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
In Chicago March came in like a lion….. so we expect to see it go out like a lamb. Now scientific data like that and whether or not the groundhog sees his shadow cannot really be refuted. Now where did I leave my Farmer’s Almanac again???
This Week’s Commentary
Metals: Gold and silver continue to fight the opposing forces of inflation versus constant talk of higher interest rates to come. This has led to volatile two way action for most in this sector. Copper has stalled as US stocks recover from recent harsh breaks.
Gold; After pushing to test mid September highs at $1370 recently, April gold has slid back to $1330. From lows near $1240 in mid December to the highs at $1370 was a $130 rise. A 50 % correction of $65 brings futures back to support from $1300-$1305. I would not consider a buy before that level.
The words from last time hold true as April gold first travelled to $1366 then fell to $1303.60 just last Thursday. If $1305 cannot hold further downside to $1280-$1285 is possible. It would likely take another strong crash for stocks or some world event to see much more than $1345 on top near term so a range from $1305-$1345-$1350 is likely coming into the FOMC meeting about rates on March 20,21.
Silver: Silver will rise and fall for the same reasons as with gold so only the numbers will change. I do expect a continued range where $16.00-$16.10 holds below while $16.80 stifles further up for the time being.
Copper: Copper has slowed as uncertainty about interest rate hikes has slowed US stocks thereby creating doubt as to future copper demand. I see no reason for stocks to slow long term so copper may wallow around between 305 and 325 until more clarity can be seen. If we continue to hold at 305 and the stock market returns to pre February action, a move to new highs above 330 are very possible.
Currencies and Financials: The US Dollar is starting to firm up while non US currencies have stalled. The one here which may be a buy is the Canadian Dollar which has been slammed from highs at 8175 in late January to lows overnight at 7700.
British Pound: The March Pound needed less than 2 weeks to push to 14375 once the 13700 resistance was broken. That was too much too soon and so far we have slid back to 14000. Support is minor at 14000 so I would wait for a test of 13700-13750 before considering a buy.
The words from last time came to pass as the March Pound made it to 13719 last Thursday. So far we have pushed back to 13880. I expect more up to 13950-14000 where I would take a serious look at a short position. Let’s watch for that possibility this week.
Swiss Franc: March futures reached 10550 last week after popping its head over 10900 two weeks ago. As I mentioned last time there was no reason for the Swiss to be above 10650, let alone 10900 but markets are very psychological and often overshoot their objectives. We bounced back to 10725 after the aforementioned break and from the current 10650 I would not consider a buy before at least 10475. On top another push to 10750-10775 may be a huge favor to initiate a short sell or buy a put option.
Japanese Yen: The big rally for both the Nikkei and the Yen coincide completely with the turnaround for the US economy and stock market since November 2016. As we rebounded in the US, both Europe and Asia have seen excellent advances for their economies as well. This is probably what is responsible for the weaker US $ despite our being in the best position to raise rates. The Yen quickly advanced on 9500 once 9275 was beaten last month. In fact it only took 3 sessions to push to 9500 once 9275 was taken out. We came right back to 9280 after the high and pushed just over 9500 last Friday. For the time being it appears that this range from 9500 to 9275 may take hold at least until the FOMC meeting here March 20 and 21st.
Euro Currency: Action here closely mimics the Swiss, or maybe it is the other way around but market action is definitely closely related. To wit, the March Euro shot to 12580 a few weeks ago and slid all the way back to 12166 last Thursday. It has taken two days to push back to the current 12345 and we may see further up to 12450 if we close above 12350. As with others here a range, in this case from 12150- 12450 is likely through later this month.
Canadian Dollar: As mentioned above we may have a buy for the Canadian Dollar this week, perhaps by tomorrow. We are at lows not seen since last June with the break to 7700 from highs near 8200 in late January. I don’t wish to pick a bottom just yet but a buy near 7675, risking below 7635 may be one idea but more likely a call option for April or May based on June futures would be the safe way to trade this very oversold market.
US Dollar: I believe the Dollar break is over and we can begin to look at buying after dips once again. I don’t think we will see the 8850 lows again but from the current 8995 further down to 8950 may find strong support. I would trade this two ways; I would consider a buy on a dip to 8950 or if it does not break I would buy on another breakout above 9050.
Eurodollar: Since the last time Eurodollar futures pushed to new lows, bounced back a bit as stock uncertainty continued and are now on the verge of lower action once again. The stock market came back immediately after the week long slam, slid back a bit and is now poised for further gains. This should enable the Fed to continue the course of gradual rate hikes. We will see three hikes this year and the odds are near 80 % that the next one will come on March 21, the culmination of the Fed meeting. We continue our strategy of buying put options here. We bought March 2019 9750 puts in November, 9737 puts in January, and December 2019 puts a few weeks ago. These look to continue to gain as futures continue to fall prior to, and after the latest rate hike.
