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,
I usually like to start out with a joke or humorous anecdote. This week’s line is easy and actually doesn’t even need a punch line. Here goes…. Dennis Rodman… North Korea. The rumor has it he is there to showcase his latest fashion line. But it is so hard to find any colors to go with black and gray.
This Week’s Commentary
Metals: Despite its extremely inflationary long term prospects the ongoing QE scheme has actually been a short term negative for metals, particularly gold and silver. The sole purpose of QE is not to help our economy but to keep stock indices moving higher which gives the illusion of a healthy economy. If stocks are perceived to be strong then the need to protect yourself with a valuable hard asset is somewhat diminished, thus the recent hard breaks here.
Gold: Once 1635 was beaten a few weeks ago for April gold, 1555 was seen in 3 days. Futures did attempt a rebound last week and made it to 1620. If this 1550 level continues to hold in the current consolidation I would expect another rise above 1600 to at least the old breakout point at 1635. 1550-1540 must hold or we might see a washout to lows not seen since the summer of 2011 near 1500.
Silver: Silver seems a bit more vulnerable than gold right now as the flush to new lows at 28.00 for May futures last Friday would indicate. That may have just have been a stop loss hunting exhibition as it immediately bounced back near 28.50. The lower breakout point was 29.80 and the first resistance is seen at 29.00. If this market continues to consolidate and can work back above 29.00, I believe we would see 29.80 – 30.60 in short order as quickly back up as we saw with the initial flush lower.
Copper: Copper can sometimes be a harbinger of stock indices price direction. For example, stock futures were reaching new highs a few weeks ago yet copper was breaking to recent lows. Just days after this divergent action stocks broke hard as the S&P fell nearly 50 points during a two day span and the Dow slumped nearly 400. The given reason for the copper flush from 377 to 354 in just three days for May futures was expected weaker demand from China but the reality is that this market has no business being at 375 let alone 345 with the housing market as weak as it is and China continuing to lower growth expectations. There is long term support at 345 but if bested 325 would be the first target and that move may only take 2-3 days so watch the 345 level.
Currencies and Financials: There are few currencies thought to be solid right now and depending on which report was issued on any given day, they all have taken their turn as the “best of the least”. The current leader is the March US Dollar as it has risen from 7880 in early February to highs near 8260 Friday. Since 0 % interest rates would not make for a strong currency I refer back to the first line “best of the least” here. Additionally the Yen seems to be finding a consolidation area near 106 and may be one to watch for a long call option and/or short put option. .
British Pound: The question is not why the British Pound was slammed from 15850 to below 15100 in about a week and a half recently. The question is why it took so long. Without our Federal Reserve and the European central banks printing trillions to bail out Britain as they did for US and European banks within the Euro zone it is rather remarkable the Pound held up for as long as it did given its poor economic state. I would expect some strong psychological support at 15000 and would use a correction to 154-155 to say thank you and initiate a bearish strategy.
Swiss Franc: The old expression “Throw the baby out with the bathwater” certainly applies here. The Swiss economy is one of the few in Europe holding its own and the reality is that it would be much stronger without the “support” being part of the Euro zone can give. I do expect support to be solid from 10500 – 10550 so use that level from the current 10615 if considering a long future. Another idea would be to sell a lower serial put for April or May Swiss options if we futures approach 10500.
Japanese Yen: After the long slow drift lower from 12700 in mid November to recent lows in mid February near 10600 we appear to be seeing a holding pattern for the March Yen. The 10600 level has been tested four times since mid February and we look to be on the verge of a speedy rebound back to 111-112. I am looking at some April calls and puts and might be suggesting a long call/short put combo later today or tomorrow, looking for at least 11000 on top this week from the current 10710.
Euro Currency: Since the blow off top above 12700 early last month the March Euro has stair-stepped lower and finally cracked to below 13000 last Friday and yesterday. Given Europe’s problems 13700 was an absurd rise. Reality has set in however and I look for a bit more down to 12850 where I would expect this market to settle down. If we see 12850 consider selling a lower put option for April or May options.
Canadian Dollar: The Canadian economy has deep ties to commodities. It is no surprise then that as crude has crashed $9 and gold $100 during the last month that the March Canadian Dollar has fallen from 10000 to 9700 in a two week period. There is minor support at 9650 but if gold and crude continue to slump that may pass as only a speed bump on the way to last June’s lows at 9540. We need a close above 9780 to turn patterns back to neutral.
