camps have had the upper hand in trading. Additionally, neither side of the market seems to have any conviction as to the future movement of the market. Technically, the chart shows a classic wedge formation, indicating that a breakout may be on the horizon. Given the relatively low volatility priced into option prices and the lack of market direction, some traders may perhaps wish to consider purchasing a long straddle or strangle with the expectation that a breakout may be nearing. Some traders may wish to buy the January 1725 put/1775 call strangle for a debit of 50.00, or $5,000. Given the high cost of the trade, some traders may look to exit the put portion of the trade on an upward breakout or the call portion of the trade on a downside move.

Fundamentals

Gold futures have been trading in a much tighter range than usual during recent sessions, as many traders try to find the near-term direction of the market. The relatively tight trading ranges have been a welcome reprieve from the wild volatility seen over the past several months. The Gold volatility indexes GVX and GVZ have moved into the mid-20's, down over 15 points from recent highs. Traders have wrestled between a number of market forces that have pulled the market in different directions. An uncertain economic outlook and the firm Dollar have weighed on metals prices. However, the uncertainty facing Europe has kept Gold an attractive investment vehicle for defensive traders. Also, Europe is expected to keep money loose as it grapples with their financial crisis. The wildcard that may ultimately trigger a response either way may be equity prices.

Technical Notes

Turning to the chart, we see the February Gold contract's trading range continuing to tighten, forming a large wedge. The direction of the market is unknown, but the ridge of the wedge or triangle suggests that the potential move could be explosive. Currently, the RSI and momentum oscillators are giving neutral readings, which can be expected during tightening ranges. Also, the moving averages have been relatively flat due to the lack of market direction.

Rob Kurzatkowski, Senior Commodity Analyst


December 9, 2011

Grain Trade Subdued Ahead of USDA Crop Report

Friday, December 9, 2011

Soybean futures may have been supported by concerns over weather conditions in South America and potential crop conditions going into 2012. However, should forecasts begin to call for more moisture in the Soybean growing regions in Brazil and Argentina, Soybean futures prices may become vulnerable to increased selling pressure as speculators liquidate existing long positions if recent support levels fail to hold. Some traders who may be anticipating a sell-off in Soybean prices going into 2012 may perhaps wish to explore the purchase of a bear put spread in Soybean futures options. For example, with March Soybeans trading at 1141.00 as of this writing, the March 1100 puts could be bought and the March 1050 puts sold for 14 cent, or $700 per spread, not including commissions. The total investment in the purchase of the spread is the maximum risk on the trade, which has a potential profit of $2,500 minus the premium paid which would be realized at option expiration in February should March Soybeans be trading below 1050.00.

Fundamentals

Sideways to lower prices seems to have been the norm in the grain complex the past several sessions, as traders gear-up for the release of the December Crop Production and Supply/Demand reports due out this morning at 7:30 am Chicago time. For Corn futures, the demand side of the equation has been the focus of the market, as U.S. Corn exports have been lackluster as "cheaper" feed grains from Russia, Australia, and Argentina have hurt U.S. export business. In this morning's USDA report, many traders are expecting a moderate decrease in U.S. 2011/12 Corn ending stocks, somewhere near the 820-830 million bushel level, vs. the 843 million bushel estimate in the November report. Any decrease in ending stocks would most likely be due to increased demand from domestic Ethanol producers and an increase in usage for feed. Global production estimates are expected to be raised as well, which could lead to higher global carry-out totals going into 2012, which will also weigh on U.S. export projections.

Many soybean traders have their focus to the south, as the production output from South America will be widely watch and likely become a key catalyst for whether buyers will favor U.S. or South American Soybeans in 2012. A bumper crop from Brazil and Argentina this season could undercut U.S. Soybean exports, particularly to China, and especially if the U.S. Dollar remains relatively strong. Current expectations are for the USDA to raise U.S. Soybean ending stocks to as high as 220 million bushels, up from 195 million bushels last month due to weak exports. However, weather conditions in Argentina and Brazil have been less than ideal so far, with dry conditions expected to extend into the end of the year. Temperatures have been moderate, however, and that is taking away some of the immediate concerns regarding potential crop production issues. However, any signs of a prolonged drought may spark a "risk premium" into Soybean futures prices.

U.S. Wheat looks to be the weakest performer fundamentally, as the market is still burdened by large global supplies and stiff export competition from South America, Australia, Ukraine, and particularly Russia. The USDA is expected to increase its estimates for global Wheat supplies by nearly 4 million tons from the 202.6 million ton estimate in the November report. Soft Red Winter Wheat (traded in Chicago) is the only one of the major grain futures markets (Corn, Soybeans, Wheat) in which speculators are holding a net-short position, and a bearish USDA report could spark additional selling pressure should recent lows fail to hold.

Technical Notes

Looking at the daily chart for March Soybeans, we notice how steeply prices fell once the highs were made back in September, with prices falling over $3 per bushel in about 3 months time. Since November, prices have remained consistently below the 20-day moving average, with this technical indicator now being a primary focal point to determine if an end to the downtrend may be near. We also see a potential "bear flag" forming, which would confirm the longer-term downtrend is still intact should prices close below the lower line of the flag on higher than average trading volume. Bean bulls will note that there is a bullish divergence forming in the 14-day RSI, which may account for the current price consolidation of the past several sessions. The next support point for March Soybeans is seen at the November 25th low of 1111.75, with resistance found at the December 5th high of 1158.75.

