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February 2013 Archives

February 1, 2013

Nasdaq 100 Futures Fails to Participate in January Bull Move for Stocks

Friday, February 1, 2013

The nearly 4-year old bull market in the Nasdaq 100 futures is starting to look a bit tired, as this tech heavy index has not mimicked the strong performances of the other major indices to start 2013. It is still too soon to tell if this market will play catch-up and soon post multi-year highs or will lead the broader market lower for an overdue correction.

Fundamentals

Though the performance of U.S. stock market so far this year has been impressive, with the S&P 500 up over 5% in January, after taking a quick glance at the daily charts for the major stock indices, it is quite noticeable that the Nasdaq 100 is definitely lagging behind the performance of the Dow, the S&P500 and the Russell 2000. An obvious culprit contributing to this outlier is the performance of Apple Inc. stock. This darling of the financial media has had a rough start to 2013, falling over $100 per share since January 1st. The relative weakness in the Nasdaq 100 may be reflective of investors' concerns about the health of the tech sector, with Nasdaq 100 stalwarts Intel, Research in Motion, Microsoft, Cisco and Dell among the largest short interest positions on the exchange. Austerity measures being put in place by cash-strapped state and local governments seemed to have put a crimp in public sector spending. This has had an effect on the sales of computers and network equipment as upgrades on infrastructure are delayed. If we shift gears from the fundamentals to the technicals affecting the Nasdaq 100, some indicators are apparent that might be reflecting some headwinds to any market rally in the near future. Among the most important could be the potential formation of a head-and-shoulders top seen on the daily continuation chart. With the value of the Nasdaq 100 index nearly tripling since the major lows were made back in early 2009, it should not be too much of a stretch to believe that a much needed price correction may be in the cards should the September 2012 highs not be put to a test in the coming weeks.

Technical Notes

Looking at the daily continuation chart for E-mini Nasdaq 100 futures, we notice what may be a head-and-shoulders top formation in the making, as the "right shoulder" has failed to test the highs of the "left shoulder" made back in April of last year. Prices are also testing the 20-day moving average (MA), which has acted as strong support on a closing basis since the "chart gap" formed after the New Year's holiday. Since the start of 2013, the Nasdaq futures have been trading in a relatively narrow 80+ point range, with the majority of the month being spent between 2700.00 and 2750.00. We also see a bearish divergence forming in the 14-day RSI, and trading volume has been light so far this year. The January 1st low of 2686.25 looks to be support for the Nasdaq 100 futures, with resistance seen at the top of the recent trading range (2768.75) made on January 23rd.

Mike Zarembski, Senior Commodity Analyst


February 4, 2013

Choppy Trade in Bond Futures Seen after NFP Report

Monday, February 4, 2013

Treasury bond futures have been in a bearish trend since mid-November of last year, with the front month futures falling nearly 10 full points in 2 ½ months. Improving economic data and a surging U.S. stock market are among the major catalysts for waning investor enthusiasm for government debt so far this year.

Fundamentals

Treasury bond futures traders were on a wild ride this past Friday, as a slew of economic reports were released. The most anticipated of the data was the Labor Department's numbers for January Non-farm Payrolls and the January Unemployment Rate. These headline figures were initially a bit of a disappointment, with January payrolls expanding by only 157,000 jobs, when many traders were looking for close to 170,000. The unemployment rate also ticked up by 0.1% to 7.9%, when most analysts were looking for the rate to remain unchanged. However, when delving into the details of the report, the employment picture brightened. Both December's and November's employment figures were revised upward by a combined 127,000 jobs. In addition, the Labor Department's annual benchmark revision, which incorporated newly available tax records, showed 422,000 more jobs were created than previously thought during the April 2011 to March 2012 timeframe. Bond prices initially rallied after the report was released on the belief that jobs growth was still below the levels the Federal Reserve would be looking for prior to any discussion of altering its current accommodative monetary stance. However, the price gains proved short-lived, as in addition to the positive job number revisions, traders saw positive signs for the economy in a better than expected University of Michigan consumer sentiment index reading last month (73.8 in January, vs. 71.3 in December, as well as indications of the continued expansion of the U.S. manufacturing sector, with the ISM January Manufacturing Purchasing Managers Index rising to 53.1 in January, vs. 50.2 the previous month. These overall positive economic reports gave some traders another reason to move funds back into equities and away from government debt such as Treasury bonds in hopes of better returns should the U.S. economy continue to show signs of improvement.

Technical Notes

Looking at the daily continuation chart for U.S. Treasury bond futures, we notice prices failed to hold Friday's early morning rally after the unemployment report was released, as many bearish traders continue to look at rally attempts as selling opportunities. Prices are now well below both the 20 and 200-day moving averages, supporting both the long and short-tem bearish view. The 14-day RSI is nearing oversold territory, however, with a current reading of 33.25. 142-19 is seen as near-term support for March Bonds, with longer-term support seen near the 140-00 price level. Resistance is now seen at the 20-day moving average, currently near the 144-28 price level.

Mike Zarembski, Senior Commodity Analyst


February 5, 2013

Beans Ready to Take Out $15?

