Search

Testimonials


"Michael is a gifted trading mentor. Over the course of several initial conversations he was able to assess my situation and recommend trading strategies that were harmonious with my personality; while at the same time attending to my family’s financial needs. I cannot stress enough how life changing this was for me." --JC, Kansas

Courses


Study with the best to become a successful trader. We have courses with renown instructors such as Peter Borish, Scott Kaminski, Victor Sperandeo, and Michael Martin. Enroll to the right to get started!

Book Reviews


"This is a great book for novice and experienced traders. Soaking up its wisdom distilled from experience and introspection will help you become more successful. And that's true even if it doesn't make you a penny." --Aaron Brown, AQR
Blog

by Andrew Hecht

Commodity Report for the Opening of markets on December 28, 2015

Summary

We are now in the final trading week of 2015. This year markets the fourth straight year of bear market conditions in raw material markets. Prices peaked in 2011 and 2012 and have been making lower highs and lower lows since.

Last week we saw some price recovery in energy and metal markets. It is likely that this action was position covering for year-end. We are likely to see the same for the final sessions of the year this week.

Highlights

Precious Metals – Gold and silver rebounded on a week-on-week basis. Silver closed last week at the $14.38 level, 30 cents higher than the previous week’s close. February COMEX gold finished $10.20 higher on the week at the $1075.80 level. Meanwhile, platinum group metals also moved higher on the week. Platinum closed the week at $884.30 per ounce up $24.80 on the week. Palladium was up $1.15 last week, closing at $560 per ounce.

Divergences continue in precious metals. However, the silver-gold ratio moved lower and is now at the 74.6:1. The platinum-gold spread closed at $191– platinum under gold. The changes in the spread reflect the relative strength on a week-on-week basis in industrial metals over gold, which was a continuation of the prior week’s trend.

Precious metals have been in a bear market since 2011. I do not expect much from these markets in the coming week, we will have to wait until 2016 to see if they continue making lower highs and lower lows.

Energy – Crude oil closed the week at $38.10 per barrel, recovering slightly from the previous week’s new multiyear lows on the active month NYMEX February futures contract. Processing spreads continued to diverge with weakness in heating oil and moderate strength in gasoline for this time of year. Term structure in crude oil remains wide with contango on the February 2016 versus February 2017 spreads in WTI and Brent continuing to trade above the 20% level.

The Brent premium over NYMEX crude has disappeared and now Brent is trading at a discount to WTI on the February contract. The move lower reflects a decrease in the political premium of Middle Eastern crude oil which could come back to bite the market in the future. Crude oil fundamentals and technicals are bearish but the political premium on crude continues to decrease with the prospects for increasing Iranian sales and exports from the U.S.

Natural gas made new decade and a half lows on January futures when they traded down to lows of $1.684 two weeks ago. This past week, this combustible commodity recovered with a rally of more than 20% off the lows. Support now stands at the 1998/1999 lows of just over $1.60 per mmbtu. Natural gas closed on December 24 at just above the $2, albeit it with dramatically lower volume than the prior week. Inventories reported by the EIA fell by 32 bcf last week and there continues to be enough natural gas stockpiles to deal with whatever Mother Nature throws at the United States this winter, which will likely continue to add bearish fuel to the natural gas futures market.

Temperatures across the United States remain unseasonably warm for this time of the year, which is a bearish sign for demand for heating commodities, natural gas and heating oil. Natural gas open interest fell by around 13,000 contracts, which is likely a sign that shorts took profits during the deluge in prices and that traders are taking risk off the table for the end of the year. The contango narrowed over the past week with February futures trading at a 5.2 cent premium to January futures, 4.4 cents lower than last week reflecting the big price recovery that took place over the week.

Base Metals – We saw a continuation of mixed results in the performance of nonferrous metals on the LME. Over the past week, copper, aluminum, lead and zinc moved higher. Nickel and tin posted losses. The moves in all metals were marginal. On COMEX, the price of active month March copper futures rose in subdued trading closing at the $2.1215 per pound level on Christmas Eve.

