« January 2012 | Main | March 2012 »

February 2012 Archives

February 1, 2012

New Life for Gold Bull Market

Wednesday, February 1, 2012

Longer-term Gold bulls must be happy with the yellow metals resurgence of late, but the prospects for higher volatility remain -- especially with the technicals starting to show that Gold may be becoming overbought in the near-term. Some bullish traders who are looking for some staying power may perhaps wish to explore buying bull call spreads in Gold futures options. For example, with June Gold trading at 1737.70 as of this writing, the June 1800 calls could be bought and the June 1900 calls sold for a net debit of 25.00, or $2,500 per spread, not including commissions. The total investment in the call spread would be the maximum risk on the trade, with a potential profit of $10,000 minus the premium paid, which would be realized at option expiration in May should June Gold be trading above 1900.00.

Fundamentals

Just like the Energizer rabbit, the bull market in Gold futures just keeps going and going, with prices posting their largest monthly gains since August of 2011. Among the reasons for Gold's renewed appeal was the weakening of the value of the U.S. Dollar, especially versus the Euro. A weaker U.S. Dollar makes Dollar-denominated commodities "cheaper" for non-Dollar holders, which increases the demand. This is demonstrated by the large purchases coming from China, despite their annual increase of domestic Gold production of 6% in 2011. The potential for a low interest rate environment in the U.S. may also be contributing to Gold's renewed investor interest, particularly after the Federal Reserve extended their outlook holding interest rates steady into late 2014. Since Gold offers no yield, investors are losing out on little income by holding Gold vs. interest bearing assets. Though Gold is currently trading nearly $200 below its all-time highs, prices have rebounded over 50% of the nearly $400 price decline seen in the last several months of 2011, when some traders were calling for the end of the Gold bull market. With few signs of Europe getting its act together to stem the sovereign debt crisis, Gold may once again assume its status as a viable alternative investment to both equities and government debt.

Technical Notes

Looking at the daily continuation chart for Gold futures, we notice what appears to be a "bull flag" formation, with prices now breaking out to the upside. Prices are now solidly above both the 20 and 200-day moving averages and momentum as measured by the 14-day RSI is strong, with a current reading of 68.20. The only real negative is that the test of resistance near the 1750.00 level was initially successful, but failed to hold above this key level for long, which may be a sign that the rally may have become a bit overdone. Should prices close above 1750.00, the next resistance level is seen at 1800.00, with support found at the 200-day moving average near the 1644.00 level.

Mike Zarembski, Senior Commodity Analyst


February 2, 2012

Sour Crude?

Thursday, February 2, 2012

Crude Oil fundamentals have turned a bit sour in recent days. The US remains well supplied and there are questions about automobile and truck fuel demand. There is also concern that the weak ADP job number on Wednesday may be a precursor to a disappointing non-farm payroll number tomorrow. Technically, Crude Oil is in a vulnerable position. If prices break through the 95.00 level on the downside, bearish momentum may accelerate. If the market is able to hold 95.00, prices may trade in the 95-100 range for the foreseeable future. Traders may look to enter into a bear call spread, selling the March Crude Oil 100.50 calls and buying the 102.50 calls for a credit of 0.40, or $400. The max profit is the initial credit and the trade risks $1,600.

Fundamentals

Crude Oil futures have been drifting lower over the past several sessions after consolidating for the better part of two weeks. The weight of the larger fuel supplies and lackluster demand has finally caught up to the market. Yesterday's EIA data showed a build of 4.2 million barrels of Oil versus estimates of an increase of 2.6 million barrels. This can be attributed to both a milder than expected winter, which has led to softer than expected demand for Heating Oil, as well as weaker demand for motor fuel. Pair these factors together with virtually zero economic growth in Europe and uncertainty over Chinese economic growth and we can see the case for the bear camp. The strong PMI numbers from China may also make the PBoC reluctant to lower interest rates in the near term, which was almost a given just a couple of weeks ago. The inability to reach an accord over Iran's nuclear program may, however, limit the downside for Crude. Also, the low interest environment may embolden commodity bulls, which could bring value buyers in if prices drop quickly.

Technical Notes

Turning to the chart, we see the March Crude Oil contract drifting lower at a swifter pace over the past few sessions. The relative low at 95.00 is the next support level the contract may test. This level coincides with the 100-day moving average, suggesting a close below this support would be seen as a technical setback. The RSI near oversold levels as well, which could add to the bearish sentiment in the even the market breaks support.

