What a difference a week makes…..
We saw the Dollar fall back to retest support. So far it has held but the real question is will it continue to hold. We see more reasons for it not to hold than for it to hold so at best we remain cautious. If the Dollar does break down we will see another leg higher in commodities which would only server to exasperate the problem we already have. Unfortunately it is no longer a question of if this mess will get worse, but rather now it is just a question of how bad will it get and how long will it take. We suspect it will be both worse than expected and take longer than expected to work itself through the system. That being said we are now looking to buy dips in commodities but we will do so with reduced position size to balance out the increased volatility.
Crude Oil:
Crude Oil had the single biggest up day in the history of recorded time on Friday. The action we saw is a clear sign that we are now finally entering into the final blow off stage of this rally. That is not to say that we have seen the top but for those that are Elliot wave theorists this is with little doubt a wave 5. We could easily see this market blow off above 150 but blow off it will and the end when it comes will be very violent just like what we saw on Friday. Macro turning points, when they come, are almost always associated with one sided emotionalism. This means that everyone will agree that the price will go higher and therefore it will not. Do not step in front of this train with shorts yet. In fact all but the most savvy and risk tolerant of traders should be on the sidelines during these next few weeks. If you feel the urge to trade this market say this in your head, until it sets in, “there are old traders and there are bold traders, but there are no old bold traders!” Don’t be a hero. If you have not been trading crude oil for the last few years this is not the time to start. “Bulls make money, bears make money, pigs get slaughtered.”
Natural Gas:
Natural gas continues its strong uptrend. We have nothing on the immediate horizon that indicates a top so we must expect more upside. That being said we choose to trade elsewhere as we feel the risk in this market out weighs the potential reward.
S&P500:
We exited our longs above 1400 but missed the short entry signal. We are now looking to sell into any major rallies especially any that get us above 1389. Bottom line here is simply more range bound action and since we are closer to the top of the range then the bottom our bias is now to the sell side.
Bonds:
Bonds are a buy at or below the 113 handle with stops below 112-08 targeting a move back up to at least 115 by months end.
Metals:
We remain long gold from 880 and stops have now been moved to entry. We are still a buyer of dips in this market and we are targeting a move back up above 925 later this month. We are not yet expecting a resumption of the bull rally, just a retest of some of the upper levels. We are also still long silver from 16.89 and stops have been moved to entry and we have already begun to exit this trade on pushes above 17.55. Copper did bounce off of 350 as we expected and are light buyers near 355 with stops below 345.
Grains:
We continue to be long wheat from two weeks ago. We will move stops to entry should we close above 8.34 this week. We will also begin exiting should we trade above 8.55. Corn took out our stops and we are now flat. We will not chase this market higher. Beans did break out above 1415 and we are now expecting this market to retest the old highs near 16.00.
Softs:
OJ seems to have stabilized but we still see better opportunities in other markets at this time. Cocoa did follow through to the upside and our shorts were stopped out. We are not chasing this market either and will wait for an overbought condition to develop before trading this market again. Coffee remains stuck in a tight 130-140 range and we are now out of our longs. We will look to rebuy long after another test of the 130 level assuming it holds. Sugar is still trying to find a bottom and until it does we will stay out. Cotton is a buy at the current levels with stops below last week’s lows. We suggest traders buy the Dec. cotton 75-85 call spread if they can get it for less than 2.5 points.