Grains- Grains continue to be volatile. January soybean prices fell from the $8.92 per bushel level to around $8.75 while March corn was fell 10 cents to $3.645 per bushel. Wheat moved a lower on the week to settle just under $4.6725 per bushel, close to key support. All eyes will be on the progress of the South American crop and whether El Nino has any effect on these agricultural markets.

Soft Commodities – Trading was fairly quiet in the soft commodity sector last week. The FCOJ futures market rallied by just under 4 cents to the $1.48 per pound level. Sugar moved marginally lower over the week and closed at 15.06 cents per pound, resistance is at 15.85 cents. The March-May 2016 sugar spread, closed at a 39-point backwardation unchanged from the prior week. Cocoa futures moved lower in a continuation of end of year profit taking and position squaring closing the week at $3210 per ton down $42 on the week. Coffee moved marginally higher closing at $1.1970 per pound on December 24. Cotton did not change much on the week closing at 63.66 cents per pound on the active month March futures contract.

Animal Proteins – Meat markets diverged as cattle aggressively added to gains and hogs moved higher to a lesser extent on the active month February futures contracts. The long-term average of the live cattle versus lean hog spread has been around 1.4 pound of pork value in each pound of beef value. The spread in February is at the 2.33:1 level — the spread moved 0.11 higher from last week’s level.

Final Comments

The most interesting divergences in markets remain in the precious metals and energy sectors. Industrial precious metals continue to show weakness relative to gold on a historical basis. The XLE continues to be strong relative to the price of crude oil.

I would like to take this opportunity to wish you all a happy and healthy New Year and all the best for 2016. There will be plenty of opportunities for profits in 2016 in the commodity sector. Many of these opportunities will present themselves in the market structure or spreads within the commodities markets.

Continue Reading...

By Andrew Hecht

MartinKronicle: Commodity Report
Report for the Opening of markets on December 21, 2015

Summary

Last week we saw two major events that affected markets. The U.S. Federal Reserve Open Market Committee raised interest rates for the first time in nine years and energy markets continued to plummet. The price of crude oil fell to lows of $34.29 per barrel on the soon to expire January contract. Crude oil is now approaching key support at the December 2008 lows of $32.48 per barrel. Meanwhile, natural gas traded to the lowest level in fifteen years.

Higher interest rates in the U.S. have been supportive for the dollar and a negative for equity and commodity prices on a historical level. While the Fed only raised the Fed Funds rate by 25 basis points in a move that was widely expected, the central bank said that they would be sensitive to data in 2016 but if all goes to plan we can expect 3-4 more hikes in the coming year.

Highlights

Precious Metals- Gold and silver diverged on a week-on-week basis. Silver traded to the lowest level since August 2009 at $13.62 per ounce early in the week but recovered to close at the $14.08 level, 19 cents higher than the previous week’s close. February COMEX gold finished down $8.10 on the week at the $1065.60 level. Meanwhile, platinum group metals also moved lower on the week. Platinum closed the week at $859.50 per ounce up $18.70 on the week. Palladium was up $16.55 last week, closing at $558.95 per ounce.

Divergences continue in precious metals. However, the silver-gold ratio moved lower and is now at the 75.3:1. The platinum-gold spread closed at $205– platinum under gold. The changes in the spread reflect the relative strength on a week-on-week basis in industrial metals over gold.

Precious metals have been in a bear market since 2011. As we now are in the holiday season, it is likely that liquidity will decrease in these markets as the end of the year approaches.

Energy – Crude oil closed the week at $36.06 per barrel, new multiyear lows on the active month NYMEX February futures contract. Processing spreads continued to diverge with weakness in heating oil and strength in gasoline. Term structure in crude oil remained wide with contango on the February 2016 versus February 2017 spreads in WTI and Brent above the 20% level. The Brent premium over NYMEX crude moved lower to under $1 premium for Brent over WTI. The move lower reflects a decrease in the political premium of Middle Eastern crude oil which could come back to bite the market in the future. Crude oil fundamentals and technicals are bearish but the political premium on crude remains very low considering that over half the world’s reserves are located in the Middle East.

