Risk of Deflation?

Across my Reuters terminal today I thought I was seeing things with talk of deflation. Has anyone looked at longer term pricing on commodities say over the last ten years…Really? Crude will close lower by 2.5% today trading back near $90/barrel after being within spitting distance of $95 just yesterday. A 38.2% Fibonacci retracement drags December Crude to $86.50 while a 50% retracement puts Crude at $84.50…trade accordingly. We are advising clients scaling into to bearish exposure. Both RBOB and heating should see further bouts of weakness as well into next week. Natural gas cannot get out of its own way as prices continue to dance around their contact lows. Wait for a settlement above $4 in December to gain long exposure. Stocks traded below their 9 day MA’s but failed to penetrate that pivot point on a closing basis. This level has held for the last two weeks but we do expect a breach very soon.

A close below 1210 in the S&P and 11550 in the Dow should signal lower ground. We have lightly started to gain bearish exposure in ES put options with some clients targeting a move in the futures to 1180. Gold is above its 40 day MA for the first time since 9/22…what a wild ride as prices sold off nearly 15% and then proceeded to rally back 12% inside of one month. The physiological level of $1700 should now support with upside targets of $1740 and potentially $1770. Expect wild swings and our suggestion is purchasing options unless you can swallow the volatility. Silver was higher by 1% today briefly trading close to $34/ounce. As prices get out of their recent congestion area we see little upside resistance until $35/ounce…trade accordingly.

Aggressive clients can start to get short the European currencies with stops above the recent highs. Those long the Swissie should let go of their longs if we are not higher tomorrow. Our largest open currency position for clients exists in the Yen as we look to be put in an interim top. Our feel is we get a violent move to 1.2750 in the coming weeks…trade accordingly. Sugar gave up 2% today as prices were unable to hold onto the 100 day MA. Scale into short as a trade under 25 cents in the March contract is expected. Treasuries like equities are trying to make a decision on direction as sideways action continues. We have no open positions but favor a move to the upside in 10-yr notes and 30-yr bonds. We view better risk/reward scenarios elsewhere so steer clear for now.

Corn is back below its 9 day MA for the first time in three weeks as this should be the beginning of the correction we’ve been looking for. As long as the 20 day MA caps any upside build bearish exposure. The 50 day MA has contained upside in January soybeans now for the last four sessions. If we do not see a trade above that level we may let go of client’s soybean longs at loss…stay tuned. Live cattle broke down 1% today as prices approach three week lows. A 61.8% Fibonacci retracement drags February back near $1.21 …where longs would be back on our radar. Trail stops on your short lean hog futures or start working out of some of your put options booking profits. A near 5% deprecation in the last week should allow that.

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

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