William Frejlich's philosophy is that money management is the cornerstone behind any successful trading plan and his weekly newsletter and trade tips emphasize that philosophy. Contact Mr. Frejlich at (312) 264-4356
Hello Fellow Traders,
OK let me be the first to say it…… Only 41 more shopping days until Christmas. I haven’t seen the animated commercial with Santa riding down the slopes on a Norelco (I should get product placement fees for that) shaver. I remember that one was always out by early October. Oh well, more Christmas to come.
This Week’s Commentary
Metals: The reelection Of Barack Obama likely means the easy money policy enacted by Ben Bernanke will continue unabated. It is widely accepted now that the printing presses in DC will keep humming and the inflationary ramifications of that will keep metals flying high. That was the initial reaction last week but futures have settled down now awaiting to see what Congress will do with taxes and spending by year end. Our economy remains stuck in neutral at best and the thought that a worldwide economic slowdown may be looming has tempered enthusiasm for long metals positions in the short term.
Gold: December gold had slid to the major support just below $1672 the day before the election on the ideas Mitt Romney may win. By the end of trading on the 6th it had soared back to $1715 and the past week has seen several attempts to break major resistance at $1740 which had been a strong swing area both up and down. If it appears that Congress will do as they always do and make a short term compromise to avoid any real solutions gold is set to push higher. After $1740, $1755 offers minor resistance but nothing serious should materialize until at least $1780 and possibly psychological resistance at $1800. I believe $1715 will hold down below for now.
Silver: December silver mimicked gold and flushed to $30.60 on November 5. By the end of trading the next day it had recovered to $32.25 and has since tried to surpass the minor resistance at $32.80. If that level is beaten I would look for a speedy ascent to $33.60 and quite possibly $35.20 shortly thereafter as the same factors affecting gold apply to silver to a slightly lesser degree.
Copper: For the most part copper will follow the stock market in a very reliable pattern. As stock indices crashed post election December copper easily slid below the 354 support and paused just above 340. The US stock market has not seen a major correction since May but seems poised for one now that true economic numbers are beginning to surface. Stock market weakness will be enough to push copper through 340 and it most likely will test the contract low near 325 in short order once 340 is taken out. If stocks recover, first 354, then 362 would be resistance.
Currencies and Financials: It is assumed that the US Dollar will go in the tank with highly diluted dollars flooding the world. This could actually be a misguided assumption in that Europe obviously is in as bad or worse shape than us (particularly if we cease the policy of bailing out European banks with US Dollars) and it was just shown that Japan’s economy has actually contracted during the past 3 months. The point is that others are in no position to raise rates either and it may just end up where the US Dollar becomes the best of the least so to speak. What I really expect is a long period of flat listless trade for currencies so our strategy of writing option strangles could be the way to go for most in this group during the next 4-6 months or so.
British Pound: The old expression “sound as a Pound” has been tested of late. December futures have slowly trended lower since the highs at 16300 in September down to the current 15860. The upper breakout was near 15760 in July so that will be the first line of support. I believe that support will be tissue paper thin however and ultimately I expect the Pound to approach 15500. I would then look for a long term range where 15500 caps the bottom with 16000 capping the top.
Swiss Franc: Although I have previously commented in these pages that the Swiss economy is actually very sound it cannot go it alone as Germany is finding out. The severe economic problems throughout Europe will obviously spill over as the “haves” cannot thrive while bailing out the “have nots”. Socialism is nothing more than a Ponzi scheme on a national level and the end result is always the same. This likely prevents any long term strong growth so I do expect the Swiss, as most other currencies, to stay within a confined range, moving up or down based on whatever bail out is bandied about that day or week. Thusly, I look for a range of 10300-10350 below up to 10700-10750 above short term and would look at the previously mentioned option strangles of selling higher calls and lower puts to try and capitalize on this lackluster range bound trade.
Japanese Yen: With a constricting economy Japan is in no shape to raise rates which should stifle any serious upside for the Yen. By the same token the low rates have been in place for some time without sparking any serious downside for the Yen which leaves a market most likely poised to stay within a relatively tight range for at least the next 3-4 months. I would think an extreme move higher may take the December Yen to 12800 while a push lower should be well supported near 12400 and possibly 12280 as an extreme low.
Euro Currency: OK folks you know what time it is. When I feel the commentary is becoming repetitious the only thing one can say is Blah blah blah blah blah……. As others in this group settle into tight trading ranges the Euro will be no exception. I expect 12600 and perhaps 12500 to hold down below for the December Euro and would not look for much more than 13000 – 13050 on top so trade those ranges accordingly.
Canadian Dollar: As the US Dollar continues its slow climb higher other currencies have slowly crept down to the lower end of their recent trading ranges. The December CD is no exception as it has moved down to the upper breakout point near 9960 which was seen in late July. We may see a bit more down, perhaps to 9900 but I do think that gold will push past $1740 and the CD tends to move higher with strong gold prices lending support. On top look for 10200-10250 to resist.