Rob Kurzatkowski, Senior Commodity Analyst


February 6, 2012

Equity Bulls Rejoice on Strong NFP Report

Monday, February 6, 2012

The E-mini S&P 500 futures have continued their bullish move, breaking out to the upside and now within range of testing the 2001 high of 1373.50. However, some technical factors may be suggesting a near-term price correction is well overdue. The 14-day RSI has moved well into overbought territory, and trading volume on the rally has been moderate at best. In addition, CBOE Volatility Index (VIX) has fallen to levels where we have seen downside corrections take place in the past few years. Some contrarian traders looking to establish a short position or equity bulls looking for a short-term hedge may perhaps wish to explore buying puts in the E-mini S&P 500 futures options. For example, with the March futures trading at 1340.00 as of this writing, the March 1320.00 puts could be bought for 20.00, or $1,000 per option, not including commissions. The total investment in the put would be the maximum potential risk on the trade. The position would be profitable at option expiration in March should the March futures be trading below the strike price minus the premium paid for the puts.

Fundamentals

Traders got a positive surprise when the Labor Department announced the employment figures for January. Non-farm payrolls rose by 243,000 last month, nearly 100,000 jobs greater than the pre-report estimate and the largest increase since April of last year. The revisions to prior months' data was also supportive, with an additional 60,000 jobs added the prior two months. The private sector, once again, accounted for all the increases, rising by 257,000 jobs in January, with manufacturing jobs increasing by 50,000. Public sector employment continues to decline, falling by 14,000 jobs, as government entities continue to struggle with budgetary shortfalls. The unemployment rate fell by a larger than expected 0.2% to stand at 8.3%, which is the lowest rate in 3 years. The market's reaction to the positive payrolls report was as expected, with equity indices rallying sharply and bond prices falling, as traders are now beginning to believe that an improving jobs picture will allow the Federal Reserve to delay any implementation of further easing measures. If there was any downside to the report it would be that the aggregate hours worked increased by a very moderate 0.2% and the size of the workforce continued to decline, with the participation rate dropping by 0.3% to 63.7%. Even with the rather solid job gains the past few months, we are still a long way from recovering all the jobs lost since the start of the financial crisis back in 2008. Job increases need to be even more robust if we are to really acknowledge a recovery of the jobs market, however, few could argue that January's employment reports were solid and equity bulls should enjoy the moment!

Technical Notes

Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice how well prices have held above the 20-day moving average since the recent lows were made back on December 20th. The index has rallied over 140 points since that time, with only a very minor correction earlier this week. To keep the rally going, prices must move above solid resistance in the 1350.00 to 1370.00 range, and volume needs to increase, as much of the recent price rally occurred on rather lackluster volume. The 14-day RSI has moved well into overbought territory, with a current reading of 75.26. The CBOE Volatility Index has fallen to lows not seen since July of 2011, which happens to correspond to the last major high made prior to a nearly 300-point drop in the S&P 500 index.

Mike Zarembski, Senior Commodity Analyst

February 7, 2012

USDA Report, Big 2012 Loom for Corn Traders

Tuesday, February 7, 2012

Thursday's USDA supply and demand report will likely set the tone for the grain markets in the near-term. On one hand, the report is forecast to show a downward revision in world supply due to South American growing conditions. On the other hand, early projections for US acreage suggest that every acre available will be put to use, which could result in a near-record crop. Technically, the chart is giving mixed signals. The market has moved above the major moving averages for several sessions, but the market has stalled, and the oscillators lean toward the bear camp. Given the uncertainty in the near-term direction of the market and low option premiums, some traders may perhaps wish to consider entering into an at-the-money straddle, like buying the March Corn 640 call and buying the March 640 put for a premium of 30.00, or $1,500. The trade risks the initial cost and has, in theory, unlimited gain potential. Some traders may possibly want to consider exiting the put on an explosive move higher, or vice versa.

Fundamentals

US farmers are expected to plant the largest number of acres since 1984, according to a Bloomberg survey, in an effort to capitalize on high grain prices. Farming has been one of the more profitable industries in recent years, so there is a temptation to maximize acres instead of rotating. Corn has seen very good demand, both as an export crop and for use in ethanol production. There is, however, a risk that production may surpass demand this year, if early indications come to fruition. Corn acres may actually be at their highest levels since 1944, at 94.329 million acres. The weight of the upcoming crop and the looming USDA supply and demand report, this Thursday have cooled off prices in near months in recent sessions. Many traders are expecting Argentine Corn production to fall due to drought, which could have a positive impact on price if supply is slashed to a greater degree than forecast.

