Hello Fellow Traders,
If you have had children within the last 15-20 years or even if you haven’t, I’m sure most of you are familiar with the lovable cartoon character SpongeBob SquarePants. Now comes a government study that says watching SpongeBob can be harmful to 4 year old children. Or it might not. Now tell me again why we are having trouble cutting the federal budget.
William Frejlich
312.264.4356
wfrejlich@pricegroup.com
This Week’s Commentary
Metals: Copper has been trending down for some time now, silver has slipped into neutral mode and gold is showing a possible double top near 1920.
Gold: December gold is showing many signs that the move may be waning or possibly over for the time being. We did see a double top near $1920 and after each rise, the sell off was fast and furious, showing a definite nervousness amongst late longs. In addition even with the specter of a serious chance of a Greek default highlighting yesterday’s news, gold fell nearly $50. A few weeks ago this would have sparked a $50 – $75 rally. We see minor support at $1780 but once beaten, $1720 could come quickly. If that doesn’t hold, $1680 is the next target so I would not pursue the long side until at least that level.
Silver: December silver has been struggling of late as traders decide whether it is a precious or industrial metal. Even on days when gold rises silver often fails so it appears that it is being viewed as an industrial metal more than precious. Or it could just be that this $43.00-$44.00 area cannot be penetrated. During the past 3 weeks the lows have been higher and the highs have been lower and the short term trend line is down so a break below recent lows is more likely than the other way around. A drop through $39 starts a quick flush to $37.50 and possibly $35.50 if momentum builds and gold alone cannot hold up the metals.
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 to 2 years from starting to improve and China has slowed considerably so it appears that nostalgia alone is keeping copper near 420. The words from last time still apply. December futures did make it to 423 and have slid back below 400. There is minor congestion from 385-390 but that isn’t expected to hold. I look for at least 370 during the coming weeks and more likely 350. Unless something drastic occurs we may see 310 by year end.
Currencies and Financials: I have spouted for over a year now that the European problems are not going away any time soon. As they push closer and closer to default it has played havoc with the currency markets. It has gotten so bad that, perish the thought, the US Dollar has risen nearly 500 points since late August as European currencies have been hammered.
British Pound: The December Pound continued to fail near the 165-166 level. Due to the ongoing problems in Greece (and get in line Spain, Ireland, Portugal and Italy for your bailout) there is little reason for much upside, December futures have fallen to the first support at 15750 and are a touch oversold so we may see a slight bounce back to the 160-160.50 area. More is needed however than empty words so that price could be a nice shorting opportunity.
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. The words from last time came quickly to fruition as the Swiss made one last one day gasp above 12500. Within 4 trading sessions it pushed to 11235. As Europe goes into spin control the words may generate a pop back towards 11750. If so let’s revisit the short side or consider put options at those levels.
Japanese Yen: The December Yen has slowly been creeping lower. The breakout point between 12850 and 12900 was tested last week but as the European currencies were crashing, the US Dollar and Yen were the flight to quality buys. The 13050 price level is now showing resistance and as mentioned, a break below 12850 will turn patterns decidedly negative. There is little support before 12550 once 12850 is bested.
Euro Currency: The December Euro was bludgeoned from above 14550 to 13501 in a mere 9 sessions. Nothing new was brought to the table but apparently traders finally realized what bad shape Europe is in. Futures did hold at 13500 and bounced back over 13700 today as strochastics readings below 6 % showed a very oversold market. We may see a further correction to 13900-14000 but the fact remains, much of Europe is in trouble and as I have stated many times, Germany doesn’t have enough money to bail out the rest of Europe. For now 13500 should be solid support down below as Germany and the European central banks are coming up with a new spin on how this will play out.
Canadian Dollar: The Canadian Dollar has risen or fallen based on the trappings of gold and crude oil on any given day. As the aforementioned commodities rose we did see resistance at 10260 tested for the December CD. Once gold and crude broke last week the CD made it to 9950. In general I believe that gold and crude have topped out for now so I expect a test of 9800 near term here.
