RSSCommodities: Looking For Greener Pastures
By Matthew Bradbard | October 06, 2008 | 1:17 PM | 0 Comments
With the third quarter now behind us we are looking for greener pastures and expect the fourth quarter to be kinder to commodity hedgers and speculators alike. The third quarter will go down in history as one of the most chaotic 3 months in terms of volatility and swiftness of commodity price declines that we have seen since 1970. The current sentiment in the commodities market is one of the most pessimistic I can remember. Buyers seem to have gone on strike, while owners of inventories and investments are liquidating in a desperate dash to cash. Markets have no confidence and are instead guided by fear, which is making it particularly challenging to navigate the markets. For technicians, the charts have been little to no help. Scale back your position sizes and monitor those positions very closely, as this is no time to try to outsmart the market, as the market is always right.
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Softs
December cocoa lost $230 dollars last week as prices continue to have an inverse relationship to the US dollar. Prices stayed within the $350 channel that has kept prices contained since June. October is one of the weakest months of the year for cocoa as December cocoa futures have rallied infrequently in October especially after weak Septembers. The Ivory Coast main–crop is in full harvest pressuring prices. On this and continued dollar strength we could get a trade down to 2300 relatively quickly.
The way we view it, March sugar went on sale last week as prices came off nearly 13% and traded back down to the levels we saw in early June. We have seen a contract low of 12.42 and high of 15.85 so far in 08’, so we view the current price as very attractive and will be accumulating March 09’ calls for clients looking for a move higher over the next few months. We will be attempting to build a position and not just looking for a trade as we will recommend clients to sit on these positions looking for a new contract high. The timing should be ideal as October generally sets the trend for sugar for the remainder of the year. If getting long futures it may be prudent to use put protection.
The supply side fundamentals for cotton are extremely friendly, but that is only one side of the equation as the demand has been lacking and the prices have reflected the lack of demand. With prices currently below the cost of production we feel it is not if, but when prices will need to move higher. The problem is that often markets can remain irrational longer than many investors can stay solvent. Prices have been down for the last 6 weeks and we made a new contract low last week. We would suggest light exposure long dated calls into this week’s USDA crop report. November fcoj lost 8.40 cents last week and has lost almost 40% in the last 2 ½ months. Depending on how the USDA estimates come in on the crop we could see a continuation of the downtrend, although we do expect a bounce from these levels. We have suggested clients to buy the 115 and 130 March 09’ call options looking to hold for a few months.
December coffee continues to fall, closing down 12 cents at another new contract low of $1.2205. Prices have now shaved 1/3 of their value from the highs in 08’, but as we have said in our recent commentaries we would look to be buyers in October ideally from lower levels and that is exactly what has transpired. We would suggest shopping 10-15 bull call spreads in December looking for prices to find some value and rally from these levels. Historically coffee is strong from late October thru the first half of November although, past performance is not indicative of future results.
Metals
December gold lost $44.80 last week and looking at the weekly chart a bearish engulfing candle is evidence that the selling may not be over. We currently sit at the 50% Fibonacci retracement level from the recent high and low and for the immediate future the market should find support at $813 and resistance at $859 followed by $930. October is typically the weakest month of the fourth quarter, but a pullback could be used to get positioned in longer dated call options as we do expect the dollar rally to run out of gas and inflation to once again become a concern but the question is when? The other side of the argument is even with a dollar rally and commodity wide sell off gold has been able to hold its own so just maybe you should have some light exposure in long dated calls looking to gain exposure if things continue to fall apart money may continue to move into gold.
The current volatility in silver is outrageous as dollar swings intra-day are now commonplace. Last week December silver lost $1.98 to close at $11.33. The trend remains down, but we will be probing longs looking for the futures to find some footing and to start trading higher. We expect the low at $10.31 on December form previous weeks to hold as support. Getting long March 09’ call spreads or an outright call is also a strategy we will be employing for our clients. $11.65 should serve as first resistance followed by $12.08; the 50% Fibonacci retracement level and the 20 day moving average.
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Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.
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