Technical Notes

Turning to the chart, we see the March Corn contract has run into a bit of resistance near the 650 level. Prices have crossed the major moving averages, including the 100-day moving average, which can be seen as a positive. To maintain its upward momentum, prices need to move above near-term resistance at the 660 level. The RSI has moved into overbought territory, which may weigh on prices in the near-term. Momentum is showing strong bearish divergence from the RSI indicator, which could be seen as bearish in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


February 8, 2012

European Concerns Supporting Wheat Prices for Now

Wednesday, February 8, 2012

A look at the daily chart for May Wheat shows that there is good resistance in the market in the 700.00 to 720.00 area. Some traders who are expecting this resistance area to hold may perhaps wish to consider exploring selling out-of-the-money calls in Wheat futures options with strike prices above the resistance area. For example, with May Wheat trading at 679.75 as of this writing, the April 750 calls could be sold for 10.00, or $500 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 March should the May futures be trading below 750.00. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. An example of one such strategy would be to buy back the short call prior to expiration should May wheat close above the October 11th high of 718.50, which was the last major high of the resistance price area.

Fundamentals

This time it is not the European debt crisis affecting markets, but rather the extremely cold weather that has sparked buying in Wheat futures, as potentially lower output from Ukraine, Russia and other Eastern European nations may draw down the current global Wheat surplus. Bitterly cold temperatures combined with below average snowfall are plaguing the "bread basket" of eastern Europe, with fears of "winter kill" plaguing the dormant crop. Poor grain production could force major Wheat exporters like Russia and Ukraine to curtail exports once again this coming season, as priority will be given to domestic demand. There are also concerns that well below normal temperatures will spread west, potentially affecting the crops as far away as France. These concerns are being expressed by traders in Paris Milling Wheat futures prices, which are trading near 8-month highs. Here in the U.S., Wheat futures have also been supportive, despite ample supplies and current lackluster export demand, as a large speculative short position in Soft Red Winter Wheat is responsible for a bout of short-covering buying now that traders believe the U.S. may see more export business returning should the Baltic nations be forced out of the export market once again. However, before anyone becomes too bullish on Wheat prices, it is important to remember that there is still a huge global surplus of Wheat this season, which could help cushion any shortfalls from Europe; additionally, India is expecting a record Wheat crop and may produce a surplus of over 12 million metric tons this season, some of which could enter the export market. So unless we see major production shortfalls from Europe, Wheat price rallies may not hold until the global surplus is exhausted.

Technical Notes

Looking at the daily chart for May Wheat, we notice prices selling off from recent highs, as the $7 handle continues to exert strong resistance. Prices are above the 20-day moving average, but remain well below the important 200-day MA, which currently resides just below the 750.00 area. Bulls will note what may be a "bull flag" forming during the past several sessions, with the lower trading volume during this "formation" adding some credence to this development. The 14-day RSI remains relative strong, with a current reading of 60.61. 700.00 continues to be psychological resistance for May Wheat, with support found at the 20-day moving average currently near the 653.00 area.

Mike Zarembski, Senior Commodity Analyst


February 9, 2012

Bean Traders Await USDA Data

Thursday, February 9, 2012

The Soybean market has been pulled in either direction by opposing forces. On one hand, the large US old crop and potentially large new crop have limited the market's upside. On the other hand, the dry spell in South America could reduce global supplies. Technically, the chart shows consolidation, suggesting a breakout in either direction may happen at any time. Some traders may perhaps with to consider entering into a non-directional strategy, such as a long straddle, by buying the March Soybean 1230 calls and puts for a combined limit of 40.00, or $2,000.

Fundamentals

Soybean futures are lower this morning ahead of the USDA supply and demand report. Beans have been firm in recent sessions, as South America has seen dry weather for most of the year. Overnight rains in Argentina, which are now making their way into Brazil, have eased concerns that yields may be extremely low due to the dryness. This could put grain traders on the defensive if today's report shows a higher than expected carryout. There has been an uptick in spot market sales in recent days, suggesting there are a good number of farmers concerned that today's report will show supplies on the higher end of expectations. The consensus estimate puts the old crop carryout near the January figure of 275 million bushels.

Technical Notes

Turning to the chart, we see the March Soybean contract trading near the early January highs near 1230. The market tested these highs late last month, but prices failed to break though the relative high. The price action during the year has resulted in a triangle formation on the daily chart, which has narrowed significantly. This suggests that a breakout may be on the horizon.

Rob Kurzatkowski, Senior Commodity Analyst


February 13, 2012

Cattle Prices Moove Sideways as Packers Balk at High Prices

Friday, February 10, 2012

With Live Cattle futures prices currently hovering near record highs, it may be difficult for some traders to initiate long positions, with the fear of a price correction looming despite bullish fundamentals. Some traders in this scenario may wish to explore buying just-out-of-the-money calls in Live Cattle futures options. For example, with April Live Cattle trading at 128.400 as of this writing, the April 130 calls could be bought for 2.000, or $800 per option, not including commissions. The total investment in the calls would be the maximum potential risk on the trade, and the trade would be profitable at option expiration in early April should the April futures be trading above the value of the strike price of the option plus the premium paid.