US Dollar: The December Dollar has stepped up nicely, rising from below 7900 in mid October to recent highs just below 8140. The 8140 area was a long time swing area so if bested we would likely see additional strength up to 8220 to an extreme at 8280. Down below I expect 8000 down to 7960 to support futures so use that range if contemplating a trade.
Eurodollar: The December Eurodollar has settled into a range from 9966 to 9972. As the Fed has said rates will stay near 0 for the next 3 years (don’t bet on that) they will do nothing now. I am looking for this useless strategy to last another 2-3 months as it is very obvious that it has done nothing to help the economy and why suffer for another 3 years. Late this year or early in 2013 we will begin to take long term short futures contracts and put option positions for this market. These comments from last time still apply so we may be looking at long term Eurodollar put options beginning in January and going out to March of 2015.
30 Year Bonds: As US stocks have finally been allowed to break, the bond market has once again become a flight to quality buy. As the S&P crashed 70 points during the three days after the election from 1435 to 1363 the December bonds rose from 14804 to 15216. That level is fairly strong resistance so if stocks do rebound we may slide back to 14916. In any event I would buy this market on breaks at least through the end of the year as many may begin to panic until Congress delays any meaningful action until at least the summer by continuing the status quo as they “work out” a longer term deal. Yeah, that’s gonna happen, a longer term deal I mean. It will happen when pigs are flying around the Board of Trade and the sidewalks are icy from hell freezing over.
S&P 500: The December S&P broke hard after November 6, falling from 1435 to 1363 in the immediate days after the election. It has tried to recover but has run into resistance at the lower breakout point of 1390. There are two main reasons for the break. The first is all of the media talk relating to the coming potential tax hikes and spending cuts otherwise known as the “fiscal cliff” due to kick in after January 1. I expect the Fed to do what they always do and institute a temporary continuation of the status quo as they work out a longer term deal. The second factor is this administration’s plans to drastically raise taxes on dividend income to as high as 40 % from the current 15 % as well as raising capital gains taxes to be taxed as ordinary income. This sell off would be unavoidable if this administration is even remotely serious about that and even further risks damaging an already vulnerable house of cards economy. If 1365 does not hold, first 1350 and more likely 1320 could be seen within days. On top a temporary “fix- band aid” to extending the status quo may be enough to push futures above 1390. I wouldn’t expect much more than 1430 on top any time soon however.
Dow: Naturally the Dow broke along with the S&P as December futures plunged from 13250 to 12670 during the 3 days after the election. On top a push to resistance at 12900 would be expected. If 12650 doesn’t hold down below first 12500, then 12350 would be the next targets.
Energies: The ongoing threat of a worldwide economic slowdown or worse and the subsequent perception of lower demand for energies has kept this group on the defensive. As with the currencies and to a certain extent, all commodities, this same type of action is being seen throughout the various complexes.
Heating Oil: From the highs made early last month at 324 the combination of the election results and the ideas mentioned above relating to lower demand, the December heating oil has pushed to 292. It has tested this level 4 times since last week and so far has held, indicating we may need to move slightly higher first. I would wait for a correction to at least 302 and maybe 306 from the current 294 and would either consider a short future or possibly sell higher call options.
Unleaded (RBOB) Gas: Gas has actually been somewhat plentiful due to lower demand and higher production for some time now. During the summer driving season futures rose from 215 in mid June up to 290 by mid September. As seasonal tendencies shift to heating oil upside will likely remain limited and we may see a range with a slightly lower bias for the next 2-3 months. On top I wouldn’t look for much more than 272 from the current 264 but if we do see that resistance tested I would consider selling higher call options. I expect 256 to hold down below and in fact this one may stay in a fairly tight 255 – 275 range for the coming months.
Crude Oil: Can we dare use it twice in one newsletter? OK here goes, Blah blah blah blah blah. Crude oil along with the others in this group have all lost upside momentum after the election and thoughts of a worldwide potential recession. On the flip side the ever present possibility of further Middle East violence (wow, you don’t usually see those words used together) probably keeps a lid on substantial down moves as well. December crude has settled into an $84 – $88 range. If we do see a breakout I believe it would be lower but not too much more than $82 and as an extreme $80 down below. A range of $80 to $90 is very possible for the next 2-3 months.
Natural Gas: Natural gas has come to life during the past few months after drifting aimlessly during most of 2012. December futures soared from 304 in early September to 397 by mid October. It corrected to 347 by yesterday and some cooler Midwest temps spurred a speedy rise above 370 today. If we see a pull back to 362 I would consider a possible futures buy or would look at a buy on February 425 calls.
Grains: This group has been bludgeoned since last Friday’s USDA numbers were released however some technical signs say we may be due for a push higher this week.
