« May 2012 | Main | July 2012 »

June 2012 Archives

June 1, 2012

Treasury Bond Futures Trade Above 150-00

Today's Idea

Picking a top in an historic bull market like we are seeing in U.S. treasuries is a difficult proposition. This is especially true in the late stages of a bull market as remaining weak shorts run for the exits and prices rally sharply, just before the "gravity effect" takes hold and prices collapse, setting highs usually not seen again for years. Though it is still too early to say if U.S. treasuries are in the final stages of the bull market, some traders who are considering establishing a short position may perhaps wish to consider exploring buying puts in Treasury Bond futures options. By buying puts outright, a trader knows the risk involved in the trade is limited to his total investment in the put purchase. An example of this trade would be buying the September Bond 146 puts. With the September futures trading at 150-17, the Sep 146 puts are trading at 1-40, or $1,625 per option, not including commissions. The total investment in the put would be the maximum potential risk on the trade, which will be profitable at option expiration in late August should the September futures be trading below 146-00 minus the premium price paid for the put.

Fundamentals

The U.S. Bond market bulls gained new life, as continued uncertainty out of Europe and disappointing U.S. Economic Data propelled traders to bid-up Treasury Bond futures prices above the 150-00 level and new all-time highs. Bond prices soared on Wednesday, as many traders begin to show great concerns about the stability of the Spanish banking system. This came on top of continued talk of Greece leaving the Euro. The Bond rally continued on Thursday, after U.S. jobless claims rose by 10,000 last week to 383,000, which was the highest level in 5 weeks. In addition, the ADP employment report showed only 133,000 private sector jobs were created last month, which is well below the 157,000 jobs that was the consensus estimate. These disappointing jobs figures may be setting up traders to revise lower their estimates for this morning's non-farm payrolls report for May. The current consensus is for a gain of between 150 and 175 thousand jobs last month, which is a moderate increase after April's dismal 115 thousand jobs gain. All the gains are expected to occur in the private sector, as both cash-strapped state and local governments continue to shed public sector jobs. Speculators have added to their net-long position in U.S. Treasury Bond futures, with the most recent Commitment of Traders report showing non-commercial traders (large speculators and funds) added 43,760 new-net long positions for the week ending May 22nd. This was before the recent price rally, which seems to have generated new enthusiasm for U.S. government debt to the detriment of both equities and commodities. Bond prices may also be getting support from short-covering by those looking to "pick a top" in this historic bull market, though a top may not appear until prices go "parabolic", which has not yet occurred at this point in time.

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we notice prices moving nearly straight-up since the "bear trap" was sprung back in March of this year. Prices are holding nicely above the 20-day moving average, and until we see a close below this indicator, it may be difficult to call an end to the recent up move. The 14-day RSI has moved into overbought territory, with a current reading of 74.45. Please note a possible bearish divergence is forming in the RSI, and should the non-farm payrolls report be positive, that may be the catalyst for a much needed technical correction. Being in uncharted territory, Thursday's contract high of 150-26 should be viewed as the next resistance level, with support seen at the 20-day moving average, currently near the 146-17 area.

Mike Zarembski, Senior Commodity Analyst


June 4, 2012

Disappointing May Payrolls Roil Futures Markets

Monday, June 4, 2012

The E-mini S&P 500 futures market is at a crossroads, as the index is hovering right around the 200-day moving average that many long-term traders view as the benchmark to determine whether a market is in a bull or bear market phase. Though the initial reaction by traders was to sell stock indices, we may see a market rebound in the next few weeks as the call for further Fed easing measures grows louder and "bargain hunters" emerge, as the belief is that some of the further liquidity being placed into the economy by the Fed may end up in the equity markets.

Fundamentals

Weaker than expected ADP employment data and rising jobless claims lowered traders' expectations for Friday's non-farm payrolls report. However, the numbers surpassed even the most pessimistic of analysts' forecasts, as U.S. Labor Department reported payrolls grew by an anemic 69,000 in May, which is well below the 157,000 jobs gain that analysts and traders were expecting. Even the monthly revisions were disappointing, as April's figures were revised downward from 115,000 to 77,000, and March's totals were lowered by 11,000 jobs. The unemployment rate ticked up to 8.2%, which is the first such increase in nearly a year. To put the numbers into some prospective, it is estimated that the U.S. economy needs to add at least 250,000 jobs per month to make a dent in the unemployment rate. An average gain of 150,000 jobs is needed just to keep up with the population growth. Markets reacted sharply after the report was released, with equity prices falling nearly 2%, the June E-mini S&P 500 falling to its lowest levels since January, and the Dow Jones Industrial Average falling below the widely watched 200-day moving average. Traders continue to flock to the "safety" of U.S. Treasuries, with the most active September Treasury Bond futures trading above the 152 handle for the first time in history. Commodity prices continue to fall, with the Energy futures down between 2 and 3% in early trade Friday. The one exception was Gold, which surged over 2%, and the yellow metal once again regained some "safe haven" status, as the U.S. Dollar was weak against the Japanese Yen and even the beleaguered Euro. The weak employment picture renewed calls from some analysts and economists for further monetary policy easing by the Federal Reserve. Fed Fund futures have now pushed back any chance of a Fed rate increase all the way out until November of 2014. So unless we see a sharp turnaround in the employment picture this summer, it appears that the U.S. may be mired in a "jobless" recovery going into the elections in November.

