|
___ James Mound Trading Group ___
Toll Free: 1-888-744-8866 WWW.MOUNDREPORT.COM info@moundreport.com
The
Weekend Commodities Review
By Head Analyst
James Mound
For the Week Ending
June 8th,
2008
Energies
After the largest one day price move in the history of U.S. crude oil futures we have no choice but to take a step back
and look at what is really going on here.
First, I have been a bear, am a bear and will be a bear in this
market. Now it is very unhealthy for a
trader to be married to a view on a market, but every once in a while a
market sets up a structure that makes it impossible for the viewpoint to
change without a serious shift in the supply/demand structure. In the case of oil the market is so far
away from the proper price association with the supply and demand that exists
in the marketplace that it is clear to me that there is fund and spec buying
that is over inflating price. It
doesn’t hurt the bull’s case when Israel is talking about bombing nuclear sites in Iran, oil inventories over the past two weeks are showing
shocking draws and it is about 1000 degrees outside across half the country.
I relate it to a rubber band that is stretched to a point
that it either snaps back or breaks.
This market’s volatility expansion on Friday is something that I have
been anticipating for months – to the downside! However it is not without logic to expect
upside volatility and price exhaustion before a severe correction. It makes little to no sense at this point
to attempt to call a top or to time a selloff. Bear put spreads are ideal trades in this
scenario because they reduce upfront cost, define risk and offer a solid risk
to reward ratio if designed with that intent.
However if volatility is in fact going to expand to the downside then
the right play is a simple straight put option with loads of time to expiration
and very, very far away from the current market price to benefit from
expanding volatility premium.
Financials
The stock market got blasted on Friday as horrendous
employment numbers rocked the market’s perception of a stable recovery from
our current recessionary environment.
The monthly employment numbers are often revised, and I suspect that
next month’s report will show an upward revision of this report. However, this Friday’s plunge is a great
gauge of the volatility and price action one should expect to the downside as
the true economic disaster we are facing is fully realized by the
market. Monday will be a key day in
this year’s outlook for the stock market.
Follow through from Friday’s collapse means an ugly time ahead, but
anything close to a full recovery means this market is supported by forces
beyond what logical thought would suggest.
Bonds are choppy as they should be. The Fed supports lower bond prices as a
lack of motivation to continue to cut rates generally means that the Fed’s
focus turns to when they can begin to hike.
The stock market weakness suggests rising bond prices as a flight to
quality ensues and the inverse correlation between the two markets is
exacerbated. This batting heads
environment will ultimately end in some serious volatility, but the interim
period allows for premium collection in what I see as an over inflated bond
option market.
The dollar took a hit on Friday with skyrocketing oil and
a stock market selloff/bond rally. The
Phillips curve is based on the idea that a reduction in unemployment, by its
very nature, creates inflation due to rising wages supported by the reduced
supply of available job seekers.
Friday’s report, showing rising unemployment, should ultimately offer
reduced inflation and a stronger dollar.
However, the current focus is on the economy and the strength of the
economy is certainly in question, therefore the dollar is seeing a
setback. It’s unfortunate too as the
technicals look bad after a failed test of 74.00 resistance on the dollar
index. This dollar bull says it may be
time to stand aside until the dollar clears 74. The euro and pound are catching a buying
wave on the dollar setback. The
Canadian dollar made a solid break and should test 9675 – a critical area to
break to create a long term trend reversal.
While this is not a very tradable market, the Mexican peso appears to
have broken out of what feels like a nearly permanent channel against the
dollar.
Grains
The mega rally in crude set the stage for some serious follow-through from
Thursday’s bounce. The charts have all
turned bullish in grains, complimented by corn’s breakout to fresh highs and
soybean’s breakout of its recent range.
Extreme weather, Argentina
strikes and rising commodity prices are pushing grains higher. Monday is a critical follow through day
with a focus on wheat to hold its ‘whip’ bull pattern by setting a new high
over Friday’s move. Rice is holding,
but it is unlikely that the market will test the highs, thus a sell recommendation
is still in place.
**Chart courtesy of Gecko Software's TracknTrade
----------------------------------------------------------
Sign Up To Receive This Report Every
Weekend – CLICK HERE!
---------------------------------------------------------
Meats
Meats turned bearish as expected
this past week, as supply takes over the reigns and forces prices to
retrace. Rising grain prices holding
prices up, but I expect a strong selloff in both cattle and hogs in coming
weeks.
Metals
Metals surged on Friday as the
dollar broke and the stock market selloff brought a flight to quality
demand. Gold remains in a wide 100
point range between 850 and 950 and should be played opposite as it
approaches either side. Silver should
follow suit but copper remains bearish.
Softs
Coffee volatility is expanding as
the market decides whether to break 142 or 128. Regardless of the short term breakout from
congestion I see coffee making an epic move and quickly retesting 170 before
year’s end. The Brazilian harvest
should help the bull’s case as the expectation is unlikely to be less than
the real numbers. Cocoa
is technically setup to test and break the highs, something I have believe
will be short lived and worthy of put buying if the market has it in it to
hit 3350. Cotton appears to have
potentially set a bottom with critical support on Dec. above 7150. Acreage is so low and weather is so
volatile that this market is unlikely to stay down for long. OJ set a nice bull pattern with
momentum. Look for a move to 140 in
short order if we break through 124. Crop rotation in many countries away
from sugar, especially in India,
may lead to a cyclical supply shift and support higher prices. Unfortunately for the oversupplied sugar
market this may take years to realize.
|