Fundamentals

The relentless bullish stampede in Live Cattle futures prices seems to have hit a wall recently, as prices are struggling to top the 130.00 level in the April futures. Meat packers have been reluctant to aggressively purchase cash Cattle at current elevated prices, especially with packer margins in the negative. This has been reflected in last week's slaughter figures, with only 589,000 head processed last week, the lowest full week total in nearly 3 years. The lower processing rates have started to be reflected in the wholesale beef market, with boxed beef cutout prices nearing $185.00. Now it is up to consumers to vote with their wallets regarding whether to continue to purchase high priced beef or to switch to lower priced substitutes such as pork or chicken for their protein needs. Should consumer demand continue to support beef purchases, even at high prices, and the export market remain solid, packers will likely be forced to be more aggressive purchasers and lend some support to the cash Cattle market, which in turn could spark a test of the elusive 130.00 in the futures.

Technical Notes

Looking at the daily chart for April Live Cattle, we notice three separate attempts to test the 130.00 level during the past few months, and Tuesday's strong close may signal that bulls are ready for another shot at this resistance level. Prices are holding above the 20-day moving average, and momentum as measured by the 14-day RSI is moving towards a neutral stance with a current reading of 56.14. Support is seen at Monday's low of 127.00, with resistance found at the recent high of 129.675 made back on January 25th.

Mike Zarembski, Senior Commodity Analyst


Hog Market Confounding Both Bulls and Bears

Monday, February 13, 2012

With a bullish seasonal bias and small futures to cash premium, Hog bulls seem to have a slight edge going into the spring. Some traders who are looking to take a moderately bullish position in Hog futures may perhaps wish to explore buying a call ratio spread in Lean Hog futures options. For example, with April Hogs trading at 88.925 as of this writing, the April 90 calls could be bought and 2 April 95 calls sold for a net debit of 0.900, or $360 per spread, not including commissions. The risk on the trade of the premium paid would occur in the above example at any price below 90.900. Profitability would occur if April Hogs settle above 90.900 and below 99.100, with greatest profit potential on the trade occurring at option expiration should the April futures be trading at the short option strike price (in this case 95.00). The biggest risks involve a price move above 99.100, where the extra option sold becomes "naked" leaving significant upside risk.

Fundamentals

Choppy price action has been the norm in Lean Hog futures lately, as bullish seasonal tendencies conflict with lackluster pork prices. Market ready Hog supplies are below last year's totals, which normally would be supportive for pork prices. However, the usual seasonal pick-up in demand has not yet materialized, which is keeping the futures price premium to cash prices rather narrow. Probably the biggest effect on Hog prices in the coming weeks will be the level of exports, which are a major component in the total demand for pork products. Large speculators continue to favor the bull side of the Hog market, with the most recent Commitment of Traders report showing non-commercial traders holding a net long position of 31,455 contracts as of January 31st. Commercial and small speculators are on the other side of the trade, but commercials continue to sell into the market, which may be keeping the front month futures price premium in check.

Technical Notes

Looking at the daily chart for April Lean Hogs, we notice that the attempt to move prices above the all-important 200-day moving average last week was short-lived, as hedge selling above 90.000 capped the bullish run. Volume has waned this week as prices moved lower, leaving some hope for bulls that the sell-off will not last. The market seems content with prices currently holding between the 20 and 200-day moving averages for now, at least until fresh fundamental news reaches the market. The 14-day RSI is neutral, with a current reading of 52.75. Near-term support for April Hogs is seen at the 20-day moving average, which is currently near the 88.150 area, with resistance seen at the recent high of 90.775 made back on February 2nd.

Mike Zarembski, Senior Commodity Analyst

February 14, 2012

Bond Prices Play Ping Pong

Tuesday, February 14, 2012

Bad news out of Europe continues to be good news for US treasuries, as investors seek higher ground in these troubling times for the EU. The upside of the market also seems to be capped due to the fact that long-term yields cannot move much lower. Technically, we see the Bond chart trading in a sideways pattern, as if traders were playing ping pong with prices. Some traders may perhaps with to consider entering into a short strangle - for example, selling the March Bond 145 call and the March Bond 140 put for a credit of 0-32, or $500. The maximum profit would be the initial credit and the trade has, in theory, unlimited risk. For this reason, some traders may choose to close the trade in the event the market breaks out in either direction.

Fundamentals

Bond futures bounced off recent lows after Moody's slashed the credit ratings of six European countries. The move came as no surprise to Bond traders, but did bolster US treasury securities over their European counterparts. Bond futures have remained in a sideways market, as opposing market forces play tug-o-war. On one hand, inflation remains extremely low, European credit markets remain a mess, and the growth outlook for much of the world remains bleak. There is always the possibility that the Fed may take action and buy treasuries if the central bank feels there is a need for more liquidity. The upper band, near 146, has remained intact due to the fact that yields are at already outrageously low levels at this price.

