by Scott Hoffman, Senior Broker & CTA
The markets should be returning to normal this week. Monday saw the release of the ISM Index (formerly the Purchasing Manager's Survey). The ISM report showed declines in orders, employment, and prices paid. This plays into ideas that the Fed is near the end of the tightening cycle. Later this week we have the ISM non-manufacturing report on Thursday and December's payroll numbers on Friday. Fed policy and inflation will likely be key themes for the beginning of the year.
Last week saw a sharp break in the S&Ps, as the inside/narrow range day breakout pattern on Wednesday led to a break under the double bottom at 1259. This week, Tuesday saw an early test of Friday's low, but the market's ability to hold Friday's low brought out the buyers. The rally was extended after the FOMC minutes were released, and the move back through 1259 extended the rally, setting the stage for today's test of important resistance at last week's high of 1279.50. A move over 1280 could lead to a retest of the contract high at 1284.70, while a drop under 1270 could stall the rally. Look for 1280 to be tough resistance for the market to clear.
The weak ISM number on Tuesday brought bonds back from the brink. Tuesday's big upside reversal should be respected, although it flies in the face of the commodity price inflation seen lately. Perhaps it's a revival of last year's positive correlation between bond and energy prices. Recent concerns about an economic slowdown (as evidenced by the yield curve inversion) should aid the bond bulls. A move over Friday's high at 115 should extend the rally, while a move back under 114 puts bonds back in a choppy pattern.
As we noted last week, the inability of the Yen to push under the 40 day moving average might lead to a reversal, and we got that on Tuesday, as traders used the weak ISM number as a reason to establish long positions in the Yen. In addition, Tuesday saw a break above trendline resistance off the last two swing highs. Look for more upside in the Yen this week, with the reaction high around 8700 as the next objective.
Tuesday saw a sharp acceleration in gold's recent rally, as the market broke out of a small consolidation formation from late last week. Tuesday's rally also gained strength from the ability of gold to fill in the December 13/14 gap at 522.90. The next upside objective for gold is the December high at $543.00. I believe gold is in the middle of a much bigger bull market, and I would look for any pullbacks to the mid to low $520 area as a buying opportunity.
The silver market followed gold higher on Tuesday, breaking out of an inside/narrow range day form Friday, and moving above last week's high at 901.50. Silver's next upside objective is the December high at 928. I am recommending that traders look to buy pullbacks toward $9.00.
I had been trading sugar from the long side for the past few months, as fund buying and thoughts of increased ethanol production pushed sugar higher. Last week saw sugar turn sideways, and Friday's bearish MACD crossover and breach of the more aggressive trendline gave us a sell signal on Friday. We covered on Tuesday as the big fund liquidation in a thin market gave us what felt like a windfall profit. The bull market in sugar is on the ropes; a move under 1400 would be strong evidence of this. A close back over 1440 would extend a recovery rally, but the double top at 1482 will serve as tough resistance.
Coffee consolidated gains last week, leading to a flag formation. I'm bullish on coffee; a move over last week's high at 108.40 should extend the rally, with the November high of 112.40 as the next objective. A move under trendline support at 105.50 would slow the bulls.
Cotton made good on Friday's big reversal, breaking into post harvest highs on Tuesday. Notable last Friday was the ability of cotton to hold the 40 day moving average, which came in at 5325. The move above last week's high at 5455 should see follow through, with a Fibonacci retracement point at 5535 the next objective.
Crude oil saw a strong rally last week, as the prospect of more normal (colder) weather and nagging supply problems continue to support crude. Last Wednesday's move over the 40 day moving average kicked off the rally. Holding over the December high at 62.85 should lead to an upside follow-through to a Fibonacci objective at 63.65..
As we pointed out on Friday, February Hogs had formed a triangle over the past two weeks (see chart). This led to Tuesday's downside breakout as the market took out the support line, which came in at 6475. This breakout could lead to a retest of the December low at 63.75, although the low level of MACD indicates there may not be much downside follow-through under there.
Beans entered 2006 with a bang as they vaulted higher, driven by thoughts of new commodity index money inflows and concerns over dry weather in Argentina. Farmers have remained tight fisted about selling last year's crop, and there is talk that the weather extremes of 2005 may lead to more weather anomalies in 2006. I like the long side of beans for the time being, as the index inflows should continue to aid the more liquid futures markets. Holding 6.20 basis March should keep the bull going. Longer term we should expect a break before spring, as farmers clear their bins and get cash for the coming year's planting.
Wheat continues to be supported by dry weather in the Wheat Belt. Although dry weather is the norm this time of year, the Plains are coming out of a dry fall, which keeps the need for a weather premium. Wheat is having some trouble around the 200 day moving average (3.45 basis March Chicago), but I think March Chicago Wheat could test the September high around 3.65 as funds continue to work out of their big short position.
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.
