by Scott Hoffman, Senior Broker & CTA
The S&P has had a strong November as moderating energy prices and seasonal strength in Q4 are providing fuel for the rally. The areas to watch for the S&Ps are 1227 on the upside and 1215 on the downside. A move over 1230 should lead to another up move targeting 1240; while a move under 1215 has downside objectives at 1210 and then 1200.
Gaining on the Yen/Euro cross and the continuing strength in the Nikkei, which has risen to three year highs, the Yen has staged a rebound off psychological support at 8500. As long as 8500 holds, expect a rally toward trend line resistance around 8650.
The Euro broke out to the downside last week after the latest ECB meeting, which was surprisingly dovish on inflation and rate hikes. The selloff was exacerbated this week by the continued violence in France, both fears that it may spread and concerns over the structural and societal problems underlying it. Recent trade is testing the 2004 low around 11750. I would use any rallies back toward 119 as selling opportunities.
The market is being pressured by rumors that China is set to sell some copper out of its inventory and the resolution of the four month strike by copper producer Asarco. As prices drop through the up trend line, the bull wedge formation looks like it may be unfulfilled. Two attempts to clear resistance at 185 have failed, and a selloff would target 179, which is a 50% retracement of the last rally. A move back up into the wedge (over 18350) should lead to a retest of 185 resistance.
Gold prices have seen a rebound this week, regaining the $460 level in spite of the strength in the dollar and weak energy prices. Gold is finding a flight to quality bid from the unrest in France. I would view breaks under $460 basis December as a buying opportunity and would be out of longs on a close under $455. Upside objectives are $470 and then $475.
Silver futures experienced a good recovery this week as they rebounded strongly off our noted support around 7.40. Wednesday's rally over the long term pivot area at 7.65 has led to more upside. I expect this rally to continue with an upside target of 7.80 to 7.85. A move under 7.60 could push prices back to 7.50.
Cocoa saw some life this week as prices approached good long term support at 1300. The market is torn between the quick start to the Ivory Coast harvest and continued concerns over the potential for political upheaval in the Ivory Coast. Technicals are bearish, but with the market trading on 2005 lows, I'd be cautious about pressing the downside for the time being. A move over 1350 could prompt further short covering.
Sugar sold off this week amid news that the EU has ample supplies of sugar for delivery and weakening energy prices. Energy prices have been correlated with sugar because of the possibility of ethanol production from sugar. The trend for sugar is still down. We are currently short and will remain so as long as the overhead gap is open. A break under the recent low should encourage more downside with an intermediate downside objective at 1050 basis March.
Concerns over near term deliverable supplies pushed Coffee to three month highs taking out the October high at 10960 basis March. The bullish MACD crossover should support this market. I'd be looking to buy pullbacks to the 110 to 108.50 area with an upside objective of the August double top at 116.
The hurricane inspired rally of the past months is showing signs of tiring, as the market has moved under the trend line that has supported it. MACD is at a high level and hinting at a bearish crossover, which will tend to reinforce a selloff to liquidate a big long speculative position. A move under 120 basis January should accelerate a selloff with trend line support around 112 as the first objective. Traders will have to wait for the Dec 9th USDA production report to get an official estimate of the extent of the damage to citrus production.
Energy prices rebounded on Tuesday, pushing back toward $60 on short covering ahead of Wednesday's inventory reports and a report by the Energy Information Agency that demand is expected to rise in 2006. For the time being, crude oil seems comfortable around $60, torn between slack demand for heating oil and nervousness over the upcoming heating season. We bought crude oil last week on a short term basis as prices rebounded back over $60, then cleared out as it ran into trend line resistance (see chart). I'm bullish on crude oil under $60, with an upside price target of $63 basis December. A close under $58.50 would turn things back to the downside.
Meat prices continue to benefit from concerns over avian flu as it is expected that pork and beef demand will increase if avian flu results in reduction of poultry production. With the hog market in an uptrend, we got long the Dec Hogs last week as prices broke out of their recent channel (see the chart below). Monday's pop put in a double top around 6800, but a correction off this high should be bought. Support in the Feb Hogs is at 6600 then 6540.
A great rally for cocoa on Wednesday, as the momentum indicator (bottom panel of the chart) gave a clear buy signal. In addition, the narrow range day on Tuesday had the market primed for a directional move on Wednesday. This was a good low-risk buying opportunity, as the 40 day moving average (1408) gave a good stop point. The first upside objective for this trade was Monday’s high at 1460.
The sugar market continues to storm higher. We’ve been long the sugar off and on for the past month, and I continue to think there’s more upside for this market. Tuesday saw a narrow range/inside day breakout pattern, which gave a good buy setup for Wednesday. The market continues to push higher amid a back ground of expected deficit in world raw sugar supplies for first-quarter 2006. The next major upside target is 1400, while a drop under 1290 could derail the rally.
The cotton market has turned more positive amid thoughts that the Chinese will soon become interested in US cotton. Prices have started to challenge the month long down trendline, and MACD is hinting at an impending bullish crossover. I’m looking to buy cotton on a break above the trend line, looking for a rally toward the 40 day moving average at 54.40. I’d be cautious here, though, ahead of Friday’s supply/demand report.
Wednesday’s weekly inventory reports showed larger than expected builds in inventories of crude and heating oil, which really took the wind out of the bull’s sails. The continued inability of Jan Crude to clear resistance at the $60 mark is also proving disappointing. Support is at $59, then $58.40 (a 50% retracement level). A close over $60 should be bought.
Monday’s inside/narrow range day led to a downside breakout on Tuesday, and the market followed through down on Wednesday, as the MACD is threatening a bearish crossover. The next downside target for Feb Cattle is trend line support at 94.50.
Last week’s double top and collapse in Feb hogs led to further downside this week, pushing them under the 40 day moving average (65.75) on Wednesday. A bearish crossover (albeit at lower levels) corroborates the selloff; although I have a modest downside target at 64.50 (November’s low).
As poultry feed accounts for a big percentage of its consumption, bean traders are concerned over the effect avian flu will have on soymeal demand. In addition, traders have been wrestling with a bumper crop in the US. Tomorrow's USDA crop production numbers have the potential to be a shocker; however, the failure of the USDA to provide a big upward revision to 2005 production could shake off some of the malaise and cause a rally. Jan beans have good resistance at 6.00. I'd be happy to sell up there, while support comes in at the fall lows between 5.70 and 5.65.
Wheat has seen a short covering rally as traders are becoming concerned about dryness in the HRW wheat areas. Dec Chicago wheat bounced off psychological support at 3.10, and a move over the old low at 316-4 to 317 should lead to further upside. MACD is hinting at an impending bullish crossover which would reinforce a rally. Expect resistance at 330.
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