Crude oil has surged as Iran export issues, gains in the euro currency, and technical short covering have helped to re-establish a bull trend. The fate of oil relies on the market’s willingness, or lack thereof, to push through key technical resistance at 115 and 120. I believe strongly that the commodity markets are in the upper range of a long term congestion move that will take years to expose. This is contingent on oil staying below the all-time highs of $147, however the likelihood is that oil will never come close to that mark if my Rubber Band theory (see past reports) proves out. This means rallies should be excellent short opportunities. With oil in particular short futures are overly risky (think WWIII and Katrina) therefore I recommend approaching bearish view in the energy sector with defined risk option strategies such as selling a bull call spread to pay for a put play.
The stock market’s immediate recovery from a two day retracement effort is not too surprising. The market’s retracement is likely to come in a bit of a punch to the gut of the bulls rather than a slow pullback. Typically when the stock market experiences sustained uptrends the retracement off that trend occurs in a sudden and violent pullback. This is a big part of the reason why put premiums are disproportionately higher than call premiums in the stock market. The market often has one-sided volatility events which are bearish. That volatility event is taking its sweet time but I suggest taking advantage of a heavily discounted VIX to scoop up straight puts. Bonds, while seemingly ready to come off these historic highs, should experience a massive rally off the anticipated stock market decline and bond calls remain a viable and inexpensive alternative to S&P puts. The dollar has held up, for the most part, during a big euro rally, supported by a choppy (and topping) Canadian dollar and sudden decline in the Japanese Yen. The yen is likely experiencing false pressure from carry trade believers – folks the carry trade is dead and the market action from interest rate policy moves are unlikely to be the fundamental driver of this market. Grab this selloff value and buy some call spreads in the yen. I continue to stand by 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 are showing signs of coming out of a congestion period – seasonally this is perfect timing and I recommend long strangles and puts in corn and beans. Rice caught a supportive bid but is unlikely to break 1500, making this a short on this rally attempt.
I do not expect cattle to break to new highs, citing Wednesday’s high as the ultimate top in cattle. Puts are highly recommended. Hogs remain an avoidable market, congesting with a slight bias to the downside.
Silver’s big run-up the past two weeks on dollar weakness should reverse this week. Look for this latest bull move to signal the beginning of a volatile period in metals as this sector should turn south with a fight from the bulls.
Softs are perhaps the most exposed to a re-emergence of the dollar and commodity trend change to bearish. Overpriced markets like coffee, OJ and cocoa are holding on to lofty prices, but could see dramatic liquidation in coming weeks. Sugar and cotton are also bearish, although cotton is avoidable.
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