Dow and Crude Oil Spread

Last week was another volatile one and I know I sound like a broken record on that note but this level of volatility is unprecedented. As I have mentioned in the past this volatility is here to stay. The biggest thing I think traders should focus on these next few weeks is the spread between the Dow and Crude oil. This is not a normal spread that people follow but it is one that we follow here quite closely. We have had a number of our indicators tell us that this spread is about to narrow significantly. Right now the spread is as wide as it has been in many years. Simply put traders should take a look at long Crude oil positions against short Dow positions. This is the single best trade I can see for the week ahead.

The Dow and S&P both hit new highs this past week. This market continues to push higher despite many warning signs. We are seeing the housing market give us signs that the road ahead is rocky at best. Couple that with shrinking corporate profit margins and you should have a stock market that at the very least cannot rally much further. Over all we remain bearish the stock market with stops above this weeks highs.
Bonds did sell off to 110 as I mentioned last week. Support at 110 did not hold and we are now clearly on our way to 108. Look for bonds to continue to trend lower in the near term. With commodity prices continuing to rise, the threat of inflation continues to overshadow and hope of a rate cut any time this year.
The energy sector continues to push higher and we expect more of the same in the week ahead. Crude oil has some significant resistance between 57 and 58 so look for the current rally to stall once we reach that level. Down side risk remain high so keep stops tight. Overall we expect the week ahead to be smaller in terms of daily range than the week past.
Gold and silver have ended the week strong, but failed to follow through to the bull side with any real enthusiasm. The week ahead looks like it will largely be one in which metals consolidate. Near term I continue to see the Dollar pressuring metals. Gold and silver are setting up the week ahead to do little more than drift. Copper is also faltering. Near term I continue to say that the 247 level in copper needs to hold in order for this market to stop sliding. If that support level is broken we will likely see the market fall all the way to 225.
The grain complex has yet to follow through to the upside from the moves we saw a few weeks ago. So far the grains have done little but drift. With all the talk of need for alternative fuels it is a bit surprising that grains have not followed through yet. Longer term I do expect grains to follow through to the upside but near term it looks as if we will rush back to fill the gaps left a few weeks ago. Buying the Grains long as they fill those gaps with stops below the gap is the best way to try and aggressively buy this dip. I continue to favor Soybeans over the other grains near term.
Oj has also been unable to follow through after pushing back through 2.00. The California freeze that made headlines is in fact having the opposite effect on the market than most expected. This is because while the freeze did damage the trees, the oranges themselves are still able to be processed into juice. So we now have a huge influx of oranges that need to be squeezed. This then goes back to normal supply demand dynamics. So since supply of oranges is now up the price is coming down. Buy the May 195 puts. Cocoa has not yet turned back up be I see a strong chance that we will see this market move back above 1625 sometime this week. That should bring many of the bulls back and could get this rally going again. Coffee is trying to turn the corner back up but for now the action is slow at best. Going long with stops below last weeks lows is the best long trade for coffee this week. Sugar really seems unable to find a reason to rally. This week the trend remains down so for now look for more down to sideways action. Longer term I remain bullish this market and am simply waiting for the market to signal a rally before jumping on board. Cotton is turning down again and is likely to continue to churn. This market cannot seem to get a rally started and for now is likely to continue to drift this week.
The trend in live cattle remains down but near term I expect a bounce this week. I would look to fade this bounce rather than buy into it. Feeder cattle continues to be sensitive to grain prices now more than ever. I would look to fade any strength in cattle this week as I do expect higher grain prices over the longer term. Lean Hogs are trending higher and for now the path of least resistance remains up. We have resistance between 66 and 67 so look for the market to stall in that range. Pork bellies have also been trending higher and in the week ahead I see that continuing. Buy trend line support on the daily charts with a 1.00 stop.
Derek Frey
Odom & Frey
Call us at 1-866-636-6378

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