James Mound’s Weekend Commodities Review

Financials

The S&P500 has developed an interesting multi-pronged technical setup on a daily chart that indicates a strong decline to 1203, possibly as low as 1184 in the near term. I believe the stock market rallied based on the Obama extensions of the Bush tax cuts, but overall the market will find weakness in global economic concerns and a reversal in premature bond selling. As money migrates back into the U.S. dollar from a continued exodus in Europe it is more likely funds will pour into bonds than an overbought stock market. Expect a dollar run to 83, a 3-5% drop in stock prices, and a decent bond retracement to 126 over a relatively short time frame. The euro and pound remain sells with the Canadian and Aussie dollar worthy of long term shorts. The Japanese yen remains a bull bright spot amid a sea of bearish foreign currency plays, with money moving to Japan as it leaves Europe and investors lack alternatives. I continue to stand by my forecast that:

Grains

Corn, wheat and soybeans have all developed congestion patterns near the highs, not altogether a bearish indicator but rather a suggestion that momentum and upside volatility have subsided. My expectations for declines in the stock market and energy sector are likely to hit the grain sector as well, given the lack of fundamental influences in grains this time of year and the overall psychology that global economic weakness means declining grain demand. Put plays are recommended across the board.

Past performance is not indicative of future results.

**Chart courtesy of Gecko Software's TracknTrade

Meats

Cattle is testing key trend line support and should fail this week. Hogs remain choppy and avoidable for the time being.

Metals

Gold and silver remain near the highs with choppy intermittently volatile trade lacking clear near term direction. Get short heading into the last few weeks of 2010 as a liquidation event is expected in both markets in the near term. Copper offers a fundamental long term sell ahead of a China slowdown causing panic selling in that market.

Softs

A short covering rally in coffee appears underway, however this move (possibly to 230) is expected to be short-lived and worthy of a put play on a further move up. Cocoa has established a likely near term top and is a sell with straight long puts. Cotton is attempting to pull off the miraculous feat of new highs after such a dramatic collapse. This is unlikely to occur, mainly on a technical level as it is very rare to see epic highs followed by an extreme retracement followed by a rapid return to the highs. Instead, look at this as the market setting a secondary top for a less volatile selloff ahead. OJ is a short with puts. Sugar is a sell using bear put spreads. Lumber remains a cycle buy on dips.

PitGuru.com’s Weekly Grains Review for Nov 8th, 2010

Friday saw a messy session with wheat and bean oil leading the way higher on relationship buying ahead of the report. Oil share widened on Chinese demand talk and possible production concerns coming out of Indonesia following the recent volcanic activity. There is no wipeout talked about but the light ash cover is coating leaves restricting photosynthetic activity. This is a concern for total production in a time of tightening global food oil supply. Wheat recovered from chart lows versus corn with protective buying seen in options. The WZ 750-800 call spread was bought all day with the WZ 750-775 call spread bought a couple thousand times. The most interesting play is in corn options with paper buying the CH 10.00 calls, the CK 11.00 calls and the CZ11 10.00 calls. This is obviously a gamma and slope play with delta a mute point with calls this far out of the money. Outside of this the market is seeing puts bought in bean oil as players start looking for the downside technical correction. Owning put vol covered is a smart way to play the put slope inversions with long futures helping counter the upside delta move. All in all a very supportive week with the market inching closer to key strike prices as the Dec option expiration approaches. Heading into the weekend the trade is asking itself, what comes next? What happens if the USDA lowers corn yield below 154? What if John Macintosh is correct and corn yield is 148? Is China’s recent absence from the bean export market the first piece of evidence that they are now covered through March? Will the USDA raise bean exports 50 million bushels and if so, where do they get the extra beans? Do they borrow from the “residual” sludge fund or are they going to raise the yield? Bean ending stocks, though larger than last year, are still too low to be comfortable making the trade jittery.

The weekend offered little fresh information leaving the trade erratically choppy heading into the November report. Early strength was seen in the wheat market with this trade seeing a 20-cent range overnight after weekend weather did not offer any relief to the US plains or NW Australia. The macro situation overnight was slightly weaker with nothing dramatic but a slight contraction erased early overnight gains in grains. All markets ended slightly lower with bean oil losing the most following a contraction in palm oil. The USD is gaining versus the Euro on growing concern over Irish debt levels with this looking to continue into the day session.

The day ahead of the report is usually a protection day. This is when traders with naked length or shorts look to buy options as an insurance policy for immediate movement. Look for hefty action in Dec options again today, following the action the market saw on Friday. With the information currently at hand the trade is looking for a drop in overall corn yield, no change to a minor increase in bean yield with world wheat numbers expected to fall again. Overall this report should offer plenty of opportunity for the trade to change their bias if they want to. The “spin” following the trade will be interesting in that pundits are polarized at the momentum concerning the actual impact fundamentals will have versus the impact of the USD. I am a fundamental trader so I feel this will be fundamentals will win the day, if not tomorrow then the market has to wait for the final numbers on the WASDE report come January.

