Swing Trader's Insight Update
The FOMC meeting is the focus of the financial markets this week. The Fed’s policy was interesting. They did some economic forecasting, discussing the slowdown in the fourth quarter of 2005, expectations for a big rebound for the first quarter in 2006, and their expectation for moderation for the second quarter. This is more detail than we normally get, and it may make future policy statements more interesting.
The big surprise from the Fed, however, was the fact that they gave no hints as to when they expect to stop raising interest rates. They made no mention of the slowdown in housing sales, and they expanded their inflation concerns beyond energy prices, although they believe that inflation is still “well contained”. The runup in metals (especially base metals like copper and zinc) and sugar may be on the Fed’s radar screen. The problem with this focus, as I see it, is that as much of the commodity price runup is due to overseas (especially Chinese) demand, so interest rate increases in the US may not have a big impact on overseas demand.
Moving forward, we have Chicago Purchasing Managers Index on Friday, which is a harbinger for next week’s national PMA index and March’s non-farm payrolls. In addition, Friday morning will see the release of the USDA release acreage estimates for this year’s crops, which is a traditional kickoff to the spring/summer grain season. Given the widespread interest in ethanol, the corn acreage figure could be interesting.
S&P: The S&Ps fell off hard on Tuesday after the Fed meeting. This move was well forecast by the triangle formed over the past week. Spoos had a false upside breakout early Tuesday but were unable to move over last week’s high around 1316. The drop through the bottom of the triangle pushed prices down to psychological support at 1300.
Looking ahead, I expect to see the S&Ps retrace some of Tuesday’s selloff, and regaining the 1308 to 1310 breakdown area helps the bulls. A move over 1316 opens the door for a retest of the double top around 1321. A drop under 1300 should bring in more selling, with 1290 and 1280 as targets.
Bonds: The bond market sold off after the FOMC meeting, as the expectation of more interest rate hikes are keeping pressure on the long end of the yield curve. Tuesday’s open under trendline support made the selloff almost a foregone conclusion, and the move under the March low at 110-02 brought in more selling. The ability of the 10 Year T Note to hold its March low dried up the selling, and bonds stabilized around 110.
Going forward, expect bonds to continue to key off the 110 area-bullish above, bearish below. An ability to hold 110 could lead to more short covering as traders buy in anticipation of the formation of a double bottom around 110. Below 110 the bears regain control, as this pushes bonds under the October 2005 lows.
Gold: The strength in metals after the Fed rate hike attests to the strength of the up trend. Higher interest rates have a bearish effect on metals prices, so their strength in the face of this imply a powerful trend is still in place. Wednesday saw a lower opening, but traders were unable to fill in the upside gap from last week.
I’m bullish on gold; the close over the March highs around $570 led to a breakout over the old high around $580, with $592.00 the next target.
Silver: Silver has been a strong market, as the small “flag” pattern of Monday and Tuesday led to a strong upside breakout over $11.00. The continued demand for industrial metals continues to drive silver higher.
I expect the up trend to continue in silver, with the close over $11 to continue to feed the bulls, with $11.50 the next target. Only a close back under the old high at 10.94 basis May softens the picture.
Sugar: Concerns over Australia’s crop and the continued frenzy about ethanol are driving sugar prices higher, as Brazil uses approximately 40% of their crop for ethanol production. After forming a double bottom at 1620, sugar saw a strong upside breakout of a triangle. It’s interesting to note that after last week’s upside breakout, the market came back and tested the apex of the triangle before taking off again.
Look for more upside in sugar. The measuring objective of the triangle is just over 19 cents, with a retest of the contract high at 19.65 not out of the question. Support is now at the old March high of 17.84.
Energies: Crude oil and their products have staged a rally in anticipation of the summer driving season and an oil worker’s strike in Norway. The issues we had with gasoline last summer haven’t been solved, as US refining capacity remains constrained and worldwide demand is strong. Tuesday’s strong performance in the face of an expected build in crude inventories attested to the strength of the trend.
Look to buy pullbacks in the energies-especially the unleaded gas, as strong fundamentals could provide for a replay of the high prices of 2005. $70 is the near term objective for crude oil, and $2.00 for unleaded gas.
Lean Hogs: Hogs appear to be trying to find a bottom as they broke the down trendline of March. They have been holding around the 50% retracement area of the rally off the bottom, waiting for Friday’s Hog and Pig Crop report.
If June Hogs can continue to hold 6600, look for a rally to test the recovery high at 6765. A move over that resistance could lead to a rally to Fibonacci resistance at 6835. A drop under Tuesday’s low would likely lead to a retest of the March low of 6495.
Soybeans: Soybeans sold off in early March as South America got timely rains. The past two weeks have seen some recovery in soybean prices ahead of Friday’s USDA acreage intentions report, as soybeans “bid for acres” versus corn. A large speculative short position in soybeans and soymeal could be a catalyst for a post report rally.
We should be able to muster a spring rally, as there’s generally some bullish case to be made for grains in the spring – low subsoil moisture, Asian Rust, weather, for example. However, given the fact that we had a large crop in spite of a drought means that although rust or weather fears may be able to keep prices up for a time, it will be hard to avoid a large carryover and price decline later this summer.
Wheat: Timely rains in the Winter Wheat Belt and ample world supplies of soft wheat have driven wheat prices down by roughly 50 cents this month. Wheat appears to be trying to bottom ahead of Friday’s USDA report, and there may be some upside in the short run. The first upside objective would be $3.50 basis May, which is where the market last broke down from.
Longer term, I like the short side of wheat, as ample world supplies make it hard to find a bull case for wheat. The Kansas City versus Chicago spread has narrowed in about 16 cents off its high, and the relatively tighter supply of hard wheat may keep this spread attractive.
The information in this article includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.