Energy Complex (NYMEX)
Crude oil did push back above 75 as we mentioned it would in the last issue. The daily chart could be forming a double top if resistance above 78 holds. Frankly we do not see that resistance holding in the near term. We see this market moving to test the highs and even breaking out through them. OPEC will try and slow the pace of the rally but frankly they have less control over the price of oil than most people think. At this point it is not a question of if we will hit $80.00 a barrel but rather when.
Natural gas has been extremely oversold for some time now and a short covering rally is now under way. For this to lead to more than a dead cat bounce the market would need to claw it’s way back above 7.50 to convince the bulls to get back in.
SP500, DJIA, NASDAQ:
The stock market is still drifting sideways waiting for the next signal from the Fed. The market has all but forced Bernanke into a corner where his only way out is to cut rates. While we do not feel it is as much of a sure thing as many would have you believe, we do feel that recent events like Friday’s NFP report could force the FOMC into cutting rates sooner than originally thought. But let’s look at what a rate cut really means. A cut in interest rates is an admission by the FOMC that the market is in fact in trouble. Therefore we feel that rate cut or not the market will fall again in the weeks ahead. We are using significant rallies to buy puts.
Bonds have taken off ahead of next weeks FOMC meeting and frankly we feel they have gotten very far ahead of reality. We see bonds falling back below 112 within the next two weeks as the FOMC should turn out to be less enthusiastic about cutting rates than the bond market would like. Buy the 112-110 Dec. put spread for $500 or less.
Gold, Silver, Copper:
Gold took off and pushed right through $700 as the Dollar fell to fresh 23 year lows. Will the Dollar continue to fall? The Dollar has already fallen in anticipation of a cut in rates next week. If the FOMC does signal that multiple rate cuts are in the pipeline then yes the Dollar will continue to break down as falling interest rates lead to devaluation of a currency. While we are not long term bulls of the Dollar we do see a near term dead cat bounce coming that could push this index back above .8200. Silver has struggled to keep up with gold as can be seen by the ever widening of the gold/silver spread. We see silver continuing to struggle in the near term but will look to position long on the next pullback. Copper continues to look strong and we see support at 320 holding up this week. We are targeting a move back above 350 later this month.
Corn, Soybeans, Wheat:
Wheat continues to squeeze the shorts. This is a classic blow off move with many gaps along the way. This trend is not one to get in the way of. These blow off moves often move farther than anyone would have predicted. Buy out of the money puts in either Dec. or March contracts and wait. While wheat shoots for the moon corn continues to struggle. Corn needs to break out above 375 to convince the bulls to get back in. We do see corn moving slightly higher in the near term but not enough to warrant a new trade. Soybeans pushed through 9.00 as we mentioned it might in the last issue. We see this market continuing higher and advise readers to buy calls on the next pullback. We see soybeans testing the July highs near 9.50 before the month is out.
O.J, Cocoa, Coffee, Sugar, & Cotton:
We expect OJ to stage a spike in price within the next 30 days but will use that to buy puts as we see this market falling back below 1.00 later this year. Cocoa is still turning back up and we expect to see this market back above 2000 by the end of October. Demand for Cocoa is highest now as chocolate makers ramp up production ahead of Halloween and Christmas. Coffee should follow through up to about 125 before turning back down. Short term trader can look to play the rally while longer term trader should use the rally to buy puts. Sugar should stage a rally back over 10.00 before the end of this month but then we could see a move back below 9.00 so here to short term traders can play the rally while longer term traders should use the rally to buy puts. Cotton is expected to fall back into a more or less sideways range trade for the foreseeable future.
Lean Hogs, Live/Feeder Cattle, Bellies:
Live cattle is forming a potential 1-2-3 top formation that should lead to lower prices. A break below 94.00 would confirm the 1-2-3 pattern. At the same time feeder cattle continues to trend higher. Feeder cattle would need to breakdown below 118 to begin to catch stops. Lean hogs have found and held support above 65.00 and could begin a new rally sometime before the month is out. We would target a move above 70.00 sometime in October. Pork bellies have formed a potential double bottom near the 85.00 level, if it can hold that support level look for a dead cat bounce to push it back above 90.00
by Derek Frey
Odom & Frey
Call us at 1-866-636-6378