Commodity Update: Cocoa Continues To Falter

closed lower yesterday for the fifth consecutive session as prices are fast approaching their November lows. While clients are not in the market, I do expect a grind lower and if forced to take a stance I’d rather be short than long. For my clients I am looking for a long entry from lower levels. RBOB closed lower again yesterday but it is finding mild support just under $2.60 in January, unable to penetrate that level over the last 3 sessions. If broken, we should see an additional nickel drop rather quickly. Similar performance in heating oil off the last 5 days giving up 15 plus cents and completing a 50% Fibonacci retracement yesterday. Next support seen at $2.82 in January. Natural gas broke support, dragging prices to 2 month lows down 2.56% yesterday. Do not rule out a challenge of the September lows. As we approach those levels I’d be interested in gaining bullish exposure with clients several months out. Stay tuned.

Stock Indices: The Dow gained 0.33% yesterday. It appears prices are going to challenge their early November highs. With the 6% gain in recent weeks a 61.8% Fibonacci retracement has played out. I see limited upside without the FOMC igniting a leg higher...which at this juncture I doubt. Yesterday’s chart of the day was the S&P 500. Like the Dow we’ve seen prices appreciate in recent weeks but I see limited gas left in the tank. Prices in December futures are having a difficult time getting above the down sloping trend line and if long I’d be lightening up or hedging positions off.

Metals: Gold has been in the green the last 3 sessions, yesterday advancing 0.52%, closing back over its 100 day MA. This is a friendly development but without further evidence I am still bearish to neutral thinking we need to see more pressure before the next ascent begins. A close back over the 50 day MA in February at $1733 would likely change my mind. Silver is building a base as well above its 50 day MA gaining 0.74% yesterday. Some clients hold back ratio spreads and are under water. While viewing the daily chart I could be convinced why clients should be long. The weekly chart is ugly, combined with the fact that I feel the dollar can't catch a bid. I’m staying the course for now.

Softs: Cocoa continues to falter lower 4 of the last 5 sessions with prices closing under 2400 yesterday for the first time in 3 weeks. Another 1.5-2.5% loss is anticipated in March futures. Sugar lost 2.34% taking prices very close to 1 month lows. If we do find support around these levels clients in March call spreads will be advised to buy back their top leg. We are down about 50% on the entire trade as is. I still think we have time to turn a profit. Stay tuned. Cotton is exhibiting signs of an interim top as a close under 73 would confirm a trade back near 70 cents where I will be an active buyer for clients. OJ futures continue to meander just above their 9 day MA but I think bearish exposure is the appropriate play trying to capitalize on a move back near $1.15. Coffee lost 4.45% as prices approach their previous lows. My clients are long calls and were hit hard yesterday. Lows will need to hold or I will be playing defense trying to recoup losses on open coffee trades. These options do have time values but a move like we saw yesterday hurt premium.

Treasuries: 30-yr bonds were unable to close above their 9 and 20 day MAs as those pivot points should now become resistance. I am currently pricing out bearish trade but am a little uneasy about jumping in ahead of the FOMC meeting as I am carrying open losses in other trades with clients. Stay tuned. If a move lower is confirmed from current levels, my target in March would be 147’00. Yesterday we saw a failed rally in 10-yr notes with a close at the 9 day MA. Risk-to-reward, this is a better play gaining bearish exposure with stops above the latest highs. The only reason I’ve yet to act is I may want to be in NOB spreads and that would be a long in 10-yr notes against a short in 30-yr bonds. Look for a more definitive play later today.

Livestock: Live cattle have started to break down, losing the last 2 days. A close under $1.30 in February should lead to a trade back to $1.2850, so trade accordingly. Feeder cattle have done the opposite, gaining the last few sessions and lifting prices near $1.50 in January to 1 month highs. This makes little sense with the degree of divergence, so stand aside. Trail stops down on lean hogs and start lightening up as we are seeing slight buying interest at these oversold levels. Bearish trades should have been able to enjoy profits on the 5.5% break in the last 2 weeks.

Grains: Corn is down 5% in the last 2 weeks but most of the damage is done in my eyes as the market has factored in a bearish report and weak export numbers in the last few weeks. If anything, we could get a bullish surprise in my opinion. Some clients hold March back ratio spreads at a loss at the moment. A trade back to the upper end of the range should get them profitable. Stay tuned. Soybeans were able to hold their own, rallying back in late dealings to hold the 9 day MA. As long as the down sloping trend line supports, near $14.25 in January, I am friendly. $8.50/bushel gave way in March wheat yesterday to register its lowest close in 5 months. Wheat remains a follower to the other Ags but since we are at the lowest level in months, light bullish probes would be my suggestion. This is far from my favorite play as I would prefer soybeans and corn to wheat at the moment.

Currencies: The dollar needs to get above the 20 day MA or below the 50 day MA as the direction of the next leg should be determined by that decision. My thinking is we work higher but let’s wait for confirmation. The euro should continue to work lower but I would have stops just above $1.3000 to protect open profits. Bearish trades are on my radar in the commodity currencies; the Kiwi, Loonie and Aussie but first let’s get confirmation that interim tops are in. Stay tuned. I think the yen is poised for a bounce; my recommendation is to exit bearish trade. 1.2400 is my objective in the coming weeks.

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