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The Weekend Commodities Review

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For the Week Ending October 4th, 2009

Mon, Oct 5 2009, 13:24 GMT
by James Mound Trading Group Team

James Mound Trading Group

General Comments

The dollar began its bull turn last week and the negative market sentiment has started.
Declining consumer confidence, rising unemployment and a nasty negative GDP are all major economic data points to bring recession fears to the forefront for many investors. Look for continued pressure on stocks and commodities and a rising dollar and bond market as the world experiences its first big bump in the road to recovery.

Energies

Oil has supported briefly as concerns over Iran take center stage. I dismiss much of this political back and forth as this has gone on for years with little real action. Sure Iran can fire off some test missiles - they have done that several times too. Sure the U.S. can threaten sanctions - they have done that more times than I can remember. The bottom line is if China, who is seemingly forever linked to Iran for oil importation, is willing to step in and say we are done doing business with you until you address this, then maybe you got yourself a real issue. But until then, Iran is free to ignore the U.N. effort to paralyze the country's import/export relationships, and oil is likely headed south for the winter.

Financials

A strong stock market decline is on its way after a week of negative economic reports. The S&P has significant support above the 980 level but after that there is little stopping the market from falling to 930. These are two critical technical areas that will be keys over the next few months to determining the long term trend in stocks. As the stock market declines expect bonds to rise and the U.S. dollar to rally. This dollar rally is critical to the long term stabilization of the U.S. economy and should be a welcomed offspring of this upcoming stock market retracement. I want to discuss for a moment why my focus is on the U.S. dollar rally. In past issues I have discussed why I think the dollar will surge, and I continue to stand by my conviction that:

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

However in this issue let's discuss the significance of the dollar and why it is such an important element of my reports recently (and will continue to be for months to come). The U.S. financial world is stuck in a triple correlation that is unlikely to change for many months. The stock market is dependant almost completely on the U.S.'s ability to rise out of recession into prosperity. Any real indication that this will not happen will likely devastate the stock market and force aggressive panic selling. Bonds are also stuck in that interest rate policy is flat lined at near zero and China continues to scoop up our bonds, notes and bills at auction. If it looks like we are not recovering quickly from this recession, as recently thought, then traders must price in what the Fed has been preaching - a long flat line at zero interest rates. So strong demand for our debt issuance and a weak stock market means a strong U.S. dollar.
This is very important because a strong dollar will pressure commodity prices.

Grains

Grains are exposed to the downside in the near term as this Friday's crop numbers should show a bearish outlook for corn and soybeans. I believe that after a digestion period wheat will be considered the lone bright spot amongst the grains as poor yield out of Canada helps to support this market at value levels.

Meats

Cattle continues to downtrend and I highly recommend playing a bear breakdown in coming months. Dec. hogs is showing support above 48 but this congestion is not worth trading. A break below means this could get ugly, and a break above 54 resumes the bull recovery.

Metals

Gold has held up as oil prices remain supportive, expectations for seasonal demand from India has pressured short covering, and specs buy on congestive technicals below the contract highs. None of it matters. If the dollar breaks out the trend will pressure gold prices. If the recession fears come back, which they already have to an extent, then India demand is out the window. The shorts will likely flood in on a break below 980. Silver has already been seeing some profit taking after a strong price surge that took the market to a near term overbought situation. Copper is declining on fears of a global demand pullback as economic data is going to rip apart this market in coming months. I remain bearish all metals.

Softs

Coffee has developed a spectacular looking pennant on a daily chart, suggesting congestion ahead of a massive price move. I remain bullish with a bit of concern over how the U.S. dollar rally will pressure coffee prices. Vietnam continues to experience significant problems following the aftermath of a recent typhoon that brought flooding to the main growing region.
Cocoa remains a strong sell as a drop in global demand is expected to knock the wind out of this market. Cotton is a buy on dips with Friday offering the start of a potential bull run. Sugar is a screaming buy on a breakout above 25.50 on the Jan. contract, which is likely to occur based on short covering and global demand pressures. OJ is a buy on dips.

Published on  Mon, Oct 5 2009, 13:29 GMT