Mike Zarembski, Senior Commodity Analyst


December 12, 2011

Grain Prices Slump as Global Production Increases

Monday, December 12, 2011

The bearish USDA report may make it difficult for Corn to stage a meaningful rally in the near-term, with potential heavy long liquidation selling possible on any rally attempts. The daily chart for March Corn shows strong resistance in the 650.00 to 675.00 area, so some bearish traders may wish to explore selling calls in Corn futures options with strike prices at or above the chart resistance levels. For example, with March Corn trading at 590 ½ as of this writing, the February 670 calls could be sold for about 5 cents, or $250 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 late January should the March futures be trading below 670.00.

Fundamentals

The old trading adage that "the cure for high prices is high prices" appears to have worked, as record or near-record high prices in Corn and Soybean futures have encouraged global producers to ramp-up production. Large global supplies are expected to dampen export demand for U.S. grains, according to the latest USDA report. On Friday, the USDA estimated U.S. Soybean exports would fall to 1.3 billion bushels, which is a reduction of 25 million bushels, as competition from Brazil and Argentina would take business away from the U.S. Lower export expectations and weaker-than-expected Soybean crush totals caused the USDA to raise domestic Soybean carryout totals by 35 million bushels to 230 million bushels. The news for Corn was also deemed bearish by many traders, as the USDA raised global Corn production to a record high of 867.5 million metric tons this season, with China's production raised to a record 191.8 million metric tons. Despite record global Corn production, the USDA left its export estimate of 1.6 million bushels unchanged, but did lower domestic usage by 5 million bushels, which accounted for the modest 5 million bushel increase in U.S. carryover to 848 million bushels. Burdensome global Wheat supplies are expected to weigh heavily on U.S. Wheat exports, with the USDA forecasting a 5% drop in Wheat exports to 925 million bushels. Wheat carryover was raised by 50 million bushels in the U.S. to 878 million bushels. With prices currently at or near their lows for the year, it will be interesting to see if the USDA turns out to be more pessimistic in its usage and export estimates than actually occurs. Despite increased production out of China, the expectation is still that China will be a large buyer of grains during the coming year. Should we see some weakness return to the U.S. Dollar, we may see an upside surprise on export sales, especially for Corn in 2012, and to a lesser extent for Soybeans. However, it still remains to be seen if this would be enough to halt the downward trend in the grain complex, especially with large speculators still holding net-long positions in both Corn and Soybeans. It may take further price weakness to drive out the remaining grain bulls before we start showing signs of an end to the recent bearish trend.

Technical Notes

Looking at the daily chart for March Corn, we notice that the long-term uptrend line drawn from the July 2010 lows has clearly be rejected, setting the stage for potentially much lower prices in the coming months. Prices are below both the 20 and 200-day moving averages, and the 14-day RSI has turned weak, with a current reading of 34.80. There also appears to be a potential head-and-shoulders pattern forming, with prices holding just above the neckline of this pattern. Should prices take out this neckline, the next major support point is not found until the 555.00 level. Near-term resistance is found at the 11/30 high of 616.00.

Mike Zarembski, Senior Commodity Analyst


December 13, 2011

Coffee Hits Technical Bear Market

Tuesday, December 13, 2011

Coffee futures have been the victim of their own success when prices were sky high earlier this year. This has resulted in soft cash market demand. Also, outside market forces have worked against Coffee. The lack of confidence in Europe, sagging US economy, and slowdown in the BRIC countries many have commodity traders on edge. Technically, the breakout of the triangle pattern to the downside after the preceding trend was lower suggests that prices may continue to move lower. Some traders may perhaps wish to consider entering into a bear put spread, like buying a Feb Coffee 210.00 put and selling a 200.00 put for a debit of 2.00, or $750. The trade risks the initial cost and has a potential maximum profit of $3,000 if the price of the underlying March futures contract closes below 200.00 at expiration.

Fundamentals

Coffee futures continued their slump due to an increasingly negative bias toward food commodities. The recent exuberance seen in the equity markets may be coming to the end in the wake of the seemingly inevitable downgrades of France and Germany by Moody's. Many large speculators, including hedge funds, have cut their long positions on food commodities to the lowest level in over two years. Not only are commodities facing outside pressure from economic growth concerns, but supply pressure has subsided quite substantially. In Brazil, the likelihood of a potential strike for the port of Santos is almost nonexistent at this point. Cash market prices and demand have been extremely weak lately, as evidenced by the extremely weak cash market demand in Vietnam. The concern that Brazil's crop could fall as low as 50 million bags has been tempered by expectations that Vietnam will increase exports by 2.5 million bags due to the anemic domestic demand. On the ICE, certified stocks were up by over 8200 bags to 1.49 million.