Technical Notes

Turning to the chart, we see the continuous Bond future trapped in a range between 140 and 146. The oscillators remain at neutral levels, not giving even the slightest hint of a move out of this range. The major moving averages rest in the middle of the trading range and, again, do not give even the slightest hint of a breakout.

Rob Kurzatkowski, Senior Commodity Analyst


February 15, 2012

Is a Decline in the Gold/Silver Ratio an Indicator to the Next Price Move for the Precious Metals Sector?

Wednesday, February 15, 2012

Some traders who are looking to establish a bullish position in Silver but who wish to have some control over the potential risk on the trade may perhaps want to explore buying out-of-the-money bull call spreads in Silver futures options. For example, with May Silver trading at 33.550 as of this writing, the May 35.00 calls could be bought and the May 37.00 calls sold for 0.570, or $2,850 per spread, not including commissions. The total investment in the spread would be the maximum risk on the trade, with a potential profit of $10,000 minus the premium paid, which would be realized at option expiration in late April should May Silver be trading above 37.000.

Fundamentals

Gold bulls refuse to relinquish their hold in the market as the solid rally we have seen so far this year has removed much of the bearish technical action we saw in the 4th quarter of 2011. Now many traders will likely question whether the recent bull move still has some legs. One clue to Gold's next move may lie in the price movement of its more volatile precious metal cousin Silver. Historically, Silver has led the precious metals sector during bull markets, and this was highlighted back in April of 2011 when the ratio traded to just above 30-to-1 (30 ounces of silver to equal 1 ounce of Gold). Though Gold prices continued the rally through early September, Silver did not follow Gold's lead, sending the Gold/Silver ratio soaring to over 56-to-1, which culminated in a nearly $400 decline in the price of Gold as 2011 came to a close. Currently, the spot ratio has been trading closer to 51-to-1, which may be a sign that investor interest is returning to the entire precious metals sector and not just "safe haven" Gold buying. This bullish outlook may have to do with improving economic data coming from the U.S., which would be supportive for the more industrial of the precious metals such as Silver and Platinum, which also have seen their price discount to Gold begin to narrow lately. Looking at daily continuation charts for both Gold and Silver, we notice what may be large "bull flag" formations in both charts, with Gold confirming this continuation pattern by breaking above the top trendline of the flag formation. Though Silver has not yet confirmed the bull flag formation, the decline in the Gold/ Silver ratio may be a signal that Silver is poised to re-establish its bullish trend.

Technical Notes

Looking at the daily continuation chart for Silver, we notice what appears to be a large "bull flag" formation, with prices currently near the upper end of the formation. Above current prices looms the 200-day moving average, currently near the 35.000 level, which will act as solid resistance. Should we see a close above this key price level, it would add to the overall bullishness seen since the start of the year. Near-term support is seen at the recent low of 32.980 made back on January 31st.

Mike Zarembski, Senior Commodity Analyst

February 17, 2012

A Potential Rebound in U.S. Cotton Production May Keep Price Rallies in Check

Friday, February 17, 2012

A quick look at the daily chart for May Cotton shows solid resistance just below the 100.00 level. Given the bearish fundamentals and fairly strong technical resistance, some traders may wish to explore selling out-of-the-money calls in Cotton futures options with a strike price above the 100.00 resistance level. For example, with May Cotton trading at 93.38 as of this writing, the May 101 calls could be sold for 1.10, or $550 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 April should the May futures be trading below 101.00.

Fundamentals

The days of $2 plus Cotton prices may be nothing but a distant memory for traders, as lackluster demand and rising global supplies may keep rally attempts in check this year. Despite the sharp drop in Cotton prices from last year, historically 90-cent plus new-crop is rather attractive and may convince some more marginal producers to still plant Cotton -- especially in the drought stricken southwestern portions of the U.S. Even if U.S. Cotton acreage is cut somewhat, it appears that U.S. production could rise this coming year, especially if weather conditions improve this coming spring and summer. Record high prices in 2011 also encouraged a surge in global Cotton production, increasing competition for U.S. exports and allowing global ending stocks to rise to an estimated 61 million bales. The wildcard for Cotton demand continues to be China, which is the world's largest consumer of Cotton. China was a strong buyer of Cotton in 2011, but signs of a moderate economic slowdown in the world's most populous nation may slow Chinese demand this coming season and put further pressure on prices. Traders will get their first glimpse at estimated U.S. Cotton production for 2012 when the USDA releases its highly anticipated Prospective Plantings report on March 30th.

