by Scott Hoffman, Senior Broker & CTA
The economic markets were pulled in a number of directions this week. Monday saw a relatively strong ISM report, which showed the US economy continuing on a relatively strong path. On mid-afternoon Monday the new Fed President Ben Bernanke reversed field and said that the financial markets had “misunderstood” him in comments the previous week, which seemed to intimate that Fed rate hikes had come to an end. This was interesting both because he changed his stance within a week, and in a broader issue, this about face has some Fed observers questioning his credibility at a time when he needs to be building it up.
Wednesday saw a relatively strong ISM services number, which has economists expecting a strong payroll number on Friday. This report overshadowed the energy inventory numbers, which showed a surprising buildup in gasoline stocks last week. This is important, as this is the time of year counted on to rebuild inventory before the summer driving season.
The financial market’s focus now turns to Friday’s payroll report for April, which is expected to show a gain of 180,000 new jobs. This would normally raise the odds of a rate hike at the next Fed meeting, but given the confusing comments by Bernanke, we’ve got a more interesting issue. In addition, markets still have to wrestle with high commodity prices (the CRB Commodity index hit an all time high on Tuesday) and the break in the Dollar.
Wednesday was a telling day for stocks, as they were unable to garner any strength from the break in energy prices. Spoos had been a range trade affair for the past weeks, with 1308 as good downside support and the 1320 to 1322 area as the ceiling (see chart). My bias is bearish; a drop under 1308 should lead to a retest of 1300, and a drop under there could push them down to the April low at 1287. On the upside, a move over 1322 could lead to a rally toward 1350.
The “Loonie” (called so because the Canadian Dollar coin has the likeness of a loon on it) has served as a proxy investment for the commodity boom, as Canada is a leading producer of many commodities. Last week’s rally over the March high just under 8900 has lead to the recent rally. Look to buy breaks in this market, with a break back to 9000 representing a good buying opportunity.
Last week saw Gold break out over its contract high at 645, fuelled by Dollar weakness and geopolitical concerns. I’m still bullish on Gold; I think traders can continue to accumulate positions aggressively as long as June holds $660 on a closing basis. A close under $660 could lead to a correction to the breakout area of $645, look to buy there.
A rumor that the new silver ETF (exchange traded fund) had bought its needed silver led to a sharp break on Wednesday, highlighting the volatility traders should expect at these price levels. I prefer buying gold over silver in here. Gold’s uptrend continues, while silver has been constrained within its range from the sharp break of mid-April.
The recent recovery rally stopped on Wednesday, as July was unable to penetrate the mid-April high around 1800. I’d look for a drop toward 1750 to 1740 as a potential buying opportunity, as the ethanol mania should continue to support sugar prices..
Two narrow range days on Thursday and Friday led to a great upside breakout on Monday. Narrow range days are my favorite patterns when looking for breakout setups, and are a cornerstone of my trading analysis. Breakout trades don’t have any long term predictive ability (note coffee’s reversal on Wednesday), but identifying breakout setups are where I start my daily market analysis, as breakout trades can trump trend moves.
Monday’s narrow range and doji bar on Monday led to a breakout on Tuesday, then a reversal on Wednesday. I like the long side of Cotton down here, as I think there’s good support around 50 cents. Cotton is going in the ground, and should benefit from being a “weather market” early this spring. Traders may also remember the damage done to last year’s crop during the 2005 hurricane season.
Wednesday’s energy inventory reports showed a surprising build in gasoline stocks as prices were approaching contract highs. Holding the 50% retracement of the last upswing (around 7290 basis June Crude) keeps the bulls alive, but I’m expecting a deeper correction toward $71 to $70, where crude should find support. The fundamental picture for the energies is still bullish, and I think a break should be bought.
June Cattle were another good example of the effectiveness of breakout setups, as Friday’s narrow range/inside day combination led to a good rally, leading to a test of broken support at 7550 on Wednesday (see chart). I bought the breakout on Monday, cleared out on Wednesday, and will be looking for an opportunity to re-buy this market.
This week has seen beans trade in the range created by Friday’s gap higher open and subsequent selloff. Last Friday was a very illustrative day, as in spite of the higher close, those that bought beans on Friday’s open would still be losing. The issue is opening gaps, as gap openings can either be an opportunity or a pitfall, depending on whether you know how to trade them. If you’re a short term trader, opening gaps can give you trading opportunities, as gap days often tend to trade in one direction, frequently creating a “fade trade” opposite to the direction of the gap.
Midwestern farmers have seen a good start to the planting season, and recent rains have helped to replenish subsoil moisture levels, which were driven down by last summer’s drought. The good start to plantings may push corn prices lower; I’m looking for December move back toward 2.50. MACD showed negative divergence on Monday’s double top at 2.75. Longer term, the continued expansion of ethanol production and a tight world stocks to usage ratio should be supportive, as does the frenzy for commodity index investing.
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.