Technical Notes

Turning to the chart, we see the March Coffee contract broke through support at the 226.70 level. The move not only breaks support, but also confirms a downside breakout from a triangle pattern on the daily chart, given that the move lower from May highs is down just about 30%, which is the generally accepted percentage drop for a bear market. The RSI indicator has not yet reached oversold conditions, suggesting there could be more downside in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

December 14, 2011

Are Bears Losing Their Chocolate Cravings?

Wednesday, December 14, 2011

The sharp and sudden short-covering rally during the past two trading sessions has sent March Cocoa futures from being sharply oversold to soaring nearly 300 points! There is good resistance seen near the 20-day moving average, and we may see some hedge and technical selling emerge near this price level unless the market receives some fresh bullish news. Some traders who are still long-term bearish on Cocoa prices may perhaps wish to use this recent short-covering rally to explore selling March Cocoa should prices move toward resistance near the 2315 price level. A move above major resistance just above 2500 would negate the longer-term bearish momentum. However, a failure of the recent short-covering rally may portend a test of the 2008 lows near the 1870 level.

Fundamentals

The nearly month-long price decline in Cocoa futures came to an abrupt end on Monday, as a move below psychological support at 2000 basis the March futures was met with a surge of speculative buying interest. The rally was a "perfect storm" for traders as large speculators were net-short Cocoa and the market was testing a key support level. However, it was a forecast from Olam International, a Singapore based commodity firm, that 2011-12 Cocoa production would be at a deficit of 100,000 tons that added fuel to the short-covering explosion that erupted on Monday. Olam predicted that Cocoa production from the Ivory Coast would total only 1 million tons, which is down 300,000 tons from last season. This bullish forecast was all that was needed for a short-covering rally to begin, which triggered buy stops on the way up, as weak bears rushed for the exits. Some additional support may have also come from news out of Ghana, the world's second largest Cocoa producer, that Cocoa shipments have been halted due to a dispute between shippers and the country's ports and harbors authorities. Cocoa prices were hovering near 3-year lows, as a stronger U.S. Dollar and ample supplies weighed on prices. Fears of demand declines out of Europe due to the ongoing debt crisis were also cited as a factor for the recent price sell-off. Though prices have rallied nearly $300 per ton in just the past two trading sessions, prices have yet to run into resistance, as hedge sellers are awaiting further short-covering buying before locking-in prices. However, there are some strong technical barriers to overcome, especially if the rally continues for another $200 to $300 per ton, which may put the brakes on any bullish attempts to rally the market.

Technical Notes

Looking at the daily chart for March Cocoa, we notice the huge reversal day on Monday, as prices moved to 3-year lows, only to rally sharply with a nearly 30- point trading range. Monday's rally sent prices above the downtrend line drawn from the November 8th high and sparked follow-through short-covering buying on Tuesday. The 14-day RSI surged upward, moving form a much oversold 11.80 reading to a weak but more neutral 38.60 on Tuesday. The most recent Commitment of Traders report shows large non-commercial traders net-short 9,659 contracts as of December 6th, and we expect to see that number drop sharply in Friday's report. Monday's low of 1983 now looks to be strong support for March Cocoa, with resistance found at the 20-day moving average currently near the 2315 area.

Mike Zarembski, Senior Commodity Analyst


December 15, 2011

Silver Continues to Dull

Thursday, December 15, 2011

Europe continues to be the focal point of traders everywhere. The recent wave of bank downgrades, while not a surprise for anyone, continues to be a black cloud hanging over the stock and commodities markets. Demand for Silver could suffer further setbacks, as investment demand has been a key driver of the physical market. Technically, the most recent downside breakout suggests that the market could continue to drop. Given the bearish fundamental and technical outlooks, some traders may perhaps wish to consider entering into a bearish strategy. Given the fact that Silver can make wild, violent swings, some traders may opt to enter into a bear put spread, for example, buying the February Silver 28 put and selling the 26.5 put for a debit of 0.50. The trade risks the initial cost of $2,500 and has a maximum profit of $5,000 if the underlying March futures contract closes below 26.50 at expiration.

Fundamentals

Silver futures were one of the big losers amidst the panic selling in commodities yesterday. The metal fell almost 7.5%, falling to the lowest closing price in ten months. Many traders have begun to question whether or not the bull market has ended for precious metals. The metal is certainly in a technical bear market, falling over 40% from April highs and exceeding the 30% that defines a technical bear market. The uncertainty over the state of Europe continues to set the tone for trading on a daily basis. The longer the European debt crisis drags on, the more apparent it is that the egos of the leaders of member states may continue to derail any meaningful accord. This threatens to have a large negative impact on the global economy, slowing demand for commodities. As a result, Silver's industrial demand could continue to slump. As Europe continues to procrastinate, the odds of the Euro currency unit seeing its demise continues to increase. The stronger US Dollar could slash investment demand to the same degree that slow economic growth has plagued industrial demand.

Technical Notes

Turning to the chart, we see the March Silver contract breaking out below support at the 30.00 level. There is also confirmation of a breakout out of the triangle pattern, which suggests that prices could test the $25 level on the downside. As noted earlier, yesterday's settlement price was off 40% from the highs recorded earlier this year. Prices have not yet hit oversold levels, suggesting the sell-off may have legs.

