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Trader Savvy Newsletter


November 21, 2006

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LME Metals are Hot!
Aluminum, Zinc, Nickel, etc…

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Swing Trader’s Insight Update

Name: Scott Hoffman

Company: Daniels Trading

Learn More About Today's Author
Years Trading: 20

Favorite Movie: Seven Samurai

Swing Trader’s Insight Update

This week may see light trading volumes as there aren’t any important economic releases, and the Thanksgiving holiday in the US will keep many traders home for the end of the week.  The volatility that sometimes occurs in thin markets may provide trading opportunities.

S&P:  Breaking over double top resistance around 1395 powered the S&P higher last week.  The recent action appears to be a small bull flag, which would project to 1417.  Look for the bullish tone to continue with all trade over the 1395 breakout area with near support around 1400.  The following week will see a number of economic releases, and the financial markets will start to focus on holiday retail sales.

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NASDAQ:  Strong earnings from technology companies have helped the tech-heavy NASDAQ.  Holding the psychologically important 1800 level is good for the bulls.  Note the pullback in momentum (middle pane of the chart), which appears to be showing a setup for another rally.

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Treasuries:  The Treasury market ended the week roughly unchanged.  Traders are weighing concerns over weak economic growth and a weak manufacturing sector on one hand, and low inflation and foreign net disinvestment from US debt on the other.  Moving ahead, traders’ perceptions of the Fed’s success in steering to a “soft landing” for the US economy should be the driver for US debt markets.  The December Bonds continue to see resistance over the 113 area, with good support around 112.  Monday’s narrow range/inside day pattern set the Bonds up for a directional move on Tuesday.

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Yen:  Weakness in the Japanese stock market has been pushing the Yen lower as traders are questioning the Japanese growth story.  With many traders having already finished for the year, look for the Yen to continue its slow grind lower.  A recent double bottom at 8474 should provide support, with resistance at 8540, which has served as a pivot point for the past few months.

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British Pound:  The Pound sold off last week on speculation that the BOE was about to follow the lead of the Fed and pause in its tightening cycle.  Interestingly though, the Pound’s decline found support around the 50% retracement level of the October to November rally.  Look for steady to lower trade in Cable this week as traders price the odds of a pause by the BOE.  A breach of 18850 could lead to a retest of the October lows around 18550.

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Gold:  Following failed attempts to clear resistance at $630, December Gold spent the last half of last week gyrating around the 40 day moving average.  Traders are looking for a new trading impetus for the precious metals, as the bullish impact of easier Fed policy has been counterbalanced by lowering inflation expectations and a relatively quiet geopolitical picture.  Holding support at $615 should eventually lead to a new rally, with $630 the key resistance.

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Cocoa:  Cocoa broke out of its upward channel as early reports are showing big harvests coming out of Africa.  Cocoa has never really participated in the “staples” commodity boom, as it’s viewed as more of a luxury item.  In addition, Cocoa has come under pressure as December has gone into delivery, as funds have liquidated December long positions without purchasing in more deferred contract months. Look for this selloff to continue, with the October lows around 1430 as the downside target. 

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Sugar:  Sugar appears to have decoupled from the ethanol mania that has “fueled” the historic rally in corn.  Czarnikow, a prominent sugar trade house, forecast a production surplus for sugar next year, giving evidence to the old adage, “the best cure for high prices is high prices”, as production has risen to meet demand.  The midpoint of the September to October decline comes in around 1200; until March Sugar can regain this price, look for continued price weakness.  I think a break under 1120 would lead to further selling.

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Coffee:  Producer selling hit coffee last week as prices reached a 7 month high on strong commodity fund buying.  The ability of March Coffee to hold the Fibonacci retracement level at 117 keeps the bulls hopes alive, with 121 then the double top at 124 as upside targets. 

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Crude Oil:  Despite a minor uptick in gasoline prices, crude oil continues its downtrend, confounding those who forecast a floor of $60.  Energy prices remain under pressure as supplies remain ample.  The benign hurricane season and the current timing (out of the summer driving season, not yet to the winter heating season) means there’s no bullish impetus for energy prices for the time being.  I look for the decline to continue, with the next downside target around $55.  The advent of cold weather may induce a knee jerk rally in heating oil, but it’s a stretch to try to trade on long term weather.

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Cattle:  The 100 day moving average has been good resistance for the February Cattle for the past few days.  Monday was a great example of an oops trade day-February Cattle gapped lower on the open, then had a strong rally to fill in the gap.  A move over the 100 day moving average (currently at 9080) should see followthrough.

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Corn:  The strong rally in corn was further underpinned by the November Supply and Demand Report from the USDA, which showed tight stocks to usage ratio for this year and the potential for an explosive year next year, even if we do see an increase in corn acres next year.  December Corn has seen resistance over 3.80, but I am interested in buying breaks, as both Argentina and China appear to be holding onto their corn.  In addition, traders could look at buying calls in December ’07 corn, as tight supply should keep the downside limited and keep open the potential for an explosive rally.

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Wheat:  Chicago Wheat is seeing pressure in the face of ample supply and worldwide competition for demand.  Supplies of quality hard wheat remain tighter, and I continue to like the long Kansas City/short Chicago Wheat spread.  The March KC/Chicago spread fell from over 90 cents in early July to form a double bottom around 6 cents in October.  Look to buy pullbacks to the low 20 cent area, with an objective of 50 cents.  Risk a close under 13 cents.

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The information in this article includes information from sources believed to be reliable and accurate, but no assurance 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.

About Today's Author

Scott Hoffman is a Senior Broker and CTA with Daniels Trading. After graduating from the University of Chicago in 1986 with a degree in Economics, Scott worked on the floor of the Chicago Mercantile Exchange. Following his time at the CME, Scott went to work off the floor, serving as the personal broker to a former chairman of the Chicago Board of Trade. Here Scott learned the trading and brokering business, a process that he continues to expand and refine. Scott is the publisher of Swing Trader's Insight, a comprehensive swing trading advisory service covering all of the major futures markets. In addition to a nightly newsletter, Swing Trader's Insight provides in-depth client education complete with specific trade recommendations and market analysis, including an S&P Morning Insight commentary, Midday Updates and Trade Management Updates. Although Scott specializes in swing trading, he has 20 years of brokerage experience that is available to all of his clients, regardless of their individual trading styles.

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