Technical Notes

Looking at the daily continuation chart for the E-mini S& P 500 futures, we notice prices hovering near both the 200-day moving average (MA) and the 38.2% Fibonacci retracement level from the October 2011 lows to the March 2012 highs. The 14-day RSI is weak, but not yet at oversold levels, with a current reading of 34.00. If the 200-day MA does not hold, we do not see any major chart support until the 50% Fibonacci retracement near the 1242.00 area. Resistance is seen at the 20-day MA, currently near the 1327.50 area.

Mike Zarembski, Senior Commodity Analyst


June 5, 2012

Crude Inventory Draw on the Horizon?

Tuesday, June 5, 2012

Crude Oil futures find themselves higher for the second consecutive session, as many traders expect this afternoon's API and tomorrow's EIA inventory reports to show a drawdown for the first time in 11 weeks. Mounting inventories and worsening economic conditions have caused prices to tumble over $20 in only a month's time. Some traders may view this as excessive, which could trigger some short-covering. However, it may take a shift in fundaments to trigger anything other than short-covering or short-term buying. Technically, the recent rapid sell-off has caused the market to move into oversold levels. This suggests the market may be ripe for short-covering, but some traders may wish to wait for some sort of chart confirmation.

Fundamentals

Crude Oil futures are higher this morning, as many traders expect inventory levels to drop for the first time in almost three months. Refiners likely drew down stocks to prepare for the peak driving season. The bounce in prices can also be seen as technical, as the recent sell-off caused the market to slip into oversold conditions. Fundamentally, traders have little to point to that can be seen as positive. Virtually every major economy around the globe is faced with major challenges to growth. The emergency call between G7 leaders over the European debt crisis does little to invoke investor confidence and could hurt demand for the foreseeable future. Crude Oil tends to be a very forward looking market, but with no end in sight for the global economic woes, it is difficult to see much, if any, optimism from the bull camp.

Technical Notes

Turning to the chart, we see the July Crude Oil contract in a freefall for the past month. The market has blown threw several key support levels, but prices have held above relatively minor support near the 80.00 mark. The relative lows at 75.00 may provide stout support. On the upside, prices may need to cross back above the 85.00 and 90.00 resistance levels to alleviate some of the selling pressure the market has seen. It is interesting to note that the RSI indicator has turned flat to slightly higher, forming a double-bottom. This suggests prices could be firmer in the not to distant future.

Rob Kurzatkowski, Senior Commodity Analyst


June 6, 2012

Corn Futures Prices Choppy on Mixed Weather Forecasts

Wednesday, June 6, 2012

The lack of a weather premium in new-crop Corn futures prices may be setting the stage for a mid-season rally, especially now that large speculative traders have reduced sharply their long positions in Corn, and dry conditions have spread to the two most important Corn producing states.

Fundamentals

New-crop December Corn futures continue to move sideways, as conflicting fundamentals are keeping both bulls and bears from becoming too aggressive in the market. First, we have the emerging U.S. Corn crop off to a good start, with the most recent USDA Crop Progress report showing 72% of the U.S. Corn crop is rated good/excellent, which is slightly above the 5-yr average. However, parts of the Midwest are becoming rather dry, with the U.S. Drought Monitor showing most of Iowa and Illinois, which are the two largest Corn producing states, abnormally dry -- or even in a moderate drought. The 6-10 day forecasts are calling for above normal temperatures throughout the Midwest, with precipitation expected to be normal for this time of year. Should a hotter and dryer forecast emerge, this could force some traders to lower their forecasts for a potential record U.S. Corn harvest this year. Currently, many traders seem hesitant to price a "weather premium" into prices, given the "risk-off" mentality that has pervaded the commodity markets due to economic concerns in Europe, China and even the U.S. in light of the recent dismal U.S. employment data. In addition, Brazil's government crop forecasters raised the country's Corn crop production estimate to 11 million metric tons, which was viewed as bearish for Corn prices. The most recent Commitment of Traders report shows continued long liquidation selling by large speculators dropping nearly 42,000 contracts as of May 29th. While many speculators are shedding long positions, some commercial traders have turned net-long Corn futures, which may be signaling that the recent price declines are becoming overdone.

Technical Notes

Looking at the daily chart for December Corn, we notice prices making a series of lower highs and lower lows since the contract highs were made back in August of 2011. Prices are beginning to hover on both sides of the 20-day moving average, keeping the short-term trend in flux. Longer-term, we would need to see a nearly 60-cent rally to test the longer-term 200-day moving average. The 14-day RSI is currently neutral to slightly weak, with a current reading of 43.52. Support is seen at the May 11th low of 499.00, with resistance found at the May 21st high of 549.50.

