Hello Fellow Traders,
It’s late August in Chicago which can only mean one thing. Both of our baseball teams are well out of any pennant races and Chicago sports fans have one thing on their minds. You guessed it– DA BEARSSSS!
William Frejlich
312.264.4356
wfrejlich@pricegroup.com
This Week’s Commentary
Metals: Last week was your typical boring week for precious metals. Gold fell over $200 in 3 sessions then rallied back $140 during the next 2 sessions. Silver was pretty calm also, falling nearly $6 in 2 sessions and coming back half way or about $3 the next 2. As they say, “Move along, nothing to see hereâ”. As Europe has been relatively tame for a few days and US stocks seem to be consolidating into a wide volatile range, this has eased some of the gold fever.
Gold: After rising about $400 since mid July gold was well overdue for a technical correction and I would still wait for at least $1650 to consider a buy. Bernanke did do one correct thing for a change and didn’t institute QE 3 after the “brain trust” met last week. He did leave the door open though saying they would discuss it in a 2 day meeting next month. If they do the right thing which in the case of anything from the Fed is to do nothing, gold may fall back to $1450. If they do another QE, the extreme inflationary aspect of that may be the impetus to drive gold to $2000.
Silver: December silver was dragged through the muck along with gold last week but is recovering as US stocks as well as European and Asian stocks have steadied. The uptrend which began in late June brought futures to $44.50 last week before the flush to $38.75. The $44-$45 area will be tough to beat on top but since economic concerns worldwide have only been pushed to the backburner and not corrected, we are likely to rise again at the first hint of renewed economic problems.
Copper: I would under no circumstances be a buyer of copper. I take that back. If December futures were near 275 or so where they should be I would consider it, but no way at 410. Use a push to 425 to look at a short position or put option for December copper. Our housing market is at least 1 ½ to 2 years from starting to improve and China has slowed considerably so it appears that nostalgia alone is keeping copper near 420.
Currencies and Financials: Despite the Fed’s best efforts, the US Dollar continues to hang in there above 7350. The Swiss has returned to planet earth and the best play I see in this group now is a short Yen or put option for the Yen.
British Pound: The September Pound saw a mini breakout to 16620 once 16550 was exceeded but it fell back easily to 16200 within a week as our equity market showed signs of consolidation. So the range continues here albeit at a slightly higher level of 16650 on top and 16150 below. I would prefer to sell into rallies here as opposed to buying the dips.
Swiss Franc: Now that the September Swiss has retreated to 12140 from highs near 142 a few weeks ago, it is only highly overbought instead of insanely overbought. The upper breakout was near 12100 and it held this first go around. If we see a pop to 12500 I would be a short seller or at least buy some October puts. However if the 12050-12100 level is defeated down below, first 11700 then 11500 could come quickly.
Japanese Yen: The September Yen has enjoyed the status as a flight to quality buy during the past month but it appears it may soon give up that crown. Japan has switched leaders once again and this uncertainty may lead to what the central bankers of Japan know best. Intervention.
No, not the kind on the Bravo channel or whichever but the age old Japanese strategy of selling Yen whenever it would build strength to help their export business. You recall that Japan floundered for years with near 0 rates (sound familiar) and it was only after they realized their economy was thriving with higher rates to the tune of far more economic growth than the paltry export business a weaker Yen would spur. I am looking for a short sale or October put options here as resistance has been strong between 13000 and 13100.
Euro Currency: The September Euro currency has gained ground as the Swiss has crashed. This may be due to relative quiet from Europe lately so I don’t look for any big moves higher. It appears a range is forming between 14650 on top and 14200 down below. A strangle where you sell (write) higher calls and lower puts to capitalize on this range may be the way to go.
Canadian Dollar: The Canadian Dollar has come back after its recent spate of weakness largely on the heels of a $13 rebound for crude oil from last week’s September future low at $75.70. Resistance is strong between 10220 and 10260 so if we see that level, let’s view other convergent markets such as energies and metals. If they are continuing with their comeback the CD may pop all the way back to 10400 if 10260 is bested. These comments from last time still are valid as the September Canadian first fell to 9980 and now as gold and crude have bounced back up, it has hit 10262. If it can push through that upper level we may see 10400 but not much more.
US Dollar: The September Dollar continues to hold near 7350 but the rebounds higher are much weaker with the last pop stopping at 7460. The Fed did hold off on the QE3 for now but left the door open for another bout at the September meeting which has now been expanded to a 2 day affair on September 20th and 21st. Let’s hope the Fed remembers that its job is to control inflation and money supply and not be a shill to artificially prop up stock market to make the economy seem stronger. If 7350 continues to hold, it may be a buy for a gain of 100 points.
Eurodollar: There is little to say here. Most contracts going out to 2013 have settled into a 9940-9950 price, reflecting rates of ½ % or less down the road. This market can and does change quickly. The 9970 level has capped the up side going back 4-6 months so a short sale near 9945-9950 going out to December 2012 or March 2013 should show very nice potential for the relative calm of 9970 capping the upside to date.