Tuesday, February 5, 2013

Soybean futures have been steadily climbing for more than half a month on inclement growing and harvesting conditions in South America. However, weather conditions are shifting, and this could put pressure on prices. Brazil's re-entry into the cash market could result in softer US export demand. Weather developments in South America should be closely monitored over the next two weeks. Technically, the Soybean chart shows overbought conditions as prices approach a critical resistance level, which could result in a failure to overtake the $15 mark.

Fundamentals

Soybean futures have rallied strongly in recent weeks on dry weather in Argentina and wet weather in Brazil. Prices have also been aided by signs that the Fed may continue pumping money into the economy, which could weaken the Dollar and make Bean exports more attractive. While these factors can be seen as bullish, Argentina is expected to receive fairly significant rainfall originating in the southwest and moving to the northeast growing region by the end of the weekend. This could alleviate fears that yields are going to be lower than expected in the South American nation. Plantings are already below average there, so yields are especially important to monitor this year. In Brazil, excessive rain has been a problem, but the growing region is expected to see wet weather, which should aid the harvest there. The cash market has seen US farmers as heavy sellers as prices have risen. Brazil has been absent from the spot market, but the acceleration of the harvest there should result in the nation being a significant factor once again.

Technical Notes

Turning to the chart, we see the March Soybean contract making a run at the $15 mark. The lead month futures contract attempted to push through this level in early and mid December, only to fail to break out. Given the overbought conditions on the RSI, many may question whether the market can sustain sufficient momentum to have a meaningful breakout above this resistance level. Failure to do so could result in range-bound trading between 1375 and 1500.

Rob Kurzatkowski, Senior Commodity Analyst


February 6, 2013

Bearish Traders Sing "The Coffee Song"

Wednesday, February 6, 2013

Coffee futures like many of the "softs" such as Cocoa, Sugar and Cotton are mired in a multiyear long bear market. However, unlike the other New York traded commodities, Coffee is the only one of the "softs" contracts where large speculators are currently holding a net-short position though the total interest among speculators is rather low which may be a sign that the 2-year long bear market may be tiring, with prices consolidating for a time.

Fundamentals

For those readers who are not big fans of Frank Sinatra, "The Coffee Song" is occasionally known by its more famous verse "They've Got an Awful Lot of Coffee in Brazil". This refrain is accurately portraying the fundamental situation in the Coffee futures market, with large old-crop supplies from Brazil and Vietnam currently overshadowing potential supply issues from Central America this season. An outbreak of Roya Fungus or (leaf rust) is plaguing Coffee producers from Mexico and throughout Central America which accounts for about 20% of global Arabica Coffee production. Some parts of this region may see up to 50% of the crop affected as the damage spreads to the south. However, global Coffee production for the 2012-13 season is expected to have increased to 144.5 million bags according to the International Coffee Organization (ICO). This rise in production was attributed to only a modest production decline from Brazil during the down year of the two-year production cycle. Though it appears that the market should be well supplied with Coffee in 2013, longer-term prospects are uncertain especially if Central American growers are unable to get a handle on the spread of this destructive fungus.

Technical Notes

Looking at the daily chart for May Coffee, we notice that it appears that the nearly 2-year long bear market is still alive and well as a short-covering rally that occurred in mid-January, ran into strong selling pressure as the market attempted to test the 160.00 price level. What we may be seeing is the formation of a consolidation pattern with prices trading within a relatively narrow range between 160.00 on the upside and 145.00 on the downside. The 14-day RSI is neutral to weak, with a current reading of 40.20. The large increase in trading volume seen on the chart is most likely the rolling of March positions into the May futures ahead of First Notice Day on February 20th. Support for May Coffee is seen at the recent lows of 144.60, with resistance found at the highs made on the most recent short-covering rally at 160.60.

Mike Zarembski, Senior Commodity Analyst


February 7, 2013

More Widening for the Brent/WTI Spread Ahead?

Thursday, February 7, 2013

The Brent-WTI Crude Oil spread has widened more than $3 over the past five sessions to over $20. The continuing problems with the Seaway Pipeline have led to bottlenecks, resulting in an increase in inventory levels at the NYMEX delivery point in Cushing, Oklahoma. The Seaway pipeline transports Crude Oil from Cushing to refineries along the Gulf Coast. The bottlenecks can be seen as a temporary condition, suggesting the spread could, potentially, tighten once the pipeline begins flowing at normal capacity.

Fundamentals

Brent Crude Oil continues to trade at a hefty premium over the WTI contract, despite being a poorer grade of petroleum, for a variety of reasons. First and foremost, there have been supply imbalances in recent years. WTI Crude Oil is priced based on Cushing as delivery point, and Cushing has seen a flood of supply in recent years from sources outside the Permian Basin, such as North Dakota and Canada. WTI is an excellent benchmark for North American supply and demand, but it has lost touch with the global market. Brent has become the true global benchmark for prices, as it represents Oil destined for Europe and other areas. While North America has remained well supplied, the same cannot be said for Europe, West Africa and Asia. There is also no set position limit in the Brent Crude Oil contract, while there is a position limit in the NYMEX WTI contract. This has attracted funds and other large investment vehicles, such as long-only funds, to the Brent contract. Because of the supply imbalances between the US and much of the rest of the world outside of North America, there likely needs to be a downward shift in global demand,or Oil needs to start flowing from Cushing to the Gulf for the spread to tighten significantly. Yesterday's EIA data showed Cushing supplies at a one-month low, indicating that suppliers have probably been using railcars to avoid bottlenecking at the hub. Even with supplies at a one-month low, the US and Canadian spot markets remain oversupplied at the moment. New Iranian sanctions aimed at preventing the OPEC nation from repatriating Oil payments into Dollars and Euros could result in an even greater disconnect between North American supply and demand economics and the rest of the globe.