Mike Zarembski, Senior Commodity Analyst


June 7, 2012

Chinese Purchases Breathe Life into Beans

Thursday, June 7th

Soybean bulls have had some bounce to their step following recent sessions, as outside markets and fundamentals have firmed-up the Bean market. Chinese purchases have been strong lately, so some traders may want to keep a close watch on the export sales figures to see if the trend continues. The carryout and acreage figures in the upcoming USDA data on Tuesday will also be of utmost importance for traders. Technically, the Soybean chart hints a near-term reversal, although the scope of such a reversal is difficult to measure.

Fundamentals

Soybean futures are up for the third consecutive session on stronger purchases from China. Beans, like the broad commodity market, have also benefited from firmer equity prices in recent days, as many traders appear to be taking on more risk. Much of the core growing region is expected to see some dry weather until the middle of the month, which could stress the crop. Next week's USDA supply/demand is expected to show ending stocks of old crop Beans shrinking once again on strong exports. If that turns out to be the case, new crop prices could be sensitive to even small shifts in weather conditions.

Technical Notes

Turning to the continuous chart, we see the July Soybean contract flirting with the 10-day moving average, but unsuccessful in breaking though to the downside. This can be seen as a positive, or at the very least, not a negative in the near-term. Friday's candle formed a spinning top, indicating the market may reverse. The recent strong sessions have resulted in prices breaking through the recent downtrend line. The recent downward crossover of the 20 and 50-day moving averages can be seen as negative.

Rob Kurzatkowski, Senior Commodity Analyst



June 8, 2012

Sugar Price Bounce off Lows on Weather Concerns

Friday, June 8, 2012

Both front month world raw Sugar futures (traded in New York) and white Sugar futures (traded in London) are now trading at a premium to the next contract month out. This may be a sign that global supplies are becoming tight and prices may need to rise, at least in the near-term, to draw out supplies to meet current demand.

Fundamentals

Sugar futures have rebounded sharply during the past few sessions, with the lead month July futures once again attempting to trade above the 20-cent level. Heavy rainfall has put a halt to the Brazilian sugarcane crush, and many traders now fear that near-term supply issues may occur. This is being reflected in the spread market, as the soon-to-be-expired July futures are now trading at a premium to the October futures, which can be viewed as sign that supplies are becoming tight and buyers are willing to pay a premium to obtain immediate supplies. In order to extend the price rebound, traders likely will need to see signs that the global economic environment is stabilizing, which so far has not necessarily been the case. However, the recent announcement of an interest rate cut by the People's Bank of China and possible stimulus measures by the Federal Reserve may start to steer traders back towards commodities and other "risk" assets. Small speculators have been holding a record net-short position in Sugar futures, and should we start to see prices forming a bottom, a significant short-covering rally may not be out of the question.

Technical Notes

Looking at the daily chart for July Sugar, we notice prices attempted to move above the 20-day moving average, however late session selling sent prices back below this widely-watched indicator the market closed back below the 20-cent level. Trading volume was extremely high on Thursday, mostly due to a move above 2-week highs, but also due to a high volume of spread trading, as positions are being rolled out of July and into the October contract. The 14-day RSI has moved to neutral territory, with a current reading of 43.61. The recent high made on May 7th at 21.17 looks to be the next major resistance point for July Sugar, with support found at the June 4th low of 18.86.

Mike Zarembski, Senior Commodity Analyst



June 11, 2012

Bulls and Bears Battle for Control in Wheat Futures

Monday, June 11, 2012

The Wheat futures market has been a "follower" in the grain complex, taking its price queue from the direction of the Corn market, and even moving in tandem with the "risk-off" and "risk-on" price movements of the commodity markets in general. Now with the winter wheat harvest under way, seasonal harvest pressure may overwhelm bullish global production estimates, especially given market participants' current "fear" of "risk" assets such as commodities, while the European financial crisis remains unresolved.

Fundamentals

Wheat futures prices have become volatile lately, as many traders' concerns about lower global production are overshadowed by economic concerns in the U.S., Europe, and China. Many analysts expect the USDA to have lowered their estimate for U.S. Winter Wheat production by 50 million bushels to 1.644 billion bushels when the June crop production report is released on Tuesday, as dry weather in the western plains is expected to have lowered yields. Globally, the picture is not much better, as less than ideal weather has played havoc with Wheat production in both China and Russia. This may lead the USDA to lower global production by as much as 6 to 8 million tons. Though the production totals appear to favor the bulls, continued uncertainty surrounding Europe and its economic future has continued to weigh negatively on commodity prices, and in many cases, has overwhelmed what may be perceived as bullish fundamentals for a particular commodity. For Wheat, lower prices for Corn has shifted animal feed usage away from Wheat now that Corn has once again become "cheaper". Wheat prices also have to contend with harvest selling pressure, as producers and commercial grain elevators sell futures to hedge incoming supplies. This tug-of-war between bulls and bears may continue in the coming weeks until we see a trend emerge.

Technical Notes

Looking at the daily chart for September Wheat, we notice prices have retraced nearly 80% of the steep rally seen in the Middle of May, when prices climbed by over $1.20 per bushel in only 5 trading days. Prices are now attempting to test the 20-day moving average, which so far has acted as near-term resistance. Volume has shown a sizable increase lately, though most the increase may be due to the rolling of positions from the July futures ahead of first notice day at the end of June. The 14-day RSI has turned neutral, with a current reading of 49.67. 629.25 looks to be near-term support for September wheat, with resistance found at the 20-day moving average, currently near the 659.75 area. 86.

