Establishing downside hedges to get my groove back in the indices

Energy: Inside day in Crude oil closing out the week higher by 2.64%. We seem to be finding sellers between $106.50-107.00. Assuming this week an interim high was established a 50% Fibonacci retracement drags futures under $100/barrel. This week I had several energy trading ideas including today’s chart of the day. The general message was that we are likely close to an inflection point and if swimming in these waters be prepared for volatility. We are experiencing massive moves in oil and the products. RBOB briefly poked its head above the February highs and since 6/26 front month futures have advanced 16%. Get ready to feel more pain at the pump. It makes me wish that Miami had a public transportation system and I did not drive a gas guzzling SUV. The move has not been as dramatic in heating oil and though a 61.8% Fibonacci retracement was completed this week and I see limited upside. I think that crude and the product have gotten way head of themselves. The gain was minimal but natural gas did close higher for the second week running. I see support at $3.50 but bulls have been unable to gain any traction failing just above $3.70. I need a clearer picture and have no bullish or bearish advice at this juncture.

S&P 500 Large Cap Index Chart for Indices
S&P 500 Large Cap Index Chart

Stock Indices: Record highs were established and even me the perma-bear in stocks acknowledge they may continue to grind higher. I am at loss but apparently this is a true recovery…yeah right. I have been dead wrong playing this sector. My advice remains booking profits after a sizeable appreciation and establishing downside hedges as every good thing eventual comes to an end. Commodity traders are better suited to follow me in other sector for now until I get my groove back in the indices.

Metals: After dropping nearly $200/ounce in the last 3 weeks gold had its first positive weekly close in 4 weeks picking up 5.35%. A higher high and higher low tells me that we may have reached an inflection point. The 20 day MA is a hurdle and the above the $1300 psychological level I see the next significant resistance at $1335/1340. The 40 day MA is currently at $1334…trade accordingly. Silver is $1.63 off its recent lows also gaining for the first time in the last 4 weeks. Clients opted to hold onto their back ratio spreads into next week. A settlement next week above $20/ounce should lead to a $21 trade IMO. To challenge the down sloping trend line that has existed since February would put September futures at $21.50.

Softs: Cocoa has established a base consolidating the last 3 weeks. This week we will finish near the upper end of the band gaining 1.22% on the week. My next upside objective remains the 50 day MA, in September at 2270. Above that level do not rule out 2325/2350. I like long futures against short calls or 1:4 or 1:3 back ratio spreads in December. Since the beginning of May there have only been 2 positive weeks in sugar and this week was not one of them with futures off by 1.23% as we are flirting with 16 cents. No bottom is in sight. Since reversing on 6/26 OJ has appreciated 13%. We ended the week with September futures above the 61.8% Fibonacci level. Move support levels up to $138 followed by $134. Coffee got hit today for 3.24% dragging futures into negative territory after 2 positive weeks. So appropriate for coffee as just when it appeared we could be poised for appreciation a dramatic reversal. Be patient as bulls can remain in the trade as long as the recent base supports.

Treasuries: 30-yr bonds will finish higher on the week clawing back after previous weeks of heavy losses. It is premature to call an interim low and I think bulls would have a stronger case if we settled above the 20 day MA and were not rejected at the down sloping trend line (today’s highs). We will need to retake 135’00 next week for me to believe appreciation is too follow…stay tuned. 10-yr notes finished roughly 1’16 off their lows above the 9 day MA but a further advance was rejected at the 20 day MA. For the gap to be filled this week futures would trade back to 125’09.0. Resistance is seen at 127’16 in the September contract. 16’ Eurodollar futures have bounced 25-35 points but I had hoped for more to increase length on the trade. With the failed rally to end the week futures are back under their 20 day MA…will that pivot point act as resistance again? My favored strategy remains short futures and simultaneously selling out of the money calls 1:1.

Livestock: August live cattle closed the week under their 9 day MA and on the lows probed the 20 day MA. The path of least resistance in my eyes remains lower with a target of a $120 trade on this contract. Lean hogs experienced the first negative weekly close in 8 weeks. Prices are approaching the 50% Fibonacci retracement levels taking prices back to levels not seen in 5 weeks. Those that have weathered the storm could be in profits on further depreciation next week. I will be quick to take off near 93 cents as we are nearing oversold levels.

Grains: After digesting yesterday’s USDA report I guess traders shrugged off any bullish weather reports and hit the sell button today. December corn gave up 3.37% finding support at its 9 day MA. Aggressive types could probe longs with tight stops…just under $5.08. I’d prefer to be a buyer at lower levels as we could get a fleeting trade under $5/bushel if Mother Nature lends her helping hand next week. New and old crop soybeans were the biggest loser, with November giving up 2.6% dragging prices under their 9 day MA. Next support is seen at the 61.8% Fibonacci level…that is about 12 cents from today’s closing price. Wheat has appreciated the last 2 weeks finishing this week just above the 20 day MA. A 10-15 cent drop should be bought. My suggested play is bullish exposure in futures on that with options protection…selling puts or buying calls.

Currencies: How currencies close out the week are not to be ignored so the scorecard…a bearish engulfing candle in the US dollar down by 2.1% the biggest development. To fill the downside gap a trade up to 83.64 is needed. I see lower trade in the coming weeks. The Euro, Swiss and Pound all experienced gains…1.79%, 1.81% and 1.36% respectively. While I anticipate higher trade do not rule out the gap formed under the markets to be filled here. The Kiwi and Aussie were the weakest of the bunch so stand aside for now. Both crosses will need to retake their 34 day EMA for me to feel an interim bottom has formed, .7860 and .9325 respectively. The lone commodity currency that did enjoy upside was the Loonie higher by 1.81%. A meaningful low may be in place with support at .9550 as the floor. A grind back to .9800/.9850 is my call. After 3 weeks of selling the Yen found its footing gaining 1.81%. I am slightly friendly as long as futures remain above par. A trade above $1.0200 would likely signal a trade back above $1.0500.

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.