Weekly Market Outlook: Currencies, Energies

As the World Series gets under way this Wednesday, the Presidential election fast approaching, an OPEC meeting and further unpredictability in global, credit, currency, equity, and commodity markets, there is change in the air. Never a dull moment for sports fans, politicians, and investors as every day brings about an event, rumor, and ball game more impressive than the last. It is really all about confidence; whether it is from the Tampa Ray bull pen, Obama supporters or the massive amount of investors looking for some stability. A quote by Warren Buffet last week failed to put the market at ease, but makes a hell of a lot of sense…” Be fearful when others are greedy and be greedy when others are fearful.” Many markets have priced in a global recession but questions remain how long it will last and how deep it will be?

Energies

December Crude oil was $5.91 lower last week, trading as low as $68.92 before closing the week at $72.13. We are trading at levels not seen in 14 months, but with winter fast approaching and OPEC moving their meeting date up to this Friday, from a scheduled mid-November meeting, expect oil to stabilize. The cost of production for many of the new projects that have come into play in the recent years is approximately $65/barrel, so we don’t expect prices to trade much below current pricing. We are not advising getting long yet, but we would expect the selling to abate shortly. Current support is at last week’s low with resistance at $78 on December.

Heating oil for December was 14 cent lower on the week, but managed to close 8 cents off its lows. We may see a bounce to $2.35, but the $2 level may serve as a magnet being that prices are so close so stay defensive. Homeowners and businesses in the Northeast need to start preparing for a colder than expected winter, because although we can consciously scale back our usage of gasoline, it will be more difficult to not heat your residences or business as prices of heating oil may be relatively recession proof. According to the EIA stocks of heating oil are 23% lower than last year’s level in the Northeast and mid-Atlantic. RBOB was 22 cents lower and is now down just shy of $1/gallon in the last 3 weeks. We printed another new contract low and with slack demand, even with pump prices falling, we think RBOB will continue to be the weak sister in the energy complex. The first sign of confirming a near term bottom would be a trade back over the 9 day moving average at $1.8625.

Natural gas was 17 cents higher where positive weeks have been infrequent. In the last 15 weeks since natural gas prices peaked in July we have had only 4 positive weeks. We closed the week back above the 9 day moving average on December natural gas and we expect the $6.50 level to serve as solid support, anticipating a bounce in the coming weeks. Last week’s injections bring the total amount of gas in storage to 3.277 trillion cubic feet, 2.7% above the 5 year average and 2.6% below last year’s level. As we said last week, we averaged down for clients on the December $10 calls to bring our cost basis down and would suggest new long entries to look at January and February.

Currencies

The December Euro currency was 178 ticks lower last week as prices have remained range bound for the better part of the last 2 weeks. The 1.33/1.3350 level has been bought over the last 2 weeks and we would expect this level to act as support with resistance at 1.36 this week. As we expect sideways consolidation, we would not suggest any long or short position trades, but to trade the range buying below 1.34 and selling above 1.36.

The December Swissie was 71 ticks lower last week and also has remained sideways between .8750 and.8900. Prices may attempt a move to the 20 day moving average this week at .8960 depending on outside market influences. We have no trade recommendations.

One of the bright spots in the currency complex last week was the Aussie gaining just over 3 cents. The low from 2 weeks ago was .6307 and prices quickly found their way back above .6900. A 50% Fibonacci retracement from the latest sell off would take prices back to .7380. This currency had overshot to the down side with the recent commodity route and with the RBA being so vigilant in cutting rates. Albeit the interest rate is still at 6.0% and looking around the globe, that level is still high. Look for an inverse relationship with the Japanese yen, we currently have a bullish bias, but have no client money committed. The Japanese yen was 118 ticks lower on the week, but the risk aversion trade is alive and well and we still have a target of 104 in the usd/jpy although it may be a bumpy ride to arrive there. We are recommending clients to buy the 98/102 call spreads for $1500, or the 102 outright for $2000. We expect the inverse relationship to stocks to carry on, so on a move higher in equities expect the December yen to ease back to .9675.

Stephen Harper was re-elected as Canada's Prime Minister. Selling has slowed in the Loonie as prices only lost 124 ticks last week. As long as metal and energy prices continue to slip, the path of least resistance remains down for the Canadian dollar. The RBC meets on interest rates this week and is expected to cut rates 25-50 basis points. If traders were to test the long side, we would suggest using options and would look at the December 88 call for approximately $850 looking for a bounce to.8700/.8800 in the coming weeks, if we can get a bounce in commodities as a whole. The British pound was 159 ticks higher last week and at present we have a slightly bullish bias. We expect prices to stay contained within 1.70/1.75, but would suggest buying dips using tight stops probing for a bounce from oversold levels.

The dollar was 52 ticks higher on the week, but did not show the resilience exhibited in previous weeks. The highs form the previous week at 83.50 should serve as resistance with first support at the 9 day moving average at 82.09; on recoil in prices we have a first target of 80.65. As we have voiced over and over, even if you do not trade currencies use the dollar as an indicator to guide you on other positions. The flight to safety into the dollar is likely to persist in the near term as long as global investors remain jittery.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.

Comments

[CLH:]

Matthew--you better stick to the World Series. You sure dont know much about energy or currencies.

2008 Oct 22 11:01 PM

[Matthew Bra...:]

CLH
Perhaps you should track our most recent trades before putting your foot in your mouthe. I will also remind you that it is not the trader that is always right but the trader that holds onto winners and cuts losses that is successful..but I am sure you know that.

2008 Oct 24 06:40 PM