Rob Kurzatkowski, Senior Commodity Analyst


December 16, 2011

Traders Showing No Love for the Euro

Friday, December 16, 2011

Given the potential volatility in the Euro, some bearish traders may perhaps wish to explore trading strategies using options on Euro futures, such as a bear put spread. For example, with the March Euro trading at 1.3057 as of this writing, the February 1.30 puts could be bought and the February 1.25 puts sold for a net debit of 0.0155, or $1,937.50, not including commissions. The total investment in this spread would be the maximum potential risk on the trade, which has a potential profit of $6,250 minus the premium paid that would be realized at option expiration in early February should the March Euro futures be trading below 1.2500.

Fundamentals

Investors and traders continue to lose faith that a meaningful solution to the European debt crisis may be near and have voiced their displeasure by shunning the Eurocurrency, which has fallen to lows not seen since January of this year. The Euro has been trading on both sides of psychological support at 1.3000 following the auction of 5-year Italian government debt earlier this week. Italy was able to auction off 3 billion of new 5-year notes, but only at a record high yield of 6.47%. Last week's announcement by EU leaders of a new set of rules to monitor individual nations' budgets and economic policies seems to have been dismissed by many traders, who are looking for more immediate actions to help stem the crisis of confidence in Europe. Many market participants would like to see the European Central Bank (ECB) become a more aggressive buyer of the debt of its struggling member nations, with a policy similar to the Federal Reserve's quantitative easing. The various ratings agencies have also noted their concerns with the lack of a "solution" to the debt crisis, with Moody's planning on reviewing all 27 members of the EU for a possible ratings downgrade. Though Euro bears certainly have the upper hand, the value of the Euro vs. the US Dollar is still well above the lows made in 2010, despite what appears to be a much bleaker outlook for the EU. Some of this can be explained by the repatriation of Euros from overseas back to European banks and businesses to help meet liquidity needs. The most recent Commitment of Traders report shows large and small speculative accounts adding to an already large net-short position in the Euro futures, which now totals over 120,000 contracts as of December 6th. This does not include any new short positions that were established as the Euro broke below recent support near 1.3250. However, the large net-short speculative portion might be a double-edged sword, as any "bullish" news out of Europe could be met with a bout of aggressive short-covering buying by weak Euro bears, making the efforts to remain short the Euro fraught with potentially large volatile price moves as we head into 2012.

Technical Notes

Looking at the daily continuation chart for the Eurocurrency futures, we notice prices trading near the lower end of the downward channel starting at the 2011 highs made back in May. If we draw an uptrend line from the major lows made back in June of 2012, we see that the bullish trade was definitively broken back in September, and even the upward correction in late October failed to move prices back above the trendline. Prices are now accelerating away from the 20-day moving average, adding to the near-term selling pressure. The 14-day RSI has moved into oversold territory, with a current reading of 29.89. The January low of 1.2870 looks to be the next support level for the Euro futures, with resistance seen at the recent low of 1.3212 made back on November 25th.

Mike Zarembski, Senior Commodity Analyst


December 19, 2011

Some Holiday Cheer on the Employment Picture in the U.S.

Monday, December 19, 2011

With the exception of a downward "spike" in August, the E-mini NASDAQ 100 futures have remained above 2000.00 throughout 2011. Some traders who are optimistic that the NASDAQ 100 futures will remain above 2000.00 to start 2012 may perhaps wish to explore selling puts in E-mini NASDAQ 1000 options with strike prices below 2000.00. For example, with the March futures trading at 2236.00 as of this writing, the January 1970 puts could be sold for 10.00, or $200 per option, not including commissions. The premium received would be the maximum potential profit on the trade, which would be realized at expiation in mid-January should the March futures be trading above 1970.00. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such strategy would be to buy back the option prior to expiration should the option premium trade at 3 times the premium received for selling the option initially.

Fundamentals

With traders' mindsets focused on events across the Atlantic, equity futures may be missing some good news here in the U.S., as recent economic data suggests some positive momentum for the economy going into 2012. On Thursday of last week, the market received a slew of positive economic reports, starting with another sharp decline in jobless claims which fell by 19,000 last week to a seasonally adjusted 366,000. This was the lowest level that jobless claims have fallen since the spring of 2008! The 4-week moving average of claims remained below 400,000 for the 5th consecutive week, coming in at 387,750. The improvement in the employment sector was echoed by the New York Fed as the December economic index rose to 9.53, vs. 0.61 in November. The Philadelphia Fed general economic index rose to 10.3 in December. This was up from 3.6 in November, and sharply higher than the -30.7 reading seen back in August. Inflation remains tame, at least on the wholesale level, as producer prices rose a modest 0.3% in November. The so-called core index, which excludes the volatile food and energy prices, rose by only 0.1% last month. If there was a down note, it was report that U.S. industrial production fell by 0.2% in November, and that capacity utilization fell by 0.2% to 77.8 last month. The declines in industrial production were mostly blamed on the slowing of the European economy, which was expected to slow demand for goods in the EU. Equity markets have been quite volatile during the past several months, as traders try to determine if the European debt crisis will spread beyond the EU. Also, the lack of any consensus by EU leaders regarding how to tackle the looming crisis has led to bouts of euphoria and depression by traders, as contradicting reports of progress on dealing with the debt situation reach traders' desks. With the market so focused on the Eurozone, some traders may be missing signs of economic improvement in the U.S., and the domestic equity markets might be unfairly punished until a resolution in Europe takes place.

