Consumer Confidence Confidence?

The headline economic indicator of the day today, Tuesday, May 26, was the Consumer Confidence number. It came out as follows:

"The Conference Board Consumer Confidence Index™, which had improved considerably in April, posted another large gain in May. The Index now stands at 54.9 (1985=100), up from 40.8 in April. The Present Situation Index increased to 28.9 from 25.5 last month. The Expectations Index rose to 72.3 from 51.0 in April. The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The cutoff date for May's preliminary results was May 19th."

Headline-wise, the future looks brighter. The perception of relatively better times ahead is gaining traction, per the Confidence Board's survey.

Per my BBQ survey, I'm not so sure. I haven't trademarked my BBQ survey yet, but I am thinking about it as I think it is a good indicator of the local confidence level. The BBQ survey consists of my personal conversations with friends and family, and new acquaintances, around the Weber BBQ during weekend grilling parties and get-togethers.

Within these groups, there is a pronounced uptic in the number of unemployed or under-employed throughout many different lines of work -- construction, service, import/export industries, etc. Also, there has been at least a report or two of either wage freezes or decreases from some in the same group, concessions forced upon them in order to stay employed.

While it's nice that there appears to be light at the end of the tunnel, it really seems to me that the consumer that exits the tunnel will look markedly different than the one that entered the tunnel. I imagine that a percentage of the workforce will in the future carry on, or fall back to, the same spending habits as before the erosion in the US economy. However, I think that percentage will be fairly small compared to the number who come out of this having changed their habits and ideas on how debt (credit cards, home equity loans, etc.) and herd-mentality speculation (real estate, commodities, etc.)  can deal a crushing blow. Or I guess that I at least hope that the average US consumer learns from what is occuring.

As I post this comment, the SP500 futures are +18.00 on the day, and the Dow futures are +173 points. The Confidence numbers are definitely boosting the market morale. The market is also aided higher, so far, by a dollar that had not returned to decline.

The 200 day SMA, per my chartwork, comes in at 924.30 for the June '09 SP500 futures. A test of that is feasible. A rally and close above that level is the formula for a push to 951.00. A rally and failure to close above it is a formula for a downside objective of 889.00, then 869.00.

Contact me if you have any questions/comments.

Cotton Update & General Commentary

December '09 Cotton (CTZ9) is hovering around where the 200 day MA and the 20 day EMA have converged. This area is roughly 58.90 to 59.20. CTZ9 broke down to 59.12 in the session today, but was able to firm up and close up toward the high end of the range.  The waffling equity markets did not help the rally in CTZ9 as much as the better grain/oilseed and worsening dollar did. So the scenario posed a couple/few blogs ago to buy the dip is working for now.

I do like the trade. I do not like the thinness in the deferred contracts. We'll take this in degrees and look for the following targets to measure strength: 61.07, 61.70, and then new swing highs. Beyond that please refer to the previous blog. The stop should be tightened per your risk tolerance.

Cattle futures are an options-sellers dream come true. A well established range for quite some time. I really don't see too much that will knock the market out of the range near-term, save for a runaway grain market.

Today the soybean market posted a decent correction in the old-crop / new-crop spread of SN9 vs. SX9. That spread today made a high of 168.6, but went out the low of 154.4. Perhaps it will actually see a greater correction back down towards the mid 130's.

A market that is now on my radar is Copper. Fundamentally heavily reliant on continued demand from China for any continued upmove, it has a pretty-looking triangle formation. You can draw your lines where you wish, but take a look:

July '09 Copper Futures Daily Chart

In my opinion, markets tend to break out of such formations in the direction of the prevailing trend. Up, in this case. Yet I have seen the opposite occur, also. I'm going to do a little more research on this market, such as looking for seasonal tendencies and correlations. I'll get back to you when I formulate a strategy.

Contact me with any questions/comments ... Bob  1.312.987.2053 // 1.80.388.0998

Long-term Perspective on New-Crop Soybeans

Let's talk Soybeans. New crop soybeans, which begin with the November futures.

