by Scott Hoffman, Senior Broker & CTA
This past week saw the financial markets react to the idea of tighter Fed policy than the market had previously priced in. This, combined with the idea that there will be a global liquidity drain saw stocks and Treasuries sell off last week, as markets saw the double whammy of higher than expected inflation numbers and weak signals from the housing sector. The economic calendar is light for the rest of the week as we await next week's FOMC meeting, with the policy announcement due Thursday, June 29th. In other news, high inventory levels have kept a lid on energy prices, and good growing weather has pressured corn and soybeans recently.
Last week's one month low in momentum marked a bottom, and S&Ps rallied to roughly a 50 percent retracement of the June selloff. That area (1266.50) has proved to be resistance for this week, and I sold Monday based off a narrow range/inside day setup on Friday. Strong housing starts released Tuesday kept the pressure on, as S&Ps traded under 1250. A move under Monday's low could lead to a retest of last week's swing low around 1230, while a rally over 1270 would take some of the pressure off. Next week the market's focus will be the FOMC meeting, and I wouldn't be surprised by a pre-Fourth of July rally. Past that, I expect the 1295 to 1300 level to be a tough ceiling for the upcoming months.
The June decline in the NASDAQ stopped and reversed off a narrow range/inside day last Wednesday, which led to Thursday's sharp rally. The decline of Monday and Tuesday found some support at a Fibonacci retracement support area at 1563. A move under there would lead to a retest of the June low, while a move over 1590 could extend a rally.
I called for a decline in Treasuries last week, after they made a false upside breakout of the small triangle before the decisive downside break last Wednesday, as higher than expected inflation numbers spooked Treasuries. I'm looking for further downside ahead of the FOMC meeting next week, with a retest of the June low at 10529 likely. Longer term, I think the Fed will need to address a slowdown, as a slowing economy, especially the housing sector, raises the odds of a "hard landing for the economy".
A double top in the September Dollar Index around 8600, especially with negative MACD divergence, signals that the Dollar's rally may be peaking. Going forward, the Dollar will need to contend with the prospect of an end to the US tightening cycle along with the prospect for tighter interest rate policies in Europe, Japan, and China. A move under last week's low at 8526 in the September Dollar Index should confirm a trend change.
Monday's doji, along with support around 8780 in the September Yen led to Tuesday's turnaround which kicked off the rally. A move over 8850 should help extend the move. I see upside objectives at 9050 then around 9100.
Not as clear cut a picture as the Yen, the Euro has support at the June low around 126, with resistance at last week's high around 12750. Tuesday's doji left the market open for a directional move on Wednesday; a drop under 126 could lead to a downside breakout targeting 12450 to 124. A move over 12680 could take the Euro to the top of the channel at 12750.
Last week's dramatic selloff followed two doji days, as a large wave of selling was touched off by the open under $600 in the August Gold. The move below $570 was rejected; this should continue to serve as a "pivot point" for gold. Tuesday's rally to $580 helped turn the trend up. A move over the down trendline (currently around $588) would confirm a bottom and lead to a test of the overhead gap. MACD is poised for a bullish crossover, which would reinforce the rally.
Narrow range days on Monday and Tuesday leave silver hanging around $10.00. Last week's swing low was forecast by the extreme low in momentum, and its current pullback toward zero indicates an upcoming directional move. Tuesday's rally over resistance around $10.20 could lead to a rally toward the overhead gap at $10.50.
The final decline under 1500 basis October Sugar seems to have formed a bottom, as prices rose back above a pivot point at 1520. After a successful retest of this area on Monday, Tuesday saw a rally over last week's high at 1548. This should help extend the upside move, with an old double bottom at 1585 then 1600 as near term objectives.
Beans fell off hard on Monday as the Soybean Belt saw more moderate temperatures and more rain than was earlier predicted. Momentum forecasted Monday's selloff, with a good short sale signal for Monday. "Turnaround Tuesday" saw a rally, as a "momentum buy" was set up. Short term, there may be more recovery. Longer term, we're still a few weeks away from the critical development period for soybeans, but barring a dramatic shift in weather, expect sharply lower prices for soybeans as we have ample stocks and a large crop to harvest and market.
"The Voice from the Tomb" says the time to buy wheat is in early July, as the winter wheat crop approaches 50 percent harvested. With a poor winter wheat crop, and news from Australia that they expect their crop to be down this year, I'm looking for a time to buy the Kansas City (winter) wheat. A pullback toward recent lows under 4.70 in September KC wheat might be the place to do so.
Last week saw December Corn break under its May low, as early planting and good weather are weighing on prices. Time is running out for a weather scare for corn; without a big change in weather, look for lower prices as the commodity funds liquidate their large long position. Look to sell a rally.
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.