30 Year Bonds: Bonds have continued their downward path for the same reason as have the Eurodollars. June bonds were trading at 15316 before last December’s interest rate hike. By February 21 they had reached a bottom at 14114. Subsequent Fed talk and choppy stock market action has slowed the downside and we did push to 14420 last Friday. But that was before the stock market came roaring back. The economy is still humming along with few negatives. Do not be too concerned with the talking points of the steel tariffs just yet. If it was a bad deal our economy will not suffer due to the tariffs. If it is not a bad deal for the US we can always altar the plan if needed. But let’s look at things logically for a moment. As the US economy treaded water for 8 years despite trillions in entitlements, I mean debt, being added to our children, most of the rest of the world’s economies did even worse than we were doing. They have all come on like gangbusters since the US economic recovery and most have come back to multi year highs. Do you really think Europe or Asia will want to jeopardize that to support retaliation against the US for trying to fix a deal they all know was bad for the US. I don’t think so. I believe they would rather stay on the positive path which they are into now and will not cut off their nose to spite their face.
S&P 500: There surprisingly is not much to say here. After rising nonstop for 14 months, a correction was not only long overdue but very healthy for the stock market. I like to compare markets such as our stock market was to a pressure cooker. You have to release the steam sometimes or it’s “gonna blow”. So Janet Yellen’s transparent political attempt to cause a major stock crash in her last address backfired as stocks have come back almost 75 % of the break, and are showing signs that a normal market correction was all that we experienced. In the long run it will make for a healthier market and economy overall. A rise past 2725 may spark further advances to last week’s high near 2800.
Dow: The story is the same for the Dow. March futures dropped from 26700 to 2320 in three days, thank you Janet but within 2 weeks it pushed back to 25800, slid to 24200 and is now back above 24700. If we see a push above 25000 this week it likely leads the way to 25800 within days afterward.
Energies: The entire group except for possibly natural gas has been creeping back higher a bit as US stocks are showing signs that the correction is over.
Heating Oil: As to the above comment, April heating oil had pushed over 210 as US stocks made new highs in late January. As US stocks backed off it took just 7 sessions for the oil to fall all the way to 181. We recovered and the April oil pushed back to 200 slid to 185 and are pushing 190 currently. This was during a time when OPEC reiterated that they will keep production cuts in place through the first 6 months of this year. We are exiting the heating season so I would not expect too much more on top but if we hold the 192-194 level on top, a sell may be in order.
Unleaded (RBOB) Gas: No lead had also suffered, falling from 210 to 184 as equities were dropping. They bounced back to 203 on the first rebound and currently reside at 19330. If 194 is taken out we may take another run at the 200 level. I slide to 184 may offer another buying chance for April gas.
Crude Oil: Crude is the market most following the action for US stocks. I believe the $55.00 level was fairly priced and the rise to $66.00 was mainly due to ideas demand would see a huge pick up with stronger world economies. April crude held support just below $63 from highs at $66.39 last week. From the current 63.50 a break below 62.80 starts a move to $61.80 followed by 60.00 if 61.80 fails to hold.
The words from last time still supply as April crude made it to $60.13 last week. So far we have recovered to $62.79. If momentum continues we may make it to $64 but I would wait for a pull back to 61.00-$61.25 if looking to buy.
Natural Gas: A warmer than average winter for the Midwest has been no friend to natural gas bulls. During the infamous stock market break April natural gas took about 2 weeks to flush from 300 to 256. We recovered to 273 so far and would need a push over 274 from the current 269 for more upside. Even if that occurs I would not look for much more than 280 on top anyway and I would consider using a further rise to look at a short position. Most likely though natural gas remains in a tight 250-280 range going forward.
Grains: Continued dry conditions in Argentina and strong exports have been responsible for the rise for soybeans and to a lesser degree for corn. Wheat has been rising due to unfavorable weather conditions in the western wheat belt. All are slightly overbought now and a correction would be nice to see but with a possible el’ nin’o in the US this spring and summer, breaks may be short lived.
Corn: Since bottoming at 3.54 in mid January May corn made it to 3.88 Friday. The move began as short covering but as beans advanced with poor Argentina weather and healthy exports, corn has seen support as well. If we see a pull back to 3.76 I will be looking at either purchasing long corn futures but for July and also recommending July call options.