Mike Zarembski, Senior Commodity Analyst



June 12, 2012

"Spailout" No Savior for Crude

Tuesday, June 12th

Crude Oil futures have seen their share of pain recently, as economic conditions around the globe figure to get worse before they get better. There is virtually no optimism that the "Spailout" will prevent contagion. Prices have remained fairly stable over recent sessions due to some shorts being covered and bottom-pickers hoping to have found an end to the slide. Some traders may want to keep a close eye on the OPEC output decision and also inventory reports today and tomorrow from the API and EIA. They may the deciding factors for the near-term direction of the market.

Fundamentals

Crude Oil futures are lower for the fourth consecutive session, as many traders are not buying into the Spanish bailout. There is some optimism that the bailout of Spain may give the nation time to restructure its banking sector. However, there is little hope that it will stop debt contagion throughout the region. Saudi Arabia has hinted that OPEC may need to raise its output levels. The figure that has been thrown around was an increase of 500k barrels a day, which equates to an increase of roughly 1 2/3 percent. In addition to the economic fears and possible OPEC output increase, many traders are expecting the highest level of gasoline inventories in 5 weeks.

Technical Notes

Turning to the chart, we see the July Crude Oil contract at a very important level just north of the 80 mark. Failure to hold this level would signal a continuation of the downtrend. On the flipside, if prices are able to hold and move above 85.00, the market may be able to gain some momentum, as this would signal a small W bottom. Momentum is showing a bit of positive divergence from the RSI, hinting at possible near term strength.

Rob Kurzatkowski, Senior Commodity Analyst

June 13, 2012

Muted Reaction by Traders to USDA Report

Wednesday, June 13, 2012

Tuesday's USDA Supply/Demand report held few surprises for traders, with the general consensus being that the report was moderately bullish for Soybean futures and neutral to bearish for Corn futures. Many traders will likely now turn their focus to longer-range weather forecasts and the quarterly grain stocks and planted acreage reports due out at the end of June.

Fundamentals

After a brief bout of volatility just after the USDA released its June Crop Production & Supply/Demand report, trading activity turned quiet, as traders noted few major changes in the Government's data. This report was being closely watched by both traders and industry participants, as it was the first major USDA report to be released during market trading hours.

The Soybean figures were viewed by analysts as the most "bullish" in the data, as the USDA expects tighter U.S. supplies. Ending stocks estimates for 2011-12 were lowered by 35 million bushels from the May report. Much of the decline was due to rising exports, with the USDA raising U.S. Soybean export totals by 20 million bushels. New-crop ending stocks estimates were lowered by 5 million bushels to 140 million bushels. New-crop Soybean prices remain high due to concerns that dry weather may hurt average yields, which given tight global inventories, seem to deserve a "risk premium" during the growing season.

Some traders were more bearish on the data for Corn futures, as the USDA kept 2011-12 ending stocks unchanged from the May estimate at 851 million bushels. Many traders were expecting a 20 to 30 million bushel cut in ending stocks. The USDA did raise its Corn usage estimate for Ethanol production by 50 million bushels, but offset this by lowering U.S. Corn exports by an equal amount, citing increased export competition, especially from Brazil.

Technical Notes

Looking at the daily chart for November Soybeans, we notice what appears to be a large "bull flag" formation, with prices now testing the upper boundary of this technical pattern. Prices are now well above both the 20 and 200-day moving averages, giving the technical advantage to both long and short-term bean bulls. The 14-day RSI is neutral to moderately supportive, with a current reading of 57.15. A breakout above the upper boundary of the "bull flag" may set-up a test of the May 2nd high of 1394.50. Support is seen at the 20-day moving average, currently near the 1295.75 area.

Mike Zarembski, Senior Commodity Analyst



June 14, 2012

Wheat to Stay Range-Bound?

Thursday, June 14th

The combination of bearish fundamentals and outside market weakness has taken its toll on Wheat. The Spring Wheat harvest is well underway, without as much as a hiccup. Barring a massive shift in weather conditions, fundamentals should remain bearish. Some traders may choose to focus their attention on currency movements to gauge short-term swings in Wheat prices. Some traders may also want to keep an eye on the fund position. Currently, funds have a fairly substantial short position, which could limit downside.

Fundamentals

Wheat prices have been hurt by very large crop sizes in virtually every major producing country. In the US, the Spring Wheat crop in Kansas is 53% harvested, compared to the 20 year average of 4%. Despite the good progress in the US, there are still some who believe that the actual crop in the Russia, Australia and Europe will come in under expectations. India, who is the world's second largest producer of Wheat, is in its sixth consecutive year of record crops. However, this is a mixed blessing for farmers, as there is insufficient storage for the grain, and the country risks losing 6 million metric tons to spoilage.

Technical Notes

Turning to the chart, we see the July Wheat contract trading in the middle of the 575-675 trading range the market has found itself in for the past nine months. It is interesting to note that momentum has moved lower, even as prices have remained steady. The RSI indicator is near oversold levels, which could support prices in the near-term.



June 18, 2012

Is the "Loonie" Ready to Resume its Flight?