Technical Notes

Looking at the daily chart for May Cotton, we notice the uptrend line drawn from the December lows has been firmly taken out on the downside, which may be the start of the next downward leg of the bear trend. Prices are now holding below both the 20 and 200-day moving average, and momentum as measured by the 14-day RSI has turned lower, with a current reading of 45.35. The moderate price rally the past couple of trading sessions might be the start of a "bear flag" formation and, if so, we likely should see prices hold below the nearest resistance level, which is currently the 20-day moving average at 95.43. Support is found at the February 10th low of 91.62.

Mike Zarembski, Senior Commodity Analyst


February 21, 2012

Gold Gets a Boost from the EU Kicking the Can Down the Road

Tuesday, February 21, 2012

Gold futures continue to display solid, bullish fundamentals as both a risk aversion and an inflation play. The news that Indian imports are slated to weaken is a bit disappointing from a physical demand standpoint, but it does appear that China will pick-up some of the slack. Technically, Gold needs to convincingly break through the 1748.00 level to gain momentum. Some traders may perhaps with to consider entering into a long April micro/mini/full-sized Gold contract, depending on risk tolerance, if the market has several successive closes above 1748.00.

Fundamentals

Gold futures are higher on European optimism, after the EU voted through a second bailout for Greece. The pan-European union, for reasons unknown, voted to give the beleaguered nation €130 billion instead of pushing for a controlled bankruptcy for Greece. This is likely especially bullish for Gold traders. Not only does the bailout perhaps delay the inevitable (Greek bankruptcy), but it also opens the door for higher inflation across the Eurozone. Tempering some of the bullish momentum from the EU bailout, Indian imports of good are expected to decline for the first time in three years because of the high cost of the metal. China is now expected to become the top importer of the yellow metal. The increase in Chinese imports has been factored into prices, but many traders were expecting firmer Indian demand.

Technical Notes

Turning to the Gold chart, we see the April contract trading near resistance at the 1748.00 level. The market did recently close above resistance here, but was unable to validate the breakout after immediately dropping back below the level. The 20-day moving average has acted as support over recent sessions, indicating a close below the average could swing the short-term momentum to the bears. The RSI indicator has pulled back from overbought levels to neutral readings.

Rob Kurzatkowski, Senior Commodity Analyst


February 22, 2012

Recent Rally in Natural Gas Prices May be Short-lived

Wednesday, February 22, 2012

A quick look at the daily chart for May Natural Gas shows strong resistance near the 3.000 level. Some traders who are expecting this resistance level to hold may wish to explore selling call credit spreads in Natural Gas futures options with strike prices at or above this important resistance area. For example, with May Gas trading at 2.850 as of this writing, the May 3.000 calls could be sold and the May 3.300 calls bought for a net-credit of 0.075, or $750 per spread, not including commissions. The premium received would be the maximum potential profit on the trade, which would be realized at option expiration in late April should the May futures be trading below 3.000.

Fundamentals

The one-way bearish trend in Natural Gas futures has taken a well deserved breather, as prices have moved into a consolidation mode during the past few weeks. Fundamentally, the outlook still favors the bears, with well above normal winter temperatures curtailing demand for Gas used for heating. The weather outlook going into March is still calling for above normal temperatures throughout the eastern half of the U.S., giving Gas bulls little hope for any significant drawdowns of Gas from storage as the end of winter approaches. U.S. Gas inventories are nearly 40% higher than the 5-yer average for this time period, and unless U.S. gas production is curtailed, it is possible that we could run out of storage room later this year. Despite this bearish outlook, prices seem to have stabilized the past few weeks, with some analysts looking for increased gas usage from power generators -- especially those with the ability to switch from coal to natural gas for its fuel needs. Bullish analysts also cite the potential for further production cuts later in the year should less profitable drilling operations finally shut down as a result of low price levels. However, it looks like short-covering buying coming from large speculative traders, who are holding a combined net-short short position of 126,398 contracts as of February 14th, according to the Commitment of Traders report that may be behind the recent price recovery. With prices no longer making new lows on a daily or weekly basis recently, these large speculators may be moving funds out of the Natural Gas market and into other markets that are exhibiting better technical trends. If true, then the current price rally may end up to be short-lived once the short-covering buying begins to wane and commercial producers take advantage of any price gains to establish short-hedges against current and mid-term production levels.

Technical Notes

Looking at the daily chart for April Natural Gas, we notice prices moving into a much narrower consolidation pattern, with prices moving into a series of lower highs and higher lows. Prices are now holding above the 20-day moving average (MA) but remain below the 50-day MA, further offering conflicting signals for short and medium-term momentum traders. The 14-day RSI has remained near neutral territory, with a current reading of 49.02. Given the current tight trading ranges, near-term support is seen at the 20-day MA, currently near 2.706, with near-term resistance found at the 50-day MA, currently near 2.935.

