The Weekend Commodities Review
A Market Review and Opinion Report By Head Analyst James Mound
For the Week Ending November 14th, 2010
For the Week Ending November 14th, 2010
The commodity correction appears to have begun, a little later than anticipated, but with enough volatility to indicate the move is underway. The vertical momentum (or velocity of decline) is just beginning to expand, setting up further declines in potentially shocking intraday price moves – most notably started by markets like oil, soybeans, sugar and coffee.
Crude oil’s plunge on Friday is indicative of the spec and fund selling I expect to see increase as the stock market declines and global economic outlook weakens. The energy sector as a whole piggybacked the commodity inflation boom of the last few weeks, but fundamentally lacks the geopolitical concern or supply issues that would justify such high prices. Oil is likely in a long term consolidation phase, having topped below $150 and above $32. The market is testing the upper inside range, and I expect it to fail all the way to $55 or lower. Natural gas remains a long term call buying opportunity to play the volatility pop to the upside.
Stocks began their slide, just above the highs set in April, and is at the beginning of what I anticipate will be a volatile selloff that continues throughout this week. Bonds remain choppy and long term puts are recommended to hedge a short term bear play on the S&P. The dollar supported near critical trend line support and has some bullish momentum with weakness in the euro expected in coming weeks. I anticipate an end of the year run in the dollar to 83, which should push the euro near 130. Sells are recommended on the Canadian and Australian dollar. The yen remains a long term buy, with bull call spreads recommended on dips. I 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.
A bullish WASDE and crop production report for bean had them nearly limit higher earlier last week, but intraday failures in corn and wheat signaled a major turn for grains that are now in an utter freefall. Look for continued downside next week to confirm the top is in for this sector. Rice also experienced a strong turn and potential long term top. Puts are worth a look in this market as I don’t believe the option chain prices in the real potential for rice to drop into single digits in 2011.
Past performance is not indicative of future results.
**Chart courtesy of Gecko Software's TracknTrade
A slightly bearish note developed in cattle as it fails again to break out of the recent congestion pattern. A grain failure means lower input costs and leeway for the market to head into a downward spiral. I expect a strong collapse in cattle in coming months. Hogs remain bearish but with little motivation to suggest a short play as I would not expect price extremes to occur in this market any time in the near future.
I discussed last month the potential for the collapse of gold and silver in Q4, and I believe that we have begun to see the underlying volatility expansion necessary to create this collapse. This does not mean that gold and silver will head straight down, but rather $2 down days in silver create the washout effect that is necessary to create additional volatility and momentum. Similar action is currently being seen in the sugar market and is indicative of a market that is ready to make its final price push and fail. Look for gold and silver to both experience 20%+ declines in short term time frames. Copper also pushed its all-time upper limits only to show strong signs of failure ahead.
Coffee is one of those exposed markets ready to crumble at the first sign of worsening global economic outlook and a strengthening of the dollar, especially after staging one of the most impressive rallies in two decades. Look to play the market’s retracement with bear put spreads using March options. Cocoa has been in a choppy congestion pattern after developing a bearish longer term technical formation. This congestion could last through the end of the year at first glance on a monthly chart, but I believe support will fail this month and the market will test 2300 before the end of the year. Cotton has been one of the most miraculous stories of the year, one that I forecasted up to 110, after which the market blew past even my wildest expectations. At this point it represents one of the greatest long term put play opportunities I have seen in some time. Sugar, like silver, has recently exploded with volatility, and this past week’s price collapse could just be the beginning. OJ is in a volatile chop, but is likely topping with downside expected in coming weeks. Lumber remains a cycle 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.