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May 2012 Archives

May 1, 2012

Gold Bulls Looking for Divergence

Tuesday, May 1, 2012

Gold traders have been a very indecisive bunch lately, as evidenced by the choppy chart. The bull camp is holding out hope that US and EU economic data diverge, which may embolden the ECB to make more aggressive moves. The chart shows plenty of indecision, with trading ranges tightening. Gold volatility, as measured by GVX and GVZ, is relatively low, indicating that option premiums can be seen as attractive. Some traders may perhaps wish to consider buying a near-the-money-straddle, for example the June 1670 straddle for a debit of 45.00, or $4,500. Given the high cost of the trade, some traders may choose to exit the put on an upside breakout, or vice versa.

Fundamentals

Gold futures have held steady in recent sessions, likely in hopes that central banks may be more aggressive. Many traders are expected to focus on the parity, or lack thereof, between US and EU economic data. The ECB could potentially lower interest rates to the same level as the US if the group of nations fails to keep pace with the US. This week is loaded with US employment data for traders to digest, with the ADP payroll data on Wednesday, claim data on Thursday, and non-farm payrolls on Friday. The fact that ETF/ETN holdings of the metal have slipped can be seen as a negative if the trend continues, as funds have been a major catalyst of metal demand. If we see strong central bank buying of the metal, it may offset some of the negative effects of lower fund holdings.

Technical Notes

Turning to the chart, we see Gold prices consolidating into a narrower trading range, forming a triangle/wedge pattern. This suggests that a potential breakout may be on the horizon. Given the preceding move lower, there is a slight downward bias. However, if prices are able to cross the 50-day moving average and 1700 level on the upside, the market may gain traction. The oscillators are currently at neutral readings, as evidenced by the RSI hovering near 50 and momentum sitting near zero.

Rob Kurzatkowski, Senior Commodity Analyst


May 2, 2012

Natural Gas Prices Rebound, but Will it Last?

Wednesday, May 2, 2012

Despite the rebound in Natural Gas futures this past week any significant rally attempts may run into strong headwinds from hedge selling as the market moves near chart resistance levels. Some traders who are expecting a continuation of the bear trend may wish to consider using the short-covering buying as a reason to explore selling calls in near-term Natural Gas futures options. For example, with June Natural Gas trading at 2.370 as of this writing, the June 2.650 calls could be sold for about 0.043, or $430 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 2.650. Given the risks associated with selling naked options, traders should have an exit strategy in place should the trade move against them. An example of one such strategy would be to buy back the option prior to expiration should the premium of the option trade at 2 ½ times the amount the option was originally sold for.

Fundamentals

Natural Gas bulls are finally getting a breather, as a short-covering rally has sent front-month June futures to nearly 1-month highs. This rally occurred after prices fell to lows not seen since 2002, taking front-month futures below the $2 level. The EIA reported that U.S. Natural Gas production fell 0.6% in February, which was the largest cut in production in 12 months. This view is supported by the Baker Hughes rig count data, which shows Gas rigs falling to their lowest levels in 10-years. Though it appears that low prices are starting to have some effect on dedicated Gas production, the market is still trying to absorb the Gas being produced as a byproduct of Crude Oil drilling. Gas bulls are hanging their hats on the continued switchover of power production to Gas-fired plants from coal helping to absorb what may become a burdensome supply of Gas in storage the remainder of the year. However, should Gas prices become more expensive then coal, we may see any increased power production demand begin to wane. The biggest potential for an increase in U.S. Gas demand is tied to the potential exporting of Liquefied Natural Gas (LNG) to Asian, and possibly European nations. However, this event will take some time, as in may not be until 2015 until a LNG export terminal is built and exports are able to ship LNG across the oceans. Market participants are holding a mixed view on the direction of Natural Gas prices, with small speculators and commercial traders on the long side of the market and large speculators holding a large but well-off a record net-short position. Much of the past week's rally may be tied to short-covering by these large speculative traders, and unless we see a clear positive shift in the demand or supply picture, commercial hedge selling may begin to enter the market should prices start to test recent highs near the 2.400 price level.

Technical Notes

Looking at the daily chart for June Natural Gas, we notice prices moving above the previous near-term resistance level at the April 3rd high of 2.335. This upward move may have triggered some buy stops as weak longs began to exit the market. Prices are now well above the 20-day moving average, which is lending some near-term support as short-term momentum traders are turning bullish. The 14-day RSI has turned positive, with a current reading of 60.01. The next significant resistance area is not found until the March 19th high of 2.607, with support found at the 20-day moving average, currently near the 2.141 price level.

Mike Zarembski, Senior Commodity Analyst


May 3, 2012

Stockpiles Enough to Finally Pull Down Crude?

Thursday, May 3, 2012

The trend of Crude Oil inventory builds has really tested Crude Oil bulls' resolve. Weaker employment data has done little to help. If the trend of inventory builds continues, this may cause the market to finally reach its breaking point, barring a geopolitical event. Technically, the failure to test relative highs near 108 has to be a disappointment for bulls. It appears that the up-move from recent lows may have been an aberration. Some traders may perhaps wish to consider selling a bear call spread by, for example, selling the June Crude 106 calls and buying the 107.5 calls for a credit of 0.75, or $750. The maximum profit would be the initial credit and the trade risks $750.

Fundamentals

Crude Oil futures are lower for the second consecutive session after release of inventory and employment data. Inventory data shows US Crude Oil stocks at their highest levels since 1990, however gasoline inventories did see a significant drawdown of 2 million barrels. Crude Oil inventories at Cushing have risen 13 of the past 15 weeks. The disappointing ADP job figures yesterday set a negative tone going into today's claim data, and although there have not been many official revisions to non-farm estimates, some traders may be looking for softer numbers than previously expected. A weak non-farm number could send prices tumbling even further, as rising US inventory levels and a weak labor market may simply be too much for bulls to overcome.