Natural gas made new decade and a half lows on January futures when they traded down to lows of $1.684 last Friday. Support now stands at the 1998/1999 lows of just over $1.60 per mmbtu. Natural gas closed on December 18 at $1.765 with the market reeling from negative price action last week. Inventories reported by the EIA fell by 34 bcf last week but there are enough natural gas stockpiles at this point to deal with whatever Mother Nature throws at the United States this winter, which will likely continue to add bearish fuel to the natural gas futures market. Temperatures across the United States remain unseasonably warm for this time of the year, which is a bearish sign for demand for heating commodities, natural gas and heating oil. Natural gas open interest fell by around 28,000 contracts, which is likely a sign that shorts took profits during the deluge in prices. The contango remains high with February futures trading at a 9.6 cent premium to January futures, 3.6 cents higher than last week reflecting that demand will rise this winter and that there are ample stocks.

Base Metals – We saw mixed results in the performance of nonferrous metals on the LME. Over the past week, aluminum, nickel and tin moved higher. Copper, lead and zinc posted losses. The moves in all metals were marginal. On COMEX, the price of active month March copper futures marginally lower closing at the $2.1080 per pound level last Friday.

Grains – Grains continue to be volatile. January soybean prices fell rose from the $8.70 per bushel level to around $8.92 while March corn was little changes at $3.745 per bushel. Wheat moved a touch lower on the week to settle just under $4.87 per bushel last Friday. All eyes will be on the progress of the South American crop and whether El Nino has any effect on these agricultural markets.

Soft Commodities – Last week was a continuation of volatility and bullish action in the soft commodity sector. While the FCOJ futures market dipped by around 6 cents to the $1.44 per pound level. Sugar moved higher over the week and closed at 15.10 cents per pound, resistance is at 15.85 cents. The March-May 2016 sugar spread, closed at a 39-point backwardation up two ticks from the prior week. Cocoa futures moved lower in end of year profit taking and position squaring closing the week at $3252 per ton down $101 on the week. Coffee moved lower closing at $1.1900 per pound on Friday December 18. Cotton did not change much on the week closing at 63.69 cents per pound on the active month March futures contract.

Animal Proteins – Meat markets diverged as cattle were steady and hogs moved lower on the active month February futures contracts. The long-term average of the live cattle versus lean hog spread has been around 1.4 pound of pork value in each pound of beef value. The spread in February is at the 2.22:1 level — the spread moved 0.12 higher from last week’s level.

Final Comments

The Fed has spoke and interest rates have moved higher. This is likely to be supportive for the dollar. The inverse relationship between the dollar and commodity prices is likely to keep pressure on the raw material asset class as we move into 2016. Meanwhile, energy prices continue to plunge and the divergence between crude oil, natural gas and the XLE is worth watching. There will be plenty of opportunities for profits in 2016 in the commodity sector. Many of these opportunities will present themselves in the market structure or spreads within the commodities markets.

Continue Reading...

By Andrew Hecht

Summary

Last week we saw two major events that affected markets across all asset classes. In the wake of the OPEC meeting on December 4 the price of crude oil fell below the August 24 lows at $37.75 per barrel. Crude oil is now approaching key support at the December 2008 lows of $32.48 per barrel.

Late last week, there were signs of troubles in the high yield bond market when a major fund froze withdrawals for reasons of liquidity. This could present markets with major worries. This week, the Federal Reserve Open Market Committee will meet for the last time in 2015 and most expect them to raise the Fed Funds rate by 25 basis points. This will be the first interest rate hike in the U.S. in nine years. While the move is widely expected, it will be the Fed’s statement after the meeting that is likely to move markets. The Fed has kept us guessing all year long about “liftoff” for U.S. rates, this week’s meeting is their last chance to make good on their promises.

Highlights

Precious Metals – Both gold and silver moved lower on a week-on-week basis. Silver traded to the lowest level since August 2009 at $13.75 last Friday making yet another new low. February COMEX gold finished down $12.10 on the week at $1073.70 level and silver moved down 65.5 cents on the week settling at the $13.89 per ounce level. Meanwhile, platinum group metals also moved lower on the week. Platinum closed the week at $840.80 per ounce down $39.60 on the week. Palladium was down $24.20 last week, closing at $542.40 per ounce.