Technical Notes

The continuous CL/IB chart shows the spread making a failed attempt to narrow to the -15.00 mark in mid-January. Initially, it looked as though the year-long trend of the spread widening may be reversing course, but the failure of the spread to cross through -15.00 suggests that the spread could remain range-bound, or possibly widen further if the -22.00 level is breached.

Rob Kurzatkowski, Senior Commodity Analyst


February 8, 2013

Corn Prices Stumble Ahead of USDA Report

Friday, February 8, 2013

U.S. Carry-out
Corn: 615 million bushels
Wheat: 728 million bushels
Soybeans: 129 million bushels
Courtesy Dow Jones Newswire


Fundamentals

After an attempt to test the 750.00 price level for May futures was stymied, Corn futures have given up most of last week's price gains, as many traders have squared positions ahead of this morning's USDA crop production and supply/demand report. Here the focus will be on U.S. Corn carry-out totals, with many analysts looking for a moderate increase of between 15 to 20 million bushels. Any increase to the carry-out total is most likely due to lower Corn demand for Ethanol production, as well as lower than anticipated U.S. exports. Last week U.S. Ethanol production rose by 0.5% from the previous week to 774,000 barrels per day, but that is still near the lowest production levels recorded since the government began tracking production in 2010. Also on many traders' radars will be the USDA's estimate for South American Corn production, with current expectations for a cut of nearly 2 million tons from Argentina due to dry weather. Looking toward the upcoming 2013-14 crop year, the U.S. is expected to produce a record Corn crop, as producers are expected to expand Corn acreage to as high as 97 to 98 million acres this spring. If Mother Nature cooperates this summer, we may see a Corn crop totaling nearly 14 ½ billion bushels!

Technical Notes

Looking at the daily chart for May Corn, we notice that since October of last year, prices seem to have formed a consolidation pattern, with the upper boundary near the 770.00 price level and the floor near 675.00, though some may argue that the break below 700.00 was short-lived and an outlier. The 200-day moving average is hovering near the 700.00 price level, which is adding to the importance of this level as a support area. The 14-day RSI has turned neutral to weak, with a current reading of 41.85. Support is seen at 703.00, with resistance found at the February 1st high of 747.50.

Mike Zarembski, Senior Commodity Analyst



February 11, 2013

The Tale of Two Winter Wheat Futures

Monday, February 11, 2013

The USDA caught some traders by surprise by lowering its estimate for 2012-13 U.S. Wheat carryout to 691 million bushels from 716 million bushels in the January report. Most traders were looking for a moderate increase in the Wheat carryout to near 728 million bushels, as U.S. Wheat exports have been running behind USDA forecasts. The decline in the carryout estimate was tied to an increase in domestic demand, especially for use in animal feed for livestock and poultry as high Corn prices and tight supplies have made Wheat more competitive from a price perspective for feed usage.

Fundamentals

Experienced grain traders know that when there is talk about the growing conditions of the winter Wheat crop, the first question that should be asked is "which one"? In the U.S., there are two major varieties of winter Wheat, soft red winter (SRW) and hard red winter (HRW). SRW Wheat is a lower protein Wheat that is normally milled into flour to be used in the production of cakes, cookies, and pastries. Production for SRW Wheat is usually centered in the Ohio River Valley states of Missouri, Illinois, Indiana, Kentucky, and Ohio. This is the class of Wheat commonly referred to as Chicago Wheat for the futures contract originated at the Chicago Board of Trade. HRW Wheat is a higher protein variety that is normally milled into flour to be used in bread making. Production for HRW Wheat is centered in the Plains states of Kansas, Oklahoma and Texas. Traders normally refer to this variety as Kansas City or K.C. Wheat, because the futures contract is traded at the Kansas City Board of Trade. The continuation of the severe drought seen in the west central portions of the U.S. has the potential to stress the development of the HRW Wheat crop that is currently in its winter dormancy phase. At the end of January, 39% of the HRW Wheat crop was rated poor to very poor in the state of Kansas, which is the leading producer of HRW Wheat. Extreme or exceptional drought conditions are found throughout the Great Plains, with longer-term forecasts calling for little relief in the coming weeks. The SRW Wheat crop is in much better shape, as adequate moisture levels are expected in the Ohio River Valley. Though there is still plenty of time for weather conditions to change, the current outlook seems to favor strong SRW production totals this summer, while the state of the HRW crop is still in flux.

Technical Notes

Given the potential differences in production expectations for the hard red winter and soft red winter wheat crops in the U.S. this season, today we are going to take a look at the daily area chart for the new-crop July K.C. vs. Chicago Wheat spread. The first thing we notice is that since the start of winter Wheat plantings last fall, dry conditions in the Plains sparked concerns about adequate soil moistures for the emerging HRW Wheat crop. Since that time, July K.C. Wheat has rallied from a 20-cent premium vs. Chicago Wheat to more than a 60-cent premium before running into some resistance. Currently the K.C. premium is just below the 20-day moving average near 60 cents, but is well above the longer-term 200-day MA near a 32 ½ cent K.C. premium. The 14-day RSI is neutral, with a current reading of 47.10. Support for the July K.C./Chicago spread is seen near a 50-cent K.C. premium, with resistance found at the recent high of a 64 ½ K.C. premium.