The market looks to open slightly lower to start the day with a weaker crude market and a sizable (100+) move in the USD over the Euro. All factors look bearish heading into the report but do not get enamored with bearish sentiment until we get tomorrow’s numbers behind us.

I am currently in Cartagena Colombia at an international conference of wheat producers and consumers. Following the conference I hope to have a better idea of what the actual world producers are looking for concerning protein, production and overall producer sentiment. From early indications I estimate that the world crop will be big but overall quality is a concern making the wheat versus corn spread a feature following the WASDE report.

World production numbers are going to be closely scrutinized. Focus on Argentina, Brazil, Australia, Russia and look for possible changes in the Chinese numbers. The USDA is currently 16 MMT above private forecasters concerning Chinese corn production so I think this a possible bomb about to go off. The direction of the impact following the grenade is yet to be seen but I have to believe that the upside is the path of least resistance for corn and all agricultural markets due to growing world consumption and questionable weather patterns. The La Nina effect is stated to be the largest in 70 years. If this is true, the Latin American crops are in for a tough struggle as planting approaches completion.

PitGuru.com Weekly Grains Review for Oct 25th

By Matthew Pierce

Friday saw a choppy lower session with both corn and beans following the script gravitating back to the highest open interest strikes at $5.60 and $12.00. This kept most of the trade subdued throughout the session with nothing exciting on the fundamental side to direct interest ahead of the weekend. There was little expected so the trade allowed options to dictate the pace. Over the weekend I saw 4364 of the SX 12.00 calls exercised with 226 puts abandoned…a good move in hindsight. In corn I saw 3016 calls exercised and 5568 puts. The puts were thought to have futures against them. These were the only two features with all other floor commodities showing only marginal interest in Nov. The overnight session was dictated by macro factors with the USD taking another dive following nothing coming out of the G20 meeting. Crude is up on extreme food oil demand with palm screaming higher making 2 year highs. Chinese markets were higher as well helping the corrective upside sentiment. The day session looks to open in line or stronger than the overnight with support from the Euro, Chinese demand, Aussie weather and now talk of standing water delaying plantings in the SW of the US HRW region.

Today’s calls are as follows: Beans are called 15-20 Higher looking at the contract high at 1235 (SF) as the first bull target. Corn is called 10-12 Higher looking to go above Friday’s high with last week’s high at 579 ½ the first upside target with the contract high at 588 offering a second level this week. Indicators remain in the upper end of the range but are still below the contract highs. Wheat is called 7-10 Higher looking to achieve the 50-day MA sitting at 702 ½ this week. Meal is called 2-3 dollars Higher looking at last week’s contract high at 340.20 as the only target. Bean oil is called 130-150 Higher leading the way on the floor looking to achieve the 50% weekly retracement level at 49.77.


Concerning weather: Weekend rains were far greater than expected in the SW region of the US with many areas that needed rains receiving them for HRW plantings. This system moved slowly across the Midwest with all harvest activity stalled. This should ease the record rate seen for this year’s harvest allowing time to catch up with the markets. There is some talk of too much rain in areas of N. TX, NE OK and SE KS but this is not a major factor yet. The benefit of the overall rains outweighs the spotty standing water. The above map shows a bearish forecast with only the far NE corner of the Corn Belt still looking at any rains to stall harvest. Looking at Australian weather, the NW’s opportunity for rain is stunted today as compared with Friday’s forecast. The forecasted rains have been pushed off to this weekend with fading confidence in the overall impact this will have. Without these rains Aussie NW production will fall to less than 50% of last year’s crop. China is looking at a very cold forecast possibly damaging their recently planted winter grain crops with wheat a serious concern. This is a short lived situation but one that deserves watching due to wheat corn relationship spread levels.

Looking ahead at this week I see commodity demand as the major factor. Chinese demand in particular is the focal point of the trade with continued rumors floating all over the trade that a major corn deal is in the works. This only enhances the availability of profit in long option and volatility plays heading into Month End. I expect to see more and more OI hitting the trade as moving into Nov due to profit potential versus a staggering US equity picture. The retail sector looks to suffer even though estimates are above last year. The 5-year trend remains low and slow not offering any incentive to join the party. On the other hand, commodities continue to gain in open interest; commodities have a real supply and demand story coupled with massive world currency issues. This train is just warming up for all late comers.

***chart courtesy Gecko Software’s Track n’ Trade Pro
Past performance is not necessarily indicative of future results.