Divergences continue in precious metals. The silver-gold ratio moved higher and is now at the 77.3:1, which continues to be a bearish signal for the sector. The platinum-gold spread closed at $2343 — platinum under gold, at all-time lows for this relationship.

The action in precious metals markets will be interesting in the sessions ahead. Gold did not follow through to the upside after the bullish technical action during the prior week and silver made a new low. Watch the inter-commodity spreads between precious metals. It is likely that an interest rate hike will weigh on the price of precious metals but they may be more sensitive to the statements rather than the action of the U.S. central bank. After Wednesday, it is likely that liquidity will decrease in these markets as the end of the year approaches.

Energy – Crude oil closed the week at $35.62 per barrel, new multiyear lows on the active month NYMEX January futures contract. Processing spreads diverged with continued weakness in heating oil and strength in gasoline. Term structure in crude oil widened dramatically with contango on the January 2016 versus January 2017 spread in WTI making a new high at over the $9 level. Brent spreads in the same months also widened. Widening contango is yet another bearish signal for the energy commodity. The Brent premium over NYMEX crude moved lower to $2.31 premium for Brent over WTI level. The move lower reflects a decrease in the political premium of Middle Eastern crude oil which could come back to bite the market in the future. Crude oil fundamentals and technicals are bearish but the political premium on crude remains very low considering that over half the world’s reserves are located in the Middle East.

Natural gas made new contract lows on January futures contract on four out of five days last week and traded at lows of $1.9590 per mmbtu before recovering slightly and closing last Friday at the $1.98 level as the market prepares for winter. Inventories reported by the EIA fell by 76 bcf last week but there are enough natural gas stockpiles at this point to deal with whatever Mother Nature throws at the United States this winter, which will likely continue to add bearish fuel to the natural gas futures market. Temperatures across the United States remain unseasonably warm for this time of the year, which is a bearish sign for demand for heating commodities, natural gas and heating oil. Natural gas open interest rose by over 30,000 contracts, which could be a sign that some shorts are returning to the market. The contango remains high with February futures trading at a 6 cent premium to January futures reflecting that demand will rise this winter and that there are ample stocks.

Base Metals – We saw mixed results in the performance of nonferrous metals on the LME. Over the past week, copper, lead and zinc moved higher. Lead was the best performer as it gained $92 per ton on the week. Aluminum, nickel and tin posted losses. On COMEX, the price of active month March copper futures moved higher in what was likely a delayed reaction to weakness in the dollar closing at the $2.1135 per pound level last Friday.

Grains – Grains continue to be volatile. January soybean prices fell from the $9 per bushel level to around $8.70 while March corn dipped to $3.75 per bushel. Wheat moved a touch higher on the week to settle just over $4.90per bushel last Friday. All eyes will be on the progress of the South American crop and whether El Nino has any effect on these agricultural markets.

Soft Commodities – Last week was a continuation of volatility and bullish action in the soft commodity sector. While the FCOJ futures market rallied by around 10 cents to the $1.50 per pound level, other soft commodities fell. Sugar moved lower over the week and closed at 14.58 cents per pound, support is at just below 14 cents. The March-May 2016 sugar spread, closed at a 37-point backwardation down seven ticks from the prior week. Cocoa futures were quiet closing the week at $3353 per ton. The forward curve in cocoa displays some tightness as a backwardation has emerged. Coffee moved lower closing at $1.2120 per pound on Friday December 11. Cotton also moved lower shedding a penny on the week closing last week at 63.71 cents per pound on the active month March futures contract.

Animal Proteins – Meat markets diverged as cattle fell and hogs moved higher on the now active month February futures contracts. The long-term average of the live cattle versus lean hog spread has been around 1.4 pound of pork value in each pound of beef value. The spread in February is at the 2.08:1 level — the spread moved 0.10 lower from last week’s level.

Final Comments

Commodity markets find themselves in a precarious position. Energy prices are falling dramatically. This means that production cost for many raw materials will fall. At the same time, the dollar has moved lower. Bullish and bearish factors are likely to confused markets raising the potential for volatility.