Mike Zarembski, Senior Commodity Analyst



February 12, 2013

Natural Gas Bull Uninspired

Tuesday, February 12, 2013

Natural Gas prices remain at the low end of their trading range, as cold weather across much of the country has failed to bring fresh buying activity. Rumors of new wells popping up across the Marcellus shale area have resulted in potential buyers sitting on their hands. Supplies remain a major problem for bulls. Technically, there is some hope for the bull camp if prices are able to climb above the 3.60 mark.

Fundamentals

Colder weather has failed to inspire Natural Gas bulls, as prices remain relatively flat. The market did not even flinch in the face of winter storm Memo, suggesting many traders believe the country is more than adequately supplied. Winter is winding down in the coming weeks and, if prices fail to rally, bulls are left hoping for a hot summer. Much of the country is expected to see below average temperatures over the next week or so. This could be seen as a last stand of sorts for the bull camp, as sellers have not yet come out in full force, given the fact that we are in winter and weather conditions are unpredictable. Production rose to a record this past November, as more Natural Gas was pumped from shale wells in the Northeast. The most recent EIA data shows inventory levels 15% above the five-year average at 2.684 trillion cubic feet.

Technical Notes

Turning to the chart, we see the March Natural Gas contract bouncing off support at the 3.20 level. The 3.20 mark can be seen as an important support level,and a failure to hold here could potentially result in significant price declines. On the upside, the market could gain some positive traction if prices are able to move above the 3.60 level, which may signal a double-bottom. The measure of the double-bottom would likely put prices at resistance at the 4.00 mark. Currently, the oscillators are giving neutral readings, with some slight bearish divergence between momentum and RSI.

Rob Kurzatkowski, Senior Commodity Analyst


February 13, 2013

Is Gold Not So "Precious" in Traders' Minds?

Wednesday, February 13, 2013

Starting in mid-December of last year, there was a noticeable divergence in the performance of Gold prices versus those of the S&P 500. During this time period, we saw the S&P move to new highs at the same time Gold prices turned weak. This was not the case throughout most of 2012, where both the movements of Gold and the S&P were more closely aligned. It would appear on the surface that investments in Gold were being liquidated and the proceeds being moved into equities. However, the most recent Commitment of Traders report shows large non-commercial traders adding over 14,000 new net-long positions in Gold during the past survey period, which could be a sign that the sell-off in Gold prices may be nearing an end and the Gold/S&P correlation will resume, or the equity price rally might be close to posting a near-term top.

Fundamentals

Gold futures prices have slumped to 1-month lows, with some investors starting to shift assets from the "yellow metal" and back into equities, as new highs are made in most major U.S. stock markets. In addition to an investment shift back towards "risk assets", some bullion traders note that physical trading activity has slowed lately, as most of the leading Asian markets are closed for the Lunar New Year holiday. If we focus on the longer-term prospects for Gold prices, some traders may want to keep their eyes focused on events occurring in India, the world's leading physical Gold consumer. The Indian government recently raised Gold import tariffs, with the intent on discouraging physical Gold purchases or investment in hopes that Indian investors will start to diversify away from Gold and, hopefully, spur investment into other assets. If this ploy is successful, we could see physical Gold buying begin to slow, which would take away some of the "support" for prices we have seen in the past from Indian buyers during periods of price declines.

Technical Notes

Looking at the daily continuation chart for Gold futures, we notice prices have fallen below both the 20 and 200-day moving averages, putting long and short-term bears in charge. Prices are down about $150 per ounce since recent highs were made back in October of last year, and it appears that we may have entered a consolidation phase, with prices becoming more stable between 1650.00 and 1700.00. The 14-day RSI is turning weak, with a current reading of 41.00. The "spike" low of 1626.00 made on January 4th looks to be strong support for April Gold, with resistance found at the January 17th high of 1697.80.

Mike Zarembski, Senior Commodity Analyst


February 14, 2013

Will US, Eurozone Contraction Slow Down Copper?

Thursday, February 14, 2013

Copper remains under what appears to be the control of the bull camp, but immanent resistance will likely test the bulls' resolve. The negative economic news from Europe and the US, while not surprising, could put some pressure on prices. No discussion of Copper is complete without mentioning some sort of work stoppage. In this case, Rio's Mongolian Oyu Tolgoi mine has halted production, which could result in tighter supplies if the stoppage lasts for a significant period of time.

Fundamentals

The positive bias in the Copper market has been fueled by expectations of strong Chinese demand. While this had been the dominant force for many traders, the Chinese New Year celebration has given some traders a chance to take in news and data from elsewhere. US retail sales were disappointing yesterday, inching up 0.1%. Given the fact that sales are typically soft following the holiday shopping season, the figure was not expected to be jaw-dropping. The results were in line with estimates, but the anemic number indicates that higher taxes may be curbing spending. In Europe, the Eurozone economy shrank 0.6%, which is the worst result since the depth of the 2008-2009 recession. Shrinking economic growth in Europe and the US may have a negative impact on the Copper market. Economic contraction and higher taxes could detail the housing recovery, which puts the ball in China's court. Counterbalancing the negative economic news from the industrialized West, Rio Tinto has stated that its Oyu Tolgoi mine in Mongolia will remain closed until the company resolves its issues with the Mongolian government. The government is asking for a greater share of the profits, stating the country has not benefited enough from the mine's development. The Mongolian government's ownership interest in the mine is 34%.

