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April 6, 2006

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Swing Trader's Insight Update

Name: Scott Hoffman

Company: Daniels Trading

Learn More About Today's Author
Years Trading: 19

Favorite Movie: Seven Samurai

Swing Trader's Insight Update

What might have been quiet midweek trade got shaken up Tuesday morning as the government of Qatar announced that they might raise their Eurocurrency reserve holdings to diversify out of the Dollar. Following on the heels of last week's similar announcement by the UAE, the Dollar took a sharp tumble against the European currencies. There is also renewed speculation that Treasury Secretary Snow may be forced out, with the possibility that they will move in someone who doesn't carry the "strong dollar torch" that Treasury secretaries have carried since Robert Rubin. In other news, the ISM report on Monday came out weaker than expected, although bond and stock traders have largely turned their attention to Friday's payroll numbers for March.

S&P: S&Ps have been range-bound between 1320 and 1300 as traders await further clues as to the direction of Fed policy. Barring an external shock, I expect this range to remain in effect for the time being, as the current economic data doesn't justify a push out of either end of the range. Longer term, this current stability will lead to instability and a trending move, as traders will be forced to rethink the status quo. The question remains as to what the catalyst will be and which direction the move will take. The divergence of the Dow (large cap stocks) and the NASDAQ (small cap stocks) does little to hint at direction.


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NASDAQ: The NASDAQ continues to be the strongest of the stock indices, as traders continue to show preference for small cap and high tech stocks. The long side looks good here: a move above recent resistance at 1740 (a 61.8 percent retracement of the January to March selloff) should lead to more upside.


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Dow: The Dow futures have been more interesting than the S&Ps, breaking down out of a small triangle formation last week. The break held at a Fibonacci retracement of the March rally, and I'd be interested in buying the June Dow on a move over 11300.


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Bonds: The bond market has sold off sharply in the past week in the face of a hawkish statement accompanying the last FOMC meeting. The market is rightly concerned about inflation, as high energy prices, 25 year highs in metals, and a new surge in sugar all point to inflationary pressures. In addition, the Dollar's selloff weighs on Treasuries, as the weaker Dollar lowers the effective return on US assets held by foreigners, which constitute a large percentage of Treasury holdings. Technically, a recovery back over 110 in the June Bonds turns the picture back to neutral from the current bearish stance, while the next downside objective is the 2005 low of 108-10. Cyclically, the year’s low for the Treasuries often comes in this general time period.


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Dollar: The recent comments by Qatar and the UAE about reducing their Dollar reserve holdings pushed the Dollar Index to its March low on Tuesday. Whether it's the scuttling of the US ports deal or fears about the sustainability of US growth, the June Dollar Index is threatening a downside breakout if it takes out 8840. The next downside target would be the 2005 low of 8740.


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Eurocurrency: Tuesday saw a big upside breakout of a triangle formation in the Euro as it moved over the March high at 12278. I expect this rally to continue, with the 2005 high around 124 as the next target. In addition to the reserve currency issue, the Euro has been garnering support from ideas that the ECB may be raising interest rates.


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British Pound: The Pound saw a sharp turnaround this week, as it went from a successful test of a three month low on Monday to an attempted upside breakout over trendline resistance on Tuesday. Wednesday saw a failed attempt to extend the rally, leading me to expect a retracement to the midpoint of the recent range, around 174.50. Clearing the March high at 17642 would lead to a retest of the 2005 high around 179.

Gold: Metals have seen a sharp rally in March, as gold benefits from inflation concerns and recent Dollar weakness. There has been a lot of talk about gold's overbought status; I don't buy into this, as continued Dollar weakness and inflation concerns (along with big index fund buying) is keeping the buyers interested. $585 is good support. A move over Monday’s should lead to a test of the psychologically important $600 level. A move over $600 opens the door for a new up-leg; I'd look for $680 as the next big target.

Silver: Silver saw a breakout of its up trending channel, as the announcement of the creation of a massive silver based exchange traded fund (ETF) prompted a higher level of interest in the long side. Look for this rally to continue, with $12 then $12.50 as the next objectives after recent highs around 1180 are cleared. The real concern I see in silver's bull market would be the actual launch of the ETF, as other metals have risen ahead of ETF launches, then fallen following launch; a "buy the rumor, sell the fact" pattern.

Sugar: The recent inability of May Sugar to clear the 61.8% Fibonacci retracement level on the last rally may have put a temporary halt to sugar's recent run-up. A close under 1790 should confirm a downside breakout. The double bottom around 1765 is first support, a move under that point would target the old breakout area around 1720.


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Cotton: May cotton may be attempting to form a double bottom as it finds support around 5240. A move over last week's high at 5390 would confirm the breakout of this 123 pattern, with a first target of 5530.


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Crude Oil: Last week's break above double top resistance has temporarily run its course. Tuesday retested the 6550 breakout area, ahead of Wednesday’s energy inventory reports. Tuesday’s narrow range day led to an upside breakout on Wednesday, which could lead to a retest of Monday’s high at $68. Longer term, I'm bullish on the energies, as I expect a price rise as we move into the summer driving season.


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Lean Hogs: Tuesday saw a downside breakout under double bottom support at 6490, which coincides with a 61.8 percent retracement of the July 2005 to December rally. Fundamentally, traders are concerned about the future's big premium to the cash index. Look for further downside, with 6200 as the next objective.


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Soybeans: Last Friday's USDA acreage estimate for soybeans came in higher than trade estimates. This combined with a large South American crop and relatively high stocks levels have traders thinking about a large carryout from the 2006 crop. May beans are on support at the December low of 560, with next support around 550.

Wheat: Last Friday's USDA report did nothing to help the bulls; in fact the rally in May Wheat to 350 (broken support, now resistance) gave a good short sale opportunity. The ability of May to hold 340 support is now the short term key; a move over 350 would improve the picture.


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Corn: A shockingly low acreage estimate from the USDA drove corn sharply higher last Friday. With the rapid expansion of ethanol production, and strong worldwide demand, traders are counting on the need for higher prices to entice farmers to devote more acreage to corn as opposed to soybeans. In the short run, holding the 266 breakout is key for the bulls. Longer term, a break toward 260 to 250 basis December should represent a good buying opportunity. I’d view 275 as a short term objective.


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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.


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