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The Weekend Commodities Review

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For the Week Ending September 13th, 2009

Mon, Sep 14 2009, 12:05 GMT
by James Mound Trading Group Team

James Mound Trading Group

General Comments

What happened in the past two weeks? If you look on the surface at the action we have seen over the past two weeks you would have to say my dollar and metals forecasts are all wrong. After all, if we are coming out of a recession (which recent data indicates) then the stock market would continue higher and the dollar would likely fall. Well, on the surface it is just that - we need to dig a little deeper to see real underlying action here. In my opinion, this is just a giant headfake before heading lower on the stock market and much, much higher on the dollar. Why do I make these forecasts amid contrary price action? Simply, you cannot get caught up in the little short term trading nuances the market throws at you. Short term traders tend to be short term in more ways than one (if you know what I mean), and I am forecasting the intermediate and long term trends here. Look at the price charts for example. Has the dollar broken the twelve month lows? Has the stock market broken 1100 on the S&P, thereby indicating a significant price breakout? Has crude oil broken $77, showing fresh 2009 highs? Even take a look at gold. Sure, gold has broken through 1000 psychological resistance and has pushed to 6 month highs, but are we at contract highs? No. In fact, the market is struggling to even test that area. This move presents an opportunity for bears like me to jump in at what could ultimately be great entry pricing. Sure, the markets could push through and test these levels I just discussed, but you are never going to call a perfect top or a perfect bottom (at least not consistently).
For that reason this week's edition of the Weekend Commodities Review is called the Golden Opportunity Edition.

Energies

Crude oil has gotten some bullish fundamental news in recent weeks as geopolitical tensions heat up in the Middle East. However, along with that news came an OPEC meeting that left a lot to be desired. If OPEC cannot make supply cuts because outside producers like Russia will fill the global demand then whatever power OPEC has is lost. That is tantamount to saying that they have lost their control over global supply. They should change their name to OSPEC (Organization of Some Petroleum Exporting Countries). Bottom line is supply is strong and there is still lackluster demand even with all the stimulus of the past year artificially supporting demand. Even the hurricane threat is a few weeks from being a real threat. Oil is a strong sell at these levels. Natural gas is a different story and that oil versus natural gas spread has begun to tighten back up. The panic selling appears to be gone and the market is getting ready to either congest or spike back to 4.50. Either way put selling on dips is recommended.

Financials

Stocks rallied after setting a secondary short term bottom, but my technical outlook is one in which I see a congestion period in the near term leading to a breakdown to 930. Bonds remain mildly bullish, but the move I had anticipated has been somewhat hit so I am inclined to stay away from the market for the time being. The dollar is the play here as a great entry point into a bullish dollar is presenting itself. I continue to reaffirm my previous forecast and statement that:

The dollar will hit 86 before it breaks below 70 or I will stop writing the Weekend Commodities Review - forever.

The euro currency is a great short with bear put spreads recommended. The yen remains a good long term strangle opportunity with a new government likely causing currency volatility for the foreseeable future. The Canadian dollar is congesting, and while it is showing a bull flag my gut says it is a great short term sell.

Grains

Grains continue to offer strong sell indicators, both fundamentally and technically. The lone exception is wheat which I see as a value buy as compared to soybeans and corn which seem fundamentally overpriced and ready for a major leg down. Rice remains a possible sell with cheap puts.

Meats

Cattle is setup for a strong price decline here as the fall from historic long term highs continues with a failure to the downside. Hogs are brushing up on some resistance with a major price point of 56 offering a critical trend indicator. A break above that mark and this v-shaped bottom could have some legs.

Metals

A weak dollar and Chinese stock market have helped bring gold back up to 2009 highs. Remember that the U.S. is not the only place that uses gold as a flight to quality and China has had a great opportunity, along with Japan, to buy some gold in recent weeks. Silver has come along for the ride and has shown its ability to get ahead of the gold market by trying to overshoot the move. This works both ways as the downside for silver has the potential to be dramatic and not a happy place for futures or exposed put sellers. The bottom line here is there is no other way for me to forecast metals prices than with a dollar forecast - and I think you all know my dollar forecast by now.

Softs

Coffee is in an ugly congestion pattern. It remains bullish but exposed to a strong dollar and not a market that is screaming buy at the moment. Until we break 145, it should be bought with futures only on dips and I recommend using a covered call strategy to collect time decay premium. Cocoa is a strong sell. I continue to recommend buying cotton on dips with straight long term call options. OJ is a value buy on dips with a target of 120 by year's end. Sugar appears to have given up on its panic rally and put buying is recommended.

Published on  Mon, Sep 14 2009, 12:08 GMT