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April 2012 Archives

April 2, 2012

Grain Bulls Rejoice After USDA Report

Monday, April 2, 2012

Even new-crop Corn futures were caught up in the bullish frenzy on Friday, despite the potential for a record harvest this year. Once old-crop Corn reached the 40-cent limit, many traders who were caught short rushed into new-crop Corn futures in an attempt to "hedge" their positions. Some traders who may be considering establishing a short position in new-crop Corn may wish to use "rallies" to explore selling call credit spreads in December Corn futures options. For example, with December Corn trading at 539.00 as of this writing, the December 600 calls could be sold and the December 650 calls bought for a net credit of 10.50 cents, or $525 per spread, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in November should December Corn be trading below 600.00.

Fundamentals

Grain bulls had a good end to the 1st quarter of 2012, courtesy of the USDA, who reported overall bullish figures in the quarterly grain stocks report. Old-crop inventories were lower than analysts' estimates in Corn, Wheat and Soybeans, with the Corn figure particularly supportive. The USDA reported U.S. Corn inventories stood at 6.01 billion bushels as of March 1st, or nearly 150 million bushels below the pre-report estimate. Last year at this time, U.S. Corn inventories stood at 6.523 billion bushels. Soybean inventories stood at 1.37 billion bushels, vs. the 1.381 billion bushel estimate. All Wheat inventories stood at 1.2 billion bushels, which was down 35 million bushels from traders' estimates. The highly anticipated prospective plantings estimates confirmed traders' expectations, with a huge expected rise in Corn acreage taking away from both Soybean and Spring Wheat totals. The USDA expected 95.9 million acres to be dedicated to Corn plantings, which was above even the highest estimate and would be the largest Corn acreage since 1937. Soybean acreage is expected to total only 73.9 million acres in 2012, which is well below the 75.5 million acre pre-report estimate and just over 1 million acres less than was planted in 2011. There was no revival in Spring Wheat plantings, with the USDA expecting only 12 million acres being planted this year, which is below even the 12.369 million acres planted in 2011 due to widespread flooding in the Northern Plains. Friday's trading session was volatile, with prices higher across the board. The biggest jump occurred in old-crop/new-crop Corn spreads, which leapt over 20 cents and widened the backwardation in the 2012 trading months. If Friday's trade is any indication, grain traders can look forward to an interesting and potentially volatile trading environment as we head into the heart of the growing season.

Technical Notes

Looking at the daily chart for December Corn, we notice that the breakdown from the recent consolidation pattern ended abruptly on Friday, with a "reversal" day formed as prices made new lows before rallying sharply and taking out the previous day's high. The 14-day RSI went from oversold levels just below 25 to a more neutral 39.01 on Friday. Though Friday's rally was impressive given the bearish planting intentions, any further rally attempts should meet some headwinds at the low end of the recent trading range near the 547.00 area, as well as the 20-day moving average, which is currently near the 558.25 price level. Support for December Corn is seen at Friday's low of 523.00.

Mike Zarembski, Senior Commodity Analyst


April 3, 2012

What is the VIX Contango Telling Us?

Tuesday, April 3, 2012

The VIX is at its lowest levels in almost five years, as fear premium has been disappearing from options and VIX futures. Traders are left to determine whether the steep contango is the result of the market lulling itself into a false sense of security, as has historically been the case, or whether the abundance of VIX ETFs has skewed the curve. Regardless of the reason, the spread between the first two months has been widening as the front month converges with the cash index. Some traders may wish to consider buying the May VIX future and selling the April future for 2.00 to the May buy side. Traders who choose to consider this trade idea may want to anticipate the spread widening to 3.00 once again on the upside, and then might perhaps consider exiting the trade if the spread falls below 1.50. It should be noted that the exchange does not accept stops on the spread, so the position will have to be monitored manually.

Fundamentals

VIX futures are mired in a contango market that does not level off until October. Historically, a contango market in the VIX futures has been a harbinger of a stock sell-off, as it is a sign that smart money is buying insurance with the expectation that volatility will rise while equity prices are slated to fall. The slew of volatility ETFs has, however, altered the landscape and could be exacerbating the VIX contango, but the exact impact of volatility ETFs on the contango is difficult to quantify. Volatility, as a whole, is at the lowest levels since 2007, prior to the 18-month recession and financial meltdown. Fear premium is at extremely low levels at the moment due to a number of factors, including relative calm in Europe and a Fed orchestrated rally in equities. While volatility premium is low presently, this is an election year and there are some troubling signs coming from Europe, including Ireland and Portugal needing more aid.

Technical Notes

Turning to the chart, we see the April VIX contract trading above support at the 15.00 level. The RSI indicator is still near oversold levels, suggesting prices could find support in the near-term. Support at the 15.00 level is stout, indicating prices could move sideways in the near-term. The April/May VIX spread has been steadily trending higher since December. After peaking at 3.25, May over April, the spread has fallen to under 2.00, but has held the uptrend line for the time being.

Rob Kurzatkowski, Senior Commodity Analyst


April 4, 2012

Cocoa Prices Weak Despite Crop Concerns

Wednesday, April 4, 2012

Though the near-term trend favors lower prices, there appears to be good chart support between the 2025 and 2050 basis the July futures. Some traders who are moderately bearish on the Cocoa market may wish to consider exploring buying a put ratio spread in Cocoa futures options. For example, with July Cocoa trading at 2205 as of this writing, the July 2200 puts could be bought and 3 2000 puts sold for a net credit of 1, or $10 per spread, not including commissions. The ideal situation at option expiration in June would be for the July futures to be trading at or just above the 2000 area. 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 close out the trade prior to expiration should the July futures close below 1950.