Technical Notes

Turning to the chart, we can see the March Copper contract steadily climbing since November. Prices have recently pulled back after failing to test the 3.80 mark. There is resistance just north of the 3.80 level at 3.8250. If prices are able to cross through resistance here, the market may test the $4 mark for the first time in a year. The 20-day momentum is showing some bullish divergence from both price and RSI, suggesting possible near-term strength.

Rob Kurzatkowski, Senior Commodity Analyst


February 15, 2013

When Will the RBOB Rally Finally Run out of Gas?

Friday, February 15, 2013

The Energy Information Administration ("EIA") recently raised its 2013 forecast for average gasoline prices to $3.55 per gallon, the second highest price following last year's record of $3.63 per gallon. High global Oil prices are considered by some to be one of the main culprits for higher gasoline prices, which is ironic given the huge increases in U.S. Oil production the past few years and the ample amounts of Oil currently in storage at the NYMEX delivery point of Cushing, Oklahoma.

Fundamentals

Motorists in the U.S. normally get some relief in the pocketbook when filling the gas tank in the winter months, as the seasonal switchover to conventional blends and lower demand usually translate into lower gasoline prices. The winter of 2012-13, however, is shaping up to be an anomaly, as average cash prices are at their highest levels for this time of year. Lower refining utilization is one reason being attributed to higher Gas prices, as operating rates have been stuck in the mid-80% for the past several weeks due to seasonal maintenance and unexpected operating issues. Even though refining demand for Oil has been cut, WTI futures prices have been strong, with front month futures up over $7 per barrel since the start of 2013. Thursday's price spike above 3.1300 in the March contract may have been caused by a surprise drawdown of gasoline inventories last week (down 803,000 barrels), which is heightening many traders' concerns about tightening supplies in the near-term. Though front month RBOB Gasoline futures are trading at their highest levels since September of last year, it is still unclear if the current rally is sustainable in the long-term. First, after a near vertical run-up in prices from 2.7500 to 3.000, we saw the market start to consolidate in a band between 3.000 and 3.0500 for nearly two weeks, which was the first pause in the rally in 1 month's time. Seasonal refinery maintenance should be completed in the near future, which should allow refinery utilization to increase, allowing fuel inventories to be replenished heading into spring. Finally, we should also note that many speculative accounts are currently holding a near-record net-long position in RBOB futures. This factor may heighten the potential risk of a significant price correction once the bullish momentum starts to turn and weak longs rush for the exits.

Technical Notes

Looking at the daily chart for March RBOB Gasoline, we notice prices breaking out to the upside after consolidating in a narrow 5-cent price range for the past 2-weeks. The 14-day RSI, which peaked at a reading near 80, is now barely in overbought territory, with a current reading of 70.22. We have to look back to April of last year to find the next resistance level for front month RBOB futures, which is seen at the 3.1528 price level. Support is seen at the low made during the recent consolidation phase at 2.9825.

Mike Zarembski, Senior Commodity Analyst


February 20, 2013

Will Gold Bring Silver Down?

Tuesday, February 19, 2013

Silver futures have been tied at the hip to Gold futures in recent weeks. The negative Gold comments from Gorge Soros and Louis Moor Bacon weighed on the precious metals market as a whole. Some Silver traders may wish to keep a close eye on Platinum, which has been the strongest performer in the sector. If the Platinum begins to fade, selling pressure in Gold and Silver could accelerate swiftly. Technically, Silver can be seen as vulnerable, as prices approach the relative low at 29.61, after a bearish breakout from a triangle on the daily chart.

Fundamentals

Silver futures have been linked to Gold, which suffered a setback after two major hedge fund managers indicated they were either abandoning or lightening their positions in Gold ETFs. Weaker economic activity has also weighed on both metals, and Silver could actually be the more vulnerable of the two, given that its value has held up better at this point, as well as its industrial nature. Silver is at one-month lows, whereas Gold finds itself at six-month lows. Inflation has been contained, indicating that Silver prices could feel pressure, even in the event that economic conditions do improve, as safe haven demand could suffer. The G20 meets this weekend in Moscow, which can be seen as a wildcard event. If there are currency war overtures, where members attempt to weaken their currencies to gain a competitive advantage, inflation could become a major concern. Currency devaluation can give an economy a short-term boost, but can also create an uncontrollable beast in inflation.

Technical Notes

Turning to the chart, we see the March Silver chart falling below minor support at the 30.90 level. The Silver chart also shows a downside breakout from a triangle pattern, suggesting prices could possibly come down and test levels in the 26's. The relative low close of 29.61 is the next downside test, and failure to hold this level could bring a few waves of short selling and long liquidation. Currently, the RSI remains neutral, despite the recent selling pressure, which is a divergence from both price and momentum.