Technical Notes

Turning to the chart, we see that the June Crude Oil contract broke the 50-day moving average and reversed sharply yesterday. The recent closes back above the relative high close at 103.22, which can be seen as previous support, were seen as possible evidence of a false downside breakout. If prices are unable to hold this level, the recent up-move appears to be more of a dead cat bounce. Ideally, bears would like to see prices dip below the pivotal psychological support level at 100. The oscillators are giving fairly neutral readings, suggesting some traders may wish to keep their focus on chart developments.

Rob Kurzatkowski, Senior Commodity Analyst


May 4, 2012

Stock Indices Looking Toppy Ahead of Non-farm Payrolls Report

Friday, May 4, 2012

Prior to the jobs report, a look at the daily chart for the E-mini S&P 500 futures suggests that the price rally that started at the October 2011 low may be starting to lose some of its momentum. This could be potentially explosive should we see non-farm payrolls fall far short of expectations, similar to the March report. Some traders who are considering establishing a bearish position or hedging an existing long position may perhaps wish to explore the purchase of an out-of-the-money bear put spread in the E-mini futures options. For example, with the June futures trading at 1396.25 as of this writing, the June 1350 puts could be bought and the June 1275 puts sold for 9.75, or $487.50 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 $3,750 minus the premium paid, which would be realized at option expiration in June should the June futures be trading below 1275.00.

Fundamentals

Many U.S. equities traders have been biding their time during the past month, as fears of slowing growth in the U.S. economy has stalled the rebound in the stock indices. Among the biggest concerns has been a slowdown in employment growth, especially after the disappointing Non-Farm Payrolls report for March in which only 120,000 jobs were created. Adding to this fear has been the rise in jobless claims, which reached its highest levels in over 5 months. Coming into this morning's release of the April jobs report, analysts have seen a mixed bag of data. On the downside was the release of the private sector jobs report from ADP/Macroeconomic Advisers, which reported that only 119,000 jobs were added last month, which was well below analysts' estimates of 175,000 jobs being created. Of more concern with the ADP figures was that factory jobs declined last month. This would be the first decline in 7 months and, if true, would be contrary to previous economic reports. Not all the news was gloomy, as yesterday's Jobless Claims figures fell by a much larger than expected 27,000 to stand at 365,000. This was the largest 1-week decline in nearly a year, and helped put an end to the upward trend the past three weeks. Many traders are revising their forecasts for today's report, with the consensus estimate calling for 165,000 jobs created in April, with all the increase coming from the private sector. The public sector is expected to continue to shed jobs, with analysts looking for a decline of 5,000 jobs last month. Much has been made in the media of the decline in the unemployment rate the past few months, currently at 8.2%, with the debate centered on whether the decline in the rate is a sign of improving job prospects or a signal that potential workers are getting discouraged and leaving the job market entirely. Many traders are looking for the rate to remain unchanged, as are estimates for the average hours worked at 34.5. Given the relatively tight range the S&P futures have been trading within the past month, any "surprise" in the data could spark a breakout from its current range and potentially set the stage for the next major move in the market.

Technical Notes

Looking at the daily continuation chart for the E-mini S&P 500 futures, we notice prices moving sideways, trading on both sides of the 1400.00 price level. Prices are holding just above both the 20-day moving average and the uptrend line formed from the October 2011 low. Trading volume has been light the past two weeks, and the 14-day RSI has begun to weaken, with a bearish divergence forming. Major resistance is seen at the contract high of 1419.75, with support seen at the April 10th low of 1352.50.

Mike Zarembski, Senior Commodity Analyst


May 7, 2012

Bearish Fundamentals Keep Wheat Prices on the Defensive

Monday, May 7, 2012

Wheat futures may have some difficulty overcoming both bearish seasonal and fundamental factors, with any price rallies offering an opportunity for traders to explore bearish trading strategies in Wheat futures options. One such strategy would be a synthetic short position, buying an out-of-the-money put and selling an equal number of out-of-the-money calls in the same contract month. Ideally, you would want to do this trade for a net credit to increase the potential price range of the position becoming a wining trade. For example, with July Wheat trading at 605.50 as of this writing, the Jul 570 put could be bought and the July 650 call sold for a net credit of 1.50 cents, or $75.00, not including commissions. At expiration in late June, the trade would be profitable as long as the July futures are trading below 650.00 plus the amount of the credit received.

Fundamentals

Wheat prices have failed in their attempted to rebound, with short-covering buying tied to rallies in other "feed" competitors such as Corn and Soybean Meal, stymied by bearish fundamentals for the market. Here in the U.S., the winter wheat crop is progressing nicely, with the USDA rating the crop at 64% good/excellent, vs. only 34% at this time last year. Now that we have entered the month of May, many traders may start to take any "freeze" weather premium out of prices, as warmer weather moves into the Winter Wheat Belt. Globally, the world is still awash in Wheat, and supplies are expected to be ample to meet demand this year. However, for the 2012-13 season there are some concerns that global Wheat production will decline, as cold weather in the major Wheat growing areas of Europe this winter has lowered analysts' potential production estimates. The International Grains Council has lowered its estimate for 2012-13 Wheat production to 676 million metric tons (mmt), which is down from its earlier forecast of 681 mmt. However, it has been Wheat's use as a "feed" grain that has kept prices closely tied to that of Corn, as tight supplies and high prices made Wheat competitive as a feed grain this past year. With U.S. Corn production predicted to be a record, it may be difficult for Wheat prices to sustain any major rally attempt should Corn prices decline this coming year. In the near-term, historic trends normally point to lower Wheat prices as we move into the summer months, as harvest pressure hedge selling can set the tone for the market -- at least until fall planting begins.