Technical Notes

Looking at the daily continuation chart for the E-mini NASDAQ 100 futures, we notice that much of 2011 was mired in volatile, but rather sideways trading activity, with prices contained within a 200-point range for most of the year. Since the "spike" lows were made back in August, prices have moved into a consolidation pattern, with a series of higher lows and lower highs on reduced trading volume. The 20 and 200-day moving averages (MA) are converging, with a slight bias to the downside in the 20-day MA. This negative bias is supported by looking at momentum as measured by the 14-day RSI, which is currently neutral to weak, with a current reading of 42.27. Near-term support is seen at the November 25th low of 2135.75, with resistance found near the 2345.00 area.

Mike Zarembski, Senior Commodity Analyst


December 20, 2011

Yearend Window Dressing, Risk Lift Bonds

Tuesday, December 20, 2011

Bonds continue to move higher and yields continue to shrink as we approach the end of the year, as many funds look to add quality assets to their balance sheets. Despite the S&P downgrade of US debt and continuous talk of diversification away from the Dollar, many global investors continue to look to the US as a safe haven when the sky is falling. Technically, the March Bond contract appears to be on the verge of breaking out, which could signal a continuation of the uptrend. Buying at these levels, however, can be difficult given the extremely low yields and likelihood that some of the recent buying has been due to window dressing. Some traders may want to keep an eye out for a reversal on the chart, indicating that buying may be subsiding. Some more aggressive traders may perhaps wish to consider jumping the gun, so to speak, and enter into a bear put spread, for example, buying the Feb Bond 143 puts and selling the 139 puts for a cost of 1-00, or $1,000. The trade risks the initial cost of $1,000 and has a maximum profit of $3,000 if the underlying March futures contract closes below 139-00 at expiration.

Fundamentals

There has been no Santa rally for the market thus far, despite the promising start to the holiday shopping season. The tumultuous events in Europe continue to plague the financial and commodity markets. Bond futures have continued to act as high ground for traders looking to avoid the uncertainty of European debt. The collapse in precious metals prices has also shaken the reserve of the Gold bugs and has added to the strength in US treasuries. As yearend approaches, investors will probably come under pressure to add higher quality assets to their balance sheet. We may see a similar phenomenon to the events at the tail end of 2008, when treasury prices spiked as the year drew to a close. The last days of 2011 could see something similar to a lesser degree, given the lofty levels at which Bonds are currently trading. Many traders are now asking themselves what happens next. The beginning of 2009 proved to be a rocky one for Bonds, and some traders may look to protect their downside if these events repeat themselves.

Technical Notes

Turning to the chart, we see the March Bond contract trading up to test the September 22nd high close of 146-02. If prices are able to successfully break through this level, it would signal a technical breakout and suggest that prices are likely to continue to move higher. Failure to break out above this level suggests that prices could continue to consolidate between 140 and 145. The RSI indicator has moved higher, but remains below overbought levels. This suggests that the market could break out prior to becoming overbought, which may strengthen a potential rally.

Rob Kurzatkowski, Senior Commodity Analyst

December 21, 2011

Too Much Sugar!

Wednesday, December 21, 2011

Though we may see bouts of buying in the Sugar futures market in the coming weeks, it may be difficult for any rally to be sustained given the rather bearish supply fundamentals seen in 2012. Some traders may perhaps wish to use any short-term rallies to explore buying bear put spreads in Sugar futures options. For example, with March Sugar trading at 23.67 as of this writing, the March 23 puts could be bought and the March 22 puts sold for a 0.34 debit, or $380.80, not including commissions. The investment in the put spread would be the maximum potential risk on the trade, which has a potential profit of $1,120 minus the premium paid which would be realized at option expiration in February should the March futures be trading below 22.00.

Fundamentals

Sugar prices appear headed toward their 2011 lows, as a potential for record production this season is keeping the bears in charge. Prices may have remained elevated throughout most of this year as traders focused on disappointing production totals out of Brazil, which is the world's leading Sugar producer. However, huge production out of India, Thailand, and Europe is more than expected to make up for Brazil's output. Analysts are now increasing their estimates for a global Sugar surplus, with some forecasters calling for a 6 million ton plus surplus in the 2011/12 season. Should prices continue to head lower, we may start to see some Brazilian cane move towards Ethanol production, instead of for food usage. This may bring some support to the Sugar market, but it may take a move below 20 cents per pound before any major shift takes place. Many traders will continue to watch the events unfold out of Europe, as EU leaders try to stem the economic malaise caused by the sovereign debt crisis. Any signs of further economic deterioration could spell further weakness in commodity prices in general, with Sugar being especially hard hit given its current bearish fundamentals.