US Dollar: The December Dollar has soared from the strong support level at 7350 to the first resistance above 7800 in the past 9 sessions. As Europe’s problems have climbed to the forefront once again the Dollar has gained against most currencies. For now it is possible to see 8000 if 7840 is taken out. This would only occur if the world didn’t buy Europe’s newest spin control but for a while they may. This probably sparks a corrective break down to at least 7640 and maybe 7580 so use those levels if considering a buy of the buck.
Eurodollar: There is little to say here. Most contracts going out to 2013 have settled into a 9940-9950 price, reflecting rates of % 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. This will remain the commentary for this market going forward. December Eurodollars for 2012 were below 9800 as recently as late April and once Europe fails this may actually benefit the US and rates look to move higher sooner rather than later.
Ten Year Note: For the second time in a week, the December bonds failed at 142.00. After each trip to 142 futures retreated to13916. I feel this 142 level will not be beaten and once 13916 is beaten down below we could see additional weakness to the breakout point between 13416 and 13500. At each of the last 2 Fed meetings 3 Fed governors dissented as to keeping this low rate policy. Hopefully we don’t have to wait another 14 months to get Bernanke to act in the interests of the American people instead of his politically elitist colleagues. If we see another rise to 142 I would be looking at 3 scenarios. The first is to short December futures, second is to buy put options and the third would be to sell higher calls, perhaps 148 or 150 calls as I see no huge potential for futures to rise much past 145 as an extreme move.
S&P 500: After the huge crash in early August I suggested that we would see consolidation albeit a very volatile consolidation. Since that time we have risen to 1200, flushed to 1110, rose again to 1230 and fell back to 1130.For now the range of 1100 to 1225 give or take a few points appears to be the expectation. Our markets are not nearly as spooked now by Europe’s problems and it actually seems now as if US equities may gain as Europe falters. It may finally be the catalyst to begin raising interest rates in the US which would be very bullish for the market at this time.
Dow: Obviously the Dow will trade the way of the S&P. December futures have alternated between 10600 down below and 11700 up above. This may continue for the short term. As long as 10600-10700 holds as support, we may test the highs at 11700 and maybe even push to 12000.
Energies: It appears that this group no longer has concerned itself with little things like fundamentals and how much consumption or demand we might actually be seeing. It has merely tagged along on the stock market roller coaster and there is no independent action. Use your opinion for equities and buy or sell energies accordingly.
Heating Oil: Put an inlay of heating oil, or no lead or natural gas for that matter, over an S&P chart and they are fairly identical. If the US survives economically the obvious implication is energies will rise as we tend to be the world’s largest consumer. Now whether we (along with the rest of the world) consume enough to warrant $90 crude or 3.00 heating oil or 3.00 gas (we don’t) is a topic for another day. For now October heat is headed for the recent lows at 284 from the current 293. If broken we might see 278 but alluding to the first line, this group is obviously being held up artificially as REAL supply demand factors would reveal much lower prices so let’s wait until the manipulation is over before considering a trade here.
Unleaded (RBOB) Gas: See above comments. Change prices to highs near 292 and support at 262 with a shot at 250 if 262 does not hold up.
Crude Oil: See above comments again. Change prices to $91 on top and $83 below with a shot at $80 if $83 doesn’t hold.
Natural Gas: Natural gas is in a different situation as the others here. Supplies for crude oil, heating oil, and no lead are abundant yet they remain highly overpriced. Natural gas shows abundant supplies yet it manages to trade only about 100 points above lifetime lows. I wonder if that has anything to do with the fact that most natural gas comes from the US and Britain and the bulk of the others comes from the Middle East. Again, this is a topic for another day but some interesting food for thought. October natural gas continues to show strong support near 380-385 but stalls near 404-406. I believe it is more likely to see an upper breakout and a push past 406 could very well spark a speedy advance to at least 425 and possibly 440.
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. These words from the last time came to fruition as, despite decent numbers form the USDA, traders sold and the given reason was harvest pressure as a fresh influx of product comes to market.
