by Scott Hoffman, Senior Broker & CTA
The big economic focus for the markets this week will be the FOMC meeting today. Bloomberg is reporting that a number of bond dealers will remove language about "removing accommodation", a sign that this round of tightening is coming to an end. Such a statement would be a real paradigm shift for the financial markets and could make for an exciting end to the year, as this would be the first policy change in nearly two years. That's not the end of the news this week; we also have we have Retail Sales, the CPI release, the Philly Fed for December, and the Industrial Production Report.
S&Ps started Monday higher off the Bloomberg report. I think this rally remains shaky, although a move past 1275 could lead to a retest of the double top around 1280. A move over 1280 could lead to further upside. On the downside, a move under last week's low at 1259.50 would derail the bulls.
The Dow has not seen the recovery that the S&P and NASDAQ have enjoyed. The bearish MACD crossover and the move above zero in momentum point to a potential downturn today.
It was a choppy week for bonds last week in thin trade. For this week, the overall trend for bonds is lower; I would expect rallies to be contained by last week's high at 11223. The extremely low level of momentum sets up today as a buy day, but I'd prefer to be trading bonds from the short side.
The bottoming action in the Yen may be coming to fruition. We've been advocating the long side of the Yen because of the rounding bottom pattern of the past weeks, and a held trade above trendline resistance at 8450 could lead to a test of resistance around 8600 (40 day moving average).
The Euro was the big beneficiary of the perceived impending Fed policy change. Monday saw a breakout above 119 (the top end of the recent range) and the 50% retracement of the November selloff (119.55). The extreme high in momentum is a caution sign for the bulls, but only a move back under 119 would derail the rally. The upside objective is the November high at 12262.
The Pound exploded higher on Monday, having successfully cleared the 40 day moving average at 17457. We've liked the long side of the Pound for the past two weeks, since the bullish MACD crossover at the beginning of the month. The extreme high in momentum is a caution sign for the bulls today.
We bought the Canadian Dollar on Friday as it had a narrow range/inside day breakout setup on Thursday. This past week's rally over the yearly high at 8649 should lead to more upside, but I have advised clients to book profits on this trade ahead of the FOMC meeting.
The gold market continues its march higher. We've liked the long side of gold since the breach of resistance at $500, and I think there's more upside to go - there's been talk of $600 by the end of the year. The problem comes in trying to find a spot to get in if you're not already long. Today's break under $530 could lead to a bigger correction; there is trendline support at $522.50.
Monday saw a big break in copper out of a few days of narrow range trade. The impending bearish crossover is hinting at an end to the run-up, and a move under last week's low at 197.00 would aid the downside. Only a close back over 203 would negate the bearish setup.
The recent run-up in cocoa started with a great example of a momentum buy day last Wednesday, 12/7, as momentum reached an extreme low, the market opened around the previous day's low on Thursday, and then rallied strongly. Prices are now testing the October/December double top around 1480, which corresponds with a Fibonacci resistance level. Expect further upside in cocoa, with a move back to the late June high over 1600 as a real possibility.
We've liked the long side of sugar since mid November when the market broke out of a small flag formation in conjunction with a bullish MACD crossover. We added to long positions last Wednesday after Tuesday's inside/narrow range day breakout setup. Sugar still looks to be headed higher, although I took partial profits around psychological resistance at 1400.
I've been looking to get long coffee because of the nascent MACD crossover, but didn't want to buy into the gap higher opening on Monday. I still like the long side of coffee, and I think traders should be monitoring this market carefully for a place to get long.
We got long Cotton last week. Cotton appears to have found good support at 5200, and Thursday/Friday saw the market clear and then successfully retest a down trendline it had followed for a month. I'd look to start to take profits around 5410, which is the 40 day moving average.
The actual onset of winter appears to be reason to sell the energy markets, the old "buy the rumor, sell the fact". The past week saw crude oil in a largely range bound affair; I'm looking for a retest of last week's high at 6130 on a close over 6000.
Disappointing cash sales drove cattle sharply lower last week, pushing it below the lower channel line (see chart). Friday's low level of momentum set up Monday for a buy day, and prices pushed back into the channel. I'm bearish overall on cattle and would use a rally to the upper line of the triangle (around 9600) as a selling opportunity. Monday's inside/narrow range day could lead to a breakout move today.
We had a buy recommendation on soybeans last week, as the market broke out of a triangle in conjunction with a bullish MACD crossover. Monday's sharp rally over the 40 day MA around 580 added fuel to the fire, but profit takers came out of the wood work as Jan Beans tested the 6.00 area and set back. I still like the long side overall, but I think we're likely in a range constrained by 5.60 and 6.00, and would trade accordingly.
Corn had a successful test of support at $2 on Friday, rallied strongly out of a breakout setup, and then saw good follow-through on Monday, testing the 40 day MA at 2.08. With the relentless expansion of ethanol production in the US, I think breaks in corn should be bought but would be cautious about chasing the market higher, as supplies are ample. Only a close under $2 would spell real trouble for the bulls.
PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH OPTION CONTRACTS. OPTIONS TRADING IS NOT SUITABLE FOR ALL INVESTORS. OPTIONS CAN AND DO EXPIRE WORTHLESS. IF YOU PURCHASE A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIMUM AND OF ALL TRANSACTION COSTS.