Ten Year Note: December notes made a brief trip above 13000 but quickly retreated below 12800 as the stock market has recovered into a consolidation mode. If this up and down market action continues, the range of 12700 – 13000 is the most likely scenario. If stocks suffer another setback, 13000 will not hold and we may see up to 13200. If stocks push through the upper end of the recent highs 12700 will probably be beaten on the way down to 12516.
S&P 500: Last week’s action was unprecedented. It was very obvious some large entity was buying after the huge down days. You don’t see the S&P down 86 points one day, up 60 the next, down 54 the next, and up 45 the next. The September S&P did reach 1077 last week and I expected 1000-1050. If allowed to run its course we should expect to see another flush towards at least 1100 as Germany has seen some negative economic reports overnight. Most of the Euro zone bail out is dependent heavily on Germany so if they start to falter, Europe may take another hit, driving US stocks lower. On top, first 1200, then 1220 will be tough resistance to overcome. These were the words from last time and they came close. We did see a rise to 1207 on top and fell back to 1110 down below. This is the consolidation I spoke of about a month ago once the initial fall off subsided. Europe has been calm of late and it seems as if the markets have put the inherent problems on the backburner now to take a much needed breather. If futures can fight through 1210-1220, we might see a technical push to 1250 where it would be highly overbought. If that area repels futures a drop to at least 1140 is very possible. That is provided of course, we see no new shocks from Europe or Asia in which case the break could be more severe.
Dow: The September Dow futures did push to 10400 last week but saw the same suspect trading action where unknown sources were buying heavily after the big down days. You just don’t see this kind of action in a freely traded market, down 676 points one day, up 418 the next, down 677 the next, and up 359 the next. We have rebounded now to 11400 and resistance is solid at first 11500, then stronger at 11750. Down below 10800 is minor support while 10500 will be stronger. I would still wait for more down before getting too heavily in here. The words from last time held up here as well. Futures made it to 11520 and slid to 10750 and are now pressing recent highs near 10500. If 10500 is beaten, look for potentially 11800. If this area cannot be taken out, look for another wash out to 10900 down to 10750 once again. As with the S&P this is on the assumption we have no new shocks to world markets and economies.
Energies: It is unusual to speak of the energy group as the tamest of the various complexes but it really has been. The action here has clearly mimicked the stock market. We saw a huge crash, a quick rise, one more unsuccessful attempt to test the lows, and now consolidation while taking aim at recent highs.
Heating Oil: Since the 52 cent drop in a mere six sessions in early April October heating oil has climbed steadily higher, pushing over 304 today. After coming from 272 this is a pretty impressive move and may have enough momentum to make it to 308. We are becoming overbought right now so I would look to that 308 price a possible shorting opportunity.
Unleaded (RBOB) Gas: The technical action is the same for no lead as with the rest of this group. October futures fell from 300 to 245 in the six day flush during early August and have now steadily climbed back to 281. There is a three day triple top at this level and if beaten might take futures to 288. If 281 cannot be taken out wait for a pull back to 268 to consider the long side. In addition the spread between heating oil and gas is exceptionally high with heating oil currently 25 cents over gas. The heating season is still 1 ½ to 2 months away so a buy of no lead while selling heating oil may pay off. I look for that spread to narrow to only 10 cents premium of heating oil during the next two weeks.
Crude Oil: September crude is showing a double top area at $88. The most recent high was $101 and the low in last week’s wash out was a bit over $75 so the midpoint there is right near the $88 high. A push through $88 may start a little hiccup to the next resistance at $91 but more likely we will be swinging back towards $80. The words from last time still apply as futures topped for October crude just over $88 before sliding back to $79.50 last week and pushing back above today. A strong push and close above $88 more than likely sparks a rapid run to $91.50.
Natural Gas: October gas dropped through support to 378 this morning. The others in this complex have been slowing trending back up and I expect that natural gas will also. The 375 area has been supportive going back a few months now and this is the kind of market which tests or makes new lows for a few days, consolidates for a bit, then quickly rises 25-30 cents. If we hold near 380 for the next day or two, I would be a buyer.
Grains: All in the group have pushed to recent highs and in many cases, new contract highs. This is unusual coming into harvest and it appears technically that the complex is getting ahead of itself. I would either short a bit higher or at least wait for a healthy correction if considering a buy.
Corn: December corn pushed to a new contract high yesterday just below $7.80. This was a $1.10 rally since the $6.68 we saw as recently as August 9. Part of this move was related to the stock market beginning to consolidate and the last surge yesterday was due to a report from the private forecast group, Pro Farmer, which dropped the prospective yield to 12.4 billion bushels this year from last month’s USDA estimate of 12.94 billion. This is a very overbought market now with Stochastics readings at 93 %. I would consider a short sale near $7.80 or if buying, wait for a pullback to the breakout point at 7.35.