Technical Notes

Looking at the daily chart for March Sugar, we notice Tuesday's rally, which was triggered by a return to "risk" assets by traders following a successful Spanish T-bill auction and improved German business sentiment, sent prices above the 20-day moving average. The 14-day RSI has moved from an oversold reading to a more neutral stance, with a current reading of 48.30. Though the short-term outlook has improved, Sugar bulls have a rough road to higher prices, especially with strong resistance found at the 200-day moving average, as well as at the down-trend line drawn from the August 24th highs which lie above the 25.00 level. Near-term resistance is found at the December 7th high of 24.25, with support found at the December 15th low of 22.62.

Mike Zarembski, Senior Commodity Analyst

December 22, 2011

Despite Gyrations, Oil Volume Falls

Thursday, December 22, 2011

Crude Oil has finally gotten a bit of good news over the past several sessions, which is a welcome change for Oil bulls, who have seen prices dragged down by the myriad of bad news out of Europe. The ECB's move to increase liquidity could be beneficial to bulls, as it could lead to a stabilization of Eurozone banking and inflationary pressure. However, risks to Oil demand remain as the holiday shopping season comes to a close, and Europe remains a mess. Technically, the Crude Oil contract has been a difficult one to read. After appearing to possibly be on the verge of breaking out to the upside, the market forms what looks like a double-top that may be invalidated. Despite the market gyrations, volatility as measured by OVX is at the lowest levels in four and a half months. Some traders may perhaps wish to consider entering into long straddle or strangle with the expectation that volatility will increase - for example, a 98.50 straddle at 6.50, or $6,500. This is an expensive strategy and may not be suitable for all traders.

Fundamentals

Crude Oil surged almost five dollars over the past two sessions, lifted by ECB lending and the largest drawdown in Oil inventory levels since February 2001. The European central bank has been looser with loans lately, which may help keep European banks solvent, or at the very least, delay defaults. The move may also help the Eurozone avoid a prolonged recession, which may stabilize petroleum demand. The EIA shocked many market observers with a 10.6 million barrel drawdown, which was well in excess of the median analyst estimate of a 2.13 million barrel draw. Products also saw some destocking, as gasoline saw a draw of 412,000 barrels and distillate inventories shrunk by 2.35 million barrels. Surprisingly, demand has been strong, increasing to 19.3 million barrels a day. Much of this can be attributed to the rise in distillate demand, which can be seen as seasonal. While the total demand for petroleum did increase 5%, the seasonal demand from trucking during the holiday season and the heating oil demand during the winter months made up much of this demand. Also, 19.3 million barrels a day is around the medium petroleum demand figure, which is hardly jaw dropping. Crude Oil may stay between the 95 and 100 dollar levels in upcoming sessions, as many traders await next week's inventory data to give a clearer picture as to whether the massive drop in inventories was a one-off event or, possibly, the beginning of a trend.

Technical Notes

Turning to the chart, we see the February Crude Oil contract snap back quickly after trading down to support near the 94.00 level. Prices may soon face stiff resistance just north of the $100 level. It will be difficult to sell Crude Oil bulls on a breakout above the $100 mark, as the previous four attempts have resulted in the market selling-off. A breakout above 100, however, would invalidate the double-top formation confirmed last week. The result could be a stalemate between the bull and bear camps and sideways trading. Yesterday's close above the 20 day moving average suggests that a near-term low may be in place.

Rob Kurzatkowski, Senior Commodity Analyst


December 23, 2011

Where Did All the Oil Go?

Friday, December 23, 2011

The upward bias in Oil prices has favored bullish trading strategies the past several months. Strong support in February Crude is seen at 90.00, and traders looking for this support point to hold may perhaps wish to explore selling puts in Crude Oil futures options with strike prices below support at 90.00. For example, with February Crude Oil trading at 98.75 as of this writing, the February 85.00 puts could be sold for 0.37, or $370 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-January should February Crude be trading above 85.00. Given the risk involved in selling naked options, traders should have an exit strategy in place should the position move against them. An example of such a strategy would be to buy back the short option prior to expiration should the option premium trade at 2 ½ times the premium received for initially selling the option.

Fundamentals

Oil futures seemed poised to test the $100 per barrel level once again, as a huge draw in Oil inventories last week sparked renewed buying. On Wednesday, the Energy Information Administration reported that U.S. Crude inventories fell by 10.6 million barrels last week, which is more than four times the pre-report estimate. Large declines in Oil inventories at the end of the year are not uncommon, as refineries attempt to minimize inventories for tax purposes. However, the size of the decline was a surprise, with the majority of the decline seen in the Gulf Coast and West Coast regions. The closing of the Houston Ship Canal last week may account for some of the declines in the Gulf Coast region, as well as sharply lower Crude Oil imports last week. Many traders will be monitoring the weekly reports in the coming weeks, to see if Oil inventories built sharply in January. If they did, this would confirm the December drawdown was mostly tax related. In addition to lower U.S. Crude inventories, geo-political risks also have been supporting Oil prices, with potential sanctions on Iran looming due to its nuclear ambitions, as well as political unrest in Egypt and now Iraq. The European debt crisis has been a weight on Oil prices this year, as a major economic slowdown on the "Continent "could spread beyond Europe and lead to an overall weakness in global energy demand. However, emerging markets still have a thirst for Oil, and even countries such as China, where economic growth levels have subsided, are still expected to show increased demand for Oil and fuel products in the coming year.