Corn: The USDA report was a mixed bag for corn yesterday. The crop was reduced from a potential 12.9 billion bushels last month to 12.4 billion this month. That was expected but what wasn’t expected was the higher carryover as the USDA raised the excess corn from 636 million bushels last month to 672 million bushels this month. This indicates a lower demand and the traders jumped on that today. December corn tried to fight through the harvest pressure, testing 7.50 both yesterday and today but weakness in wheat and beans finally dragged it down to test the 7.30 double bottom. Once that was exceeded, it flushed to 7.17. This has the feel of a blow off bottom and I do think corn can test the 7.50 level again by next week.
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. These words form last time would have paid off as futures made it 14.65 afterwards and have slid to 13.82 this morning. The 13.80 provides some support and we might see a test of 14.10. If so we may have another short sale as the USDA numbers yesterday for beans were raised from 3.056 billion bushels expectation to 3.085 billion. As this coincides with harvest, a break below 13.80 probably starts further weakness to 13.50.
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. These numbers proved worthy as well from last time as December meal saw a high just over 390 and a low this morning at 361.30. A bounce to 375 may provide another short sale chance. If 362 can be beaten first 356, then 348 would be the next lower targets.
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. Shortly after these words from last time the December oil hit 5922 and bottomed near 5700 this morning. Use a correction to 5800-5820 to initiate another short sale. A break of 5680 probably spurs further down side to 5525.
Wheat: The wheat numbers actually came in far below last month’s USDA numbers yet the weak beans and corn dragged it lower as well. December futures have fallen from above 8.00 to this morning’s low at 6.96. Support is solid at 6.90 and I look for a bounce back to 7.60 short term. I also like the fact that December wheat has now fallen to 22 cents below December corn and may have a recommendation to buy wheat versus selling corn this afternoon or early tomorrow.
Softs: This seems to be one of the few complexes which is actually trading according to their individual fundamentals.
Cocoa: December cocoa failed at 3250 as it had no business at that level anyway and it has now tested 2860 both yesterday and today. We likely will see additional weakness as the 2860 area probably won’t hold. Stops generally build up below a market in this situation and a drop below 2860 may spark a rapid descent to at least 2800 and possibly 2720.
Sugar: October sugar failed twice just under 3200. It did test support at 2850 and bounced back but the rally attempts are dwindling. Be patient and wait for at least 2720 if thinking of a buy.
Cotton: As recently as this past March the May and July cotton futures traded above 22500. This year brought some of the worst drought conditions to Texas in history. This was followed by monsoons and flooding and it is highly likely we will see a significantly reduced crop this year. With March and May 2012 cotton trading near 10800 this may be one of the better buys on the board. I will be exploring some futures and options strategies this week and will be entering the long side soon.
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. Futures held at 15600 after these words and made it to the resistance above 170. For now, unless we see any late season hurricane activity which may affect Florida, a range between 160 and 175 may take hold.
Coffee: December coffee filled the gap at 288 and stopped just over 290. Futures held 275 for a time but reached the more important 268 support each of the past two days. We may see a test of 275 but I would not look for much more on top any time soon.
Rice: December rice continues to advance on lower world supplies. After reaching 1855 last week futures were due for a break, particularly with other agricultural markets faltering. For now the November rice may test 1800 and support is very strong between 1760 and 1770 so if we see a correction to 1770 I would consider a buy.
Livestock: This group has come on strong the past two weeks. We must be careful here as falling stock markets usually result in lower livestock prices also. We have rebounded to just below resistance areas and we may be looking at some short positions but not quite yet.
Live Cattle: October futures tested 11350 four times during the past few weeks. Once it became obvious this 11350 was holding shorts threw in the towel and began to cover. This started the rise and once 11550 was beaten first 11800 then 12000 came easily. Resistance between 12100 and 12200 may slow the top side here so consider a bout of profit taking if long. If equities firm and 122 doesn’t hold the old contract highs above 125 are a possibility.
Feeder Cattle: The story is the same here. October feeders tested 13200 multiple times and actually tested 13100 as a blow off bottom and have been moving slowly higher since. Resistance is strong from 13900 to 14000 and since these are historically high prices I would consider taking profit if long at those numbers.
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. The words from last time came close as futures did make it to 8307 once 8500 was taken out. We flew out of that area and have risen to 8785 today. I look for a bit more up, perhaps to 8900-9000 before expecting any significant pull back.
Questions? Ask William Frejlich today at 312-264-4356
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