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 the Midwest we sometimes like to skip seasons. We had snow in late April but this past weekend saw 80s for much of the Midwest. While some may say we went from winter to summer, in Chicago we like to say we went from winter season to construction season as millions of potholes need to be repaired on our well-travelled roads.
Metals: Gold and silver are fighting the opposing forces of the inflationary aspects of a strong economy versus the continuing prospects of further rate hikes to slow down the inflationary possibilities. This may keep them in the tight trading ranges we have seen during the past two months. As US stocks continue to recover after sharp breaks each time the Fed talks of another rate hike, copper has come back as well and may be on the verge of another leg higher.
Gold; June gold held just over $1300 support last week. For the time being we may push to 1320 and if that is taken out 1335 is a possibility. Short of world conflict or a major stock market crash I don’t see much more than 1335 on top right now and if 1300 is beaten first 1290 then 1280 would likely follow.
Silver: For the most part July silver has swung between 16.10 and 16.80 except for the 3 day rise to 17.40 then drop below 16.80 in mid April. I expect the same action for silver as I do for gold which means not much upside from current levels and a slowing down side as well. I would wait for another test of 16.10 if thinking of a long for July silver.
Copper: July copper made a steady move higher until the stock market saw the sharp break in late January into February. We saw about a 40 cent break down to 29600 in late March, recovered to 32200 by late April and currently sit near 30800. The stock market is slowly adapting to higher rates and as long as stocks progress as they have, I expect to see copper push to 32500-33000 near term. If we see another slide to 30200 I would consider a long for July futures.
Currencies and Financials: For months I have been explaining why I felt the Dollar was undervalued while non US $ currencies were in many cases (Euro,Swiss,Yen) extremely overvalued given the condition of our economy versus theirs and our higher interest rate picture. This picture dramatically changed since the Dollar bottomed near 8900 just three weeks ago as the June Dollar reached 9303 this morning.
British Pound: The discussion this week will be how far the non US $ currencies have fallen and what to expect going forward. The June Pound has made it to 14400 as our $ was reaching the aforementioned lows. In less than 3 weeks the Pound had fallen to just over 13500 last Friday. We will continue raising rates and our Dollar has a long way to rise so for most currencies, I will be looking to short after corrections higher off of their harsh breaks. For the June Pound currently at 13517 the first area I will watch is 13850. If we test up to 13800-13850 I will be looking at a short and likely risking above 14000. Down below if 135 doesn’t hold look for more to at least 13300.
Swiss Franc: Granted the Swiss has been battered down harder than it should have as the Euro has dragged European currencies down with it but we still have more to fall. The move to 11000 for the Swiss in late February was to say the least a joke, to say the reality, a great shorting opportunity. That was the peak and we have crawled slowly lower until we broke below 10500 a few weeks ago. June Swiss traded to 9977 overnight and from the current 10010 I would not consider a sell before 10150-10200. Down below a close below 10000 paves the way for more down to 9750.
Japanese Yen: The June Yen was fairly strong and had made it all the way up to 9620 by late March. By last Wednesday futures had fallen to 9120 which was near the higher breakout point in late January. From the current 9190 I would use an additional correction to 9300 to examine the short side. Additionally a trade below 9100 may set the stage for further weakness to 8850-8900.
Euro Currency: Despite dropping from 12650 to lows today at 11845, the June Euro still has a long way to drop. I’d be nervous to sell after a 800 plus drop in a couple of months and will probably wait to see a correction to 12250 from the current 11865 before shorting. This may be the beginning of getting back in line with its real value which I feel is closer to 11000. There is a little support at 11750 but nothing of significance until the lower gap at 11434 from last June.
Canadian Dollar: The June Canadian Dollar is showing a perfect head and shoulders bottom. A view of the daily chart shows 7750 bottoms in late March (shoulder), a rise to just below 8000 during April (head, and current drop to bottoms at 7750 once again to complete the other shoulder. A rise above 7800 confirms the formation so we may have a play here this week. I’ll keep all posted.
US Dollar: There isn’t much to say which I haven’t already. Futures traded to 8850 and as mentioned above, we have climbed all the way above 9300 in just three weeks. I expect 9400 easily but if some of the other currencies correct higher, the Dollar may correct lower. From the current 9303 wait for a slide to 9220-9200 for another chance to enter.
Eurodollar: There is little to say here. Futures continue to drift steadily lower and will continue to do so as financials such as the Eurodollars and bonds drop as interest rates rise. December futures have fallen from 9800 early this year to a low at 9733 today. Two more rate hikes during 2018 should push these to 9675 by expiration.