US Dollar: The US Dollar began to advance about a month ago when it seemed as if Ben Bernanke was going to think about helping the economy instead of being a stock market shill and might possibly end the QE as many of the Fed governors have suggested to him. The Dollar bottomed at 7880 and has climbed back to 8260 despite the fact that Big Ben reaffirmed his dying devotion to keeping the printing presses rolling. Being that Europe is in poor shape as well as much of Asia, and even China is admitting to a slower growth, the Dollar should remain the currency “du jour” for at least the short term. However a move to 8400 would be an extreme advance and I would certainly look to exit any long positions by that point.
Eurodollar: The December 2013 Eurodollar was on the verge of a harsh break when it was believed the Fed may actually try to be part of the solution and allow rates to start creeping higher and end the inflationary QE. Last week Ben Bernanke in his testimony before Congress ignored the words of his colleagues and reiterated that the printing presses would keep rolling. This stopped any breaks in their tracks and the Eurodollars are back in tiny trading ranges once again. Let’s keep an eye on this one and at some point move out to June 2015 puts.
30 Year Bonds: Last week’s word that Italy was again in trouble sparked a flight to quality buy for US 30 year bonds as they flew through strong 144.16 resistance up the old breakout point at 146.16. This was a little too much too fast and we are slipping back to 14520 as of this writing. I would use a correction to 144.16 to 144.08 for March bonds to either go long a June future or purchase a call option and/or write a lower put option.
S&P 500: The March S&P saw a one day correction recently. This has pretty much been the norm for stock index futures since the QE program began. No one has been forced out since last May with tinny 1-2 day corrections not scaring anyone out. And even the May break was rather tepid as futures dropped from 1400 to 1240 at that time. This is not healthy action and markets are always stronger in the long run when they have time to back and fill and let out a little steam occasionally. Our economy is so fragile right now however despite the trillions pumped into it so Big Ben is not likely to let up any time soon. That said, I would not be a buyer here at 1535 and would begin to systematically buy put options. This market reminds me of the game Jenga, where each person alternately keeps adding a wooden block on top of the others and when the tower crashed down the one who put the last block on is the loser. The key though is that the blocks always come crashing down at some point since there is no solid base underneath. A range between 1550 and 1480 looks to be the pattern for now.
Dow: The same situation applies here. Only the numbers change and for the Dow the upper extreme now is slightly above 14250 and the major support is seen at 13800.
Energies: The last few weeks have seen a reversal of form here where the Big 3 of crude, no lead and heating oil have been slammed while natural gas seems to have reached a new long term bottom.
Heating Oil: Heating oil reminds me of the old Batman television series when a fight would ensue and big block letters on the screen describing the action looked something like this ……. BANG &^%#*G&%$# POW *^$**%%*H*^%$E#CRASH. And in commodities terms that pretty much describes April heating oil being pummeled from 320 to 290 in 8 trading sessions. I had harped for months that supplies of heating oil were more than adequate and it had little reason to be trading at 300, let alone 320. That said it is quite oversold at the same time reaching a strong support level at 290. Wait for a correction back to 300-302 to look at the short side.
Unleaded (RBOB) Gas: The break for April gas was equally severe as futures flushed to 306 from 332 but in a mere 4 trading sessions. Supplies remain adequate and at 306 we are still well above what seasonal tendencies say we should be for this time of year. A pop back to 318 from the current 308 may be a chance to short and I would not even think of a buy before 298.
Crude Oil: April crude finally slid below 9000 yesterday. This most like took out long time longs who placed stops below that key psychological level. Now that that is out of the way I expect a rebound to at least $91.30 and possibly all the way to $93.00. This may entice enough longs to jump back on the bull bandwagon before the next wave of selling begins. If we do see $93 I would be suggesting selling higher call options and/or selling futures outright. If $90 doesn’t stem the tide the next major support comes in at $87.
Natural Gas: The harsh break from 368 in mid January culminated with a blow off drop to 320 by mid February for April natural gas. It took just 6 sessions for futures to push back to 356 and it appears to be taking aim at the 362 level. If bested, further advances to 378 are possible. Let’s use a correction to the chart gap at 338 to look at a bullish strategy.
Grains: Beans and meal remain firm, corn is steady and so far we have not seen a floor under the wheat. I believe it is time to start examining the buy wheat/sell corn spread as May corn is now 3 cents over May wheat.
