Commodity Update: Crude Closes Under 50 DMA

finished slightly higher yesterday, but well off its highs, closing just under the 50 day MA. I’m not prepared to go short just yet but I did advise clients to dump the reminder of their long plays and move to the sidelines. Buying was rejected in RBOB as prices failed to settle above their down sloping trend line. An interim top MAY be in the making. A close under the 8 day MA would likely confirm we get a correction in January back near $2.65. For the last 2 weeks the 50% Fibonacci level has served as resistance with January heating oil futures failing to get above $3.10. That level for now serves as the line in the sand. I expect the entire complex to track one another so if we see a setback elsewhere this contract should find its way back under $3/gallon. Natural gas found support at its 61.8% Fibonacci level just above $3.50 but I’m not convinced just yet. I will be searching for bullish trade but at this point I think it will be coming from lower levels. Stay tuned.

Stock Indices: The S&P has completed a 61.8% retracement, rallying just better than 6% in the last 3 weeks. (see chart of the day) The 50 day MA rejected further buying and to me it appears we will get a correction from overbought levels. My target is a 2-3% correction in the coming weeks. My favored play is short futures while at the same time selling out of the money puts 1:1. We saw a reversal in the Dow as well, with a close 1.1% off its intra-day highs. I don’t see prices able to maintain a trade north of 13000 and see a trade lower in the coming weeks.

Metals: Inside day in February gold futures yesterday which meant I was able to maintain a slight gain. I am in the camp we see a trade south from here. In fact, to see the dollar trade to one month lows and not to catch more of a bid in gold lends to my idea that we are due for a correction. As long as prices are under their 50 day MA I am mildly bearish. Under yesterday’s close I see support at $1700 followed by $1670. I would've liked to see more downside follow-through after Friday's swoon in silver with prices registering a marginal gain. We will need to see a penetration of the 50 day MA approximately 50 cents from current pricing for confirmation. Aggressive traders should have bearish exposure targeting a trade back near the 100 day MA. My favored play in both metals is back ration spreads to capitalize on depreciation to follow.

Softs: Cocoa bounced off its 9 day MA to finish up 0.84% after trading to 2 months highs. Remember dollar down equals cocoa up so pay close attention to this relationship. I see limited upside in cocoa from here as I think the dollar is overextended. Sugar gained 2.12% to trade up the 50 day MA and previous resistance. Further upside should give traders an opportunity to book profits on any longs they've accumulated in recent weeks. Upside resistance in March futures is seen at 20.25 followed by 20.55…21. Cotton is overbought and could trade south if we see equities melt down. As long as the 50 day MA holds, stay in bullish trade but on a bust of that level exit all remaining longs. A failed rally in OJ with prices closing under their 9 day MA the last 2 sessions. A correction should play out in my opinion, taking January back near $1.15…trade accordingly. Coffee was able to maintain a positive close but prices closed under their 9 day MA and 1.6% off their highs. Prices in March will need to take out $1.58 this week or within the next few weeks for me to remain in longs with clients.

Treasuries: 30-yr bonds closed in the red for the first time in 6 sessions probing both the 9 and 20 day MA. I would be looking at a bearish trade but I think equities will trade south, so I will refrain from any exposure with clients for now. I may be willing to explore bearish trade from higher levels though, so stay tuned. 10-yr notes also lost ground yesterday at their lows, touching their 9 and 20 day MAs. I am on the sidelines but will explore bearish trade from higher levels and NOB spreads are back on my radar, though I've yet to move.

Livestock: Reversal in live cattle yesterday as lower trade was rejected and prices climbed back above the 20 day MA. I don think prices can get much higher than $1.31 in February before they turn south again. January feeder cattle also found some buying; I was able to trade back near unchanged levels on the day. Risk to reward, it could go either way, so stand aside. Lean hogs reversed lower in late dealings to close down 1.44% at the up-sloping trend line. I see further downside and like bearish trade with an objective of 83 cents in February.

Grains: Corn prices were in the green on the close yesterday, but nearly 10 cents of their highs. Some clients remain in bullish trade but we may take a little heat before our targets are reached. Stay the course for now. January soybeans gained 1% to close just off 3 week highs. A grind higher should persist but prices will need to remain above their 20 day MA for me to continue singing that tune, in January at $14.37. Wheat closed lower for the third day running giving back 35 cents/bushel. $8.50 in the March contract has supported for the last 4 months but that level should be challenged very soon and I would not rule out lower trade. If so, $8.20 is my target. I currently have no exposure in wheat with clients.

Currencies: The US dollar lost 0.36% yesterday, to trade to 3 week lows completing a 61.8% Fibonacci retracement. I do not see much lower ground and would expect buying to support very close to these levels. That being said, those long European crosses are advised to trail stops up just under current levels to remain profitable on a correction. I still like bearish trade in the Aussie thinking a commodity correction should pressure and I do not see any bullish action taken by the RBA this week.

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