30 Year Bonds: As recently as April 11 the June bonds were trading at 14628. Within two weeks traders started to take seriously that the Fed would continue to raise rates. Within two weeks they crashed to 14117. Last Friday completed a correction to 14408 and we currently reside at 14316. I would use another test of 14408-14416 to look for a long-term short position. I believe the Fed raises another ¼ point at the June 11/12 meeting and probably another ¼ point during the September meeting. In theory that should push the futures below 14000 so let’s watch this one closely during the next couple of weeks.
S&P 500: The market initially crashed hard in late January into February over trade war fears. As it is becoming obvious this will not likely do any long-term damage traders began to worry about the interest rate hikes since equities traditionally get nervous about that possibility. We are starting to see a subtle shift now where rate talk is absorbed without the market taking too big a hit. We still see the market break often times after great economic numbers in the “good news is bad news” as stocks then worry about further rate hikes to slow a heating up economy to slow the inflation which can accompany surging markets. From the current 2677 I believe once we break 2680 we will at least move to highs at 2720 from two weeks ago. If 2720 fails to stop, first 2780, then 2800 would be the next targets.
Dow: The story obviously is the same for the Dow and only the numbers change. After reaching 23500 last week June futures so far have soared back to 24425. A push through today’s high at 24425 starts a run to first 24600, then 24800. If 24800 is bested there is little resistance before 25200. Down below support should be solid at 23200-23300.
Energies: Energies continue to rise driven by strong crude which is due to the much healthier world economies we have seen during the past year. Demand has risen and going forward, demand is expected to continue to rise. We are sort of stuck right now however since futures have risen too far to buy yet remain too strong to short. The best bet is to hope for corrections to enable you to enter at less risky levels.
Heating Oil: As to the above, June heating oil rose from 18000 in late February to highs at 21871 yesterday. I couldn’t recommend a buy up here and expect a correction to at least 20800 and possibly 20400 if momentum builds. Don’t look to buy before those levels.
Unleaded (RBOB) Gas: As with the heating oil gas rose but not as swiftly, moving from 18400 in late February to highs at 21523 a week ago. Again we are too high too soon so I wouldn’t buy before 20400 and possibly 20000.
Crude Oil: The rise from 5700 in February to highs yesterday at 70.84 is also a way too much too soon scenario. Yes demand has been good and yes we have less in storage than this time last year. But demand is more perceived demand so far and despite having less than last year, at this time last year we had a huge surplus. In addition futures were trading in the high 40s then so they have more than accounted for somewhat lower supplies. No one knows exactly what will happen with the Iran deal and how it will affect crude. My guess is any move will be short-lived because let’s face it, even when Iran wasn’t allowed to be selling crude, it is the worst kept secret that they were sending quite regularly to Russia and China so the world supply situation won’t really change one way or the other. There may be a psychological bump higher if President Trump nixes the deal, but I feel it won’t linger for more than a day or two in the market. The US stock market is likely to be the market which sees weakness if we pull out of the deal.
Natural Gas: There is little to discuss or trade with natural gas right now except for possibly writing option strangles. (selling calls and puts on each side of market to take in premium) May natural gas has settled into a 260-280 range with little to drive it in either direction now. If we were to start to see any indications of a warmer than normal spring/summer we might see a rise to 300 but with plentiful supplies and outside factors throwing bearish aspect into the trade, let’s stay on the sidelines for now.
I looked at these words from last time and I see nothing at all I would change. Perhaps the range changes from 264-284 for June natural gas but other than that, the analysis stays the same.
Grains: Corn and wheat made huge runs higher, beans and meal made mini moves higher and each has pulled back from recent highs as we await spring weather and this coming Thursday’s (11:00 am central time) crop production/supply demand report.
Corn: The carry out has decreased, Brazil and Argentina have significantly lower crops than last year and the funds have switched to the long side. July futures have risen from 3.77 in early April to highs at 408 ¼ last week. Weather conditions have improved as the Midwest bypassed spring this year and pushed right from winter to summer so crop progress should improve quite a bit during the next two weeks. After this Thursday’s numbers we will be back to a weather market once again. I would look for a slight pull back to 3.96 coming into Thursday so aggressive traders may take a crack at the long side. Another play which could pay off would be to buy June call or put options. They are based on July futures but expire on May 25 so you would have two weeks of time left. This could be to protect longs through the report but because of the short time value, premiums are very inexpensive so your risk is cut to these smaller premiums paid.
Soybeans: The beans are probably more susceptible to the possible tariff wars between the US and china as they are traditionally big buyers of US beans. Beans have been volatile with big swings after US China talk. The latest low came in early April when July beans crashed from above 10.70 to 9.95 in just three sessions. Of course it took a mere 6 sessions to reach a new high at 10.79 once China backed down. Better Midwest weather spurred a harsh sell off which took beans to 10.10 yesterday and my guess is they will be somewhere near 10.25 coming into Thursday’s report. Weather versus demand is the biggest factor moving forward.