If the Fed raises interest rates on December 16, it is inherently bearish for raw material prices but the market is likely to focus on the statement and future intentions of the central bank rather than the action after the meeting. I remain cautiously bullish on the U.S. dollar, I believe the recent dip is a buying opportunity and this means that I believe that commodity prices remain in a long-term bear market with interest rates heading higher and the price of all energy commodities falling.

There will be plenty of opportunities for profits in 2016 in the commodity sector. Many of these opportunities will present themselves in the market structure or spreads within the commodities markets.

Continue Reading...

By Jason Pearce

Has the Wheat Crop Flip-Flop Stopped?

Van Gogh Wheat Field

About a month ago, we posted a watch list of various inter-market spreads that offered trading opportunities. It was based on the criteria that the spreads between several correlated markets had reached price boundaries that were historically extreme. Some of the spreads had already rolled over and were fair game; some were still trending in outlier territory and should be closely monitored. All of them had a history of making sizable reversals.

In the grain sector, the relationship between Kansas City and Chicago wheat caught our attention. The price of the KC wheat dropped below the price of Chicago wheat back in late June. This set things in motion for a buying opportunity. You know the old disclaimer that’s going to be inserted right here: Past Performance Is Not a Guarantee of Future Results. However, good trading is about probabilities, not prediction. Therefore, I would submit to you that Past Performance Can Tell You Something About the Probabilities of the Future.

History shows that anytime the price spread between Kansas City wheat and Chicago wheat inverted it has always been followed by a recovery. So we’ve been keeping an eye on this spread since the inversion. Recent price action suggests that a recovery from the summer price flip-flop could finally be underway. This may be the green light we needed for spread traders to get positioned on the long side.

Paying For Quality

The price difference between the wheat contracts in Kansas City and Chicago is not due to the location of the exchanges, it is based on the differences in the types of wheat for the underlying futures contracts. The Kansas City wheat contract is for hard red winter wheat and the Chicago wheat contract is for soft red winter wheat. The protein content of hard wheat is higher than that of the soft wheat. It is considered to be of a higher quality, so it normally trades at a higher price.

Although we are looking at two different types of wheat here, the price correlation between these two crops is extremely high. When you superimpose the price charts of Kansas City over the Chicago wheat, you’d be hard-pressed to spot the difference between the two. This high correlation between the two markets makes for a ‘safer’ spread trading candidate. ‘Safer’ is a relative term, though. When you are dealing with leveraged futures contracts, there’s always risk involved. But risk management and strong correlations in spread relationships help to mitigate the risks.

Kansas City Wheat Chicago Wheat overlay (nearest-futures) weekly

Kansas City Wheat Chicago Wheat overlay (nearest-futures) weekly

Despite the higher quality, the price premium of the Kansas City wheat over the Chicago wheat is not a locked in guarantee. This is because there can occasionally be changes in the supply and/or demand of one of the crops that does not impact the other crop as much. So one of the contracts may rise or fall faster than the other. This has been the case for this year.

The Inversion of 2015

Ample supplies around the globe and multi-year highs in the US dollar have weighed heavily on the entire wheat market this year. This was merely a continuation of the multi-year bear market across the entire grain sector. However, there was a temporary run-up this summer when the soft wheat growing region was hammered by a deluge of rain. This occurred just before right before the harvest as the seeded area was already below the five-year average.

The price decline continued when the second half of the year started and Kansas City wheat moved down at a faster rate than the Chicago wheat. Ergo, the spread price inversion. The government resumed their projections for global grain supplies to reach new all-time highs before the next North American harvest. This week’s new multi-year high in the US dollar only serves to reinforce the bearish outlook.

Vulnerable Shorts

Despite all the gloomy news about abundant grain stocks and the strong greenback, the wheat market may be vulnerable to a rally right now. According to the recent weekly Commitments of Traders report, speculators have increased the size of their net short position in the Kansas City wheat rose for six consecutive weeks. This is the longest such bearish streak in four years. Furthermore, the size of the net short position is the largest in nearly a decade.

