Commodity Update: Manic Market

has completed a 61.8% retracement but prices need to maintain this $90/barrel level or things could fall apart. I have been advising clients to scale into longs at these levels but I would only own 1/3 – 1/2 of the position you want to own until the market proves you right. We are catching a falling knife at this point. Not only was Crude hit by 2% but so were the distillates with RBOB trading to last week’s support just above $2.80 in July and heating oil posting a fresh 2012 low also just above $2.80. I track mostly Crude but understand all three products generally move in the same direction and the formula is generally for every $1 move in Crude futures, expect 3-5 cents in the distillates. The next few days will be critical to see if the recent lows hold and the energy bulls are able to hold on. Natural gas has consolidated in recent sessions and it appears we are due for a correction which, as a speculator, would be my play. However, until prices break the 8 day MA, this interim top is yet to be determined. Just from a risk standpoint, one could probe shorts with tight stops. Say 5-10 cents above recent highs.

Stock Indices: Stocks have found mild support but I view  this as temporary and would remain in the bear camp until prices have a consecutive close above their 9 day MAs which have capped rallies of late. In the S&P 500, that level is 1315; 12500 in the Dow. We may in fact get a bounce from oversold levels but all that would suggest is to exit shorts and not to establish longs.

Metals: In the last week gold rallied $70 only to retrace almost that entire amount. The idea of buy and hold is dead. However this may sound familiar; Be a buyer with both hands around $1535 in June. Also be willing to cut and run on a close below $1515 because if that level is breached we are likely headed lower. I still see value at this level thinking a trade back over $600 is our destiny in June. With silver under $28, I am not a buyer until prices find a value zone. With prices dancing back and forth in a $1.50 range, traders without impeccable timing can get chopped up. Wait for signs of an interim bottom. Copper broke $3.40, in my opinion on its way to $3.30, as momentum traders love this move. Fade the rallies. I attended an ETF conference yesterday and one speaker on metal ETFs made it worthwhile. Check out a spread chart of platinum to gold. Typically platinum is at a premium to gold though it is currently at a discount. A possible pairs trade, or--I cannot believe I am saying this--I may be buying platinum for some of my larger, more aggressive clients.

Softs: Cocoa has given up over 6% in the last three sessions reaching my downside objective yesterday. The inverse relationship to the dollar will exist but the easy money has been made on shorts. Once sugar broke 20 I see no support unit 15 cents. That does not mean we will see 15 cents but I would not be long until an interim bottom is formed. Those that took my recent buy recommendation should have taken a loss on their futures and somewhat offset that with their options hedge. Cotton prices continue to melt down, so a trade under 70 cents is not out of the question. Prices have lost 8% this week alone. Coffee should be getting cheaper at Starbucks with a near 5% loss yesterday, dragging prices to 21 month lows. Expect more downside.

Treasuries: For a few sessions now Treasuries have failed to reach higher ground but prices have yet to break their 9 day MAs. When that happens I will say we have established an interim top. Those levels are 147’14 in 30-yr bonds and 133’18 in 10-yr notes.

Livestock: Both live and feeder cattle appear to have put in an interim top last week as prices have started to back off. June live cattle closed back under the 9 day MA for the first time in two weeks yesterday. I expect prices to lose an additional 2-3% before finding support. A 50% Fibonacci retracement in September feeder cattle would put prices back at 157.50; that would be my target. With prices back under both the 9 and 20 day MA in lean hogs I would work out of longs and look to reposition in longs from lower levels.

Grains: Grains traders have needed to be active of late in this manic market but ideally traders took advantage of the recent pop in both wheat and corn. The trade now is on the sidelines looking to buy again from lower levels. Last week corn rallied nearly 70 cents only to do an about face and retrace 50 plus cents this week. Wheat’s move up was more drastic, but prices have not retraced as much on a % basis. A 50% retracement puts wheat at least 20 cents cheaper and in my opinion we should get that vey soon. Soybeans have now breached the trend line that had held all of 2012 and prices hit my first target; a 38.2% Fibonacci retracement at $13.60…see previous posts. I’m looking for more, thinking we trade to $13.20 and potentially on a long shot $12.75. Stay tuned.

Currencies:  The dollar index is above 82.00 for the first time in 2012 exceeding my expectations. The easy money has been made on longs but I do not expect the 82.00 level to hold as support much longer. The Cable hit my downside objective, retracing 61.8% and trading back down to levels not seen since March. Tighten stops. All other crosses look weak but they’ve seen quite a run, so trail stops and on another big down day today or Friday I would close all positions and move to the sidelines.

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