Technical Notes

Looking at the daily chart for February Crude Oil, we notice prices rebounding after briefly trading below the 200-day moving average. Since the recent highs were made back in mid-November, prices have formed what appears to be a "bull flag" formation, which is generally viewed as a consolidation formation that typically resolves itself in the direction of the previous major trend. Volume has also been on the lighter side during the past few weeks, which is consistent with a "bull flag" formation. The 14-day RSI has turned up, with a current reading of 54.65. The December 16th low of 92.52 is seen as near-term support for February Oil, with resistance seen at the November 17th high of 103.37.

Mike Zarembski, Senior Commodity Analyst


December 27, 2011

BOJ Intervention Fails to Spark Yen Sell-off

Tuesday, December 27, 2011

The BOJ has not been able to devalue the Yen to the extent that the central bank would like. Unlike the Swiss intervention earlier this year, the Japanese central bank has fewer tools at its disposal by not pledging unlimited intervention. The new trade agreement with China and the lingering European concerns could also continue to bolster the Yen. Technically, the Yen has been a quiet market that may be on the verge of breaking out. Some traders may possibly with to co nsider entering into a bull call spread, like buying the Feb Yen 1.30 calls and selling the Feb 1.325 calls for a debit of 0.0050, or $625. The trade risks the initial cost and has a maximum profit of $2,500 if the March Yen closes above 1.3250 at expiration.

Fundamentals

The Bank of Japan has failed to devalue the Yen significantly versus the US Dollar, extending the central bank's streak of unsuccessful interventions. The failure of the BOJ to get a meaningful depreciation of the Japanese currency versus the Dollar could face further snags after China and Japan entered into a direct trade agreement. The agreement means that the two nations will directly exchange currencies instead of exchanging into Dollars as an intermediary currency. The move eliminates exchange risk for both nations and could encourage trade growth. It also suggests that China could increase its investment in Japanese government bonds, which would create demand for Yen. Going into the New Year, investors may continue buying safer assets as a result of the European mess, which could continue to support the Yen.

Technical Notes

Turning to the technicals, we see a relatively uneventful March Yen chart. After dropping sharply at the end of October, the Yen has been in a very tight sideways pattern between 1.2750 and 1.3000. Recently, this range has been tightening, suggesting the market may be on the verge of breaking out. Given the small open-end of this consolidation, the move is not expected to be particularly large. The 50 and 100-day moving averages are just above the upper end of this range, suggesting that an upside break-out could swing momentum to the bulls' favor.

Rob Kurzatkowski, Senior Commodity Analyst


December 28, 2011

Mild Temperatures Keeping Natural Gas Bulls in Hibernation

Wednesday, December 28, 2011

The long-term bearish bias in Natural Gas prices appears to be intact, with little in the way of near-term catalyst to change this outlook. However, it may take an end to the winter heating season for some traders to feel comfortable adding aggressively to their short positions to move prices below 3.000. Given this scenario, some traders who are looking to establish a moderately bearish position in Natural Gas futures may perhaps wish to explore buying a bear put ratio spread in near-term Natural Gas futures options. For example, with February Natural Gas trading at 3.133 as of this writing, the February 3.100 put could be bought and two 2.950 puts sold for a net credit of 0.010, or $100, not including commissions. By doing the ratio for a net credit, the trader wideners the potential range of prices in which the trade would be profitable.

Fundamentals

It is tough being a Natural Gas bull these days, as prices continue to languish near the $3 per mmbtu level, despite that fact that we're in the heart of the winter heating season. With front month futures trading at 27-month lows, it is getting harder to find reasons for a rally. Above average temperatures in the Midwest and east coast regions of the US have hurt gas demand, with US inventories running nearly 12% above the 5-year average. This large gas surplus has allowed traders to largely ignore recent slowdowns in production, with the Baker Hughes rig count data showing 8 consecutive weeks of lower rig counts. Though it appears that lead month Natural Gas prices are destined to see a 2-dollar handle sooner rather than later, some weather forecasts are calling for colder temperatures to reach the east coast next week. This will keep traders focused on the 6 to 10-day outlook to see if the recent warm spell may be nearing an end. Many large speculative traders continue to expect lower Natural Gas prices, with the most recent Commitment of Traders report showing large non-commercial traders adding just over 2,600 new net-short positions for the week ending December 20th. This increased the net-short position to just over 161,000 contracts. Though this sounds like a huge net-short position, it is far from the record 297,972 net short positions that were held back in July of 2008 at the apex of the Gas bull market.

Technical Notes

Looking at the daily chart for February Natural Gas futures, we notice prices beginning to consolidate between 3.250 and 3.100, with current activity holding near the bottom on this price range. The 14-day RSI remains weak, holding just above oversold territory with a current reading of 30.49. Support is found at the contract low of 3.100 made on December 19th, with resistance seen at the 20-day moving average, currently near the 3.350 level.

Mike Zarembski, Senior Commodity Analyst


December 29, 2011

Was Last Week's Crude Oil Drawdown a Fluke?

