Market Challenges

Hands down the recent months have been the most challenging markets to trade in my career. I think it is a combination of uncertainties, volatility and the undeniable correlations between different asset classes. Tomorrow is the ltd for November so December is now the lead month in Crude oil. After a spike on the EIA today Crude reversed and as of this post is $3.50 off its highs. We likely put an interim top in today and now should trade from the short side looking for a trade back under $80/barrel. I have had a number of clients try to navigate this market and lose money because the volatility. Do not be afraid to trade small size and even options. A volatile market and too little capital is not a good recipe.

My suggestion is to be a seller above $85 and a buyer closer to $77 and do try to navigate new positions in the middle of the range for what it’s worth. Outside market influence mainly the dollar and equity markets will continue to influence oil. For instance a trade lower in stocks and higher in the greenback will only accentuate a move south in Crude. Continue to wait for a breach of the down sloping trend line in natural gas…no need to pick a bottom. Being the market is overbought and failing to make new highs we think the run higher is complete. However you do not get confirmation of a sell signal until the S&P breaks 1180 and the Dow breaks 11200 so getting short before that happens is extremely risky. The next trade we do if we venture into these waters is likely bearish exposure in the S&P but we’ve yet to commit capital…stay tuned.

Gold closed lower for the third consecutive session giving up $10/ounce today. The recent action is testing my bullish resolve but for now we stay the course with clients. In recent weeks we’ve been advising purchasing February bull call spreads. Inside day in silver with prices in December futures down 2.5%. Most clients have bullish exposure but we will need to hold onto the $30.30 level or we would quickly lose faith. Silver’s sideways action the last two weeks represents a coiled spring so once a decision on direction is made we expect a large move…the trick is to be on the right side. Our clients are long in full disclosure. A break below the 50 day MA or above the 34 day MA is where the dollar is headed. We favor a break down with a target of 76.40. Aggressive clients continue to scale into bearish exposure in the Yen which of late has been like watching paint dry but in our opinion a large decent is just around the corner.

In the softs sector we like buying March cocoa and selling March sugar. It is too early to call a bottom but yesterday MAY serve as an interim low in cocoa…stay tuned. Sugar lost 3% today and is on the verge of breaking the 100 day MA. On a breach of that level at 25.75 in March expect an additional 3-5%. Treasury traders remain in their bearish 30-yr bond trades holding out for a trade closer to 137’00 to offset. Move to the sidelines in corn as we should be able to re-establish longs from lower levels. Soybeans broke the 50 day AM today so futures traders should be out and looking to buy at lower levels . As for option traders we will weather a bit more heat and potentially buy back our top leg as we are in January call spreads for some of our clients. There appears to be a correlation between the S&P and live cattle so if we are correct with our assessment in the stock market look for the correction in the cattle market that we’ve been forecasting . Aggressive traders could get short with stops above the recent highs but the preferred trade is to buy a break in 2012 contracts. We see a challenge of the 20 day MA in the near future…stay tuned.

Risk disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.