Mike Zarembski, Senior Commodity Analyst


February 24, 2012

Near-term Supply Tightness Supporting Sugar Prices

Friday, February 24, 2012

With Sugar supplies remaining tight in the near-term and some important technical indicators favoring Sugar bulls, some traders may wish to explore bullish trading strategies for short-term trades. An example of such a strategy would be to buy a bull call spread in near-term Sugar futures options. For example, with May Sugar trading at 24.77 as of this writing, the April Sugar 24.75 calls could be bought and the April 25.50 calls sold for a net-debit of 0.32, or $358.40 per spread, not including commissions. The total investment in the spread would be the maximum risk on the trade, with a potential profit of $840 minus the premium paid which would be realized at option expiration in mid-March should the May futures be trading above 25.50.

Fundamentals

A rally in London White Sugar prices and tight deliverable supplies have sent New York Raw Sugar futures to 4-month highs. Much of the excitement is centered in the soon-to-expire March futures, with some traders looking for a major commercial trader to stand for delivery of most of the available supplies once the March contract expires. Delivery concerns are also supporting front month May White Sugar futures, which in turn are strengthening the refining margin spread between the two contracts. A late start to the Brazilian Sugar harvest is also seen as supportive to near-term prices, as is the rally in energy prices, which makes Sugar's use in ethanol production much more attractive. Though near-term fundamentals look positive, longer-term the market still has to deal with what appears to be a huge Sugar surplus this year. India has issued an order to allow exports of an additional 1 million metric tons this season, as the country is expected to have a 4 million ton surplus this year. We must remember that it was two consecutive years of poor Sugar crops in India that sent Sugar prices above 30 cents per pound for the first time since the early 80's last year, and having India return to the export market should help to cap price rallies. In addition, once Brazil begins the Sugar harvest in earnest, we may see additional price pressure, as near-term supply tightness will likely abate. Going forward, Sugar traders should also keep a close eye on the global economic outlook, as any signs of an economic slowdown spreading from Europe -- and especially to Asia -- could curtail global Sugar demand. Technically, large speculators have begun adding to their existing net-long positions, adding nearly 6,000 contracts for the week ending February 14th. With prices now trading above the 200-day moving average once again, we may see further buying by trend-following traders, with analysts waiting to see if producer hedge selling can withstand speculative buying in order to determine if the price rally still has some room to grow.

Technical Notes

Looking at the daily chart for May Sugar, we notice the bullish momentum that resulted from the close above the 200-day moving average on Wednesday was halted on Thursday, as selling by weak longs capped the session's gains. Hedge selling was mostly absent, as it appears that producers are looking for prices to move higher, possibly testing resistance just below 25.50 before entering the market. Momentum as measured by the 14-day RSI is strong, with a current reading of 64.68. Should prices be able to move through psychological resistance at 25.00, we may see potentially significant buying emerge, as buy stops get triggered and momentum trading systems trigger "buy" signals. If this occurs, this could set-up a test of chart resistance currently seen at the November 8th high of 25.45. Support for May Sugar is found at the 20-day moving average, currently around the 24.60 area.

Mike Zarembski, Senior Commodity Analyst


February 27, 2012

That's a Lot of Corn!

Monday, February 27, 2012

Potentially large new-crop Corn supplies and steady demand for old-crop Corn may motivate some traders to explore bullish spread trades in Corn futures. For example, old-crop May Corn is currently trading 88 cents over the new-crop December futures. Traders who may choose to initiate a bull spread would buy May Corn and sell December Corn in anticipation of the May Corn premium to December Corn widening even further.

Fundamentals

They say the cure for high prices is high prices, and that certainly seems to be the case with the Corn market, as favorable new-crop prices apparently are encouraging U.S. producers to dedicate the highest amount of acreage to Corn plantings since 1944! This estimate comes from the USDA's outlook forum where it was predicted that 94 million acres will be planted to Corn this coming season. The USDA is expecting a whopping 14.27 billion bushel production from these 94 million acres, compared to 12.358 billion bushels this past season. If the estimate process is accurate, this would be a production record. The 14.27 billion Corn crop assumes above baseline yields, so early plantings and ideal weather this summer would be needed to meet this production level. This outlook has pressured the new-crop December futures especially hard, as it appears that assuming at least baseline yields and current demand expectations, we may have more than ample Corn supplies this coming season. The picture for old-crop Corn is not quite so bearish, as increased Chinese imports and a less than stellar production outlook from Argentina should help to keep a steady bid under May and July futures in the coming weeks.