Technical Notes

Looking at the daily chart for July Wheat, we notice prices trading in a relatively narrow $1 price range since November of last year. During this time, we have seen the range begin to tighten, with prices making lower highs and lower lows along the way. Prices have continued to test the 100-day moving average, but have had little success moving above this key indicator. The 14-day RSI is weak, with a current reading of 37.44. The recent high of 655.50 is acting as strong resistance, as this was the daily high for three consecutive days earlier last week. Support is seen at 590.00.

Mike Zarembski, Senior Commodity Analyst



May 9, 2012

Beans Keeping Other Grains Above Water

Tuesday, May 8, 2012

Soybeans have been the lone market keeping the grain complex afloat this spring, due to feverish buying from China. The market is pricing a very large reduction into global stocks, which could lead to disappointment if inventory levels are on the high side of those estimates. It is dangerous when one commodity keeps an entire sector afloat. Corn and Wheat have very weak fundamentals, suggesting a large inventory estimate could trigger a large scale sell-off, especially if it is paired with a weaker export sales figure. Some traders may perhaps wish to consider entering into a bear put spread if the July Bean contract breaks 1450 on the downside - for example, buying the July Soybean 1400 puts and selling the 1350 puts for a debit of 10.00, or $500. The spread risks the initial cost and has a maximum profit of $2,000 if the July futures contract closes below 1350 at expiration.

Fundamentals

China has continued to buy Soybeans from US farmers after South American crops were severely damaged by drought conditions. This could severely stress US old crop supplies, especially if there is anything other than ideal growing conditions. The end result could be the lowest stocks-to-usage numbers since the 1960's. The market has priced-in a substantial reduction in inventory levels for this Thursday's USDA report. The average analyst estimate calls for inventory levels to drop to just below 53 million tons, which would be a reduction of 23% from the prior report. It seems as though the only thing that can cool the market would be a slowdown in purchases from China.

Technical Notes

Turning to the chart, we see the July Soybean chart turning almost parabolic. Prices easily passed resistance at the 1450 level and are now retracing a bit to retest the level. The next significant resistance level comes in near 1650, which is the record high from 2008. In order for the market to maintain positive technical momentum, prices must successfully hold the test of the 1450 level, which coincides with the uptrend line. The RSI indicator has recovered from overbought levels, but still remains on the upper end over neutral. Momentum is nearing the zero line, hinting at possible weakness. It is of interest to note that the RSI indicator peaked in March and has failed to keep pace with prices since then. This can be seen as negative, but timing the signal can be very difficult.

Rob Kurzatkowski, Senior Commodity Analyst


Voting Against Austerity Sinks the Euro

Wednesday, May 9, 2012

The Euro's recovery from Monday's spike low of 1.2957 has put a strong support point into the market, and some traders who are bearish on the Euro may wish to wait until this key level is taken-out on the downside, preferably on a closing basis, before exploring selling the June Euro.

Fundamentals

Like a cat, the Euro seems to have nine lives, as the currency once again has failed to sell-off sharply, despite rather bearish news. Over the weekend, election results in both France and Greece favored anti-austerity candidates, putting into question any current bailout efforts and which may eventually set the state for Greece leaving the Euro. In addition, elections in the German state of Schleswig-Holstein, were not favorable for the political party of German Chancellor Angela Merkel, potentially leading to more internal opposition to Germany's hard-line stance towards reforming the spending habits of struggling Euro members. These election results may move EU leaders towards more stimulus measures, such as lowering interest rates to near zero, a bias towards more increased government spending in order to help spur economic growth. Both these factors would normally be bearish towards the Euro, but after an initial sell-off subsequent to the election results being announced, the front month June futures rebounded back above 1.3000. Some of the rebound in the Euro was tied to a positive German factory orders report that dampened some of the bearish momentum for the Euro. In addition, the large net-short position being held by speculators may have resulted in a sell-the-rumor and buy-the-fact reaction after the elections, as the outcome really was of little surprise to many analysts. Going forward, some traders may wish to focus on the Euro's reaction to what is deemed "bearish" or "bullish" news and wait for a positive correlation between the news and outcome to explore positioning in the direction of the market move.

Technical Notes

Looking at the daily continuation chart for the Euro futures, we notice that the rebound on Monday from over 3-month lows did not last long, as Tuesday's sell-off has once again put the Euro on the defensive. The 14-day RSI is weak, with a current reading of 34.89. Should Monday's low of 1.2957 give way, there is little support seen until the 2012 low of 1.2627 made on January 13th. The next resistance area is seen at the 20-day moving average, currently near the 1.3157 area.

Mike Zarembski, Senior Commodity Analyst


May 10, 2012

Lack of Confidence Shakes Gold

Thursday, May 10, 2012

Gold has certainly lost its luster with traders in recent session! The US economy, which was showing encouraging signals, now seems weaker. Also, the fact that Greece has continued to drag its heels and failed to approve austerity measures could result in worsening EU debt conditions. Some traders may perhaps wish to consider selling a bear call spread - for example, selling the June Gold 1650 calls and buying the 1680 calls for a credit of 2.50, or $250. The maximum profit on the trade would be the initial credit and the risk is $2,750.

Fundamentals

Gold futures have followed the broad commodity market lower, as investors' funds pour into US Dollars. The uncertain economic future of Europe has resulted in the greenback being the safe haven bet for investors. The week began on a sour note, after France elected a far left candidate to take over the presidency of the nation. France had been one of the few bright spots for the embattled EU, and there are fears that a leftist president could slow a potential recovery. The failure of Greece to push through austerity measures reinforces the fact that investors simply cannot trust the nation to make the needed sacrifices to remain solvent. Commodity markets as a whole have been pummeled in recent sessions, especially energies, which are suffering because of inventory builds and the prospects of slower growth.

