Oil prices quickly retraced and are fast approaching the 2011 lows set earlier this month. Where the global economic outlook goes so goes oil prices. Significant downside should be anticipated on a break below the August 9th lows. Rbob and heating oil should follow suit, but expect natural gas to begin to trade opposite as that spread between crude and natty tightens.
The stock market tested, but failed to close above, the critical 1199 mark on the S&P I had discussed last week. Concerns over European stability continue to plague the markets which are seemingly fighting the reality that the world is in a recession. Friday offered a critical indicator as to the market’s psychology and momentum as it destroyed a decent rally attempt by the close. On a technical level there is little to suggest anything but a retest of the 1077 lows on the Sept. S&P set back on the 9th. Bonds remain bullish during this stock market mayhem, but I would look to spread 1 short mini S&P500 against 1 short 30yr T-Bond to play a lack of upside in bonds versus the downside exposure in stocks. The dollar remains a buy on dips as the congestion that is playing out offers a bunch of misleading short term signals. The long term outlook continues to be bullish, pressuring the euro, pound, Canadian and Aussie dollars. The yen is a buy on dips as well, but there should be a congestion period for a brief time as the market fights against the intervention area from just two and a half weeks ago. I continue to standby my forecast that:
The Japanese Yen futures will hit 140 before it hits 80 or I will quit writing the Weekend Commodities Review...forever.
Grains should experience serious pressure as slow exports and a weakening global economic outlook change the demand side of the equation in this sector. Look for corn and beans to get beaten down with volatility to the downside while wheat remains a spread buy against either. Rice remains a sell with puts.
Cattle turned bearish in a hurry last week and I expect significant downside through much of the remaining part of 2011, making this a bear market to jump on early. Hogs turned south once again and broke to fresh near term lows only to recover somewhat on Friday. Look for a fresh low closing price before entering into a short, which is as simple as a close below Friday’s low.
Gold and silver continue to scorch higher on a flight to quality play. This bubble is just getting bigger and bigger as the stock market tumbles and the euro falls. The problem is gold is priced globally in U.S. dollars which means if the euro is set to take a big hit then there will be a bigger gold bubble forming for the rest of the world than the one we see here in the U.S. For example, if gold is at $1850/oz and the euro drops 10% then those holding euros will see gold trading closer to something like $2,035/oz. Now let’s say gold rallies to $2,500 and the euro drops 30%, then those holding euros will see gold trading something closer to $3,250 – now we are talking one serious bubble. Silver, similar to gold, would experience currency-related pressure as the bubble gets bigger amid U.S. dollar strength. However, at what point does the inflated price of gold get ignored during a global panic and stock market meltdown? This will be the question that lies ahead. Copper remains a bear market amid a global demand slowdown. The current congestion pattern is likely to break this week.
In typical orange juice fashion the market went from freefall to v-shaped recovery all in about two weeks. The market is unlikely to maintain support and should be shorted on this bounce with straight puts. Coffee has rallied substantially on supply concerns and is fast approaching a critical resistance area, likely holding below 280. Cocoa remains a technical buy with a double stop reversal below the August 11th low. Cotton might congest with the current levels being the high of that anticipated range. That could offer a swing trade short here with stops about 400 points off Friday’s high and a target near 98. Sugar is a sell with straight puts.
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