Soybeans: May beans bottomed at 9.55 as May corn held 3.54. While the corn only rallied 30 cents May beans made it all the way to 10.83 last Friday, making it a move of $1.28 in about 6 weeks. We are quite oversold and a correction to the breakout at 10.40 may be another opportunity to get long. Let’s monitor weather in Argentina and at the first hint of rain we may see that break I described. This Thursday brings the monthly crop update and March 29 is the first big report of the year, quarterly crop production and carryover both domestic and world.
Soy Meal: May meal screamed higher for the same reasons mentioned in the bean commentary, soaring from 330 on February 6 to highs at 404 just last Friday. We did correct to 385 and now reside at 392, I would have to wait for further downside to 370, given the overbought conditions before I would feel comfortable with a buy.
Bean Oil: May oil has been the laggard here for various reasons. It did make a run from 3160 to 3295 but quickly retreated to 3193 before holding there. From the 3225 now I would wait for another test of 3180 before considering a long. There has been strong demand for bean meal and when the meal is crushed it releases the meal and oil. Oil supplies are not as tight as meal and there are other vegetable oils which can substitute, thus the reason you often see oil falling despite meal rising.
Wheat: May wheat had been steadily climbing as it advanced from 4.25 to 4.80 in January and early February. Unfavorable conditions in the western wheat belt generated a solid 40 cent climb to 5.20 once 4.80 was bested in just two trading sessions. We have chopped between 4.95 and 5.20 since then indicating we may have gone high enough for now. I would not consider a buy before at least 4.80 and possibly 4.60 if 4.80 fails to support prices.
Softs: Cocoa and cotton have soared of late as sugar, OJ and coffee continue to struggle to find support.
Sugar; May sugar was holding fast above 1320 until last trading day for March futures. Apparently the March shorts decided to roll over to short May as futures flushed to 1284 from highs near 1356 the prior day. Within 2 days futures took off to 1380 and so far have come back to 1336. A strong push through 1380, then 1400 is needed for any appreciable upside but first the demand picture must pick up.
Cocoa: Some short term delivery problems in the Ivory Coast gave May cocoa a steroid injection as it exploded from 2240 to 2460 in just two sessions once 2240 was breeched. There is no way to recommend a buy after the rise from 1820 in December to 2460 today so I would not even consider a buy before first 2240 and more likely 2100.
Cotton: Bang Zoom Alice…. To the moon…. That old Honeymooners line describes May cotton which has exploded from 7647 on February 16 to highs at 8530 today. We have exceeded most near term expectations during such a short time frame and as with cocoa, we must wait for a correction as volatility and risk is greatly expanded after such a move in such a short time frame. I wouldn’t even consider a long before 8000.
Orange Juice: May juice saw a mini run from 13300 in late December to 15200by later January. When no solid freeze was seen in Florida the fairly substantial supplies on hand took mover and futures fell back to 138 both Friday and today. There is little reason to pick a bottom yet and we are too low to short. The best bet here is to wait and see if May juice can push to 13000 or lower for a possible short term by.
Coffee: May coffee is suffering from the fact that there is just too much cheap product out there. Each rally attempt since November has ore and futures reached new lows shortly after each corrective attempt to rise. After making 12400 last week May coffee has retreated to 121 and needs to hold above the recent lows at 11855. If broken 11550 is possible. If the 120-118 area can hold this time around we may see a more substantial correction to 128-130 based on current patterns.
Livestock: Hogs and cattle have been suffering of late. Hogs have become more oversold than cattle and I expect a corrective bounce this week.
Live Cattle: After a two week rise from 11800 to 12700 April live cattle reversed yesterday. So far we have come back to 12470 and are on the verge of breaking below the uptrend line. If so there is little support before 12200 and if that fails to hold, the next stop would be 11900-12000. Wait for that if considering a buy.
The words from last time came exactly to pass as April cattle held 12200 as a low both today and Friday and they bounced back tom 12320 today. The 50 % correction higher takes us to 12500 where I would feel comfortable with a short position. This market is fighting the opposing forces of decent demand against much larger than last year being placed on the feedlots during the June –August period of this year. This may serve to keep futures in a tight range for now until one of the opposing forces wins out.
Feeder Cattle: Market action was the same for feeders as March futures pushed from 13800 to 15200 yesterday. The settlement was 14872 today. There is congestion at 14600 but if broken there is little support before 14200.
As with live cattle the words from last time also came to pass for feeders. Once 14600 was beaten March feeders flushed to 14275 and bounced back over 14400. The 50 % correction here comes in just above 14700 so let’s watch that level for a possible short.
Lean Hogs: April hogs topped at 7725 on January 8. Both Friday and today futures held just below 6700. They bounced back to 6875 today after reaching stochastic levels below 5 % last week. I expect further up to the gap at 6980 and if that fails to resist on top, further upside to 7200 is possible.
Questions? Ask William Frejlich today at 312-264-4356
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