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The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
May 18th,
2008
Energies
The
news this week is way ahead of the price action as all signs are pointing
south amid a continued rally to fresh contract highs. Saudi Arabia
increases output, global demand forecasts are cut, the U.S.
stops building the strategic oil reserves and yet all of this bearish news
does little to stop this market hysteria.
In cases like this you follow the fundamentals and wait for the price
to turn. Look at Dec. 75 puts in crude
or an September bear put spread in heating oil or
natural gas.
Financials
Strong retail sales helped to
boost the S&P to fresh near term highs, setting the stage for a possible
continuation of the short term trend.
While I am not entirely convinced that it will hold, the longer term
trend line resistance and overall bearish long term chart pattern suggests
that this market is near an intermediate term top. Long September 1150 or 1200 puts plays a
great volatility pop that is likely to occur on a severe price correction
over the summer. Bonds remain choppy
and a great short strangle opportunity.
The dollar is puling back a bit amid the U.K.’s decision to not waiver in its stance to avoid future
rate cuts. The dollar is still in the
very beginning of a long term trend reversal and should be bought on dips
with shorts in the euro and pound also recommended. The Canadian has held support above 9675
and should be avoided until a break below that mark, indicating a short play
at that time.
Grains
A successful weekend for corn planting should be the straw
that broke the bulls back and send the grains reeling. Corn is setting up what I like to call a
whip formation. It is where a market
breaks out of a channel or wedge by setting a fresh near term high (or in
this case an all time high) and then ‘whips’ back to test the lower end of
the previous congestion. This is a
momentum boost that often gives the market the push it needs to break the
congestion, in this case to the downside.
Expect breakdowns across the board, furthered by a continued U.S.
dollar rally and a sharp reversal in oil in coming weeks. The roll from corn to beans because of
delayed planting has become a bit of a non-issue because of recent plantings
reflective in last week’s crop progress and what should also be revealed
after the close on Monday. Long Dec.
corn $4 puts should offer a solid risk to reward ratio because this option
has not gained a cent since the highs and is likely to get a delayed
volatility spike on a significant price breakdown. Rice broke critical support and appears to
have set a cycle top. This was always
a ‘rough’ market to trade but it has now become virtually impossible despite
the great technical setup.
**Chart courtesy of Gecko Software's TracknTrade
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Meats
A bit of price exhaustion in cattle sets up some selling
expected this week, along with hogs which have ran out of steam in its
overbought market condition. Put plays
across the board.
Metals
Gold got a boost this week as
mining issues may come to the forefront in Venezuela
as Chavez strokes his ego. However the
market has been glued to the oil picture and will likely fail in coming weeks
as oil tops and the dollar makes continued gains. Silver, copper and platinum are likely to
follow suit. The global economic
slowdown will put pressure on copper and platinum as demand declines.
Softs
Coffee
continues to show strong signs of price congestion as a bull pennant unfolds
and the market spikes to fresh near term highs. Cocoa
is topping as strong selling pressure is coming in waves with little to
impress on rally days. This market has
likely seen its highs in the near term.
Cotton is holding a nice bottom support and could see significant
gains in coming months despite lackluster momentum on the charts in the near
term. Look at deep out of the money
calls and expect a significant rally through October. OJ is getting whacked as light volume is
triggering sell stops and testing critical 105 support. I remain a long term buyer down here. Sugar is showing a choppy pattern as a
batting heads environment tries to hold some level of price support. On one hand you have ridiculous oil prices
and increasing use of sugar for ethanol production. On the other hand you have overwhelming
supply that should squash any increase in demand. A bit of a quandary for the market but
overall I am buyer of calls on a value play down at these price levels.
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