This week we are seeing signs that some of the froth in commodities may finally be coming out. While we remain long term bulls of the overall commodity sector, we feel at this time that many of the commodities are overbought or in the case of energy, in a bubble. That is not to say that some markets, crude oil in particular, can’t keep going higher. But we expect the overall CRB index to at least begin to consolidate, if not roll over. Bottom line here is that it is time to be defensive as the “easy trend following money” is likely to have passed.
Crude Oil:
Crude oil closed last week near the 145 level but opened this week and almost immediately fell to test 140. Five Dollar moves in crude oil used to be a massive day but now it’s just an average day. We still see signs that we could spike above 150 before topping but we are getting very close to a near term high if we are not already there. Longs need to lock in gains and protect paper profits now. This is not the time to be greedy. We are exiting longs and in some cases even buying puts this week.
Natural Gas:
The break we warned about in last weeks issue looks to be happening this week. The August contract would have to close below 12.50 to signify a break in trend so wait for that before attempting to short. This could just be another dip to buy so those with a high degree of risk tolerance can look to buy this dip with stop and reverse orders below 12.50.
S&P500:
This market is still trying to hold support near the 1250 level. While we may head fake below that level a bit this week, but we still feel that buying this dip is smarter than chasing it lower. We are working stops from 1245 down to 1234 on longs that were taken between 1255-1275. Our target remains at 1325. Again buying dips this year has been harder to stomach, but it has still worked more times than not.
Bonds:
Bonds have continued to rally as stock investors run for cover. We do feel that the short term bounce in bonds is all but over and are now exiting the remaining long 112 and 113 calls we recommended two weeks ago. At the same time we are now looking to buy the September 115 puts. We are buying these puts with a trade weight of 50% of the position that was taken on the long calls two weeks ago. In other words if you went long 10 calls with us two weeks ago we suggest you exit them now if you haven’t already, and then buy 5 Sept. 115 puts with those profits.
Metals:
While we remain long term bulls of gold we are looking at a number of things this week that could pull this market back. First thing is clearly the stabilization of the Dollar. If that continues it should at least put the breaks on the rally in metals if not turn it around. We are therefore exiting longs for the time being and purchasing a few strangles. Silver we are avoiding at this time due to volatility. Copper stopped most of our shorts out last week but the few that remained have now made up for the losses on those that were stopped. We are looking to sell rallies in Copper this week with stops above 409.
Grains:
Grains started the week with a sharp pullback based on dollar strength. We do expect more downside in grains and are looking for rallies to sell into with stops above last weeks highs. Beans could fall back to 14.00 or even lower in the near term while Wheat could fall back to strong support near the 7.50 level. Corn remains the one place where we could see continued strength but near term we expect to see 6.25 retested. Again if the Dollar is really turning up, that alone should cause a broad pullback in commodities.
Softs:
OJ did manage to break out and then run above the 118 level mentioned last week. We would not advise anyone to chase after it if you are not already onboard. OJ is a very thin market prone to erratic movement on little to no news. Cocoa also took it on the chin early this week due to the strong Dollar. We expect that market to continue to move lower as it too had a bit of a bubble. Sell rallies if they come but we suspect they will be small if they come at all. Coffee also pulled back due to the strong Dollar. This is why we told readers in last week’s issue not to chase this or for that matter, any market. Coffee is likely to retreat all the way back to 130 before finding any real support. Sugar had a brief head fake above 14 last week but is now also pulling back with the rest of the complex. We suspect Sugar will fall to at least 12.50 before finding any real support. Cotton did not hold support at 70 the way we expected. If support near 65 holds we will look to buy long again near there with stops below 62.