Fundamentals

Cocoa bears seem to have firm control of the market lately, as concerns about the mid-crop harvest have, so far, failed to spur buying interest. This weekend, the International Cocoa Organization lowered its forecast for this season's harvest from the Ivory Coast and Ghana, the world's first and second largest Cocoa producers respectively, dropping the production totals by a combined 250,000 tons, due to abnormally dry conditions during the past few months. This news sparked a moderate rally early in the trading session on Monday. However, aggressive selling emerged once the July futures approached the 2300 per ton level, which sent prices lower to end the trading day. Continued concerns that the economic slowdown in both Europe and in Asia may slow demand for Cocoa this coming year seems to weigh on speculators minds, with the most recent Commitment of Traders report showing large non-commercial traders (large speculators) holding a net-short position of 3,752 contracts as of March 27th. This data was prior to the nearly $200 per ton price decline seen during the past few sessions, and large speculators may be increasing their short position as prices continue to move in their favor.

Technical Notes

Looking at the daily chart for July Cocoa, we notice prices failing below 2200, which set-off a slew of sell stops once this psychological support level was breached. Prices are now well below both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI has tuned weak, with a current reading of 36.0. The next support point is not found until the January 6th lows of 2048. Resistance is found at the 20-day moving average, currently near the 2323 level.

Mike Zarembski, Senior Commodity Analyst


April 5, 2012

More Jobs = No Easing?

Thursday, April 5, 2012

Gold futures have taken a hit recently, due to lower growth projections for much of the globe. The lower growth/inflation outlook for much of the world has hurt Gold's appeal as both an inflation hedge and from a supply and demand standpoint. Technically, the June Gold contract is approaching several important support levels on the chart. Some traders may perhaps with to consider selling a call credit spread - for example, selling the May 1650/1675 call spread for a premium of 7.00, or $700.

Fundamentals

Gold futures suffered heavy losses yesterday, after speculators lowered their expectations of Fed action. A good portion of yesterday's selling pressure came from funds, suggesting funds may have switched from net long to net short. Wall Street has been attempting to strong-arm the Fed into QE3, but the FOMC has relented -- at least until now. The likelihood of more easing is diminishing with each positive economic report, which brings tomorrow's Non-farm Payrolls report into focus. If US employers can show at least modest job growth, the possibility of further reckless monetary policy decreases. In other Gold news, the Indian jewelers' strike is now at day 19, lowering physical demand in the near-term. Indications from India are that consumer demand is still good, despite external reports to the contrary. This suggests that demand should pick up right where it left off prior to the jewelers' strike. This can be seen as one of the few potentially bright spots for the Gold market presently.

Technical Notes

Turning to the chart, we see the June Gold contract breaking out of a pennant/triangle on the daily chart. This indicates the market could see further downside. The next significant support level can be found near the 1600 level. If the market fails to hold 1600, prices could come down to test the relative low close of 1540.90. The RSI indicator is not yet at oversold levels, suggesting more downside is possible in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

April 9, 2012

European Debt Woes, Renews Life for Long-Term Bond Bulls

Monday, April 9, 2012

Bearish Bond traders may perhaps wish to consider using the recent rally in prices to explore buying out-of-the-money puts in Bond futures options in the anticipation that support at 135-00 will not hold. For example, with June Bonds trading at 138-08 as of this writing, the June 135 puts could be bought for 1-06, or $1,093.75 per option, not including commissions. The total investment in the option would be the maximum potential risk on the trade. At expiration in late May the trade will be profitable if the June futures are trading below 135-00 minus the amount of premium paid for the option.

Fundamentals

U.S. Treasury Bond futures have seen renewed buying interest during the past two trading sessions, as traders' concerns turned back to Europe, with Spanish bond yields at their highest levels in over 3 months. A poorly received auction of Spanish bonds triggered a move towards "risk-off" investments such as The U.S. Dollar and Treasury Bonds. Spanish 10-year bond yields now stand at 5.8%, which is the highest level since December and the highest level since the ECB began its long-term refinancing operations to help quell rising yields of struggling European nations. The rise in long-term U.S. Bond prices comes despite an apparent shift in the Federal Reserve away from further easing measures, allowing analysts to lower the odds of another round of quantitative easing (QE3) to below 50%. After trading in a relatively narrow 6-point price range for the past six months, bond prices fell below support near the 140-00 price level in mid-March, as better employment data and continued signs of an improving economic outlook in the U.S. sent stock prices higher and took some of the "safe haven" luster from the Treasury market. However, renewed concerns about Europe and signs of slowing growth in China appear to be enticing traders back into U.S. Treasures. Now the question remains whether Bond prices have put in a near-term bottom near the 135-00 level and are poised to move back into the 140 to 146 trading range, or if the recent rally is nothing more than a short-covering bounce in what could be the start of a potentially significant price decline and end to the historic Bond bull market that began over 30 years ago!

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we notice prices holding just below the lower level of the previous consolidation pattern. The 20 and 200-day moving averages are holding near each other, which may be a sign that a new consolidation pattern, though at a lower level, may be forming. There is what appears to be a possible double-bottom formation starting at the October 28th low of 135-05, which was tested again on March 19th. The 14-day RSI has moved from oversold levels to a more neutral reading of 46.94. Support is seen at 135-05, with resistance found at the recent high made on March 30th at 139-05.