Corn: May corn completed its journey from 7.50 in late January to lows near 6.80 by late February as exports lagged and South American corn conditions improved. We have seen a pickup in exports to China lately and any time there is word that China is buying that particular market sees a rise. For the short term we may see additional strength to 7.20 from the current 7.05 but with the ongoing harvest in South America I do not see any big moves until mid April at best as we begin planting season in the US. A range from 7.20-6.80 is likely short term.
Soybeans: Beans have been saved twice from the wrecker’s ball after large purchases from China. We saw two breaks of nearly a dollar followed each time by sharp rallies after China liked the lower prices and came in buying. May futures are currently near 14.75 and I do not believe we will exceed $15.00 with the South American harvest in full swing and cheaper fresh product available. For now 14.20 should stop any down moves while 15.00 likely stifles further upside.
Soy Meal: May meal has seen similar action as with beans. I don’t expect that resistance at 445 will be beaten anytime soon and the odds are better that support at 420 will be taken out. Futures are at 436 so don’t be in any hurry to buy here. If 420 is beaten we could test 400-405 rather quickly.
Bean Oil: Oil had been leading the charge higher for the soys until mid February when May futures crashed from 5320 to 4870 in little more than a week. This market became oversold quickly and so far has rebounded to 5020. Look for a bit more up to 5080-5100 which is the halfway point of the sharp break. If that level repels, a short may be in order.
Wheat: Wheat is highly overdone on the down side after the break from 8.10 in late January to recent lows below 7.00. Cheaper world crops coupled with slightly improved weather conditions for US winter wheat was the culprit. I am looking at various bullish strategies here as I feel we are very close to a rapid recovery to at least 7.50 for May futures from the current 7.02. Some possibilities include buying wheat and selling corn as a spread, buying call options or bull call spreads and/or writing lower put options. Look for a trade tip today or tomorrow to that effect.
Softs: Cotton has confirmed a bottom, sugar is trying to form a base and cocoa and coffee may offer short term buys.
Sugar; The trend remains down but selling has slowed here. May sugar bottomed at 1770 last month, advanced to 1860 and have retreated to the current 1810. We should see strong support at 1790 and it would take a close above 1860 to confirm a temporary bottom. This is one to watch going forward.
Cocoa: Yesterday’s flush to 2053 was a low not seen since last June. Cocoa supplies are adequate and there has been relative calm in the Ivory Coast. I believe this market is pushing to 2000 and needs to flush out long term sell stops below that important psychological level. Wait for that action before considering a buy here.
Cotton: May cotton has continued its nice climb pushing to the first resistance at 8750. The breakout at 7750 in January stalled near 8400 but once the 8150 level supported futures 4 times in February this market soared. We are slightly overbought now and I do expect a pull back to the secondary breakout point at 8400. Let’s watch for that action this week.
Orange Juice: May OJ broke out above 12000, stalled at 13200 and is back into that breakout level near 12000. I believe we will test yesterday’s lows at 12000 again this week. If beaten 11800 should hold so I would use that number if contemplating a trade. Use call options for safety and if buying futures near 11800, protect yourself below 11400.
Coffee: Since mid February the May coffee has crawled higher with good market action of higher highs and higher lows. The first resistance is at 14800 and this may spark some selling. I would wait for a dip to at least 14000 from the 14460 we are now seeing and consider a bullish strategy. If 14800 is bested first 152, then 155 would be the next targets.
Rice: For a while last month rice appeared on the verge of a higher trade as May futures blasted up to 1670 once a key area at 1590 was beaten. Apparently that move was fool’s gold and we are back into major support at 1550. If this level continues to hold, a buy, risking below 1530 may pay off.
Livestock: Cattle seem to have finally stopped dropping while hogs are down to lows not seen since last May.
Live Cattle: June cattle bottomed near 12350 last week and have crept back to 12565. The next line of resistance at 12640-12660 will show us if more upside can be expected. A drive through those prices sets the stage for further upside to 12920.
Feeder Cattle: After a 12 cent break from 154 to 142 during February the April feeders seem to have found its legs. The final lower breakout below 14700 will offer resistance now but if beaten 15100 should be the next target. Use a dip to 14350 from the current 14470 to consider the long side.
Lean Hogs: To quote the April heating oil commentary….. BANG &^%#*G&%$# POW *^$**%%*H*^%$E#CRASH. April hogs traded at 9050 in late January. They reached new lows this morning at 7972. Last May the lows were seen at 7950 so this should hold at least during the first test. If 8175 is beaten first 8225 then possibly 8400 might be close behind.
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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