These short positions are speculators that we are talking about. They don’t actually have the physical wheat to deliver against the contracts that were sold short. Should any of the CTAs or hedge funds decide to do some short-covering as we approach year end, it could result in a sharp rally that triggers program-buying (buy stop orders) by other speculators. This may have a domino-effect and continue pushing prices higher as more and more buy orders are triggered by higher prices. The KC/Chicago wheat spread would likely soar on the turnaround. Any bullish change in the underlying fundamental picture would only add fuel to the fire.

Know the Boundaries

Just like in healthy human relationships, it’s important to know where the boundaries are at in spread relationships. When boundaries are tested or crossed, the balance of things will be upset. Something big will happen. In spreads, this usually means that a reversal is inevitable.

Kansas City Wheat Chicago Wheat ratio 1.2 (nearest-futures) weekly

Kansas City Wheat Chicago Wheat ratio 1.2 (nearest-futures) weekly

At normal levels, Kansas City wheat should have a price premium either side of 10% over Chicago wheat. When that premium climbs to 20% or more, then it’s time to pay attention. The KC wheat has only reached a premium of 20% or more over the CBOT wheat about half a dozen times in the last four decades and it never lasted. Therefore, if you even see a +20% markup on the KC wheat you know that the KC/Chicago wheat spread is a prime candidate for a short sale.

Conversely, when the Kansas City wheat loses its premium over the Chicago wheat it’s a warning shot for traders. In the event that the Chicago wheat reaches a premium of 5% or more over the Kansas City wheat, it’s time to get your game plan (and your capital) together for an opportunity on the long side of the spread.

Kansas City Wheat Chicago Wheat ratio 0.95 (nearest-futures) weekly

Kansas City Wheat Chicago Wheat ratio 0.95 (nearest-futures) weekly

For Chicago wheat to surpass a 5% premium over Kansas City wheat, the KC/Chicago wheat ratio has to drop to 0.95:1. The ratio has only been this low two times in the last ten years and not even a dozen times in the last four decades. The inversion was always temporary. Inevitably, things would play out and Kansas City wheat would go back to have the normal 10% premium (or more) over Chicago wheat. In spread terms, KC wheat would get back up to a 35 to 40 cent premium over Chicago wheat.

Darkest Before the Dawn

In late June, the nearest-futures KC wheat closed below the price of the CBOT wheat. This was the first spread price inversion in three years so we immediately put it on the watch list. The spread rebounded in the second half of July, but it was never able to get back above the ‘even money’ mark. It just settled into a trading range for the rest of the summer.

Kansas City Wheat Chicago Wheat spread (nearest-futures) weekly

Kansas City Wheat Chicago Wheat spread (nearest-futures) weekly

A month ago, the nearest-futures December KC/CBOT wheat spread left the trading range and plunged to a new eight-year low of -40 1/4 cents (premium Chicago) on the daily timeframe and -33 cents (premium Chicago) on the weekly timeframe. The spread has only been this upside down on three other occasions since 1970. This is a big deal. The more infrequent that the price levels have been hit, the more potential the spread has for a major move. By all accounts, there was nothing to stop the KC/CBOT wheat spread from sinking to the September 2007 capitulation low of -61 1/2 cents (premium Chicago). The relationship was coming under fire.

Turning On a Dime

Despite the new multi-year lows in early November, the spread has since made quite a turnaround. More impressively, this occurred in the face of new contract lows in both the Kansas City wheat and the Chicago wheat just this week. It is quite possible that the spread has finally bottomed out.

Further evidence of a turnaround is the behavior of the spread itself. First of all, the March KC/Chicago wheat spread ended the month with a close above the declining 75-day Moving Average for the first time in six months.

March Kansas City Wheat Chicago Wheat spread daily

March Kansas City Wheat Chicago Wheat spread daily

In addition, the spread has rallied nearly 25-cents from the November 5th contract low. This is the biggest rally in fourteen months. It is also the longest rally since the bounce off the December 2014 low. This ‘overbalancing of price and time’ is indicative of a trend change. Based on history, the KC/Chicago wheat spread may now be on its way toward +40 to +50 cents (premium Kansas City).