Mike Zarembski, Senior Commodity Analyst


April 11, 2012

Mixed Signals from USDA Supply/Demand Report

Wednesday, April 11, 2012

The USDA Corn carryout estimate has taken some of the steam out of the recent rally in prices, and we may see further long liquidation selling until more "bullish" fundamentals present themselves. A look at the daily charts for July Corn shows good technical resistance near the 660.00 level. Some traders who are looking for continued weakness in Corn futures may perhaps wish to explore selling out-of-the-money calls in Corn futures options, with strike prices above chart resistance. For example, with July Corn trading at 627.00 as of this writing, the June 660 calls could be sold for about 11 cents, 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 May should July Corn be trading below 660.00.

Fundamentals

Grain traders have barely recovered from the planting intentions report when the USDA released its data for the April crop production and supply/demand report on Tuesday. The report contained a few surprises, most notably leaving the 2011-12 Corn carryout estimate unchanged from the March report at 801 million bushels. Analysts were looking for a nearly 85 million bushel reduction in carryout given the much lower March 1st Corn stockpile estimate. There are many theories being floated around as to why the USDA kept the Corn carryout unchanged, based on thoughts that early spring Corn plantings will allow some new-crop Corn to reach maturity prior to August 31st in some southern areas. This would allow the early harvested Corn to be counted in this year's carryout totals. Some traders believe the USDA is uncomfortable lowering carryout totals below 800 million bushels, as this would indicate Corn supplies would become extremely tight prior to the fall harvest.

The view for the Soybean market was moderately bullish, with the USDA lowering Soybean carryout by 25 million bushels from the March estimate to 250 million bushels. World Soybean carryout was lowered to 55.5 million metric tons, down 1.8 million tons from the March estimate. The South American Soybean production totals continue to be revised lower with a 2.5 million metric ton decline in Brazilian Soybean production estimate and a 1.5 million ton drop in the Argentinean harvest.

Technical Notes

Looking at the daily chart for July Corn, we notice prices now trading well below both the 20 and 200-day moving averages, as the rally triggered by the prospective plantings report has started to fade. The 14-day RSI has also turned weak, with a current reading of 42.09. The most recent Commitment of Traders report shows large non-commercial traders surprisingly lightening-up on their net-long positions of April 3rd, though much of this may have occurred just prior to the release of the prospective plantings report. The next support point for July Corn is not seen until the March 29th low of 602.50, with resistance seen at the recent high of 659.75.

Mike Zarembski, Senior Commodity Analyst


April 12, 2012

Has Gasoline Already Peaked in 2012?

Thursday, April 12, 2012

RBOB fundamentals have turned bearish recently, as the global economy is sputtering along at a modest pace. Despite the economic risks facing the economy, the Fed has resisted further easing. Also, it seems as though the risk of a military conflict with Iran has subsided. Despite all of these negative factors, the fact that refiners have a difficult time turning a profit may result in some refiners deciding to close facilities. For this reason, some traders may perhaps want to consider entering into a bearish strategy, but one with limited loss potential. For example, some traders may choose to buy the May RBOB 3.33 puts and sell the May 3.30 puts for a debit of 0.0100, or $420. The trade risks the initial cost and has a maximum profit of $840 if the May futures close below 3.30 at expiration.

Fundamentals

There has been much discussion over the past several days regarding whether Gasoline prices have peaked for the year. It may be a bit premature to be having the discussion when the driving season has not yet begun. Those believing the 2012 highs for the RBOB contract have already been made have a compelling argument, as the economic outlook for the US and much of the world remains largely negative. The fact that the US economy is simply not creating jobs at a pace many would like to see may have a negative impact on demand. Overseas, the slowness in Europe was expected, as was a slowdown in China. The rate at which China has been slowing has been a concern for many, and several different forecasters have slashed the Asian giant's growth outlook recently. The UN-Iran discussions over Iran's nuclear program offer promise and can be seen as a negative for Oil prices. What may ultimately decide the direction of the RBOB contract this year is refining capacity, especially on the East Coast. Many refiners are struggling to turn a profit, especially if they are running well short of their own capacity. This may trigger refinery shutdowns, shrinking the nation's overall refining capacity.

Technical Notes

Turning to the chart, we see the May RBOB contract appearing to be forming a rounded-top. Prices did manage to bounce off of the 50-day moving average, avoiding a technical setback. Failure to hold the average suggests that prices could slip and test the 3.00 mark. To regain upward momentum, prices will need to close above the 3.40 level. Both RSI and momentum have been moving, diverging from RBOB prices since late February, signaling that a top may be in place.

Rob Kurzatkowski, Senior Commodity Analyst

April 13, 2012

Natural Gas Prices Fail to Hold Support at $2

Friday, April 13, 2012

Establishing a bearish position in Natural Gas with prices at 10-year lows may be difficult for many traders, despite few signs that the 4-plus year bear market is near an end. This scenario may present an attractive opportunity for some traders to explore bear put spreads in Natural Gas options. For example, with the June Natural Gas futures trading at 2.105 as of this writing, the June 2.05 puts could be bought and the 1.85 puts sold for a net-debit of 0.068, or $680 per spread, not including commissions. The total investment in the debit spread would be the maximum potential risk on the trade, which has a potential profit of $2,000 minus the premium paid which would be realized at option expiration in late May should the June futures be trading below 1.850.