Friday, June 15, 2012

The Canadian Dollar's recent decline may provide an opportunity for long term bulls on not only the Canadian economy, but for commodities as well, especially once the fear of economic turmoil out of Europe subsides.

Fundamentals

Sometimes the actions of traders in the financial markets don't seem to make sense. A case in point is the sell-off in the value of the Canadian Dollar(C$) vs. its larger neighbor to the south. The pundits blame the fall of the Loonie on a "risk off" or a "flight to safety" mentality by traders and investors due to the continued economic concerns regarding Europe and a slowdown in economic growth in China. Many traders seem to still consider the Canadian Dollar as a "commodity currency" despite its sound banking system, free market economy, higher interest rates, and solid employment picture. Ironically, some of the funds being moved out of the C$ have gone into the Japanese Yen, despite that country's aging demographics, enormous government debt, and recovery from a devastating earthquake/tsunami. Yet this is considered a "safe" asset by market participants. The "risk off" trade has sent front-month C$ futures plunging from nearly 1.0200 vs. the Dollar to 0.9550 in one month's time. Some analysts believe that the commodity bull market has ended and a new downward cycle is about to begin. This has also weighed on the C$, especially as Oil prices have fallen nearly $30 off their recent highs. However, should this call be premature, the Canadian Dollar may be poised for a significant up-move once traders realize that commodity demand has not cratered, and assets move back into "risk-on " trades.

Technical Notes

Looking at the daily continuation chart for the Canadian Dollar futures, we notice prices consolidating after the Loonie fell over 600 pips during the past month. Prices are now hovering near the 20-day moving average (MA), but need to rally nearly 200 pips to test the 200-day MA. The 14-day RSI has rebounded from oversold level, currently reading a more neutral 46.64. The June 4th low of 0.9568 looks to be solid support for the lead month futures, with resistance seen at the 200-day MA, currently near the 0.9899 area.

Mike Zarembski, Senior Commodity Analyst



Natural Gas Futures Spike on Bullish Storage Data

Monday, June 18, 2012

The sharp run-up in Natural Gas prices may be short-lived, as the market appeared oversold and was poised for a short-covering rally on any "bullish" news. Unless we start to see a dramatic drop in production or a steady increase in demand, especially from industrial users, hedge selling on any rally attempt to near the 3.000 level for front-month futures may overwhelm speculative buying, especially if it is mostly short-covering in nature.

Fundamentals

After selling off steadily for the past 4 weeks, Natural Gas futures exploded to the upside, rallying over 14% on a bullish EIA storage report released last Thursday. The weekly report showed that only 67 billion cubic feet (bcf) was put in storage last week, which is well below the 75 bcf gain most analysts were expecting and caught bearish traders by surprise, sparking a massive short-covering rally. Many analysts chalked up the more moderate gains to higher than expected demand, especially from power generators, many of which are switching from coal to natural gas for power production. The EIA estimates that utilities will use 20% more Natural Gas in 2012 due to "cheap" Natural Gas prices. In addition, some traders noted the weather forecasts calling for more above normal temperatures in the Midwest, with Chicago expected to see 6 consecutive days above 90 degrees. Though recent fundamentals were deemed bullish for Natural Gas in the short-term, Gas in storage is still at record levels for this time period, and we will still need to see increased demand to alleviate potential storage issues later this year.

Technical Notes

Looking at the daily chart for July Natural Gas, we noticed prices retreated from recent highs nearly 90% of the move from the April contract lows. Prices are now running into some resistance at the 20-day moving average (MA), which is also near the 50% Fibonacci retracement level. The 14-day RSI has turned neutral, with a current reading of 51.61. This past Thursday's low of 2.168 looks to be support for July Natural Gas, with resistance found at the 100-day moving average, currently near 2.578.

Mike Zarembski, Senior Commodity Analyst



June 19, 2012

Sugar Fundamentals Anything But Sweet

Tuesday, June 19th

Sugar fundamentals remain weak, as global surpluses enter their third year. However, oversold conditions and strong equity prices have injected some life into the market in recent sessions. Can these factors provide enough momentum for the market to mount a sustained rally?

Fundamentals

Australian Sugar exports are expected to climb 13%, adding to the global supply glut of the sweetener. Globally, Sugar is expected to see its third consecutive surplus, suggesting Sugar prices may continue to feel pressure. The US Dollar has been a bit softer in recent sessions, as equity prices have rallied. The resulting favorable exchange rate for the real suggests that Brazil may continue dumping Sugar onto the world market, creating a glut in the spot cash market. Despite Brazil's readiness to sell supplies to take advantage of favorable currency conditions, the country has seen a severe reduction in production in its Center South region to the tune of 19%. The country is hoping for dryer weather conditions in order to complete its harvest. Equity markets could act as a supporting force for Sugar, even if fundamentals remain soft.

Technical Notes

Turning to the chart, we see the July Sugar contract reversing sharply after testing support at the 19.00 level. Prices have broken through resistance at 21.00 in early trading. The next significant resistance level can be found at 22.00. The recent up-move has resulted in prices crossing above the 50-day moving average. The RSI indicator is nearing overbought levels, which coupled with more significant resistance looming may suggest the pace of prices may be slowing down.