Technical Notes

Turning to the chart, we see the June Gold contract breaking through the 1600 level on the chart, which was technical and psychological support. Prices are now in danger of making a run at the relative low close of 1540.90. Failure to hold that near-term low could trigger widespread selling. The RSI is nearing oversold levels, which could offer the market support in the near-term. Prices bouncing off intraday lows yesterday resulted in a lower wick forming on yesterday's candle, hinting at prices possibly gaining some traction.

Rob Kurzatkowski, Senior Commodity Analyst



May 11, 2012

Oil Leak

Friday, May 11, 2012

Some traders who are expecting Oil prices to continue to fall in the near-term but who potentially may wish to go long Oil if prices continue to fall may perhaps want to explore a diagonal ratio spread. This spread involves buying a near-the-money put in a closer to expiration month and selling multiple further out-of-the-money puts in a farther out contract month. For example, with July Crude trading at 97.00 and August Crude trading at 97.29, the July 95 puts could be bought and 2 August 87 puts sold for a credit of 0.45, or $450 per spread, not including commissions.

Fundamentals

Apparently Crude Oil prices can move in both directions, as a nearly $10 decline during the past few trading sessions has many analysts questioning the sustainability of the Oil bull market that began in early 2009. The bearish arguments are many, including ample global supplies, rising value of the U.S. Dollar, and a move away from "risk" assets due to continued economic concerns out of Europe. Earlier this week, Saudi Arabia's Oil minister Ali Naimi was quoted as saying that "Oil prices are too high," which was interpreted by some analysts as a sign that OPEC may raise its output quotas at its next meeting in June. Here in the U.S., Oil inventories are more than ample, with Oil inventories standing at their highest levels since August of 1990. Inventories are especially burdensome in Cushing, Oklahoma, which is the delivery point for NYMEX WTI futures. In Cushing, Oil supplies are at record levels at just over 44 million barrels. This increase of Oil moving into Cushing looks to be tied to the eventual reversal of the Seaway pipeline that will allow Oil to move from Cushing to the Gulf Coast and then be shipped to the East Coast. Continued uncertainty in Europe due to elections of anti-austerity parties in both Greece and France has increased the likelihood that any agreements to aid the fiscally troubled Euro countries may be in jeopardy, which in turn has sent some traders fleeing away from commodities and into what are considered safe haven investments. Large and small speculators were heavily net-long Crude Oil futures, holding a combined net-long position of over 320,000 contracts as of May 1st. It is this long liquidation selling that has triggered the steep decline during the past few sessions, as weak longs finally threw in the towel on their positions, with few willing buyers emerging at current price levels. Before becoming too bearish on Oil prices, however, we should remember that a "risk premium" may still be needed, especially given the potential for disruptions out of the Middle East and West Africa.

Technical Notes

Looking at the daily chart for July Crude Oil, we notice prices holding just above the 50% Fibonacci retracement level, as buyers seem to be emerging as fresh lows are being made. The market is holding near the 200-day moving average, trading on both sides of this key long-term indicator. The 14-day RSI has held just above oversold levels, with a current reading of 31.83. The December 16th low of 93.45 looks to be the next major support level for the July futures, with resistance found at the April 10th low of 101.77

Mike Zarembski, Senior Commodity Analyst



May 14, 2012

Corn Futures Fall on Bearish USDA Supply Report

Monday, May 14, 2012

After trading as high as a $1.10 July premium to the December futures, the old-crop/new-crop spread has started to weaken, currently trading at an 81-cent July premium. With an expected increase in the 2011-12 ending stocks estimate and a potentially early harvest, we may see this premium begin to shrink, as buyers await "cheaper" new-crop supplies. Some traders who are turning bearish on Corn may perhaps wish to explore bear spreads in Corn futures - for example, buying December 2012 Corn and selling July 2012 Corn. Those who choose to trade this bear spread would want to see the July premium to the December futures narrow.

Fundamentals

It looks like it will be a tough year for Corn bulls, as the potential for a record crop this season continues to weigh on prices. In its May crop production & supply/demand report, the USDA raised its estimate for 2011-12 ending stocks to 851 million bushels, which is up 50 million bushels from the April report and nearly 100 million bushels above average analyst estimates. This huge disparity between the government and private forecasts was due to the projection of an early U.S. Corn harvest this season. If accurate, this would lead to end-users having access to new-crop supplies possibly as early as August, which would help to elevate potentially tight supplies at the end of the marketing year and potentially take some of the "premium" out of old-crop futures prices. New-crop futures also received some bearish news, as the USDA raised its outlook for this year's harvest to 14.79 billion bushels, with an expected record average yield of 166 bushels per acre. Globally, 2011-12 Corn carryout estimates were raised by nearly 5 million metric tons (mmt) to 127.6 mmt, as the USDA raised sharply its Brazilian Corn crop estimate to 67 mmt, vs. 62 mmt last month. Many analysts were expecting a more moderate increase to 62.7 mmt. Cash-connected traders were surprised by the numbers, as cash prices have been trading at a premium to front-month futures, which signals that physical supplies are tight. Some traders believe that any dip in prices may increase export demand, particularly from China, which would negate much of the USDA's expected gains in ending stocks. All this bearish news sent lead-month July Corn to its lowest price levels of the year, as large speculative accounts continued to shed their long positions. With old crop Corn still trading at an 80-cent premium to the new-crop December futures, we will need to see strong export sales to help justify the premium, especially with a early harvest looming in buyers' minds.

Technical Notes

Looking at the daily chart for July Corn, we notice prices falling to lows not seen since March of 2011, as the market is starting to reflect the belief that the U.S. will produce a record Corn crop this season. Prices are now well below both the 20 and 200-day moving averages,, and momentum as measured by the 14-day RSI is weak, with a current reading of 33.00. The most recent Commitment of Traders report shows large non-commercial traders are holding a net-long position of over 160,000 contracts as of May 1st. Though this position is thought to be much smaller since this week's sell-off to 2012 lows, it is still a formidable position, and any further weakness may be exacerbated as this long position is liquidated. The March 2011 low of 568.25 is the next support point for July Corn, with resistance found at the April 30th high of 634.75.