Rob Kurzatkowski, Senior Commodity Analyst


Cotton Prices Consolidate near 8-month Highs

Wednesday, February 20, 2013

Cotton's rather surprising strength has not gone unnoticed by some speculators, who have been adding to long positions the past few weeks. However, though most of the focus has been on the front month "old crop" futures, the bullish fundamentals seem to favor "new-crop" futures starting in December of 2013. With analysts looking for U.S. Cotton acreage at 10 million acres or lower, we should see production totals decline this season even if weather conditions improve.

Fundamentals

Bucking the trend of lower prices for the so called "softs" commodities, Cotton futures are trading near 8-month highs, as surprisingly strong U.S. exports coupled with lower new-crop planting intentions are keeping the bullish trend alive. China, the world's leading consumer of Cotton, has continued to re-stock Cotton inventories despite already ample supplies. Chinese buying represented just over 30% of U.S. weekly old-crop Cotton export sales last week, and cumulative exports sales are running ahead of the 5-year average. New-crop futures also found some support from a survey from the National Cotton Council, in which U.S. producers were expected to plant just over 9 million areas to Cotton this coming season. This is compared to 12.36 million acres last year, in what was also a down year for Cotton acreage. Though these fundamentals appear bullish for U.S. Cotton prices, the global picture is not as rosy for the bulls. World Cotton ending stocks rose to a record 81.86 million bales, sharply higher than the just over 69 million bales seen last year. Though China is still a willing buyer of Cotton in the export market, it remains unclear if they will remain as aggressive as they have been, especially with inventories at seemingly ample levels. Some analysts also note that the March/May old crop spread has moved back into a contango, where more deferred futures months are trading at higher prices than nearby futures. This may signal near-term demand is starting to weaken, which could put pressure on the current bullish move.

Technical Notes

Looking at the daily chart for May Cotton, we notice that after a near vertical rise from 75.00 to 80.00, prices have now traded in a narrow 4-cent price range for the past 3 weeks. The past several sessions have seen sellers attempt to test the 20-day moving average, but they have so far been stymied from sending the market lower. The 14-day RSI has backed away from overbought levels but is still reading a relatively strong 64.19. Support is seen at the chart "gap" formed on January 28th at 81.33, with resistance seen at the top of the recent price range at 84.01.

Mike Zarembski, Senior Commodity Analyst


February 21, 2013

Is Coffee Fishing for a Bottom?

Thursday, February 21, 2013

The world has an excess of Coffee and no one to buy it. Ideal growing conditions in Brazil and Colombia have resulted in a huge crop at a time where the global economy is like a boxer on the ropes. The massive speculative short position and technically oversold conditions hint at possible short-covering in the near-term. Overall, volatility may be set to kick-up in the near future, as the la roya leaf rust fungus spreads across the Central American growing region. Thus far, there has been very little concrete news coming out of the region. As more news becomes available and traders can better judge the full extent of the damage, volatility may increase.

Fundamentals

Coffee futures have been in steady decline under the pressure of the massive Brazilian crop and uncertain demand. European demand, in particular, has been a major concern for Coffee growers, given the economic situation across the continent. Brazil continues to see favorable weather conditions showing no signs of production letting up. Colombia continues to recover from the la roya fungus, which infested 40% of the nation's trees. Roughly half of the trees lost have been replanted, and the government expects production to reach 85-95% of normal production within the next two years. While Colombia has made huge strides in combating the leaf rust fungus, Central America is bracing for an outbreak. Costa Rica has already declared a state of emergency,and there is buzz that Guatemala and El Salvador also have suffered heavy crop losses. The larger crop in Brazil and Colombia has outweighed the bullish effects of the spread of the deadly fungus in the near-term. Long-term ramifications paint a more dire outlook, as the depressed price of Coffee could result in Central American nations not having the funds to deal with the outbreak as efficiently as the Colombian government. As more news emerges from Central American growers, volatility may kick-up significantly and give bulls a bit of traction. Some speculators have been building a large net short position of 36,595 contracts (excluding funds), which is a 29% increase over the prior week. This suggests that the market may be ripe for short-covering.

Technical Notes

Turning to the chart, we see that the May Coffee contract bounced sharply yesterday. This could be interpreted as a possible short-term reversal on the daily chart. Prices did manage to trade above previous support (now resistance) at the 150 level in the latter portion of January, before falling back once again. If the market does indeed rebound, it will be interesting to see if this price level is tested once again. The 14-day RSI reached 10.74 as of the close on Tuesday, showing extremely oversold conditions. This likely contributed to the rebound in prices. On the downside, prices need to remain above the relative low close of 136.95 to avoid potentially triggering additional selling pressure.

Rob Kurzatkowski, Senior Commodity Analyst


February 22, 2013

Is Dr. Copper Warning of Slower Growth Ahead?

Friday, February 22, 2013

Copper prices have been particularly hard hit from the recent change in investor sentiment in regards to the global economic recovery. Failure to reach an agreement to forestall a series of automatic U.S. federal spending cuts or sequestration by the March 1st deadline has made some investors particularly nervous that drastic government one of the leaders signaling a move back into economic growth assets.