Rob Kurzatkowski, Senior Commodity Analyst



June 20, 2012

Drought Concerns Send Grain Futures Soaring

Wednesday, June 20, 2012

The beginnings of what may become a rather serious drought in the southern and eastern Corn Belt may trigger grain traders to begin pricing a "weather risk premium" into futures and especially options on grain futures as concerns will now center on how much Corn and Soybean yields will be hurt by the rough start to the growing season. This season is especially critical given tight global old crop supplies.

Fundamentals

The anticipation of bumper U.S. Corn and Soybean crops are being challenged by Mother Nature, as hot and dry weather has plagued the Midwest early in the growing season. Moderate drought conditions are spreading throughout the Corn Belt, with the important grain producing states of Iowa, Illinois and Indiana among the hardest hit. Weather forecasters are not holding out much hope for improved conditions in the near future, with the 6 to 10-day forecasts calling for above normal temperatures and below normal rainfall. Growing conditions are already beginning to deteriorate, with the USDA weekly crop progress report showing 63% of the U.S. Corn crop rated good to excellent. This is down 3% in just a week, and is 7% below this time last year. For Soybeans, only 56% of the crop is rated good to excellent, vs. 60% last week and 68% a year ago. With U.S. ending stocks already tight, some traders were counting on record production for both Corn and Soybeans this year, though we will need to see whether conditions begin to improve soon in order to meet this goal. Many traders will focus closely on the USDA planted acreage report due out at the end of June to see exactly how much acreage was dedicated to both Corn and Soybeans this season, with the hope that huge acreage can help offset any drought damage to yields and prevent potentially short supplies going into the new year.

Technical Notes

Looking at the daily chart for December Corn, we notice prices soaring during the past two sessions, with only the 200-day moving average (MA) and the exchange 30-cent limit limiting further gains. Momentum as measured by the 14-day RSI has turned positive, with a current reading of 60.97. Resistance is seen at the aforementioned 200-day MA, currently near the 564.25 area. Should this technical barrier give way, we could see a test of the 575.00 area. Support is seen at the 20-day MA, currently near the 523.25 price level.

Mike Zarembski, Senior Commodity Analyst


June 22, 2012

Chinese Manufacturers Put Crude Demand in Doubt

Thursday, June 21, 2012

Crude Oil futures have been hurt by a supply glut and soft economic conditions. The continued weakness in the Chinese manufacturing sector has no end in sight and could result in much lower petroleum consumption than previously thought. Technically, the Crude Oil chart looks as though it could be close to confirming a bearish continuation.

Fundamentals

Crude Oil futures briefly traded below the $80 level in overnight trading, as the market faces growing supplies and slow growth. Yesterday's EIA data showed an increase in Oil inventories of 2.90 million barrels to 387.3 million barrels, which is the highest level since 1990. Crude production is moving along at a brisk pace of 6.35 million barrels, but the problem is that consumers are not using the products (Gasoline and Distillates), which have seen an inventory builds themselves. In a growth economy, a supply glut is not considered a major problem, as it can be worked down. However, the world is not in a growth phase. China's manufacturing activity has shrunk for the eighth consecutive month with no end in sight, the Eurozone is expected to contract 0.1 percent, and the US is expected to grow more slowly than real inflation. The Eurozone has continued to face debt problems, which are expected to account for a decrease in Oil consumption of 340,000 barrels a day in 2012 and 230,000 barrels a day in 2013. For the bull camp to regain momentum, or at the very least stop the slide, the economy needs to surprise to the upside, or Crude supplies would need to be squeezed.

Technical Notes

Turning to the chart, we see the August Crude Oil contract continuing to trade in the sideways consolidation range between 81.00 and 86.00, but never closing above 85.00. Breaching the lower end of the range at 81.00 would signal a continuation of the downtrend. A solid breakout above the 86.00 could turn the tide for the market. It is interesting to note that the RSI has been climbing since late May, which could indicate a shift in the downtrend in the future.

Rob Kurzatkowski, Senior Commodity Analyst


Cotton Price Volatility Now Moves to the Downside

Friday, June 22, 2012

With old-crop July Cotton headed toward first notice day, some traders will turn their focus to the new-crop December futures, where the potential for a rebound in production out of Texas, which is the largest Cotton producing state in the U.S., and signs of a hefty global surplus this coming season may set a negative tone for new-crop Cotton futures early in the growing season.

Fundamentals

Cotton traders have been on a wild ride the past few weeks, especially in the old-crop July contract. First, prices rallied nearly 25 cents per pound, as a huge purchase by China sparked a massive short-covering rally. Commercial traders (exporters) were forced to scramble to obtain old-crop supplies to meet China's demand. However, with prices at 2-month highs, profit-taking selling has emerged, as it appears that many traders are starting to believe that China's near-term needs have been met -- especially after the release yesterday of another disappointing manufacturing purchasing managers' report, with the PMI index remaining below 50, which is a sign of contraction. In addition to Chinese economic growth concerns, there are thoughts that for the 2012-13 marketing year, Cotton ending stocks could be at or near record levels. This has weighed more heavily on the new-crop December contract, but spillover selling was also noted in the July futures. Daily price activity in July futures have become very volatile, with several limit-up and limit-down days occurring recently -- especially as traders are busily rolling out their positions ahead of first notice day on June 25th. With the focus about to turn to new-crop futures, volatility may actually start to diminish somewhat, unless we see adverse weather conditions start to affect the major growing regions in the northern hemisphere.