Mike Zarembski, Senior Commodity Analyst



May 15, 2012

Lack of Job Creation Puts the Ball in the Bear Camp

Tuesday, May 15, 2012

Equity markets have not been able to shake the weight of influence from outside markets. Greece's indecision, resulting in the inability to pass austerity measures, continues to haunt Europe and the global economy. Today's retail sales figures may show whether or not consumers are as positive with their checkbooks as the sentiment data would indicate. Technically, momentum seems to be with the bear camp, which would like to see prices take-out 1345 and 1335 on the downside. Some traders may perhaps wish to consider entering into a bear put spread, like buying the June E-mini S&P 1340 puts and selling the 1300 puts for a debit of 10.00, or $500. The trade risks the initial cost and has a maximum profit of $1,500 if the June E-mini settles below 1300 at expiration.

Fundamentals

Equity prices have been hammered in recent sessions amid growing signs that the US recovery is slowing down. One area of particular concern is the inability of the US economy to create sufficient jobs to maintain economic momentum and get the US on the path to long-term economic health. The seemingly never-ending European debt crisis and Chinese economic slowdown have also negatively impacted the US economy. It is of interest to note that over the past several years, whenever economic indicators have turned positive, energy costs have begun to soar, which may be a major contributor to the inability of the US to create jobs, as businesses are forced to quickly pare costs. In all of the recent doom and gloom, the lone bright spot seems to be the US consumer remaining somewhat upbeat. Friday's Michigan Sentiment data showed a better than expected reading of 77.8, trumping the consensus estimate of 76.0 and April figure of 76.4. It is, however, difficult to see consumer confidence continuing to strengthen if the economy is not able to create jobs.

Technical Notes

Turning to the chart, we see the June E-mini S&P confirming a double-top pattern, suggesting prices could come down to test the 1300 mark. After confirming the pattern, the market has consolidated. Some traders may wish to be on the lookout for a move below 1345 to offer further validation of a bearish reversal. Recent lows have tested the 100-day moving average, which could add to the negative technical momentum in the event prices breakout out of the consolidation.

Rob Kurzatkowski, Senior Commodity Analyst


May 16, 2012

No Soft Landing for Cotton Futures

Wednesday, May 16, 2012

Though the fundamentals continue to look bearish for Cotton futures, technically the market appears to be oversold, and a short-covering rally may not be out of the question. One strategy to consider given the aforementioned scenario is the purchase of a calendar spread in Cotton futures options. For example, with July Cotton trading at 80.02 and December Cotton trading at 77.30 as of this writing, the 77 put calendar spread could be bought (buying Dec 77 puts and selling July 77 puts) for a net debit of 3.65, or $1,825 per spread, not including commissions. This strategy may involve some decision-making by traders, who may wish to roll forward the short leg of the spread near expiration to help defray the initial cost of the long side of the trade.

Fundamentals

My how the mighty have fallen! That is the theme for the Cotton futures market where after trading at its highest levels since the Civil War in 2011, prices have fallen by nearly 70% from historic highs, as global supplies are at record levels. Last week, the USDA released its supply/demand outlook for this coming season, and the numbers were not pretty. In the U.S., government statisticians estimated the U.S. Cotton crop at 17 million bales for 2012, which is up nearly 1.5 million bales from last year, as improving weather conditions in Texas should be supportive to increased production this season. This production increase is expected to increase U.S. Cotton carryover to 4.9 million bales, or nearly double last year's ending stocks totals. Globally, the world is awash in Cotton, with global ending stocks expected to reach 73.75 million bales, which if accurate would be a record. Cotton bulls' greatest hope would be for increased demand, especially from China, due to lower Cotton prices. The USDA does expect U.S. Cotton exports to increase by 600,000 bales this marketing year, but this still would not be sufficient to make a dent in the global surplus. Though the northern hemisphere growing season has just begun and traders may start to place some risk premium into prices should weather conditions turn for the worse, any rally attempts may draw in fresh hedge selling, potentially placing a cap on prices this year.

Technical Notes

Looking at the daily chart for July Cotton, we notice prices collapsing after the release of the USDA supply/demand report last week. Prices are now well below both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI has moved into oversold territory, with a current reading of 22.27. Though we are now trading off the worst levels of last week, the steep sell-off occurred on higher than average trading volume and may be a sign of capitulation by long holders. If true, this may actually trigger a bit of short-covering buying as weak bears book profits. Last Friday's low of 77.16 looks to be near-term support for July Cotton, with resistance found near 86.55.

Mike Zarembski, Senior Commodity Analyst



May 17, 2012

Can Facebook Breathe Life into NASDAQ?

Thursday, May 17, 2012

Stocks have come under pressure lately, after the lack of job creation all but stopped the economic recovery in its tracks. Outside pressure from Europe and China does not make matters any easier, as it appears that the US will have to go it alone. The pop, if any, that Facebook may provide, may be a temporary distraction for traders, but material problems will likely take precedence. Some traders may perhaps wish to consider entering into a bear put spread, -- for example, buying the June E-mini NASDAQ 2450 put and selling the June 2400 put for a debit of 10.00, or $200. The trade risks the initial cost and has a maximum profit of $800 if the June contract settles below 2400 at expiration.

