Commodity Update: Bears Regaining Control

traded to 8 month lows breaking $90 with a vengeance losing 3.25% yesterday. I have been advising buying around $90 so anyone listening is taking some heat. For now I am holding longs, taking on water for clients that are brave enough to hold. Given that the trend line that has supported since 2009 was breached yesterday, tread lightly and do not add to open positions until the market has established a bottom. My clients are willing to weather this move for a few more dollars before cutting losses, but I could be dead wrong so keep your position small for now. RBOB broke support as well and it appears July will attempt to fill a gap from late 2011 approximately 4 cents from yesterday’s close. Based on the near 20% reduction in prices in the last two months we should see relief at the pump. Yeah, right. Heating oil lost 2.5% dragging prices to 8 month lows trading under the December support levels. Prices should be close to finding a value zone for all energy products but do not rule out further news out of Europe or an ugly NFP overextending this market further. I see solid support at $2.60 but that is another 5% decline from yesterday’s close in heating oil. Natural gas has lost 40 cents in the last four sessions and a touch more--a 61.8% retracement is complete. I would look for an exit door on recently established shorts on another 5-10 cent drop.
 
Stock Indices: Bearish engulfing candle with stocks closing on their lows back under the 9 day MA. It looks like we get lower action from here. I was hoping for a higher selling point but prices were unable to get above the 20 day MA and bearish news out of Europe and positioning ahead of Friday’s NFP has traders selling. Resistance is seen at 1315 in the S&P and support at 1285 followed by 1255. As for the Dow, resistance at 12500 with support at 12300 followed by 12150.
 
Metals: A near $40 trading range in gold yesterday with prices reversing mid-day only to close up 1% near their highs. As I said yesterday I like buying dips as long as prices remain above $1535 in August. Considering yesterday’s close that is approximately $30 of risk and I feel the upside is $60-80. First resistance is seen at $1600 followed by $1640. Until silver closes above $28/ounce I am cautious. I’m a believer on a settlement above $28 and then on a close above $29 expect $30.50. Copper is back at its lows. So much for a bounce. As long as we see pressure in commodities expect a trade to $3.30 in July futures. More so then trading copper track the price action to help with other positions.
 
Softs: Sugar may be establishing a base. Even in the face of serious selling elsewhere, sugar held its own to close only marginally lower. Let’s see if $19.25-19.40 can hold the next few days in July futures. Cotton retreated yesterday closing down 2.6% back at its lows. If 70 gives way, expect 65 cents. I still think if the S&P can find its footing we get a dead cat bounce but this is not a buy recommendation rather just a heads up for those short. In my opinion we are long overdue for a snap back, so trade accordingly. As a spec play--because the risk-to-reward makes sense--aggressive traders can scale into longs in cocoa futures with stops below the recent lows. This level also held back in mid-April. As always, remember tht past performance is not indicative of future results. Weakness should persist in coffee but until we get a rally I’m content on the sidelines with clients.
 
Treasuries: Treasuries break out to new highs as risk OFF is exhibited and flows are coming into Treasuries as a safe haven. I’ve said many times that it is not about yields but rather, making no money in this complex is better than losing money elsewhere. Continue to use the 9 day MAs as your pivot point; in 30 yr-bonds at 148’00 and at 133’25 in 10-yr notes.
 
Livestock: Live cattle were lower by 1.2% closing under the 20 day MA as I expect further pressure. An additional 1.5-2% deprecation is expected until support comes in. September feeder cattle closed well off their lows but a 61.8% Fib retracement occurred on their lows with September trading back to 156.25. This could suffice but with weakness from outside markets expect that level to be challenged again in the coming sessions. Lean hogs have advanced 4.25% in the last four sessions and if prices can trade above 88.00 in June we should see a trade to 90.00, completing a 38.2% Fibonacci retracement.
 
Grains: Corn found mild support just above $5.50/bushel and with all the weakness in outside markets to only lose .50%, I’m fairly impressed. Aggressive traders could start scaling into longs in December and if concerned about downside buy some inexpensive July puts. Yes they are different crop cycles, but the correlation exists and you don’t need to pay for time as July options only have 3 weeks. A 50% Fibonacci retracement has occurred in wheat but I feel we could see 15 more cents of depreciation and then I would be neutral. From here I’m slightly bearish. Soybeans came under pressure, losing 1% to give back the previous three days' gains. I am bearish and feel a close under $13.60 in July should signal a trade back to $13-13.15 into next week. Oats posted fresh 2012 lows down 3.5% yesterday and over 20% in the last week. Until we find support here, do not commit to a sizable long position in grains as oats generally set the tone and can be used as a precursor when trading in this sector. July soybean oil held up well but prices will need to hold 49.00 on a closing basis or I would cut losses on recently established longs. Bottom line: Crude will need to hold this level or soybean oil should trade lower.
 
Currencies: 4 out of the last 23 days: That's the number of down days in the dollar index in the last four weeks. This one-sided action is almost as impressive as the San Antonio Spurs record of late. This is not sustainable and though I am incapable of picking tops I think we’ve baked too much into this cake. Pressure continues across all currencies with all crosses except for the yen which is getting beaten down. The commodity currencies are back at their lows, so probing longs did not work. All I can say is set those short trail stops as I do not think this will last forever. Trend followers, congratulations: May should prove to be a great month in FX.
 
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