Fundamentals

Not since 2002 have front month Natural Gas futures traded below the $2 level, but this major support level finally gave way on Wednesday, with the front month May futures settling at 1.984. The Gas market continues to struggle from increasing production from shale formations and sluggish demand, especially following a much warmer than normal winter in much of the U.S., including the warmest March temperatures on record. April is considered the beginning of the Gas build season, when supplies are put into storage to be drawn down in the winter months, normally beginning in November. Late season cold snaps can cause gas draws in April, though current forecasts are calling for above normal temperatures for the northeastern parts of the U.S. in the coming days. The weekly EIA Gas storage report was mildly bullish, with only 8 billion cubic feet (bcf) of Gas placed into storage last week, vs. pre-report estimates of a 25 bcf build. However, Gas storage levels remain burdensome at 2.487 trillion cubic feet (tcf), which is nearly 59% higher than the 5-year average. Even with futures prices at 10-year lows, Gas output has not decreased significantly, as wells producing both Oil and Gas are still profitable, with Crude Oil prices above $100 per barrel. So unless production decreased dramatically, it will be up to the demand side to expand Gas usage, which is starting to occur as power production plants are being switched from coal to Natural Gas. However, unless this conversion occurs quickly, it is possible we could see storage capacity stretched to the limits as we head into the 4th quarter of this year.

Technical Notes

Looking at the daily chart for May Natural Gas, there really is not much to say. With the exception of a 6-week price consolidation from late January to the start of March, prices have been steadily declining, with support points failing to hold all along the way. Now that the $2 handle has given way, we have to look back 10-years to late January of 2002 to find the next support point, which is the January 28th low of 1.850. The 20-day moving average looks to be the next resistance area, currently holding at 2.224.

Mike Zarembski, Senior Commodity Analyst

April 16, 2012

Major Trend-line Being Put to Test in S&P Futures

Monday, April 16, 2012

Though the current outlook for the June E-mini's is uncertain, the potential is there for a sizable correction should the major uptrend line fail to hold, Currently, the trend line comes in near the 1346.75 area and some bearish traders may perhaps wish to explore selling the June E-mini S&P 500 futures should we see a weekly close below 1346.75.

Fundamentals

The line has be drawn in the sand, or more appropriately, the uptrend line has been drawn on the chart for the S&P futures, as the recent correction in the index has been stymied so far by a major trend line drawn from the major lows made back on October 4th of 2011. Fundamentally, we have seen a mixed bag of data -- better than expected earnings being reported by some major banks, industrial metals producers and an internet juggernaut; increased lending by Chinese banks and tame consumer and producer inflation readings being offset by a jump in jobless claims; lower than expected 1st quarter GDP readings from Chin; and continued concerns about European sovereign debt, with the disappointing March Non-farm Payrolls report being the biggest weight on investors' psyche. Trading activity has been rather volatile this past week, with the S&P hitting 1-month lows early in the week, only to be followed by a 30+ point rally over two trading sessions, which appeared to have halted the recent price correction in its tracks. However, a weak close to end the week has made many traders a bit nervous going into the weekend. Given no clear trend coming from the fundamentals, it appears that technical considerations may have been a bigger influence on traders recently. It may behoove market participants to focus on any attempts to move the index below the October 4th trend line, as a weekly close below this line could spark the beginning of a potentially major price correction. However, should this trend line hold, some equity bulls may feel more comfortable adding to long positions and setting up a potential move above 1400.00.

Technical Notes

Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice prices being bounded by the above-mentioned uptrend line and the 20-day moving average. Trading volume on the price bounce this week has been rather lackluster, which may be aiding the bearish argument that a major price correction may be in the works. There may also be a rounded-top forming on the daily chart, but it would take a move below 1338.50 to confirm the chart pattern. The 14-day RSI is in neutral territory, but it has started to trend lower, with a current reading of 45.98. 1350.00 is now seen as the next support point for the June futures, and should we see the index fall below the March 6th low of 1338.50, there does not appear to be any technical support until we reach the 200-day moving average, currently near the 1269.00 level. Resistance is found at the 20-day moving average near 1393.00.

Mike Zarembski, Senior Commodity Analyst


April 17, 2012

How Long Will Investors Keep Settling for Low Yields?

Tuesday, April 17, 2012

The rally in 10-Year Note futures has slowed, but prices remain firm on defensive buying from overseas investors. The European debt mess and slower growth in China have been the reasons behind the recent buying. However, economic progress in the US and the fact that Notes have negative yields when adjusting for inflation could limit the market's upside. Some traders may perhaps wish to consider selling a bear call spread - for example, selling the June 10-Year 133 calls and buying the June 135 calls for a credit of 0-20, or $312.50. The maximum profit would be the initial premium received and the spread risks $1,687.50, so traders may wish to exit the position on consecutive closes above resistance at 132-16.

Fundamentals

Treasury futures have held steady in recent sessions on sovereign debt and economic concerns. Europe has not yet been able to devise a plan that would bring stability to the region, creating overseas investment demand despite extremely low yields. Chinese economic growth has been on traders' minds, as there is concern that China will focus on economic reforms instead of aggressively attempting to stimulate economic growth. The result could be a significant slowdown. Despite these bullish factors, yields are simply too low for many investors to accept. The current sub 2% yields on the 10-Year Note could result in investors looking toward blue chip stocks or commodities as alternatives. Inflation adjusted, Note yields are currently negative, suggesting a price ceiling near the 132 level.

Technical Notes

Turning to the chart, we see the June 10-Year Note contract rallying back after testing support at the 127-16 level. The momentum of the market has slowed in recent sessions, suggesting prices may move back into a range between 130-00 and 132-16. There are conflicting indicators, as RSI has peaked and is beginning to reverse back, resulting in bearish divergence. However, momentum continues to outpace both price and RSI to the upside, hinting at further strength in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

April 18, 2012

Oil's Recent Decline May be Near an End?