Technical Notes

Looking at the daily chart for December Cotton, we notice prices falling once again below the 20-day moving average after finally crossing above this short-term indicator for the first time in over 1 month's time this past week. The 14-day RSI has shifted lower and is holding just above oversold levels with a current reading of 38.51. There was what appeared to be a 'V" bottom formation on the daily chart; however, Thursday's limit-down move may have negated this bottoming technical pattern. 75.00 looks to be the next resistance level for December Cotton, with support found at the contract low of 64.61.

Mike Zarembski, Senior Commodity Analyst



June 25, 2012

Coffee Traders Well Caffeinated as Volatility Rises

Monday, June 25, 2012

After falling nearly $1 per pound since the start of 2012, Arabica Coffee futures prices appear to be trying to form a near-term bottom, with prices looking to begin a consolidation phase as both buyers and sellers are being stymied within a 10-cent trading range during the past week.

Fundamentals

After a 4-week span of a slow and steady decline in prices, Arabica Coffee futures price volatility levels have spiked, with daily 8 to 10-point ranges seen last week. Some of the increased volatility may be tied to outside forces, as a "risk off" mentality has become widespread, leading to a sell-off in the entire commodity sector. However, Coffee's fundamentals are starting to look a bit less bearish, as a rainy forecast for parts of Brazil may delay the country's Coffee harvest. In addition, Arabica Coffee prices are not keeping up with the strong market for Robusta Coffee, which may spur arbitrage traders into looking at Arabica/Robusta spreads. Brazil is also moving into the down cycle for Arabica production in the upcoming season, which may lead to longer-term support for next season's futures. Both large and small speculative traders have been net-short Arabica Coffee futures, with the most recent Commitment of Traders report showing a combined 12,576 net-short speculative position as of June 12th. The wild price swings of late may be a sign that the recent down move may be near an end, with commercial traders becoming interested buyers near the 150.00 level in the September futures. Hedge selling pressure may emerge on sharp rallies, which may help to keep prices range bound for a period of time.

Technical Notes

Looking at the daily chart for September Coffee, we notice daily trading ranges widening during the past few sessions, as commercial buyers are supporting prices near 150.00 and hedge selling is emerging near the 160.00. Between these prices, short-term traders appear to be in control, moving the market within this price range. Technical traders will note that the 20-day moving average is being tested on the upside, but Coffee bulls have been stymied so far. The 14-day RSI has emerged from oversold levels to a weak to neutral reading of 39.95. Recent lows at 150.10 look to be support for September Coffee, with resistance seen at the June 20th high of 161.50.

Mike Zarembski, Senior Commodity Analyst


June 26, 2012

Heat Wave Threatens Corn Crop

Tuesday, June 26, 2012

Corn futures have been one of the hottest markets lately, sparked by hot, dry weather, which could reduce what was previously expected to be a record crop. The next week to two weeks are going to be very important to the health of the Corn crop, so traders will be closely watching weather conditions. Demand has been relatively soft, and wetter conditions in China could slow export demand from the Asian nation.

Fundamentals

Corn futures have caught fire in recent sessions due to the about-face in weather conditions in the US. The early warmth and good growing conditions of spring have given way to dry, drought-like conditions. The next 10 days are going to be vital for Corn, as intense heat and dry conditions are expected to stress crops. Temperatures are forecast to hit triple-digits across much of the Midwest. Any moisture would offer relief from the parched conditions seen recently. China is expected to see some moisture in the coming days, which should lessen the stress on crops there and take some of the pressure off US growers. The weekly Corn Conditions report showed that only 56% of Corn was rated good/excellent, compared to the 10 year average of 69%. Traders will want to keep an eye on the weather forecast, as a cooler and or wetter shift may slow the bulls' momentum. Weather models have shifted for the eastern Corn Belt, hinting at possible moisture and warm weather, but not extreme, temperatures. The western portion of the Corn Belt is the major concern for traders, as that is the region which is expected to suffer the brunt of the heat wave's extremes.

Technical Notes

Turning to the chart, we see the December Corn contract taking-out resistance at the 550, 575 and 600 levels. Relative highs around the 615.00 level present the next test for the market. The recent rally has brought about overbought conditions on the RSI, which may slow the rally down. If the market is able to break-out above the 615.00 level, significant resistance at the 675.00 level could be tested.

Rob Kurzatkowski, Senior Commodity Analyst


June 27, 2012

Drought Condition in the Midwest Weighing on Feeder Cattle Prices

Wednesday, June 27, 2012

Feeder Cattle futures often trade inversely to Corn futures, as high feed costs weigh on profit margins for livestock producers, lessening the desirability of increasing herd sizes. Given the potentially significant drought we are seeing in the Midwest this year, feed costs may stay high in the coming months, capping potential rally attempts in nearby Feeder Cattle futures in 2012.