Fundamentals

The recent slide in equity prices is no surprise to many, given the fact that the US recovery has seemingly ground to a halt and debt worries continue to haunt Greece. Even tech heavyweights like Apple that can seemingly do no wrong have seen their valuations scrutinized and their stock prices plummet. Some traders are now asking themselves whether Facebook, the poster child of Web 2.0, can pump some life into sagging equity prices. There are already many red flags surrounding the company and its advertising revenue stream. If established tech companies with proven revenue streams such as Apple and Google have failed to inspire shareholders, it is difficult to see a company with so many question marks provide a significant boost to the market. That being said, the hype surrounding the company and dumb money buying may provide a short-term sugar high.

Technical Notes

Turning to the chart, we see the June E-mini NASDAQ breaking support from the relative low close at 2589.50. There is little to no support until the 24.00 level on the downside. Prices also closed below the 100-day moving average, adding to the bearish momentum. The RSI indicator is now at oversold levels, suggesting that prices could see a bit of a technical bounce or stabilization in the near-term. Interestingly, momentum has been relatively flat during the slide in prices.

Rob Kurzatkowski, Senior Commodity Analyst



May 18, 2012

Coffee Bear Market Cools as Prices Consolidate

Friday, May 18, 2012

Arabica Coffee's negative fundaments and the potential for aggressive hedge selling by South American producers on any significant rally may keep pressure on Coffee prices. Aggressive traders who are bearish on Coffee may wish to consider using any rally attempts to explore selling out-of-the-money calls in Coffee futures options. For example, with July Coffee trading at 179.10 as of this writing, the July Coffee 195 calls could be sold for 1.10, or $412.50 per contract, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in early June should the July futures be trading below 195.00. Given the potential 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 options sold prior to expiration should the July futures close above chart resistance seen at 193.00.

Fundamentals

After a decline of over $1 per pound during the past 8 months, Arabica Coffee futures prices have begun to consolidate, hovering just north of 175.00 in the most active July contract. Like many commodities, Coffee prices have hit headwinds from the continuing drama that is Europe, as well as a much stronger U.S. Dollar. Actual Arabica Coffee fundamentals have also been a negative weight on prices, as analysts are looking for potentially record production out of Brazil this season -- which if true, would help replenish tight supplies seen the past few seasons. Many speculators, both large and small, have been holding net-short positions in Coffee futures for several weeks, but have begun to lighten-up on their short positions as prices begin to consolidate. The most recent Commitment of Traders report shows the combined net-short speculative position was decreased by just over 2,700 contracts to stand at 11,208 contracts as of May 8th. Arabica Coffee may be seeing some spillover support from Robusta Coffee futures trading in London, where bullish fundamentals, including lower exports from Vietnam, have sent prices to 8-month highs. However, any rally attempts in Arabica futures may be capped by hedge selling, as producers may take advantage of any rally to hedge what may be a record harvest in South America.

Technical Notes

Looking at the daily chart for July Coffee, we notice prices beginning to consolidate starting in the middle of March. Since that time, we have traded in a relatively narrow 20-cent price range, but have made a series of lower highs and lower lows within the recent price boundaries. The market has been trading on both sides of the 20-day moving average (MA) lately, but remains well below the longer-term 200-day MA, which is currently hovering near the 224.00 price area. The 14-day RSI has turned neutral, with a current reading of 50.30. The May 9th low of 172.20 appears to be support for July Coffee, with the April 4th high of 193.00 appearing to be the next major resistance level.

Mike Zarembski, Senior Commodity Analyst


May 21, 2012

Sugar's Price Rebound May be Stalling

Monday, May 21, 2012

Some traders who are bearish on Sugar but who wish to limit their risk to their total investment in a trade may perhaps wish to explore the purchase of a bear put spread in Sugar futures options. For example, with July Sugar trading at 20.43 as of this writing, the July sugar 20.50 puts could be bought and the July 19.50 puts sold for a net debit of 0.40, or $448 per spread, not including commissions. The total investment in the trade would be the maximum potential risk on the trade which has a potential profit of $1,120 minus the premium paid, which would be realized at option expiration in June should the July futures be trading less than 19.50.

Fundamentals

After successfully testing major psychological support at 20.00, July Sugar futures prices have rebounded modestly, but additional gains may be hard fought. First we have the start of the Brazilian cane harvest, with ships lining up at Brazilian ports expected to load 1.2 million metric tons of Sugar. Though Brazil's harvest is expected to be lower this season, huge supplies out of India and Thailand are expected to more than make up any Brazilian shortfall. In addition, continued concerns about the health of the global economy and slower growth prospects out of China are expected to aid in forming a global Sugar surplus this coming season. Technically, prices have been correcting from oversold levels, with large speculators having already liquidated much of their net-long positions during the past couple of weeks. The non-commercial net long position has fallen to only 61,148 contracts as of May 8th, according to the most recent Commitment of Traders report. This is only ¼ of the net-long position seen during the commodity-wide bull market back in 2008, and is a signal that speculative interest is moving out of Sugar and into other markets. If that is the case, commercial traders may start to play a greater role in the market's direction, especially if hedge selling increases as the South American harvest progresses.

Technical Notes

Looking at the daily chart for July Sugar, we notice prices failing to close above the 20-day moving average during the mini rally this past week. This failure may negate the "V" bottom formation that appeared last week. The 14-day RSI has turned lower, with a current reading of 36.56. The May 14th low of 20.07 appears to be support for the July futures, with resistance found at the May 7th high of 21.17

Mike Zarembski, Senior Commodity Analyst


May 22, 2012

Iran Accepts Inspection, Dashing the Hopes of Crude Bulls

Tuesday, May 22, 2012

The bear camp is firmly in control of the Crude Oil market at the moment, given the fact that economic projections continue to trend in the wrong direction and some of the geopolitical risks may be mitigated by Iran allowing Western inspectors into the nation. This does not mean the tension will completely dissipate or that Middle East fears will completely go away. Some traders may wish to consider entering into a trade with predefined risk, such as a bear put spread, like buying the July Crude 92.50 put and selling the July 90.00 put for a debit of 1.00, or $1,000. The trade risks the initial cost and has a maximum profit of $1,500 if the underlying July contract closes below 90.00 at expiration.