Fundamentals

The Copper market often has been said to possess a PhD in economics, because its performance frequently forecasted the strength of the global economy. So if the price action during the past few trading sessions is any indication, we may be looking at some headwinds for any meaningful economic recovery. Copper futures are now trading near 2-month lows, after having fallen by over 20 cents per pound in just 3 trading sessions. This weak performance was also being mimicked by other commodity markets such as Crude Oil and Platinum that would normally be supported by an improving economic climate. Copper stocks in LME warehouses have also increased, which may be a sign that physical demand is not as strong as previously thought. The severity of the declines in Copper prices, as well as other industrial commodities, may be a product of a change in investor sentiment, which now seems to be moving away from holding "risk assets". This view was reinforced by a rather hawkish tone seen in the minutes of the Federal Reserve's FOMC meeting in January, which were released on Wednesday. The minutes reveled that some members were favoring a winding down of economic stimulus and bond buying sooner than economic data would dictate. In addition, the Chinese government appears poised and ready to implement policies that should help to dampen rising speculation in the Chinese real estate market. Speculators were net-sellers in COMEX Copper last week, with the Commitment of Traders report showing a net-decline of nearly 2,200 contracts for the week ending February 12th. Though the recent uptrend appears to have been broken, the sharp decline in prices seems to have moved the market back into an area of support on the daily chart. This may stem further sharp price declines unless economic data continues to point to declining economic growth prospects in the coming months.

Technical Notes

Looking at the daily continuation chart for Copper futures, we notice prices falling sharply through the uptrend-line drawn from the November 2012 lows. Prices are now testing the 200-day moving average, which is holding near the 3.5555 price level. The 14-day RSI is now approaching oversold levels, with a current reading of 32.60. The next support level is seen at the December 20th low of 3.5175, with resistance found at the 20-day moving average, near the 3.8420 area.

Mike Zarembski, Senior Commodity Analyst


February 25, 2013

The Cure for High Grain Prices

Monday, February 25, 2013

Current tight Corn and Soybean inventories may be a distant memory later this year, as U.S. production this season could be at record levels. If the USDA production estimates hold true, we could see Corn inventories of over 2 billion bushels, vs. 630 million this season. Soybean inventories may double to 250 million bushels, vs. only 125 million bushels projected by the end of the current marketing year.

Fundamentals

U.S. Grain production is expected to increase sharply, with record harvests seen in both Corn and Soybeans this coming growing season, as producers respond to relatively high prices due to last season's drought. This was the forecast by the USDA at its annual Outlook Forum. USDA economists are forecasting a U.S. Corn crop of 14.350 billion bushels, which if accurate would be a jump of 35% from last season. The U.S. Soybean crop is estimated at 3.405 billion bushels, which would be up a more modest 13% from last year. The USDA is estimating acreage planted to Corn at 96.5 million acres, and to Soybeans at 77.5 million acres. The USDA production estimates assume that yields will return to trend after the worst drought since the 1930's devastated crops last year. The effects on cash market prices could be dramatic, with the USDA lowering its estimate for the average 2013-14 Corn and Soybean prices by 33% and 27% respectively. Cotton production appears to be the biggest loser in the battle for acreage this coming year, as huge global supplies and higher potential profit margins for both Corn and Soybeans should encourage less acres to be dedicated to Cotton, with the USDA looking for only 9.8 million acres being planted this season. Some traders will be eagerly anticipating the official USDA prospective plantings report on March 28th, which will give the first real glimpse as to what producers actually expect to plant this coming season.

Technical Notes

Looking at the daily chart for new-crop November Soybeans, we notice prices initially rebounding on Friday, following a moderate sell-off on Thursday, after the USDA Soybean plantings estimate was released. However, the price gains were short-lived, as the market closed sharply lower to end the trading week. The current new-crop Corn vs. Soybean price ratio of 2.328 is near the 30-plus year average, but is on the lower end of the price range seen since 2008. This may favor Soybean prices gaining moderately versus Corn prices to encourage adequate Soybean acreage. Prices are hovering close to both the 20 and 200-day moving averages, as prices are currently near the middle of a $1-wide consolidation range seen since November of last year. The 14-day RSI is turning weaker, with a current reading of 39.88. Support for November Soybeans is found at the November 16th low of 1255.25, with resistance found at the February 4th high of 1350.75.

Mike Zarembski, Senior Commodity Analyst



February 26, 2013

Heavy Snow Damps Soil and Wheat Price Outlook

Tuesday, February 26, 2013

Outside market forces have put pressure on the Wheat market, despite the worst drought conditions in almost 8 decades. Those drought conditions are expected to improve with the large snowfall across much of the Great Plains, which will give the parched earth sustained moisture. This would likely take away the safety net that drought conditions provided for prices. This would also mean that export demand must ramp-up significantly to support prices. Technically, the chart has seen major damage done recently. Now, the bull camp's resolve will be tested at the 700 mark.

Fundamentals

The heavy snowfall across much of the Great Plains should help ease the worst drought conditions for Wheat since the 1930's. The Winter Wheat crop went dormant in November, during the worst of the drought, and will emerge again in March. Winter Wheat accounts for roughly 70% of the nation's total Wheat production. While the snowfall in much of the region was 20 inches or so, it will not likely break the drought. It should, however, get much of the Wheat that's already been established out of the ground next month. This will likely be considered a bearish development for Wheat, as yields may very well be much better than previously expected. The pace of exports has ramped up, which could offset the improved crop outlook to a certain extent. Sales of CBOT Wheat were over 282k for the week ended February 14th, which is somewhat surprising, given the poorer quality of the grain. The wildcard for Wheat is growing conditions around the globe. In recent years, other major producers have had issues, which could potentially limit the downside for Wheat.

