This past week we thought we would see upside follow through on the Dollar. The Dollar did start the week pushing higher but then turned and hit new lows. Our trailing stops took us out at breakeven so it was no harm no foul. This week we have a deluge of data. We have the all important FOMC meeting on Wednesday and then we end the week with the monthly NFP report, and we have many other smaller reports coming out every day this week. The markets have already priced in a cut of .25 by the FOMC so the direction hinges on the “guidance” they give in their statement about future cuts.
With gold trading near $800 an ounce and crude oil trading above $93.00, the Fed. is walking a very thin line between trying to help out the mortgage industry and slowing inflation. We expect that they will have to say something to slow the freefall of the Dollar. If they fail to support the Dollar then $1000 gold and $100 oil will be seen before Christmas.
Energy Complex (NYMEX)
Fears of escalating attacks on Iraq from Turkey as well as the announcement of new sanctions imposed on Iran by the US, coupled with a much large than expected drop in weekly crude oil inventories and a Dollar that continues to fall, have all come together to push crude oil above $93.00. By most accounts the inflation adjusted high price in crude from 1980 is said to be $93.09. So we are now here at the highest prices crude oil has ever traded at, even when adjusting for inflation. That being said we are looking to Wednesday’s FOMC meeting to determine future direction. Most if not all analysts expect the FOMC to cut rates by .25 basis points. If that is all they do, the Dollar could begin to see a rally even in the face of a rate cut, if the Fed. says that they are becoming concerned about inflation. With oil at these levels and Gold trading around $800 an ounce, not to mention the incredibly high prices in the grains as well as many other commodities, it is a wonder it has taken them this long. So we are expecting a pullback on the back of the FOMC announcement. However, if tensions in the Middle East continue to flare up that could easily override any moves in the Dollar, so keep one eye on the news over there.
Natural gas is still stuck in a sideways channel although now it is testing the upper end of that channel. We still see this market as undervalued and expect to see it trading over $10.00 later this winter.
SP500, DJIA, NASDAQ:
Stocks have rebounded and retraced 62% of the recent sell off. This leaves the market ripe for another correction. We see stocks pulling back after the FOMC meeting as the only thing that could push stocks back to new highs would be a cut of .50 basis points which almost no one expects. We see the S&P testing at least the 1525 level this week.
Bonds did in fact test the 114 level last week and has now built a bull flag on the daily charts with the flag itself lying between 113 and 114. If the FOMC signals more rate cuts to come then bonds could see a move towards 118. We are, however, not expecting that and instead read this last leg of the rally as a potential double top. We see bonds drifting lower after the FOMC meeting and are targeting a move back towards the 110 handle by Thanksgiving.
Gold, Silver, Copper:
Metals started the week pulling back as many markets did but also ended up turning sharply higher, stopping out our shorts and getting us long at the same time. Gold’s move on Friday was yet another breakout from a bull flag. Momentum is strong and the trend remains up and until the Dollar finds support look for gold to rally. Silver too could see 15.00 this week if the FOMC signals more rate cuts to come. We have covered our short palladium at a profit and are now flat that market. Everything in metals in the near term hinges on the Dollar and the Dollar hinges on future direction of FOMC policy so look for Wednesday’s meeting to set the tone for the future of these metals.
Corn, Soybeans, Wheat:
Dec. Wheat traded briefly below 8.00 last week but has yet not found momentum in any follow through to the downside. We are still reading the daily charts as a head a shoulders top so we are selling rallies and still targeting a move back below 7.00 before the year is out. We suggest new trades buy puts rather than short futures as this market is prone to both limit up and down days lately. Corn continues to trade within its well established channel although now it is back to testing the upper end of this range. As I mentioned last week, this market would need to push back above 3.90 to attract new buyers. Beans have now hit our initial target of 10.00 we see an upside break out coming soon that could push price up to 12.00 before the year is out.
O.J, Cocoa, Coffee, Sugar, & Cotton:
OJ continues to fall as we had expected and our OJ put spread is showing an open profit. We are still targeting a move below 1.25 by Thanksgiving. Cocoa has seen a sharp rally in the last few days but we do not advise traders to chase this market if you are not already in. We do not see this current rally pushing above 2050. Coffee is still trying to regain its footing after the fast break down from 1.40. We are still looking to go long near 1.20 with stops below 1.15. Sugar saw a head fake last week and we still see this market drifting sideways at best in the near term and therefore will look elsewhere for trading opportunities. Cotton is still drifting sideways but the possibility of an upside break out is increasing each day that Cotton stays above 62.
Lean Hogs, Live/Feeder Cattle, Bellies:
Live cattle fell again this week hitting our target at 95, we see strong support on the Dec. contract at 94. Feeder Cattle also continued to trend lower as we expected it would but here to wee see strong support coming in near 107. Lean hogs are trying to find a bottom but at this time a bottom is yet to be confirmed, but get ready as a reversal in trend is coming soon. Bellies are trying to get a rally together and could be a leading indicator for hogs but again at this time it is still too early to tell.
by Derek Frey
Odom & Frey
Call us at 1-866-636-6378