November Soybeans (SX9) have rallied about $2.00/bushel since the beginning of March. Most of this rally, in my opinion, has been due to the effects on old-crop Soybeans caused by decreased supply out of Argentina and hence, increased demand for US soybeans from such sources as China. As old-crop has rallied, so has new crop. Though not to the same extent as old-crop, evidenced in the widening spread of SN9 vs. SX9.

Ok, projected ending stocks for the '08-'09 crop year are thin, no doubt. As the top-line number for supply for the '09-'10 crop year, we'll be beginning the new crop year without much room for error when it comes to production. Given.

One variable that has been taken care of so far is the seed quality. Mr. Trey Koger, soybean specialist with the Mississippi State University Extension Service, was recently quoted in a trade magazine as saying "Overall seed quality for this year's crop is outstanding." (Cotton Farming, May 2009, One Grower Publishing, LLC) The article continues on to say that germination rates and vigor are excellent. So, it appears that the crop should be off to as good a start as might be hoped for by a producer.

Hence, my thoughts are to look for a shorting opportunity in this souped-up market. First let's look at the seasonal tendency:

This graphic is a little messy, but bottom-line it appears that there are about three rallies and pull-backs into July - and then a considerable break. The more-recent 5-yr. pattern shows a more stable upswing beginning April and ending July.

But where might the ultimate upswing end? Good question. I don't know. But here's what I see as potential zones for the market to fall from:

The top graphic is a daily of SX9. There's a chance the SX9 could stop here at the 200MA, around $9.85ish. It may also stop a little bit higher at the January highs of $10.45ish.

The "shoot for the stars" number is found in the lower graphic. Similar to the CTZ9 chart I posted recently, the SX9 has formed a W bottom. If it plays out according to the textbooks, the upside target in my opinion comes in around the $12.80 area.

So what am I saying? Do I think I can get away with giving you a $3.00 range for a high in SX9 and then tell you to get short at your own risk? No. What I am doing is laying a foundation for a thought process that has a long-term short bias in this presently bullish market. This market, as had the Cotton market on the upside, is on my radar. Now it's on your's, too. I'll keep you updated on my thoughts about it as time goes on, and you'll be the second to know as soon as I think the timing is right to act.

Contact me if you have any questions or wish to open an account to put into practice some of the things I discuss.

Bob // 1.800.388.0998 // 1.312.987.2053

OI in SP Options & Cotton Strategy

Upon reviewing the Daily Bulletin for the Emini-SP500 options, in my opinion the bulk of Open Interest for the July options expiring this Friday is at the 900 strike. See the excerpts of the bulletins below:

December '09 Cotton futures have been on a tear to the upside and now is finally showing signs of a possible retracement. If so, this will set up a momentum trade that will look to get long this market on this pullback. See the following chart for the specifics of the strategy:

Save for oilseeds, hard red spring wheat, deferred rice contracts, and interest rate futures, the bulk of the futures contracts today are lower. Soybeans, especially old crop, have been notably resilient. Cuttin' time will soon be upon us for winter wheat, so maybe I will start checking out spreads between the Minneapolis (Spring Wheat) and Kansas City (Winter Wheat) markets. I'll get back to you on that if I see a reasonable play.

USDA S/D Estimates & Cotton Projection

Grains and Oilseeds had a sloppy session today. The markets started out on a weak note, more than likely due to squaring up before the monthly USDA supply/demand report due out tomorrow morning. The expectations for the report are summarized in the .pdf found at the following link, courtesy of Informa Economics:

http://marketinsight.tradehugger.com/files/mc05-11-09.pdf

I thought I'd also take a moment to say HOLY COW - HAVE YOU SEEN THE COTTON MARKET LATELY? Weren't we at 50 cents/lb. for that new-crop December Cotton futures contract just five weeks ago? I'm not really that surprised, as you know I posted that trade reco in cotton pre-acreage report back in March. Perhaps the market is realizing that cotton was (is?) undervalued based on decreased production anticipations and increased hopes for better economic footing across world economies.

Where do we go from here, though? Well, pictured below is my reason for an estimated upside price target for CTZ9 @ about the 67 cent level. It's a "W" bottom on a weekly chart:

Contact me if you have any questions.

