Being Objective as a Commodity Investor

For the last year and half we have gotten bad news about the economy and we are now starting to see more favorable news trickle in, the key is to be objective and to look at everything. It seems that all the markets are interconnected as the metals trade with the currencies, energies with equities and all agriculture seems to move together. Observe relationships and follow the flow of money. For instance, we’re not in a bull market in stocks but investors who have ignored equities because of a bad experience have missed a huge move, oil inventories are at an 18 year high but oil has moved $9 higher in the last 2 weeks. There is virtually no demand for cotton, yet prices have advanced 40% in the last month. Natural gas prices look cheap, however that was also the case 2 months ago, since then prices have dropped an additional $2. I guess what I’m getting at is don’t ignore the good or bad news and be more critical when making decisions in your portfolio.

The US Department of Energy said crude oil supplies were up 4.1 million barrels, supplies of gasoline were down 4.7 million barrels while heating oil supplies were up 1.5 million barrels. June crude oil closed up $1.75 to post its second positive week in a row closing over $9off the previous week’s low. Energy prices appear to be pricing in a recovery and pick up in demand for later this year, though there is no support for that conclusion. That being said, prices may have gotten ahead of themselves and a correction is probable. Support is seen between 51.50/52 with resistance at 53.50 followed by 54.50. This week’s direction may be determined more by outside influence such as NFP and the stress tests as energies seem to be taking leadership from equities. June heating oil was higher by 1.26 cents which is not too impressive all things considered. Support comes in at 1.36 and resistance between 1.40/1.42. June RBOB was higher by 7.72 cents making its way to a 6 week high. Support is seen between 1.45/1.4650 with resistance at 1.5450. We have advised clients to put in GTC profit orders on any 20 cent July and August call spreads. We have a chance of seeing a move thru 1.57 this week which would trigger buy stops.
The US Department of Energy said underground supplies of natural gas were up 82 billion cubic feet to 1.823 trillion cubic feet. Supplies are now up 34% from a year ago and up 23% from the five-year average. June natural gas ended up 16 cents or 4.7% on the week. Signs of stabilization in the manufacturing sector may well point towards a recovery in the industrial usage that has been lacking. Resistance comes in at the 20 day moving average at $3.63 which prices have not closed above since 3/25. The fact that we printed a new contract low and prices held is a positive sign, for now support should hold at 3.35. A trade idea; we will start to explore selling August $3 puts and buying 6 September $8 calls for even money. We would expect to keep the premium on the put and on an explosive move higher over the next few months trade out of the calls which presently would be deep out of the money.
After the close Friday, the USDA estimated the week’s beef production at 516.7 million pounds, down 3.2% from a year ago. June live cattle ended 15 ticks higher, in spite of concerns that beef exports will be slower on the Swine flu concerns. Support is seen between 81.50/81.75 with resistance at the 9 day moving average at 82.10. August feeder cattle were off by 115 ticks closing at a 4 week low as it appears prices are heading lower. Resistance is seen at the 9 day moving average at 99.85 with support at 97.80 although we cannot rule out a trade below 97.00
Pork production was estimated at 418.4 million pounds, down 2.7% from a year ago. Countries abroad announced that they will not import pork from the US due to Swine flu despite statements from world health officials that consuming pork is safe. Hogs are getting a bad wrap being there is no evidence that hog populations are suffering and outbreaks are traditionally named according to their origin. Last week the named was changed to the H1N1 virus from Swine flu but has the damage already been done? June lean hogs finished down just over 6 cents last week making new contract lows. We have advised aggressive traders to buy; buying June 72 calls for 90 points looking to exit at 200 points on a rebound. Also we have client’s long futures from 64.50/67.50 expecting the gap formed last week to be filled in coming weeks on a trade back to 71+.
The June Euro was higher by 25 ticks last week fighting back from losses early in the week. Support is seen at 1.32 followed by the 50 day moving average at 1.31. Resistance comes in at 1.34, on a close above that level look for an attempt at 1.37. The ECB meets on Thursday and should reduce rates from 1.25% to 1.0%.
The Aussie was higher by 90 ticks last week. Support comes in between .7175 and .7200 with resistance seen at last week’s high at .7363. On the RBA meeting this week we expect rates to stay at 3.0%. On a pullback we will be a buyer of 75/80 call spreads in September for clients below $1000, stay tuned.
The Swissie was higher by 26 ticks last week and continues to follow the lead of the Euro. Support is seen at the 50 day moving average at .8696 with resistance between .8850 and .8900. Stand aside for now.
The June Canadian dollar closed up 187 ticks, the highest close in over three months. This marks the 8th consecutive positive week. We had been calling for a trade above 84 cents for weeks now and finally the market delivered. We advised clients to take profit in June and roll their May and June contracts into September. We bought 85/90 call spreads for clients at $1500. Support is between .8330 and .8375 with resistance at .8510.
The yen gave up 260 ticks last week closing back below the 50 day moving average seemingly making its way back under par. The 50 day m.a. now becomes resistance at 1.0147 with support eyed at .9950. The risk aversion trade is back, with equities moving higher, the yen continues to move lower.
The June Cable was higher by 262 ticks last week. Support comes in between 1.4750 and 1.4800 with resistance at 1.5075. We will be looking to be a seller anticipating a trade back to 1.4300. The BoE is expected to hold rates steady at 0.50% Thursday.
The RBNZ reduced interest rate from 3.0% to a record low 2.5% and said that they expect to keep the rate low into 10′. The Kiwi was higher by 28 ticks last week. Moving forward we expect sideways consolidation between .5600 and .5800. No trades currently.
The June dollar index was lower by 16 ticks last week, closing lower now for 2 weeks running. Support comes in first at 84.00 followed by 83.25 with resistance at 86.00. We would expect prices to continue south for the time being, the next leg being determined by the stress tests and NFP.
Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.

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