Technical Notes

Turning to the chart, we see the May Wheat contract continuing to break down after failing to break through the 800 mark on the upside. The result of the two failed attempts to cross this level was a small M-top in the daily chart. Prices have come down to test minor support at the 700 level. Failure to hold here suggests prices could come down and test support near the 650 mark. RSI is showing extremely oversold conditions after the recent wave of selling, hinting at possible near-term strength.

Rob Kurzatkowski, Senior Commodity Analyst



February 27, 2013

Chocolate on Sale?

Wednesday, February 27, 2013

Cocoa prices may be near a critical juncture, with the most active May futures trading near recent support near the 2100 per ton level. A look at a long-term chart show little support below 2100 until we get to the 2000 per ton level. Many speculators remain net-long Cocoa, according to the Commitment of Traders report, but have been cutting back on the size of their positions the past week. Should we see a move below 2100, the possibility of a sharp decline due to sell-stops being triggered should not be discounted by traders.

Fundamentals

Cocoa futures continue to slump, as improving fundamentals and outside factors weigh on prices. Cocoa port arrivals in the Ivory Coast, the world's largest Cocoa producing nation, have started to increase, which is keeping the market well supplied in the near-term. Better than expected rainfall this past week is taking some of the weather "risk premium" out of Cocoa prices, as dry conditions earlier in the season raised concerns regarding the development of the main-crop. Recent weakness in the value of the Euro, now tied to concerns that there was not a clear winner in the governmental elections in Italy, is also considered a factor weighing on Cocoa prices, as any spread of instability in the Eurozone may lessen demand for luxuries such as chocolate. European Cocoa demand is particularly important, as Europe is the largest consumer of chocolate per capita. Not all the fundamental news is bearish, however, as Cocoa production out of Ghana is expected to be below expectations, and the coming end of the main-crop harvest should likely allow current Cocoa supplies to be absorbed -- especially as "bargain" buyers begin to accumulate stockpiles at prices near 9-month lows.

Technical Notes

Looking at the daily chart for May Cocoa, we notice prices trading at lows not seen since June of last year. In the past, fresh buying seemed to have emerged once prices traded near the $2100 per ton level, and Tuesday's test of this key support point was once again thwarted by bulls. The 14-day RSI is weak, but has not yet reached oversold levels, with a current reading of 34.20. Last week's low of 2102 looks to be support for May Cocoa, with resistance found at the 20-day moving average, currently near the 2175 price level.

Mike Zarembski, Senior Commodity Analyst


February 28, 2013

Iran Progress Holds Back Oil Prices

Thursday, February 28, 2013

Crude Oil futures are on the verge of posting a loss for the month of February, after moving higher with little resistance in December and January. It appears that uncertain economic conditions and rising inventories finally caught up with the petroleum complex. Fundamentals over the past week have improved, as inventories did not ride as much as expected, and consumption has increased. Any bullish lift that prices may have received from improved demand seems to have been quashed by progress in Iranian nuclear talks. Technically, Crude Oil is vulnerable on the downside. Prices sit on the 100-day moving average, and this coincides with a possible bear flag, suggesting a downside breakout could potentially bring swift price declines.

Fundamentals

Crude Oil futures have consolidated over the past week, after dropping more than 5 dollars in the two sessions prior. Growing stockpiles of Crude Oil appear to have begun to weigh on prices, however this week's data actually seems to favor the bull camp. Yesterday's EIA data showed Crude Oil stocks rising only 1.1 million barrels last week, versus expectations of a 2.5-million barrel build. Gasoline had a larger drawdown of 1.9 million barrels, versus estimates of a 1-million barrel draw. US fuel consumption over the past 4 weeks was 18.5 million barrels, which is up 2% from the 2012 average. The positive supply and demand data came at the worst time for the bull camp, as Iran's rhetoric has turned positive following discussions with the West over its nuclear program. The Iranian government suggested there was a turning point in the talks, and that the West gave a proposal that the Oil producing nation deemed fair. If additional progress is made and a deal is reached, some of the fear premium could be sapped out of Crude Oil prices. On the economic front, German unemployment has fallen in the month of February. Europe's largest economy returned to positive economic growth after contracting in the last quarter of last year. US durable goods orders rose 1.9%, while home sales rose 4.5%, giving traders hope that the US economy could be turning the corner.

Technical Notes

Turning to the chart, we see the April Crude Oil contract trading in a flag-like consolidation pattern after prices dropped sharply from highs. This suggests prices could come down and test the 87.50 mark in the near-term. Recent selling has taken prices below the 20 and 50-day moving averages, and the consolidation channel sits on the 100-day average. Also, it appears that the 20-day average is on the verge of crossing the 50-day average on the downside, which could be seen as negative. The RSI indicator remains near oversold levels, even after prices consolidated. While prices and the RSI indicator have remained flat in recent sessions, the momentum indicator has continued lower, hinting at additional near-term weakness.

Mike Zarembski, Senior Commodity Analyst