Wednesday, April 18, 2012

A quick look at the daily chart for June Crude Oil futures shows the recent down move in prices may be near an end, as a rounded-bottom formation appears to be developing. There is good chart support near the 96.65 area, and some aggressive traders may perhaps wish to explore selling puts in Crude Oil futures options with strike prices below this chart support level. For example, with June Oil trading at 105.11 as of this writing, the June 95 puts could be sold for 0.55, 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 mid-May should the June futures be trading above 95.00.

Fundamentals

Crude Oil futures prices remain volatile, with prices beginning to recede from recent highs. We are starting to see Oil's risk premium begin to recede, as hopes that continuing talks with Iran over its nuclear program can avert possible military action in the region. In addition, continued concerns of a slowing Chinese economy and ample supplies of Crude in the U.S. have taken some of the bullish luster out of the market. Brent futures have been especially hard hit, as this global benchmark grade had priced-in a much higher risk premium due to any potential embargo of Iranian Crude. Many traders are now beginning to believe that the embargo, which was to begin on July 1st, may be averted, as Iran now appears to be willing to negotiate with western nations over its nuclear ambitions. Lower first quarter GDP readings out of China, the world's second largest Oil consumer, are flaming the belief that Asian Oil demand may slow more than previously thought this year. Inter-commodity spreading has become very active, as many traders are unwinding long Brent and short WTI futures due to a potential early start to the reversal of the Seaway pipeline that will allow Oil stored in Cushing, Oklahoma to be sent to the Gulf Coast, helping to elevate the large glut of Oil in the delivery point for NYMEX futures. Here in the U.S., Oil inventories remain ample, with many traders and analysts looking for a 4th consecutive week of higher inventories when the weekly EIA energy stocks report is released later this morning. The current consensus is for U.S. Oil inventories to have increased by one million barrels last week; if so, we will have seen a nearly 20 million barrel increase during the past four weeks! Many large speculators, who have been holding large net-long positions in Crude Oil, are starting to lighten-up on their long positions, with the most recent Commitment of Traders report showing that large non-commercial traders shed 17,808 net-long positions as of April 10th, dropping the total net-long position to 277,273 contracts. Despite the long liquidation selling, Oil prices remain above psychological support at $100 per barrel. Until we see a close below this price level, it may be difficult for some traders to begin to turn aggressively bearish.

Technical Notes

Looking at the daily chart for June Crude Oil, we notice what appears to be a rounded-bottom formation, which may potentially be capping the recent price correction. Tuesday's trade sent prices back above the 20-day day moving average for the first time in over two weeks. The 14-day RSI has moved back into neutral territory, with a current reading of 51.08. The low of the recent down move at 101.22 looks to be near-term support for June Oil, with resistance found at the recent high made back March 29th at 106.21.

Mike Zarembski, Senior Commodity Analyst


April 19, 2012

Brisk Planting Pace Shakes Out Corn Bulls

Thursday, April 19, 2012

Crop progress is well ahead of its ten-year average by an astounding 10%, which has driven Corn prices lower. Crop conditions are expected to remain ideal, suggesting it may take an acre-grab by Soybeans to turn fundamentals in favor of the bull camp. Attractive prices could result in a pickup in physical purchases, as well as attracting technical value buyers. Some traders may perhaps wish to consider selling a put option below support at 575, such as selling the June 570 put for a premium of 8.00, or $400. The trade has unlimited loss potential, so traders may want to exit the position in the event support at 575 in the underlying July contract is broken.

Fundamentals

Corn futures have been sliding in recent sessions on long liquidation and early crop progress. Farmers have taken advantage of the unseasonably warm spring, planting 17% of the crop, versus the 10-year average of 7%. There was some hope from the bull camp that the recent wet weather would interfere with or slow down plantings, but the forecast calls for warm weather without excessive moisture in the near-term, presenting ideal planting conditions. There are rumblings indicating that some farmers may be switching to Bean acres instead of Corn to take advantage of attractive pricing. Many traders may be a bit skeptical of such rumors, as they tend to be plentiful this time of year and are oftentimes unsubstantiated. Some traders may instead want to look to planting data for concrete evidence of a crop switch. Corn prices are flirting with the $6 level, which may be attractive to physical buyers, especially China, who has been surprisingly quiet in the import market. Likewise, speculators may be considered potential value buyers at current levels.

Technical Notes

Turning to the chart, we see the July Corn contract trading near support around the 600 level. This area of the chart offers several areas of support, most notably at the 575 level, which can be seen as a make-or-break level. If Corn mounts several closes below 575, it would signal a significant bearish breakout. Support near 600 and 575 may attract value buyers. Currently, the oscillators are giving neutral and flat readings which do not offer any insight to the potential near-term direction of the market.

Rob Kurzatkowski, Senior Commodity Analyst

April 20, 2012

Are Gasoline Futures Signaling Better News for Drivers This Summer?

Friday, April 20, 2012

A quick look at the June RBOB chart shows short-term momentum turning down, with significant resistance seen in the 3.3000 to 3.3750 price levels. Some more aggressive traders may perhaps want to explore selling out-of-the-money calls in RBOB futures options with strike prices above the current chart resistance levels. For example, with June RBOB trading at 3.1143 as of this writing, the June 3.38 calls could be sold for about 0.0200, or $840 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 May should the June futures be trading below 3.3800. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the trade move against them. An example of such a strategy would be to buy back the option prior to expiration should the June futures close above the previous high of 3.3698.