Technical Notes

Looking at the daily chart for the May/December Corn spread, we notice a break above previous resistance at an 80-cent May premium on Thursday. In addition, the 20-day moving average (MA) has crossed above the 200-day MA, which is considered a bullish signal. The 14-day RSI has begun to strengthen, with a current reading of 64.85. The next resistance point for the spread is seen near the 100 level, with a move above this point setting-up a test of the 125 area. Support is seen at the 200-day MA, currently near the 72.50 area.

Mike Zarembski, Senior Commodity Analyst


February 28, 2012

Risk-On Aiding Copper Prices

Tuesday, February 28th

Base metal futures have gotten a lift from the aggressive action taken by Europe to avoid a Greek default. Chinese policy seems to have had a positive impact on economic activity, although a quantifiable result has yet to be seen. Technically, the market appears to be waiting on a breakout; however, the direction the market may take is unknown. Some traders may perhaps wish to consider entering the long side of the market on consecutive closes above the 4.00 mark.

Fundamentals

Copper futures are up for a third consecutive session ahead of US consumer confidence. Equity and commodity markets got a boost from the German legislature, as a second bailout for Greece was approved. The bailout, along with increased risk appetite from investors, has resulted in a weaker US Dollar. Defensive currencies, like the greenback and Japanese Yen, have been on the defensive lately, as investors have become increasingly confident in the EU's various bailout packages. There are also doubts that the slowdown in China will be as dramatic as previously expected. Nonetheless, the Chinese government is attempting to head-off a sharp slowdown in economic activity by lowering banks' reserve ratios.

Technical Notes

Turning to the chart, we see the May Copper contract testing the $4 level earlier this month, but failing to break through. The market was able to hold support at the 3.75 level, suggesting many traders may being focusing their attention to 3.75 and 4.00. Failure to hold 3.75 could be seen as a negative and would confirm a double-top on the daily chart, hinting at a possible test of 3.50 on the downside. If the market is able to pick up enough steam to break-out above the 4.00 level, the market may test 4.25 or, possibly even the 4.50 level.

Rob Kurzatkowski, Senior Commodity Analyst


February 29, 2012

Can Bullish Soybean Fundamentals Overcome Technical Resistance?

Wednesday, February 29, 2012

For the past year or so, the May/July Soybean spread has traded in a range from a 10-cent May Premium to about a 10-cent May discount vs. July. The spread is currently trading near the low end of this price range (a 7.5-cent May discount), and recent momentum has begun to favor May gaining on the July contract. Given the potential bullish supply situation in Soybeans, some traders may perhaps wish to explore buying May Soybeans and selling July Soybeans in anticipation of the May futures narrowing the price discount to the July contract.

Fundamentals

The Bean bull market is alive and well, as strong export demand and disappointing harvest prospects in South America have sent prices back above 1300.00. Both the Brazilian and Argentinean Soybean crops have been hampered by dry conditions this season, which has caused analysts to lower their production estimates. The USDA forecasted the Brazilian Soybean crop at 72 million metric tons in its February report, which is down 2 million tons from its January estimate. The Argentinean crop was lowered by 2.5 million tons to 48 million tons this season. Some analysts believe the USDA is too optimistic in its estimates, with several private forecasters expecting an estimate which is an additional 2 to 3 million tons lower in March. Lower production from South American producers should shift additional export business to the U.S., which is viewed as supportive for prices -- particularly old-crop futures. Though the longer-term outlook for Soybean prices remains supportive, the near-term outlook is mixed, as lower crush margins in China may lower immediate demand from the world's largest Soybean consuming nation. Also, some technical traders believe that Soybean prices may have become a bit overbought, and a quick look at the daily chart shows an area of solid resistance in the most active May contract between 1300.00 and 1350.00, which may set the stage for a price correction in the near future. As we move towards the spring planting season in the U.S., traders will begin to turn their focus to new-crop production and are eagerly awaiting the first official estimate for U.S. planting intentions to be released by the USDA in its March 30th Prospective Plantings report. Current new-crop futures prices seem to favor additional acreage allocated to Corn this coming season, which if true, could spur a rally in new-crop Soybean prices in the coming weeks, as higher prices will be needed for Soybeans to take some acreage from Corn -- or even Cotton -- to prevent sharply lower Soybean carryout totals later this year.

Technical Notes

Looking at the daily chart for the May/July Soybean spread, we notice the May discount beginning to tighten, as the spread is now trading above the 20-day moving average. Notice the steady climb in the 14-day RSI that began prior to the bull spread's breakout to the upside. Support for the spread is seen near an 11-cent May discount, with the next resistance level found near the 5-cent May discount area.

Mike Zarembski, Senior Commodity Analyst