Fundamentals

Crude Oil futures are under pressure once again, after Iran bowed to international pressure and decided to allow nuclear inspectors to visit the nation. The US is not backing off of its call to keep sanctions on Iran, but may lose the backing of the international community if Iran is fully cooperative with the Western inspectors. The Organization for Economic Cooperation and Development, or OECD, trimmed its growth forecast for the Eurozone, citing the continued debt problems. The possibility of a breakup of the EU cannot be ruled out, although the odds of that happening in the near-term are not great. A geopolitical event or improved economic data could awaken bulls from their slumber. Without one or both of these factors falling into place, any buying pressure could be seen as technical in nature.

Technical Notes

Turning to the chart, we see the July Crude Oil contract continuing to trend lower, after taking-out near-term support near 92.50. This sharp sell-off has resulted in oversold conditions on the RSI, which checks in below the 30 mark again this morning. The combination of technically oversold conditions and the market's initial hesitance to break through the 90 level could result in a technical bounce. However, a breakout below 90 could result in an upswing in bearish momentum.

Rob Kurzatkowski, Senior Commodity Analyst


May 23, 2012

Soybean Prices Fail to Recover Despite Hot and Dry Weather Forecasts

Wednesday, May 23, 2012

It is too early to dismiss any potential weather issues this coming year, and new-crop Soybean futures may not be pricing-in an adequate "weather premium," especially given tight global supplies. Some traders who are bullish on Soybeans may choose to use any price weakness to explore the purchase of bull call spreads in Soybean futures options. An example of this trade would be to buy the November 1300 calls and sell the November 1500 calls for a net-debit of 46 cents, or $2,300 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 1500.00.

Fundamentals

Soybean futures prices have attempted to rebound from recent lows, with some traders beginning to focus on weather forecasts calling for warm and dry conditions in the eastern and southern regions of the U.S. The Climate Prediction Center in its 8 to 14-day outlook is calling for above normal temperatures throughout the Midwest, with well-above normal temperatures expected in central and southern Illinois, eastern Missouri, southwest Indiana, and the western parts of Kentucky and Tennessee. The warm weather outlook and below average precipitation forecasts have sparked some concerns that any yield benefits from early planting may be overridden by less than stellar growing conditions early in the season. Dry conditions are being seen in parts of the Midwest, including most of the state of Minnesota and northwest Iowa. There are also some dry patches in parts of central and southern Illinois, which may be more of a concern for Soybean traders given the state's importance to U.S. Soybean production. It is not uncommon for market participants to price a weather "risk premium" into grain prices, and given the tight global supplies of Soybeans this season, it is imperative that the U.S. produce a bumper crop. China has been a big Soybean buyer this year, with the country's imports up 22% from last year. The jump in Chinese imports has surprised some traders, especially given the slowing growth numbers out of the world's most populous nation. But with the South American harvest disappointing and given tight supplies, Soybean buyers were not taking any chances of being caught short supplies if U.S. production did not live up to expectations. The big caveat for Soybean prices may end up being how many additional acres U.S. producers will dedicate to Soybean production, especially from "double-cropping" Soybeans after the Winter Wheat harvest, which is running ahead of schedule. Should we see 1 to 2 million additional acres of Soybeans planted this season, this additional production could make the difference between very tight supplies and mostly adequate supplies as the marketing season comes to an end.

Technical Notes

Looking at the daily chart for November Soybeans, we notice that prices have fallen below the up-trend line drawn from the December 2011 lows. In addition, prices are now poised to test the 200-day moving average, which if taken-out to the downside, may spur further long liquidation selling. The 14-day RSI is weak, with a current reading of 37.09. The 200-day moving average, currently near the 1266.50 area, looks to be support for November Soybeans, with resistance seen at the May 17th high of 1318.00

Mike Zarembski, Senior Commodity Analyst


May 30, 2012

Cattle Prices Struggle to Move Higher as European Woes Weigh on Commodities

Friday, May 25, 2012

Looking at the daily chart for August Live Cattle, we notice the "spike" bottom made on April 27th at 114.350. Given the current bullish fundamentals seen for Live Cattle, some traders who are bullish may perhaps wish to explore selling puts in August Live Cattle futures options with strike prices below the April 27th lows. For example, with August Live Cattle trading at 119.325 as of this writing, the August 114 puts could be sold for 1.325, or $530 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 early August should the August Live Cattle futures be trading above 114-000.

Fundamentals

Live cattle futures have been resilient in 2012, overcoming a "mad cow" scare and European woes that have taken some of the luster out of commodities. Fundamentally, the outlook for Live Cattle prices is positive, as Cattle placements in feedlots is expected to be lower than last year's totals due to high feed costs. Beef production is also expected to be lower going into the summer, at the same time that consumer demand normally increases during the summer grilling season. Nearby futures prices are running at a $3 to $4 discount to cash prices, as many speculators continue to shun commodities due to European concerns that have taken center stage and some traders have moved into "risk-off" positions such as the US Dollar and Treasuries. However, should the European debt crisis begin to settle and consumer confidence begin to improve, we may see some traders begin to stampede back to the long side of the Cattle market.

Technical Notes

Looking at the daily chart for August Live Cattle, we notice what could be construed as a head and shoulders bottom or a 'V' bottom forming. Now prices have moved above the 20-day moving average (MA), but still have a bit further to advance to reach the 200-day MA which is currently located near the 124.250 price level. The 14-day RSI has turned neutral, with a current reading of 49.31. Near-term support is seen at the 20-day moving average, currently near the 118.625 area, with resistance found at the May 21st high of 122.425.