Fundamentals

The talk of potentially record high Gasoline prices this summer has caused a media buzz, with some talk that we could see retail prices reach $5 per gallon. However, if one were to look at the RBOB Gasoline futures market, the picture looks a lot less dire for motorists. Summer month Gasoline futures are trading about 20-cents below their recent highs, as it appears that many traders are beginning to focus on U.S. Gasoline demand which has been rather weak lately. In addition, U.S. Gasoline inventories are running just over 2.5 million gallons above the 5-year average, despite nine consecutive weeks of lower inventories as reported by the Energy Information Administration (EIA). It has been lower imports and lower refinery runs that have kept Gasoline supplies from becoming rather burdensome so far this year. High Oil prices, particularly for Brent Crude, have been the main driver behind keeping Gasoline futures above $3 per gallon, as the "risks premiums" in Oil futures prices, which appear to have been running anywhere from 10 to 15 dollars per barrel due to nervousness over a potential embargo of Iranian Crude. With Oil prices among the biggest factor in the cost of Gasoline, high Crude prices overwhelmed otherwise rather negative supply and demand fundamentals for Gasoline. Speculators have been holding a near-record long position in RBOB futures, with the most recent Commitment of Traders report showing a combined non-commercial and non-reportable net long position of just over 103,000 contracts as of April 10th, after reaching a record 111,094 net-long position one week earlier. Should RBOB prices fail to halt the recent downtrend soon, we may start to see long liquidation selling emerge.

Technical Notes

Looking at the daily chart for June RBOB, we notice what appears to be a rounded-top formation, with its center at the contract high of 3.3689. Prices are starting to pull away from the 20-day moving average, and the 14-day RSI has turned weak, with a current reading of 34.73. The next major support point for the June contract is not seen until the 200-day moving average, currently near the 2.9150 area. Near-term resistance is found at the 20-day moving average, currently near the 3.2550 price level.

Mike Zarembski, Senior Commodity Analyst


April 23, 2012

Sugar Futures Appear Oversold but Speculative and Hedge Selling May Cap Rallies

Monday, April 23, 2012

Though longer-term fundamentals seem to favor the bear camp in Sugar, the recent steep sell-off in prices appears to have moved the market to oversold levels and a near-term price correction would not be out of the question. Some traders remaining bearish on Sugar but who may wish to take advantage of any near-term price bounce may want to explore buying a diagonal ratio spread. Here the trade would be buying a near-the-money put in a further out contract month and selling 2 or more further out-of-the-money puts in a closer expiration month. For example, with July Sugar trading at 21.54 as of this writing, the July 21.50 puts could be bought and 2 of the June 20.00 puts sold for a net debit of 0.68, or $761.60. The goal of this trade would be for Sugar prices to remain steady or even fall moderately in the near-term, but only make a large down move after the expiration of the near-tem options.

Fundamentals

Sugar futures have become bitter for commodity bulls, as prices have fallen to lows not seen since May of 2011. A global Sugar surplus is the main reason behind the sell-off, and major Sugar exporters such as Brazil and India are expected to increase exports this marketing year. Recently, the market has received a bit of bullish news, which if true, may signal that prices are becoming oversold. First, we have seen some private forecasters calling for a much lower Brazilian Sugar cane harvest than current government estimates. In addition, the USDA raised the limit for low-tariff Sugar imports by 420,000 tons, as the existing quota has been met much earlier than anticipated. Sugar imports from Mexico, who is the largest supplier of foreign Sugar to the U.S. and not subject to tariffs due to the NAFTA agreement, may be lower than expected, as Mexico's Sugar output is running 10% lower than last year's levels, because dry weather has hurt cane yields. In addition, Mexico's domestic Sugar consumption has increased, leaving smaller supplies available for export to the U.S. Despite the looming bear market in Sugar prices, speculators are still holding a relatively large net-long position, with the Commitment of Traders report showing a combined net-long position by both large and small speculators of 165,140 contracts as of April 10th. This position may help cap any rally attempts as weak longs begin to exit trades on any rally attempts to help cut losses. In addition, it is expected that producer hedge selling may emerge should we get a price correction back towards resistance near the 23.00 price level.

Technical Notes

Looking at the daily chart for July Sugar, we notice prices plunging after the market moved below 23.00 late last week. Though volume soared during this week's sell-off, we must take note that a good portion of the trading volume involved spreads, as speculators began to roll their positions out of the soon to be expired May contract into July or more deferred contract months. The 14-day RSI has now approached oversold levels, with a current reading of 30.32. We have to go all the way back to May of 2011 to find the next support point, which is the May 17th low of 21.00. Resistance is seen at the 20-day moving average, currently near the 23.19 level.

Mike Zarembski, Senior Commodity Analyst

April 24, 2012

Soft Indian Demand Leads Gold Lower

Tuesday, April 24, 2012

Gold futures have sagged due to concerns over economic growth and lackluster physical demand. Indian demand has been surprisingly soft ahead of today's Akshaya Tritiya festival, widely considered a Gold buyer's holiday. This could offer concrete evidence to support the recent rumors coming out of India that demand is soft. Technically, Gold futures have failed to make any positive technical progress, suggesting prices may continue to slide. Some traders may choose to consider entering into a bearish position, such as a bear put spread - for example, buying the June Gold 1600 puts and selling the June 1550 puts for a debit of 10.00, or $1,000. The trade risks the initial cost and has a maximum profit of $4,000 if the underlying June futures close below 1550 at expiration.

