The Weekend Commodities Review
A Market Review and Opinion Report By Head Analyst James Mound
For the Week Ending October 31st, 2010
For the Week Ending October 31st, 2010
The dollar’s choppiness has created a bit of a seesaw rally in a few commodity sectors. This congestive price action is not altogether uncommon amongst markets in an intermediate trend change. The dollar is unlikely to consolidate for much longer and I continue to expect a rally to ensue to 83, pressuring commodities and implying an inversely correlated decline in stocks.
A wicked pennant consolidation above trend line support is indicating a volatility breakout in oil next week. My bias is to the downside as the dollar’s anticipated strength pressures global demand for oil and drives prices to break below critical support. A close below $80 on the Dec. contract should offer technical confirmation, along with psychological pressure, and send prices falling. Heating oil is no longer a seasonal play against rbob, with an early start to winter potentially priced into this relatively wide spread. Sell heating oil against long rbob. Natural gas remains a long term call buying opportunity.
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Stocks remain choppy as they setup a failing technical structure below key resistance at 1216.75 and 1193.00 respectively. Anticipated strong selling in stocks this week is likely to support bonds, but overall the bond market is choppy and not worthy of a long. The dollar is the play with strength expected in coming weeks and a rally to 83 by year’s end pressuring the euro and pound. The Aussie and Canadian dollars may offer flight to quality buys, but I recommend selling the bounces as these markets are overbought and ready to trend change to bearish. The yen seems unable to hold any declines as dollar strength does not necessarily mean yen weakness. A flight to quality play in the yen is benefitting from selling in the euro and investors migrating money there. Moreover, dollar declines are often helping to surge the price of the yen, so a yen rally in any market condition means hysteria buying demand. I wouldn’t be surprised if the market runs to 12522 then sells off a bit, but I would recommend buying the dips and continue to stand by my forecast that:
The Japanese Yen futures will hit 140 before 80 or I will quit writing the Weekend Commodities Review…forever.
Grains continued higher last week, following alongside a dry weather supply concern in the wheat market. Corn broke topside resistance in the overnight this evening, but if the market fails to close above 5.88 it could be an area that the market sets its high. Overall the choppiness in the dollar is allowing grains to run free with this commodity bull surge, but the continuation of this rally is in doubt. Play short grains after the corn market fills its gap and closes below the gap.
Cattle turned a bit negative this past week, but momentum still remains bullish. I expect that to change rapidly and a strong swing down this month. Hogs will likely be contained, although it remains a sell on bounces.
Gold rallied back to erase the previous week’s decline, and silver surged to fresh highs amid a short covering rally. There are few if any real sellers in this silver market and I do believe the squeeze is on, which means market hysteria buying, a spike high top, and V-shaped market reversal ahead. How high can silver go? Expect near term resistance below 25.22, but if the market rallies beyond that there is little to control the breakout. That being said, I recommend establishing long term bearish positions in gold and silver. Copper should not see $4 and I anticipate strong selling here.
The coffee high set last week amid dollar congestion should be its last gasp rally in the near term. Puts are recommended to play volatility to the downside. Cocoa is in a congestion pattern and I see choppy downside ahead. Long term puts are recommended. Cotton’s volatility is truly epic, although the market has supported off of two lock limit down attempts. Therefore it is logical to conclude someone out there still needs to hedge at these prices or is slow liquidating a beaten short position. I recommend puts on up days in anticipation of this coming to an end shortly. OJ remains a sell on bounces. Sugar is in extreme overbought condition and has held up well on strong dollar days. I continue to recommend scaling into longer term put plays here. Lumber is a buy on dips.
*Disclaimer: There is risk of loss in all commodities trading. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Past Performance is not indicative of future results. Information provided is compiled by sources believed to be reliable. JMTG or its principals assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Options do not necessarily move in lock step with the underlying futures movement. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the express written consent of James Mound Trading Group LLC.