Thursday, December 29, 2011

Crude Oil futures suffered a setback yesterday, after the API showed a substantial inventory increase and European Central Bank lending continued at a feverish pace. Today's EIA report is likely to confirm that the prior draw down was a fluke. Many traders continue to monitor the events in Iran, but some have already discounted the fact that the nation's threat to close the Strait of Hormuz is probably an empty one. Some traders may perhaps wish to consider entering into a bear call spread, for example, selling the Feb Crude Oil 105 calls and buying the Feb 107 calls for a credit of 0.50, or $500. The initial credit would be the maximum profit and the trade risks $1,500.

Fundamentals

Crude Oil futures are lower this morning, after the API inventory report showed a large increase in Oil inventories, nullifying last week's substantial gains. The API reported that inventories rose 9.57 million barrels for the week. Today's EIA report will shed a little more light on the situation and give a clearer picture as to whether last week's draw of over 10 million barrels was a one-off event. The rise in ECB lending at an almost alarming rate did little to help the bull camp, as European banks could be in an even worse situation than previously thought. Many of these institutions are in crisis mode, and we may see full scale government bailouts in the not too distant futures. While these factors can be seen as bearish, the wildcard remains Iran. The Oil-rich nation has threatened to close the Strait of Hormuz if the West beefs-up sanctions to stop the nation's nuclear ambitions. This may be more political posturing than an actual plan that it intends to carry out, as Iran could suffer more than any other nation should the waterway be closed.

Technical Notes

Turning to the chart, we see the February Crude Oil Contract once again reversing sharply after crossing above the 100.00 level. Whether this is a temporary setback or an indication that the market will try to come back and test the 95.00 level remains to be seen. Prices remain above the 20-day moving average at the moment. A crossover below the average would suggest that a near-term high may be in place. The oscillators are giving neutral readings, but it is interesting to note that the RSI indicator has actually moved higher, despite yesterday's reversal on the chart. This could be seen as near-term bullish if it were not for the momentum indicator showing bearish divergence prior to the RSI divergence.

Rob Kurzatkowski, Senior Commodity Analyst


December 30, 2011

Is the Bull Market in Gold Ending?

Friday, December 30, 2011

Gold prices appear at a crossroads, with the potential for an accelerated sell-off as weak longs continue to exit the market -- but also the potential for sharp gains should recent lows hold and bargain hunting buying emerge. This sets the stage for traders to explore strategies that would benefit from a big move or increased volatility in Gold prices, such as the purchase of an out-of-the-money strangle in Gold futures options. For example, with February Gold trading at 1547.00 as of this writing, the February Gold 1600 calls and the 1500 puts could be bought for a 31.50 debit, or $3,150 per strangle, not including commissions. The total investment in this strangle is the maximum potential risk on this trade. Given the high initial cost of this trade, some traders may wish to exit the trade prior to expiration in late January should the option premium fall to 50% of the initial cost of the trade or should the trade move to 130% of the amount of the initial investment.

Fundamentals

After reaching all-time high prices in 2011, Gold bulls certainly don't have much to show for the rally as 2011 comes to a close, as prices have fallen over $350 from their highs. Not only has Gold begun to lose some of its "safe-haven" luster, but several key technical indicators look to be pointing to even lower prices at the start of 2012. Lead-month Gold futures are now trading well below the 200-day moving average, which is an important technical signal, as many traders look at where prices are verses this long-term moving average to gauge if a market is in a bullish or bearish phase. In addition, the uptrend line drawn from the key October 2008 lows was broken on Thursday for the first time. A weekly close below this trendline could lead to a bout of accelerated long liquidation selling. Gold prices are not getting much help from a resurgent US Dollar, which is normally viewed as a bearish indicator for commodity prices. It appears that the assets that were being moved into Gold due to concerns about Europe and its handling of the debt situation have started to find a home in other venues, such as US and German Treasuries. This has taken some buying interest away from Gold, despite much lower prices than those seen earlier this year, as investors now appear more willing to earn even meager interest from owning government bonds than they do owning precious metals that not only pay no interest, but are also a cash drain, as both storage and insurance on metal holdings must be paid. There is heightened concern for investors now that Gold prices have failed to make new highs, and those buyers who were late to the party are now seeing heavy losses to the value of their metal holdings.

Technical Notes

Looking at the daily continuation chart for Gold futures, we notice Thursday's sell-off below previous support at 1532.70 was short-lived, as prices received by the close cut the daily losses in half. This could spark some near-term bargain hunting buying, as long as Thursday's lows continue to hold. This is backed by the 14-day RSI, which has moved into oversold territory with a current reading of 27.93. If we look at the Fibonacci retracement from the October 2008 lows, we notice prices have not even retraced to the 38.2% level! This could potentially lead to further losses, with the 50% retracement not coming into play until the 1300.00 area. The most recent Commitment of Traders report shows speculators shedding over 26,000 net-long positions during the week ending 12/20. This was before the most recent price declines, and we should expect to see further declines in the net-long speculative position in this afternoon's report. Below this past Thursday's low, the next support point is seen near the 1478.00 area, with near-term resistance found at the December 21st high of 1642.10.

Mike Zarembski, Senior Commodity Analyst