Fundamentals

Gold futures have continued to trend lower, propelled by equity market weakness and concern over physical demand. ETF demand has not dropped very much from all-time highs made in March, and central demand for the metal is expected to remain firm. However, physical demand from India remains a major question mark for traders. The long jewelers strike already hurt demand, and now the worries over the effects of the global economic slowdown on demand have taken center stage. Outside of a full-scale financial crisis hitting the EU, defensive buying of the metal is not expected to increase on a large scale.

Technical Notes

Turning to the chart, we see the June Gold contract failing to gain upward momentum. The most recent high at 1679.50 failed to break through resistance at 1680.00, and also the 100-day moving average. Some traders may want to closely monitor whether prices break through recent lows at 1612.30. If prices manage to break through these levels on the downside, June Gold could potentially test support at 1600 and 1550.

Rob Kurzatkowski, Senior Commodity Analyst


April 25, 2012

Bond Rally Regains its Stamina after "Bear Trap" was Sprung

Wednesday, April 25, 2012

U.S. Treasury Bond futures have moved back into the middle of the recent price consolidation range that dominated trading for the majority of the past 6 months, after a downside breakout proved to be nothing more than a "bear trap". Investor nervousness may trigger more volatile trading activity, which may behoove some traders to explore strategies that could possibly benefit from a heightened trading environment. One such strategy could be the purchase of a strangle in Treasury Bond futures options. An example of this type trade would be the purchase of the June Bond 146 calls while at the same time buying the June 140 puts. With June bonds trading at 142-28 as of this writing, this strangle could be purchased for 1-14, or $1,218.75 per spread, not including commissions. The total investment in the trade would be the maximum potential risk on the trade, which would be profitable at option expiration in late May should the June futures be trading above 146-00 plus the premium paid or below 140-00 minus the premium paid.

Fundamentals

The calls for the end of the Bond bull market that were prevalent just one month prior appear to have been a bit premature, as continued European debt woes combined with weaker economic data from both the U.S. and China are renewing fears of a global economic slowdown. Many traders are once again shedding "riskier" assets like equities and commodities and moving funds into the so-called "safe haven" trades, such as U.S. and German debt and the U.S. and Japanese currencies. This week, market participants appear to be focusing again on Europe, where political uncertainties in both France and the Netherlands are sparking fears that a movement away from the austerity measures to deal with the Continent's debt crisis is gaining traction. In France, the seemingly likely defeat of current President Nicolas Sarkozy by his Socialist party challenger Francois Hollande, would leave Germany more isolated in its attempts to spur budgetary constraints on debt-laden countries in the monetary union. In the Netherlands, a collapse in budget talks has caused the country's Prime Minister Mark Rutt and his Cabinet to offer their resignations. If accepted, this could cause early elections and possibly set the stage for the country to lose its coveted AAA rating. In addition, a report that showed Chinese manufacturing activity contracted this month and rising U.S. jobless claims is also adding to the "risk-off" mentality of some traders lately. The remainder of the week holds several key economic reports including durable goods, pending home sales, and 1st quarter GDP readings that many traders will likely be watching to see if there are any signs of improvement in the U.S. economic outlook. Perhaps most importantly, some traders will await the release of a statement this morning after the end of the 2-day FOMC meeting on the lookout for any changes in the Fed's outlook for the U.S. economy and signs that additional easing measures might be in the cards. If there are, we could see additional buying emerge in Treasury futures, with a potential test of the contract high not out of the question.

Technical Notes

Looking at the daily continuation chart for June Bonds, we notice prices now trading back into the middle of the major price consolidation pattern that began back in November of 2011 after the downside breakout failed to move prices below major support near 135-00. We are now seeing the 20-day moving average (MA) cross above the 200-day MA, which many market technicians view as a bullish signal. The 14-day RSI is strong, with a current reading of 60.18. The only major negative seen in the recent price rally is that trading volume has been below average, which may signal that much of the recent rally was triggered by short-covering rather than fresh buying by Bond bulls. Traders should keep an eye on the Commitment of Traders report to see if new longs are entering the market, which could be the catalyst for a test of the contract highs. The 12/19 high of 146-11 appears to be the next major resistance level for June Bonds, with support found at the 200-day MA, currently near the 139-20 level.

Mike Zarembski, Senior Commodity Analyst

April 26, 2012

China Offers Corn Traders Some Hope

Thursday, April 26th

Corn futures have been in the doldrums due to the massive acreage and brisk planting pace. Because of these factors, many traders believed that the only forces that could move the market higher were either an act of God (severe weather conditions) or record export demand. It looks as though China may be obliging with the latter, but the extent of future purchases remains an unknown. Technically, prices have held key psychological and technical support at the 600 level, but no bullish patterns have developed. Some traders may perhaps wish to consider selling puts below key support at 575 - for example, selling the June 570 puts at 4.50, or $225. The maximum profit would be the initial premium and the trade has unlimited loss potential. Traders may want to mitigate this risk by buying back the puts on consecutive closes below 575.00.

Fundamentals

Corn futures got a bit of a boost from indications that China is increasing its imports of the grain. There were purchases of 1.28 million tons of Corn for export this week, including 600,000 tons marked for export to "unknown destinations." Many expect that this grain is headed for China. China may have purchased a total of 2 million tons of new crop Corn since last week. Strong demand from China was expected coming into the crop year, and this recent wave of buying hardly inspired bulls, but did help stabilize prices. In the US, the new crop is progressing without issue due to fairly ideal growing conditions. There is some minor concern that a potentially colder and wetter weather pattern could disrupt planting progress. Given how well early plantings have progressed, the impact of the weather should be minimal.