Outside Confirmation (Just In Case You Need It)

Coincidentally, Societe Generale is on the same page as us. Although they recently lowered their average price forecasts for several ag markets, the bank actually raised their price expectations for soft red winter wheat. Moreover, they stated that they expect the Kansas City wheat to go back to trading at a premium of 7-10% over the Chicago wheat in the first quarter of 2016. Perhaps the analysts are students of history. Perhaps they read our research.

What to Do Now

It’s time to get long. Simply put, spread traders should be buying Kansas City wheat contracts and shorting the Chicago wheat contracts.

For entry points, you might want to consider buying a pullback of 8-10 cents. This idea is based on the current price structure: During the multi-month decline off the May top, the March KC/Chicago wheat spread made several bounces of ten cents or more. During the recent one-month rally, the spread has made a pullback of six and a half cents and another pullback of nine cents. Therefore, countertrend moves of 8-10 cents appear to be good entry opportunities.

Seasonally, the KC/Chicago wheat spread has a tendency to soften in the second half of December. Buyers can use this to their advantage by scaling into a position if the pullback materializes.

March Kansas City Wheat Chicago Wheat spread (even money line) daily

March Kansas City Wheat Chicago Wheat spread (even money line) daily

The November 5th contract low of -26 cents (premium Chicago) is an important line in the sand for the March KC/Chicago wheat spread. A close below this price would indicate that the recovery is in jeopardy. Therefore, it would be prudent to use such an event as a liquidation signal for long positions. Take the hit, get to the sidelines, and wait for a recovery signal before you reenter.

Even if the KC/Chicago wheat spread plunges to new lows before the year is out, it should eventually rebound. Unfortunately, we don’t have a crystal ball that tells us how low it will go first before that happens. Every record low price in history was made when the previous record low was broken. You don’t want to be held hostage in a long position during those sorts of events. Cut your losses if the spread between the hard red wheat and the soft red wheat dips into the red. You can make it all back once it’s in the black.

Continue Reading...

by Andrew Hecht

Report for the Opening of markets on December 7, 2015

Summary:

Last week we saw three major events that affected markets across all asset classes. On Wednesday, a tragic terrorist attack in San Bernardino, California is yet another reminder of the dangerous world in which we live. On Thursday, the ECB surprised markets by not delivering the level of stimulus expected and the U.S. dollar fell. The dollar index made a new high at 100.60 and then proceeded to fall over 2600 points on the session. The dollar put in a bearish key-reversal trading pattern on both the daily and weekly chart.

On Friday, the jobs report supplied another data point in support of an interest rate hike by the U.S. Federal Reserve later this month. OPEC met in Vienna last Friday and the result of the meeting could be a free for all of selling in oil from members. in a surprise move, OPEC adopted a “wait and see” policy in terms of the low level of oil prices while at the same time the cartel unofficially raised their production ceiling to 31.5 million barrels per day.

Highlights:

Precious Metals – Both gold and silver made new multiyear lows last week as they fell to $1045.40 and $13.805 respectively before the correction in the dollar caused a rally in both precious metals. February COMEX finished up on the week at $1085.80 level and silver moved up to $14.545 per ounce. Meanwhile, platinum group metals also moved higher on the week. Platinum fell new lows at $825 but closed the week at $880.40 per ounce. Palladium traded down to under $523 but closed the week at $566.60 per ounce.

Divergences continue in precious metals. The silver-gold ratio is around 74.4:1, which is continues to be a bearish signal for the sector. The platinum-gold spread closed at $203.50 — platinum under gold.

The action in precious metals markets will be interesting in the sessions ahead. It is possible that gold will follow through to the upside after the bullish technical action last week. Watch the inter-commodity spreads between precious metals.

If the silver-gold ration and platinum gold spread move lower, it could mean that we will see a sustained recovery rally. However, I would look at any price recovery as another selling opportunity as the fundamentals for the U.S. dollar remain bullish for the medium-term.