Soybean or Bean Oil Reco

With "only" a 25 cent range in the SN9 today and "only" a 72 point range in the BON9 today, I believe we have the makings of a short-term trading strategy ...

As a short-term trading strategy, I like to look for short-term consolidation patterns from which a market has a good shot of breaking out. One such pattern is when a market develops an Inside Day & simultaneously contains itself within a trading range that is the most narrow of the recent 7 bars back. 

The exception to this rule that I will accommodate in my trading approach is if a particular market has been on a tear, I may not wait for it to be the most narrow range of the last 7 bars, but pretty close to it. It must still be the most narrow range, though.

The approach when the parameters are met is to play a breakout of the range , one way or the other, by placing buy and sell stops above and below the range, respectively. Wait for the market to elect one side, and then hopefully conitnue in the direction of the breakout and allow for stop management to come in as I trail the stop to reduce risk or potentially lock in profits.

Take a look at the Bean Oil and Soybean Charts below, both for the July 09 Contracts ...

As you can see, both have managed Inside Days today, both have "been on a tear" in my opinion, and both have managed today to have the narrowest ranges in the past 6 days. Thus, I believe worthy of the breakout strategy. The breakout could very well happen in the night session. The risk is approximately the value of the distance between the stops you place for the breakout. The gain all depends on stop management once a stop is elected and you're in a position.

Contact me with any questions or comments.

Buy Strength & Weakness, + A Hog Reco

Sometimes you can see a good risk:reward trade setting up from a mile away. You feel good. It looks good. The technicals and the fundamentals, the stats, the timing, the liquidity, the psychology -- all line up like pretty ducks in a row.

When I made the reco to look at the old-crop / new-crop Soybean spread, the strategy anticipated continued weakness and more follow-thru to the downside. Which did not happen. Instead, the market held right at about the low $0.80's and really hasn't looked back. Now it's at new highs.

Clearly, the train has left without us. The same train that we could see coming from miles away. The reason is that I did not think to publish a buy on strength scenario just in case. Sometimes it pays to be aggressive, and missing the train that could've provided a hypothetical approximate 150% return on margin is proof in point. Going forward, when possible, I will include buy on strength scenarios for the more aggressive traders out there.

As of this writing, December Hogs (LHZ9) have pulled back to fill the gap left by last week's rally off the Swine Flu Tuesday lows. I think once the cloud lifts on this H1N1 Flu fearfest, LHZ9 will be able to sustain a recovery back toward the highs of the recent pre-flu trading range which in my opinion is approximately 68.00 - 69.00. Presently we're at 63.00ish.

This flu thing is volatile, and the LHZ9 is subject to the latest perception of how coughing pigs and hogs may spread this virus, if at all. So, this is a market where the risk should be kept limited via buying calls. The LHZ9 70 Cent calls are about 3 cents, or $1200. Recently, when LHZ9 was trading near the high end of the range, the the LHZ9 70 Calls were valued in the 4 to 4.5 cent area. So I'd be looking for a return to that level. The risk is potentially all premium paid for the option, although you certainly may reduce an entire loss and pull the plug at any time per your risk tolerance.

Contact me with any questions/comments.

So Far So Good

The Soybean spread I talked about yesterday is moving along, though it's moving without us so far. The area I discussed as being supportive to the market is beneath where it closed today, and was below the "off the board" low of $80.4 made earlier today. Oh well, we've picked our point and will be patient for the market to retreat towards our levels.

Following up on the Lean Hog scenario, too, they were able to put in a pretty good rally today. The market essentially approached the statistically significant downward move, and then apparently ran out of aggressive sellers. Let's look for the 'semblance of a retest of recent lows. Should it then hold, I think we should come up with a strategy to get long and ride that market back up to rational levels.

I'll be watching and working on that.

Old-crop New-crop Spread in May

The spread between the price of the old crop Soybeans and the new-crop Soybeans has been on a tear to the upside. In January, the price of SN9 and the price of SX9 were identical. Three days ago SN9 was up to $1.18/bushel pricier than SX9. A pullback has been widely anticipated, and now we're starting to see it. Herein may lie an opportunity:
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