Mike Zarembski, Senior Commodity Analyst



Greece Leaving Euro a Mixed Bag for Gold

Tuesday, May 29, 2012

Many gold traders have been waiting for this day (Greece leaving the Euro) for some time. Oftentimes, the market still reacts sharply, even after the news has been priced in, but that appears not to be the case this time around, as the Gold market yawned off the news. From a currency standpoint, the news can be seen as negative for the Euro and Gold. From a defensive standpoint, there may be a flight to quality, which may benefit Gold. Some traders may perhaps wish to consider entering the long side of the market in the event that the chart confirms a double-bottom formation and breaks out above 1600.00.

Fundamentals

Gold traders have been digesting the news that Greece will be leaving the Euro on June 18th. The possibility of this scenario has been hanging over the market for over a year, so it shouldn't be a huge shock. It is mixed news for Gold traders. On one hand, it could send the Euro lower and result in a stronger Dollar, which would likely be negative for Gold. Even though the EU parts ways with one troubled economy, countries like Spain, Italy, Ireland and Portugal remain, so the EU is far from being out of the woods. Demand for Gold as a safe haven may pick up, as even "safe" currencies like the Dollar are plagued with their own problems.

Technical Notes

Gold traders have been digesting the news that Greece will be leaving the Euro on June 18th. The possibility of this scenario has been hanging over the market for over a year, so it shouldn't be a huge shock. It is mixed news for Gold traders. On one hand, it could send the Euro lower and result in a stronger Dollar, which would likely be negative for Gold. Even though the EU parts ways with one troubled economy, countries like Spain, Italy, Ireland and Portugal remain, so the EU is far from being out of the woods. Demand for Gold as a safe haven may pick up, as even "safe" currencies like the Dollar are plagued with their own problems.

Rob Kurzatkowski, Senior Commodity Analyst


Crude Struggles to Hold Above $90

Wednesday, May 30, 2012

Though the current trend in Oil prices seems to favor the bears, it can be difficult to become extremely bearish given the potential for disruptions in Oil production out of the Middle East and Northern Africa. Some traders who may be considering taking a bearish position in the short-term but who wish to have some upward protection should events turn in the Middle East may perhaps wish to explore a diagonal ratio spread in Crude Oil futures options. An example of this trade would be selling the July Crude Oil 91 calls and at the same time buying 2 August Crude 105 calls. Ideally, one would want to construct this type of spread at a net-credit to increase the price range in which the trade would be profitable at expiation on the short leg of the spread.

Fundamentals

After closing below the $90 per barrel level for the first time in 7 months last week, Crude Oil futures have attempted to rally above this key support level, but are running into resistance as many traders' "risk off" mentality continues. On Tuesday, after the long Memorial Holiday weekend, Oil prices initially rose, trading above $92 per barrel for the first time in three sessions, as an impasse in talks between major world powers and Iran over its nuclear program surfaced. In addition, bargain hunters bought Crude Oil futures, as it appeared that prices have become "oversold" based on some technical indicators. However, Tuesday's price gains failed to hold, as a weaker than expected U.S. Consumer Confidence report and stronger U.S. Dollar brought sellers back into the market by the close. Both large and small speculators continue to unwind net-long positions in Crude Oil, according to the most recent Commitment of Traders (COT) report. For the week ending May 22nd, speculators shed just over 20,400 net-long positions in Crude Oil futures. Though this is a large decline, the net-long position still remains quite large, currently standing at nearly 250,000 contracts according to the COT report. Until we see some signs of stability coming from the Eurozone or sanctions against Iran do occur on July 1st, we may see continued long liquidation selling in Crude Oil capping any rally attempts as traders exit "risk" positions and move towards gaining liquidity during the uncertainty surrounding global events.

Technical Notes

Looking at the daily chart for July Crude Oil, we notice prices holding well below both the 20 and 200-day moving average, giving both long and short-term Oil bears the edge. The 14-day RSI has failed to move out of oversold territory despite Tuesday's early rally attempt and currently reads a weak 26.18. Traders who follow Fibonacci retracements may note that prices are hovering around the 61.8% retracement level. Oil bulls must see prices hold this level or a test of the 78.6% retracement level near the 84.50 area increases. Near-term support is seen at last week's low of 89.28, with resistance found at the 20-dy moving average, currently near the 95.75 area.

Mike Zarembski, Senior Commodity Analyst



May 31, 2012

Notes Hit Record Low Yields

Thursday, May 31, 2012

Note futures have had a meteoric rise lately, fueled by toxic debt from Europe and uncertain economic conditions around the globe. However, traders can't help but wonder how low yields will go before US investors throw their hands up and move to potentially higher yielding assets. The situation for overseas investors is not as cut and dried, as exchange rates could dictate money flow. Some traders may perhaps wish to consider entering into a bear call spread, such as selling the July T-Note 135 calls and buying the July 136 calls for a credit of 0-10, or $156.25. The maximum profit would be the initial credit and the trade risks $843.75.

Fundamentals

Note and Bond prices continue to rise due to strong foreign demand, as investors head for higher ground. While US investors point to the record low yields in the 10-Year Note, foreign investors may benefit from the exchange rate. This is especially true in the Eurozone, where sovereign debt from some member states is beginning to look like high yield bonds. The departure of Greece from the Euro sets a precedent and others could follow. There has been some safe haven buying from US investors who are uncertain in the near-term future of the stock and commodity markets and prefer some sort of yield, however small, to simply sitting in cash.

Technical Notes

Turning to the chart, we see that the September 10-Year Note pushed to new highs yesterday. Prices quickly fell back into the prior trading range in the 132-134 range in early trading today. It is interesting to note that the RSI indicator has been showing bearish divergence from prices over the past two months. This can be seen as a negative for prices in the future, however, the divergence can last months and is difficult to time on its own. Traders may want to keep an eye on the chart for a reversal pattern.

Rob Kurzatkowski, Senior Commodity Analyst