Energy – Crude oil closed the week below the $40 level on the active month NYMEX January futures contract at $39.97 per barrel. Processing spreads weakened slightly in heating oil but continued to strengthen in gasoline. Term structure in crude oil widened with contango on the January 2016 versus January 2017 spread in WTI making a new high at the $7.77 level.

Brent spreads in the same months also widened. Widening contango is yet another bearish signal for the energy commodity. The Brent premium over NYMEX crude moved marginally higher to $3.03 premium for Brent over WTI level. The move higher is likely due to fears surrounding Middle Eastern crude flows in the wake of increasing terrorist attacks.

Crude oil fundamentals and technicals are bearish but the political premium on crude remains low considering that over half the world’s reserves are located in the Middle East.

Natural gas made new contract lows on January futures contract at $2.131before recovering and closing last Friday at the $2.1840 level as the market prepares for winter. We saw the first inventory withdrawal of the season last week and stockpiles fell below 4 trillion cubic feet.

There are enough natural gas stockpiles at this point to deal with whatever Mother Nature throws at the United States this winter, which will likely continue to add bearish fuel to the natural gas futures market. Natural gas open interest rose slightly which could be a sign that some shorts are returning to the market.

The contango remains high with February futures trading at a 6.1 cent premium to January futures reflecting that demand will rise this winter and that there are ample stocks.

Base Metals – We saw mixed results in the performance of nonferrous metals on the LME. Over the past two weeks, copper and zinc moved marginally lower with aluminum, nickel, lead, zinc and tin posting small gains. Most of the gains came late last week when the dollar moved lower. On COMEX, the price of active month March copper futures made new multiyear lows at $2.002 on November 23 as concerns about China and the prospects for an interest rate increase in the U.S. in December dominated trading. The dollar lifted copper to close last Friday at $2.0760 per pound. The rally in copper was tepid considering moves in precious metals and the dollar.

Grains – Grains saw volatility over the past two weeks. January soybean prices moved back above the $9 per bushel level while March corn rallied to over $3.80 per bushel. Wheat moved lower to a new low at $4.655 and then recovered to $4.845 by last Friday. Grain prices received some support from the potential for El Nino to flip to a La Nina during next year’s pollination season. La Nina has caused nasty droughts in the U.S. in the past.

Soft Commodities – Last week was a continuation of volatility and bullish action in the soft commodity sector. While the FCOJ futures market pulled back to just under the $1.40 per pound level, other soft commodities gained. Sugar moved higher over the past two weeks and closed at 15.44 cents per pound after making new highs at 15.85 on Friday. The March-May 2016 sugar spread, closed at a 44-point backwardation up five ticks from the prior week. This signifies the potential for a supply issue this March.

Cocoa futures continued to show strength closing the week at $3390 per ton. The forward curve in cocoa is moving into backwardation on supply concerns. Coffee continues to show signs of life closing at $1.2695 per pound on Friday December 4. Cotton also rallied on dollar weakness closing last week at 64.89 cents per pound, the highest level since late August.

Animal Proteins – Meat markets diverged as cattle fell and hogs moved marginally higher. The long-term average of the live cattle versus lean hog spread has been around 1.4 pound of pork value in each pound of beef value. This spread, on December futures, closed at 2.17:1 last Friday, down on the week. The spreads in February is at the 2.18:1 level — both months spreads moving lower from levels two weeks ago.

Final Comments:

Yet another terrorist event last week means it is likely that volatility across all asset classes will increase. While the correction in the dollar was bullish for commodities, the outcome of the OPEC meeting certainly yielded the opposite effect. The prospects for an interest rate hike in the U.S. continue to rise, which is historically bearish for raw material markets.

There is volatility ahead for all markets and that means there are plenty of profitable opportunities in the weeks and months ahead in the commodity markets for those who understand these markets. The volatile dollar and deviation between U.S. interest rates and others around the world will surely create a bumpy road in all assets classes, particularly in commodities, which tend to be the most volatile of all. The majority of these opportunities will come from spread relationships.

I remain bullish on the U.S. dollar, I believe the dip last week was a buying opportunity and this means that I believe that commodity prices remain in a long-term bear market.

Continue Reading...
Page 10 of 133« First...89101112...203040...Last »