Soy Meal: Meal has been the leader here as July meal saw a steady advance from 317 in late January to highs at 407 last Wednesday. Again, better weather and getting too far ahead of itself sparked a harsh break down to 381 so far. Support is minor at 375 but more major at 370. Once the report is out-of-the-way its back to-day to-day possible volatile trade due to the weather.
Bean Oil: There are many edible world oils which explain why bean oil seldom shows the exuberance which beans and meal show. In fact as they were rising, bean oil was tanking and only began to rise when meal and beans corrected lower. A buy near 3040 from the current 3090, risking below 2965 would be the only way I would trade this Cinderella of the soy group.
Wheat: Poor crops in Europe and the Ukraine and a dry Kansas spurred the move for July CBOT wheat from 4.67 on April 24 to 5.39 by May 3. Helping rains in Kansas and a natural profit taking pull back brought us back to 5.06 this morning and action may be quiet as we await this week’s big numbers.
Softs: Cocoa and cotton continue to soar and OJ has joined the rally club. Coffee made a 10 cent bounce off of long time lows and sugar is showing a pulse for the first time since late last year.
Sugar; July sugar showed a blow off bottom formation two weeks ago with the flush to 1093. This was from highs above 1500 early this year. It did correct up to a strong resistance at 1180but has slid back to 1140 now. Although the crop from last year was hefty, a nearly 50 % drop in price coupled with better prospects for this year’s crop being lower could help to see a comeback. July sugar needs to hold over 1100 to continue its attempt to form a base but more likely needs strength above 1200 to see any healthier rallies.
Cocoa: Shipping problems with the Ivory Coast crop and a somewhat reduced crop from last year caused an explosion higher here. In December July cocoa was near 1800 and still below 2000 in early February. We took off in early March and the first wave to 2650 should have more than accounted for any shortages. Once most shorted at those overdone levels another wave higher enabled cocoa to make it to 2950 before crashing right back to earth (2700 ) within a couple of days. For the past two weeks cocoa has bounced up and down between 2700 and 2900 and I would feel far more comfortable shorting at 2900 than buying. Another option is to write high call options for September in the 3400-3500 range.
Cotton: A hot and dry Southwest USA coupled with continued strong demand from China led the way for July cotton to make it above 8800 last Friday. We have pulled back to 8600 now and further weakness to the breakout at 8500 may be a buying opportunity. A push through 8800 may set the stage to see 9000 shortly thereafter.
Orange Juice: Since bottoming at 13600 in late March OJ has been on a tear pushing all the way over 16500 in about a month. Much of this is early buying but I am not sure why as hurricane season doesn’t begin until about June and there is no shortage of juice worldwide. South America’s crop is somewhat reduced but not enough to cause a 30 cent spike higher in a month. I would wait for at least a 15 cent pull back and then consider September call options.
Coffee: May coffee is suffering from the fact that there is just too much cheap product out there. Each rally attempt since November has failed 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.
The words from last time still apply and futures did reach 11610 today. The 11500 area should be supportive and we could see a short cover rally anytime which could take us to 122-124. If 115 is bested we may slide further to 110.
The words from last were on point as futures did make a low at 11530 and actually made it to 12595 last Wednesday. They have slid back to 12000 currently and now this area must hold for coffee to possibly be a buy. More likely a range between 11800 and 12800 will ensue so a buy near 11800 may pay off.
Livestock: As cash prices are finally breaking lower we may see some lower trade for live and feeders while good demand from Japan may keep a lid on hog breaks.
Live Cattle: a month ago June cattle nose dived to lows at 9700 and recovered to 10500 by the next day. They continued to 10800 as cash prices remained stubbornly high. So far pull backs have held at 10400 but as cash is beginning to fall that area must hold or we face another flush to 10000 as supplies remain high. We are entering the barbecue season in the US and that may be enough to hold the 10400 level.
Feeder Cattle: Ditto for feeders and for the same reasons. After a one day flush to 12900 May feeders shot higher to 13900… the next day. As with live, a bit of follow through brought us to 14300and so far we have sunk back to 13600. The 13450 level must hold or we could see further weakness to 13100. August futures may have longer term bullish prospects as recent cattle on feed reports show lower placements to the feed lots later into summer.
Lean Hogs: the beatings for hogs seem to be nearing an end. The drop from 8600 in January to 7000 by early April took care of most shorts and bottom picking, along with strong demand from Japan are supportive. After the run over 7900 by late April was followed by one last sharp break to 7200 two weeks ago traders seemed to say “enough is enough” and so far we have popped back to 7575. I would use a slight drawback to 7400 to look at a long position.
Questions? Ask William Frejlich today at 312-264-4356