Soybeans: After hitting a low at 12.82 on August 9, November beans exploded higher, reaching a high at 14.58 1/2 today. Beans are even more overbought than corn with Stochastics near 95 % here. These prices remain historically high for beans and I’m not sure that world demand warrants 14.60 beans right now. Three ways to play this would be to short futures at 14.60, a purchase of a put option, probably the 13.50 puts for about $650 or writing a higher call as the 1550 calls will bring in about $1000 or the 1600 calls which would fetch about $650
Soy Meal: As with beans, December meal is also overbought with a 94% Stochastics after the rise from 342 on August 9 to a new contract high at 387 yesterday. You can use the same strategy which I discussed with beans and if you wish to buy, I would wait for a correction to the possible swing support at 362.
Bean Oil: Bean oil has obviously come along on the soybean train to the tune of a rise from 5310 on August 10 to yesterday’s high at 5862. We are also quite overcooked here and I would wait until at least 5580 if considering a buy or look at 5900 if thinking of initiating a short.
Wheat: The move higher for wheat has been much steadier than the rest of the group which saw huge spikes higher. As mentioned often here, both bean products and corn are historically high within 10 % of their all time highs while wheat is trading at just a little over one half of their all time highs. We pushed to 8.08 for December wheat yesterday and I would wait for a correction to 7.60 if thinking of a buy. Another alternative is that December wheat is trading at only 24 cents over corn now. If we see that spread tighten to 10 cents wheat over corn, I would do the long wheat short corn spread.
Softs: This market has found some life during the past two weeks and we do have some trading opportunities which I will discuss below.
Cocoa: December cocoa has failed four times between 3140 and 3150 just since last week. If that area is beaten we might see a little bit more to 3250 but not much more. Demand has slowed, there is calm in the Ivory Coast for now, and I do not see the demand or even anticipated demand being enough for any sustained move. I like the short side at 3250 and if you must be a buyer, wait for at least 2950, and possibly 2860 from the current 3070.
Sugar: It is said that Brazil will have a somewhat diminished crop this year but the rise in October sugar from 2640 to 3185 between August 8 and August 24 more than accounted for that possibility. The breakout point higher was 2860 so if thinking of a buy, wait for 2860 from the current 2960. Additionally, if we see another attempt at 3200 that could be a nice selling chance.
Cotton: The drought in the Southwest is being considered one of the worst since the dust bowl in the 30s. Much of that area’s cotton crop is unrecoverable. It has been said that if we do not see much relief there that next yea’s crop may also be in jeopardy. December futures are against resistance near 10500 after holding 9400 support last week. A push through 10500 starts a move to at least 11000 and possibly 11400 shortly after. The words from last time came close and still apply. Fundamentals remain as the most bullish in this group yet futures prices are below ½ of lifetime highs while the others here are within 10-25 % of their all time highs. Weather has improved slightly in the Southwest US both moisture wise and heat wise but it remains to be seen whether the damage was already done. Either way, I like the long side on dips and if we see a pull back to 101-102 for December cotton, I would like the long side.
Orange Juice: November juice crashed from 192 to 15250 in just days earlier this month. Support is solid at 153 and if we pull back to 153-155 from the current 157 I will be looking at a long future or possibly a call option.
Coffee: During the past 2 ½ weeks the December coffee has soared from 236 to this morning’s high above 286. We may see a move to the old chart gap from May at 288 but with Stochastics showing a balky 96 % a correction to at least 275, and possibly 268 if momentum builds looks to be in order first.
Rice: December rice has been trying to push through1750-1760 for the past two months. We saw a new contract high at 1770 this morning. I do believe we will see a large break in price but we might push to 1800 first. This market is notorious for rising or falling 200-300 points in mere days and we are slightly overbought now so I would be careful or buy puts as protection if long.
Livestock: Even with the recent sell off both live and feeder cattle are still historically overpriced given the current demand and export business. Hogs have fallen steadily since mid July and have come back into a normal pricing structure.
Live Cattle: October futures failed at the pricey 12100 resistance and have twice held solid support at 11350. With economic uncertainty and historically high prices near 115 I believe 11350 will be broken. If so 110 would be the first target followed by 108 if 110 offers little support.
Feeder Cattle: Since peaking at 146 in early July October feeders have shown a steady downtrend. I believe this will last for a while so I would use corrective rallies as a better chance to sell short higher. There is some support between 130 and 131 so I would look for a rise to 13450 from the current 13275 to consider a short. If 130 is then beaten first 12750, then 125 would be the initial targets.
Lean Hogs: October hogs have slid from a high at 9400 in late July to some strong congestion and support at 8550. The daily chart shows that this 8550-8500 area as very critical. A break below 8500 may start a quick flush to 8200 and if we hold 8500-8550, we could see a quick comeback to at least 8900.
Questions? Ask William Frejlich today at 312-264-4356
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