Technical Notes

Turning to the chart, we see the July Corn contract consolidating just north of the 600 support level. The 600.00 mark can be seen as more of a psychological support level, as more significant chart support comes in at 575.00. The consolidation with a preceding down move hints that more downside is possible. The RSI is giving an oversold reading, which could be supportive of prices.

Rob Kurzatkowski, Senior Commodity Analyst


April 30, 2012

Soybeans Sidestep Commodity Sell-off

Friday, April 27, 2012

Given the potential for rising volatility in Soybean futures this growing season, it may be difficult for many traders to maintain outright long-term positions, as large intraday price swings may not be uncommon given the current supply/demand situation. Traders choosing to establish a bullish position in new-crop November Soybean futures may perhaps wish to explore the purchase of out-of-the-money bull call spreads in Soybean futures options. For example, with November Soybeans trading at 1364.00 as of this writing, the November 1400 calls could be bought and the 1600 calls sold for a 45 cent debit, or $2,250 per spread, not including commissions. The total investment in the spread would be the maximum potential risk on the trade, which has a potential profit of $10,000 minus the premium paid, which would be realized at option expiration in late October should the November futures be trading above 1600.00.

Fundamentals

The sustainability of the rally in Soybean prices has been impressive, especially in light of the general weakness in commodity prices lately. Fundamentals clearly favor the bull camp, as a continued decline in estimates for South American Soybean production and strong export demand have caused old-crop/new-crop Soybean futures spreads to soar, with the July/November spread now running over a $1 premium to the July. New-crop prices have lagged somewhat, as many traders believe that relatively high Soybean prices may entice producers to plant more acres to Soybeans than current USDA estimates. However, even if we get an additional 1, or even 2 million acres of Soybeans planted this year, weather conditions need to be near perfect to allow adequate supplies to meet what appears to be sharply growing demand this coming season and prevent Soybean ending stocks from becoming extremely tight. So far U.S. Soybean plantings are running ahead of schedule, with the USDA reporting that 6% of the Soybean crop has been planted, vs. the 10-year average of 2%. Commodity funds are heavily net-long Soybeans, with the most recent Commitment of Traders report showing non-commercial traders holding a net-long position of 244,158 contracts as of April 17th. If the net-long positions in Soybean Oil and Soybean Meal are added in as well, the position totals nearly 400,000 contracts! This huge long position may scare some traders, as it appears that the market has become overbought; but if the bullish fundamentals remain, it may be difficult for any sizable correction to occur, especially if fresh buying emerges by those desiring to enter the Soybean market an any price dips.

Technical Notes

Looking at the daily chart for November Soybeans, we notice the recent price correction that took the market from nearly 1400.00 to 1332.00 seems to have taken the formation of a "bull flag" pattern. This bullish pattern is even more likely given that prices failed to test the uptrend line drawn from the major low made back on December 14th of last year. The pattern appears to have been confirmed, since we have closed above the recent high of 1365.50. Longer-term, Bean bears may argue that a double-top formation may be in the works if prices do not surpass 1400.00 in the near future. The 14-day RSI has moved from overbought territory to a more neutral reading of 51.99. The next support point for November Soybeans is seen at the uptrend line, currently near the 1333.25 level, with resistance found at the April 13th high of 1382.00.

Mike Zarembski, Senior Commodity Analyst


Cattle Futures Rebound after Mad Cow Scare

Monday, April 30, 2012

Given the steep sell-off seen prior to the "Mad Cow" report, the panic selling on the day of the USDA announcement may have been a "selling climax", with prices now at what appears to be oversold levels. Some traders who are expecting a rebound in prices may wish to explore buying bull call spreads in Live Cattle futures options. For example, with the June futures trading at 112.700 as of this writing, the 114 calls could be bought and the 118 calls sold for 1.250, or $500 per spread, not including commissions. The total investment in the spread would be the maximum risk on the trade, which has a potential profit of $1,600 minus the premium paid, which would be realized at option expiration in early June should the June futures be trading above 118.000.

Fundamentals

It was a tough week for those long Live Cattle futures, as prices were already hovering near yearly lows when on Tuesday, the USDA announced that a case of so called "Mad-Cow" disease was found in a dairy cow in California. This news caused Live Cattle futures to plunge the daily 3.000 limit in all 2012 contracts months, as many traders remember the carnage that occurred following a previous scare back in late 2003. In the most recent case, the bearish reaction may have been overblown, as the USDA stressed that no meat from the affected animal had entered the food supply. The biggest wildcard will come from the reaction of major U.S. beef importers, such as Japan and South Korea, who back in 2003 banned U.S. beef imports for many years -- and some markets, such as China, still severely limit U.S. beef imports. Many analysts currently do not expect a temporary ban to occur in this isolated case, as long as there are assurances that the infected animal did not enter the food supply. Any drop in U.S. beef demand due to this scare should also be short-lived, as long as this remains an isolated case. Some more aggressive traders are looking at the panic selling as a potential buying opportunity, citing the futures discount to cash market prices as well as higher cash beef prices, which should help to support prices in the coming days, especially if no further cases of "Mad Cow" are discovered.

Technical Notes

Looking at the daily chart for June Live Cattle, we notice prices trying to form a bottom after the steep sell-off seen early last week. We do see what appears to be a bullish divergence forming in the 14-day RSI as this indicator emerges from oversold levels. During the major price decline that began in early March, the 20-day moving average has acted as strong resistance, and this once again appears to be the case. Thursday's low of 111.550 is the next major support point for the June contract, with resistance seen at the 20-day moving average, currently near the 115.225 level.

Mike Zarembski, Senior Commodity Analyst