The Weekend Commodities Review
Further selling pressure persisted through the Wednesday weekly inventory data, but showed signs of reversing heading into next week as the threat of war with North Korea revives the previously diminished geopolitical tension. We head into next week’s meeting on the uranium enrichment issue with Iran, one with far more critical implications to the energy complex, with the idea that the U.S. has overcome resistance with China and Russia and may very well be in a position to put pressure on Iran. This spells energy rally, and one that is far overdue. Calling a bottom here is nearly impossible, but dollar averaging calls with some time on them in these markets is a strategy that will pay off when premiums spike on a market rally. Natural gas fell apart on a breakdown off of a solid technical formation. This market is in no man’s land, but let us not forget this market is down 50% over the same approximate time that crude is down only about 25% - can you say oversold?
The stock market surged to new highs, following the Dow’s record breaking move and setting a great short entry point into what could be a significant downside failure. Is the economy really landing softly? Does that question even come up when the Dow is setting all time highs and the market is up this much through October? This is not a bull market, and this not a rally that will sustain itself. Bond prices found their near term top as the market realizes there is little price threshold for a shift in policy back to one of potential rate hikes. The market is likely setting up a wide channel on the 30yr. bond with the top near 113 and the bottom near 106. This allows for reversal plays within two basis points on either side, but also for premium collection (albeit pitiful premiums) in the middle.
Oddly enough, the last two weeks represents the largest two week price move in either direction since April. The dollar continues its strong rally as anticipated and should see 90 sooner then you would think, but being patient with currencies has always been a safe bet. The moves tend to take two steps forward and one step back and this move is no exception. Just start thinking in terms of 4 or 5 point battles and a 20 to 30 point war and I think you can play the next three year bull run with great success. The euro and yen are both great short plays, and the Canadian remains lagging behind the move. Look for a close below 8780 in the Canadian to signal further downside ahead.
So this grain bull preached that there are better places to make a buck than grains and the last two weeks have been nothing short of tremendous. No wheat supply, rising corn demand and a general market hysteria rally has sent grains to extremes. In talking with a few floor traders this week, it really seems to be a short covering rally backed up by some huge institutionals getting caught on the wrong side. We’re talking in the tens of millions just since Wednesday. How long can this continue? This market sector should run until an island key reversal day (a stand alone gap up day with retracement intraday and gap down the following day to fill the original gap) ends the short covering rally. This isn’t the only way to set a top here but this price move begs for something extreme to top it. Scoop up some puts on Monday if wheat tests 5.50 and corn is anywhere in the 3.20 arena – even if you are jumping the gun with an early entry (that’s why they’re puts and not futures). $2.50 for oats is pushing it no matter what the other grains are doing. Take a look at moving some grain longs into rough rice, which should see a major price spike in the next couple of weeks.
Grain prices through the roof and meat inventories at record highs means ranchers are going to flood this cattle market and send cash prices tumbling. The real question is whether the ranchers can hold out long enough to see if feed prices will drop before going into panic mode. Remember, any rancher in the country would tell you 88 cents is a darn good profit – so how greedy is the market? Dec. live cattle has gap resistance below 89.30. A daily chart of bellies looks like a steady heart rate monitor since August, and that type of consolidation doesn’t last long in this market.
Gold and silver showed signs of price support as the market tried to get ahead of an energy bounce and dollar stall out. The best look on this sector is silver, as it is right on the cusp of a bull breakout. Figure $11.87 to break the highs and $12 to break the 50% retracement mark and this thing could fly higher. But until then you have to be on the sidelines or short and let the market signal the entry.
**Chart courtesy of Gecko Software’s TracknTrade
Congestion near the lows in sugar would normally suggest a gap down ahead – a pattern that has repeated several times since it fell from the highs. But the congestion is a bit different as the market is building on extremely low and choppy volume and my guys in the pit tell me the market is about to explode again. Long strangles are highly recommended. Coffee is stuck – plan and simple stuck, but don’t let this bull market put you to sleep and send you looking elsewhere for opportunity. The opportunity is now to pile on the bull call spreads in March coffee. OJ sky rocketed on about the ugliest supply report I have ever seen in that market. The gap higher is probably just the beginning of OJ volatility. This is a great market to look at a November strangle that expires in a week and to play puts on a ratio with long futures for January (3 OTM puts to one long futures). Cocoa isn’t pretty when it is trapped in this range but calls are still the play here. Lumber looks to have turned and may be worth a look as call premiums are dirt cheap. Cotton showed a nice double bottom formation, but the chart is setting up for a break – above 50.50 says buy and below 48.10 says sell – and you readers know my gut says lower prices ahead.
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