This week we begin with rising tensions with Iran. This situation will surely keep the bid in energy and metals until it gets sorted. We have seen commodities as a whole move back towards multi year highs and that has many people rushing to invest in our markets. These new investors usually have a very low tolerance for risk so they are likely to increase the overall volatility in the entire sector. This means that as traders we will be presented with more and more opportunities to trade, but it also puts an even greater premium on risk management.
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Stocks: Like we said last week, this market is able to turn garbage into roses. The Fed clearly stated that they are concerned about inflation but the stock market shrugged that off and rallied none the less. Even the increased tensions with Iran cannot hold this market back. This week we see a small amount of upside follow through in the early part of the week and then a turn lower. Oil prices have responded higher to the Iran news and that should take the wind out of the bulls sails this week. This week looks like a great time to establish a short position trade in the Dow or Russell 2000.
Bonds did end the week breaking below 112 as we had expected. This week we expect to see this market trend lower possibly all the way back to 110. As I mentioned above the FOMC clearly signaled there intention to remain hawkish and that should depress bonds a bit as traders digest this.
Crude oil took of partly on the Iran tensions. That will likely be the big story of the week. The situation with Iran could spin out of control quickly but we see that as unlikely. Look for Crude oil to consolidate around the $65 level unless the Iran situation does go badly. If it does then crude could quickly rally back above $70. Natural gas on the other hand is a sell. We are targeting a move back below 7.00 this week.
Metals remain strong. Here too the Iran situation looms overhead. Gold should maintain its strength until the hostages are released. While we are long term bulls of the metals, we could see a short term pullback if the situation with Iran is resolved peacefully. Silver should be range bound between 13.25 and 13.75. Copper has been very strong but here too we see the potential for a pullback being greater than the likelihood of more upside in the near term. Short copper above 313 with stops above 315 and target a move back to 305. Take a look at a weekly or monthly chart of Palladium. This metal has the potential to stage a major long term rally. We do not do long term position trades very often but in this particular case we feel it is worth while. We believe that Palladium could rally all the way above 500 before the end of the year. Buy Dec. 2007 Palladium futures between 325-350 and hold.
Corn bounced but held the descending trend line resistance so we expect further downside this week. Wheat also bounced late last week but we still expect this market to move below 450 in the near term. Soybeans trended up nicely last week. If support at 7.50 holds then this market could see 8.00 sometime soon but with the other grains trending lower it is going to be an uphill battle either way. Buy any tests of the 7.50 support with stops below 7.40. Oats have seen a meteoric rise and we are shorting the July contract above 2.90 this week with stops above 3.00.
OJ did sell off last week and we expect follow through this week. We are targeting a move below 190 on the May contract. Cocoa broke out above 1800 last week and is now on its way to 2000. We should see a new sideways channel develop around the 2000 level once we get there. Coffee is trying to turn back to a bull market but we have yet to break out above descending trend line resistance at 115. If the market can trade above that level then we could see this market take back off if not then this is just another head fake. Sugar continues to drift lower and for now we see little going on here. Cotton continues to be range bound. This market cannot get out of its own way and for now is neutral at best. Wait for a break below 53 to go short or a rally above 55 to go long.
Live cattle has consolidated around the 98 handle and for now looks neutral to negative at best. Feeder cattle stopped our longs out at 105 and we are happy to take the profit. This market has formed a bull flag that could signal a continuation but frankly we see greater downside risk than upside potential in the week ahead. Lean hogs have now put in a double bottom with the Dec. ’06 lows. Buy long with stops below 61.00 on the April contract. Bellies have stalled and could see a deeper correction this week.
Odom & Frey
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