Fundamentals

June has been a tough month for anyone long Feeder Cattle futures, as prices have fallen to 2012 lows. The catalyst behind the steep sell-off has been a bout of very hot and dry weather across the Midwest and Great Plains, with temperatures above 100 degrees becoming the norm. This has sparked fears that the U.S. Corn crop may not live up to prior expectations of record production this season. A limit-up price move in Corn futures triggered an opposite move in the Feeder Cattle market, with several contracts trading down the 300-point daily price limit. The current drought has wreaked havoc on pasture land and forced producers to move the livestock herd off to feed lots earlier than normal. Additionally, high feed costs are keeping young cattle on feed for shortened time periods, as producers are sending them to market earlier than normal. Many buyers are now reluctant to pay high prices for Cattle given the onslaught of supplies being sent to market. Though current conditions are considered bearish for near-term futures, we could see tighter supplies of market-ready Cattle next year, as breeding stocks are trimmed this season and a resumption of the bull market in Cattle could be on the radar in 2013.

Technical Notes

Looking at the daily chart for August Feeder Cattle, we notice how quickly prices declined during the past few sessions, as sharply higher Corn prices sent Feeder bulls fleeing the market. The 14-day RSI has moved into oversold territory, with a current reading of 24.73. We do see some support in the August contract near the 145.000 area, with resistance found at 154.650 .

Mike Zarembski, Senior Commodity Analyst



June 28, 2012

Gold Tug-O-War

Thursday, June 28, 2012

Gold futures have been held back by the currency markets and slow economic growth. Defensive buying of the metal has prevented prices from dropping precipitously, as plenty of uncertainty remains over the fate of the Euro and EU. The opposing forces could keep the market moving sideways. Technically, the failed upside breakout hints at consolidation.

Fundamentals

Gold futures have had a lackluster showing lately, despite the troubles facing Greece and the rest of Europe. Weak economic growth has diminished Gold's appeal as an inflation hedge. To have inflation, you first need growth. Some forecasters are suggesting that the Chinese GDP could drop to the mid 7% area, which would be the slowest the Chinese economy has grown since the late 1990's. The West is faring even worse, as Europe is expected to have an economic contraction, and the US is expected to grow at a rate of less than 2%. Inflation in the US is not expected to exceed 1.5 to 2.0%. Because of the uncertainty surrounding the future of the Euro, the US Dollar has remained firm, which has acted as a barrier to Gold's appreciation.

Technical Notes

Turning to the chart, we see the August Gold contract forming a failed double-bottom pattern at the beginning of June. The pattern failed to both make the measured move and signal a reversal of trend. The market appears to be set to trade sideways if it can hold the 1535 level on the downside. The oscillators are giving neutral readings at the moment.

Rob Kurzatkowski, Senior Commodity Analyst


June 29, 2012

Grain Traders Nervous Ahead of USDA Report

Friday, June 29, 2012

The June USDA planted acreage and grain stocks report is notorious for surprising traders and analysts with government forecasts that can vary rather significantly from the pre-report estimates. This year, the Soybean planted acreage figures may be particularly scrutinized, as the report may account for more double-cropped Soybean acres than actually will occur due to poor topsoil moisture in the winter wheat growing areas.

Fundamentals

Many traders typically focus their attention on the USDA's June Planted Acreage and Grain Stocks report given the potential for large price swings after the data is released. However, this year's report may take on more significance given the hot and dry conditions seen early in the growing season. U.S. and global supplies of both Corn and Soybeans are relatively tight this year, and there were high expectations that a large increase in planted acreage would potentially lead to a record harvest and help elevate tight carryout next season. However, the makings of a potentially damaging drought are spreading throughout the central and eastern parts of the Midwest, putting into question the ability to reach trendline or above yields. Some analysts are comparing this season to that of 1988, when an early hot spell sent Corn and Soybean prices soaring in an historic bull market. For Corn futures, many traders are still looking for a large increase in planted acres, with the pre-report estimate running near 95.95 million acres, which is up over 4 million acres from last year. Corn inventories as of June 1st are expected to total 3.182 billion bushels, or nearly 500 million bushels below last year's totals. For Soybeans, the record heat in June is not as critical as that for Corn, as the critical development stage for beans usually does not occur until August, giving some time for the crop to rebound. Many traders now expect U.S. Soybean planted acreage to total about 75.58 million acres, up 600,000 acres from last year. Soybean inventories as of June 1st are expected to total 640 million bushels, up 21 million bushels from last year. Given the current weather situation, any major "surprises" in the USDA's estimates could spark wild price swings; particularly should the data be deemed 'Bullish" by analysts.

Technical Notes

Looking at the daily chart for November Soybeans, we notice the "bull flag" formed from the selloff starting in April through early June has been confirmed, as prices moved above the recent high of 1394.50. There appears to be some near-tem resistance at the 1440.00 level, as rally attempts earlier this week failed to take out this price level. The 14-day RSI is holding just below overbought levels, with a current reading of 63.72. Support for November Soybeans is seen at the 20-day moving average, currently near the 1345.75 area. Resistance is found at the recent high near 1440.00.

Mike Zarembski, Senior Commodity Analyst