Perception vs. Reality

The latest advance in stocks and commodities with the fall in treasuries and the US Dollar, could in fact be a precursor of what is to come but the pace of the advances and declines is flawed. These spectacular moves in such a short time are irrational and almost always not true. Stocks are moving higher as investors believe we will start to see a recovery in coming quarters and on hope that the worst is behind us. I’m not convinced on either front just yet. Commodities are rallying for the same reasoning and the fact that inflation may be around the corner. It is undeniable that this is a valid concern but perhaps premature. The move in treasuries is justifiable and for the US government to think they can get global investors to bail them out of this mess by issuing long term obligations and paying 3% is ludicrous. The US dollar is dead and will be considerably lower years from now. Day to day the volatility is unpredictable, however even Warren Buffet recently said 5-10 years from now the US dollar could be considerably lower. Markets tend to move irrationally and to extremes when fear and greed is present and this is never been more apparent across all asset classes. The investor that diversifies their portfolio and can differentiate between perception and reality will come ahead in the long run.

June crude oil closed up $6.01 last week, the highest close in 4 months. What was resistance will now become support between 55.75 and 56.25 with resistance at 60.00. Oil has traded higher 11 of the last 14 days on good volume so it is safe to say this rally is real and most likely sustainable, albeit with periodic setbacks. June heating oil was higher by 14.33 cents. Resistance comes in at 1.5375, support is seen between 1.47 and 1.48. It is not unreasonable to expect a 50% retracement of the recent move taking prices to 1.3525. June RBOB blasted higher by 19.72 cents last week trading to its highest level since 11/4. Resistance comes in between 1.75 and 1.80 with support at 1.63 followed by 1.55. We have advised clients to exit their July and August 20 cent bull call spreads at a profit. We should get a setback being the last 2 weeks we saw a 25% advance.
June natural gas closed up 77 cents at its highest level in 5 weeks. Much of the move is attributed to an expected decline in US production and industrial usage coming back on line. Since bottoming on 4/30 prices have moved $1 higher or 33%. We advised clients to book partial profits on their longs and to tighten up stops. Perhaps one of my best trades ever (Sell August $3.25 puts & buy 6 September $8 calls) was bought for $150 and closed at $3,650. $3.25 should serve as the low; we see support at 3.90 with resistance at 4.50 in June.
As of last week the USDA said that 33% of the corn was planted, down from the five-year average of 50%. July corn was higher by 13 ΒΌ cents last week to its highest level since 1/26. Support comes in at 4.15 followed by 4.00 with resistance at 4.25 followed by 4.38. Based on the market, action traders are content being long rather than short into the USDA report as pre-report guesses have a lower ending stocks number due to strong demand and lower South American production. Longs have been in the driver seat but we expect a 30-40 cent correction starting this week and will have clients on the sidelines until this happens or we get a different read.
As of last week the USDA said that 6% of the soybean crop was planted, down from the five-year average of 11%. July soybeans were higher by 23 cents last week. Prices traded within a 40 cent range, we feel this sideways consolidation exhibited exhaustion. First support is seen at 10.90 but we anticipate a break to 10.60 and possibly 10.20. Resistance is seen at 11.20. We sold June $11 calls and have clients positioned in put spreads into the USDA report. We ought to see a correction lower being soybean acreage should come in greater than the previous report and even with a moderate drop in ending stocks the market has already priced in a significant increase in demand for US beans. On drier weather here and in South America perhaps the demand has been overestimated.
As of last week the USDA said that 23% of the spring wheat was planted, down from the five-year average of 59%. July CBOT wheat was higher by 27 cents to its highest level since 2/10. Resistance is seen at 6.05 with support at 5.84 followed by 5.65. July KCBOT wheat gained 24 cents and has traded higher 8 out of the last 9 sessions to the highest price since 1/30.We assume most of the recent upside was due to short covering, the market believes damage will surface and this has made shorts nervous. On Tuesday’s report the endings stocks numbers should see little change and have no impact on prices.
July sugar was higher by 28 ticks last week taking prices to a 10 month high. 12 of the last 14 days sugar has traded higher, although preliminary we think an interim top was formed last Thursday. Thursday’s high now becomes resistance at 15.60 with support down at 15.00. A 38.2% Fibonacci retracement takes prices back to 14.50, a 50% retracement to 14.17. We will be looking to be a buyer of March 10′ calls on a setback.
July cocoa gained $195 as the inverse relationship to the dollar was displayed. This was the first close back above the 20 day moving average in 4 weeks. Support comes in between 2425 and 2440 with resistance at 2550 followed by 2600.
July orange juice jumped up 5.85 cents with parts of Florida suffering from drought conditions. After 4 failed attempts to get thru 92 cents last week we should see prices back off. Support is seen first at 88.50 followed by 85.50. Stand aside.
July coffee jumped up 6.40 cents, the highest close in twelve weeks, on talk that world demand may be holding steady in spite of weak economic conditions. We were able to exit the July 120 calls for clients at a profit. For now we would stand aside as our short term objectives have been met. Resistance comes in between 1.2750 with support at 1.25 followed by 1.22.
July cotton was higher by 2.85 cents last week gaining for the last 8 days. Cotton has been on a tear but at this juncture we think prices have gotten ahead of themselves being they have gained 65% in just 2 months. Recently we sold July 55 calls and bought twice as many December 65 calls for clients. The trade idea was on a correction in July look to capture the premium and then hold the December calls. We are currently making money on this trade but for the wrong reasons so we will attempt to cover the position this week at a 25% profit. The lesson here is if a market is not performing how you expected it would when you put on the trade then exit.
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Risk 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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