Corn: Despite Friday’s report showing a lower crop than expected as well as a lower carryover December corn has taken a beating. Since the peak at $8.50 in August then subsequent flush to a low at $7.05 in late September then rise to $7.70 last month futures have drifted from $7.65 to $7.30. The test of $7.10 this morning has put futures into oversold territory. I look for at least $7.30 – $7.35 this week and then we will evaluate to see what the longer term prospects look like next week.
Soybeans: Beans have been crushed since early September when January futures peaked at $17.80. The upper breakout for this contract was in early June at $13.90 and this morning’s break has the feel of a blow off bottom. I am in no way expecting $17.80 again or even $16.00 for that matter but I do think we can see a quick recovery to $14.50 from the current $14.02, possibly this week.
Soy Meal: December meal broke out to the upside last June when it surpassed 425. From the September peak at 542, futures have moved steadily lower all the way to the aforementioned 425 breakout level. I expect a bounce back to at least 450 by early next week. At that point we can decide whether a short sale is in the cards.
Bean Oil: OK, I’m not going to use it three times in one newsletter but you know what I’m thinking. Here is my description of bean oil since early September when it was perched at the lofty peak of 5860 until today. BANG %$#(*& POW*^&^(&* CRASH !!! (^%^$(* Today’s low at 4684 may hold for a while as Stochastics readings in the low single digits show a very oversold market. I look for a brief and rapid correction to 4925 where I would have to consider a short position.
Wheat: Two sessions ago after Friday’s USDA numbers December wheat had traded to $9.17. Despite a relatively neutral report the baby was thrown out with the bath water as wheat came all the way back to July’s higher breakout from $8.40 – $8.50 with an $8.43 low. As with the others here I expect higher trade this week and for wheat that may mean a push to $8.80. I like wheat’s potential and I would almost consider this break as a long term buying opportunity.
Softs: Most in this group have reached long time lows during the past week, some warranted, others as lemmings following the others over the cliff.
Cocoa: December cocoa has slowly stair stepped lower since the rise to 2700 in September. There is long term support between 2300 and 2320 which was tested last week. For now there is little reason to be long or short cocoa and it appears a range from 2300 to 2500 will be the action moving forward. Consider a strangle of selling February 2600 cocoa calls and 2000 or 2100 puts as this tight range looks to continue.
Cotton: December cotton saw the long awaited flush to 6900 last week followed by a quick spike back to 7170. I believe the 6900 area is a bottom or very close to a bottom and would consider a buy if we test 6900 once again. Another possibility would be a buy if December cotton pushed past the resistance at 7250. A move of that nature probably generates enough momentum for further advances to 7500 and possibly 7750.
Sugar: Possibly plentiful world supplies coupled with a general easing for most commodities was the catalyst for March sugar to slide to long time lows below 1900 last week. I believe that is at least a temporary low and look for 1980 this week and perhaps 2060 by later next week. I would consider a long future or a sell of February put options if sugar tests 1900 again form the current 1930.
Orange Juice: January juice bottomed near 105 in mid August made it to 130 by mid September and has approached 105 again recently. These are not extremely low prices for juice historically but are low going back the past 5 or 6 years. Aggressive traders may try a long futures contract if 105 is tested again from the current 109 and more cautious traders might look at call options.
Coffee: There appears to be no bottom here as December coffee slammed through the psychological support at 150 today on the way to 14575. If we see further weakness to monthly support at 140 I may be suggesting writing lower put options as I feel 14000 would be highly oversold.
Rice: January rice pushed to lows not seen since June with today’s wash out to 1476. A drop to 1450 may offer a buying chance for futures and if bottom picking isn’t your style a call option may pay off as fundamentals do not warrant prices this low.
Livestock: Cattle have settled into some very dull low volatility trade while hogs, a scourge just 2 months ago, have suddenly caught fire.
Live Cattle: Cattle has been a perfect candidate for writing option strangles. Since March the high for December cattle has been near 131 and the low near 122. A step further shows a range of 131 to 124 since July and a coiling market with a 200 point range during the past 3 weeks. Cattle tend to drop during poor economic periods so this may be why we have settled into a tight range. I’d rather sell near 127 however than buy near 123.
Feeder Cattle: January feeders have slowly slid to 14500 from the highs at 15100 last month. For now I would expect 14350 – 14400 to hold but as with live cattle I would rather sell rallies here than buy dips so I’d wait for a correction to 14750-14800 to consider the short side.
Lean Hogs: December hogs are making up for lost time. Since bottoming at 7000 in late August hogs have pushed to today’s high at 8135 with nary a pullback other than 1 or 2 day 250-300 point drops followed immediately by 250-300 point rallies. There is very strong resistance at 8150 so I would wait for a correction to at least 7650 from the current 8050 to consider a long.
Questions? Ask William Frejlich today at 312-264-4356
Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented is from sources believed to be reliable and all information is subject to change without notice.
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