Weekly Outlook: Energies, Currencies, Metals

With 2008 trading coming to a close, the majority of prices in commodities as a whole, much like other asset classes, are off considerably from their highs and volatility has been greater than ever. We see no reason for this volatility to end just because we have a new number on the calendar. Hopefully traders learned some lessons about risk management and diversification, so they can apply those lessons to trading in 2009.

For those of you who have not made commodities an integral part of your portfolio as of yet, what are you waiting for? It is our opinion that the printing of paper being done by central banks globally will set the stage for inflation at some point in 2009. We also believe that the FOMC has made it clear that one way to get us out of this credit mess is to devalue our dollar, which again is commodity friendly. Deleveraging should continue in Q1, but at a less rampant pace than what we have experienced of late.

We will be doing a 2008 year in review and a 2009 outlook in the next few weeks in hopes to keep all informed. On top of that, we will be doing an analysis of the CTAs that we have been recommending for clients. We expect the growth in the Managed Futures to continue for years to come and would suggest all seeking to learn more about Managed Futures to make inquiries.

Energies

The US Department of Energy said that crude oil supplies were down 3.1 million barrels, supplies of gasoline were up 3.3 million barrels, while heating oil supplies were up 1.8 million barrels. In spite of the announcement that OPEC will cut production by 2.2 million barrels per day on January 1st, February crude oil fell to a new contract low, weighed down by expectations of slow demand ahead. February Crude oil closed down $5.09 off 12% on the week. $42 is viewed as resistance with the 9 day moving average at $41.64. We see mild support at $35, if the market believes OPEC member countries will stick to their cuts we could get a bounce. February heating oil closed down 15 cents on the week. 1.42 should serve as resistance with 1.2250 serving as support.

Before we suggest a bottom, we would like to see a trade back above 1.65. For now we would stand aside, although some clients have suggested selling puts under the market once a bottom is in place. Looking at the premium 6 months out heating oil prices are only 12% higher. Comparing this to RBOB where prices 6 months out hold a 35% premium, February RBOB was just over 12 cents lower last week. We see resistance in February between.95/1.00 with support at .80. A similar play could be made selling puts once a bottom is established.

February natural gas gained 50 cents or 9% last week closing the week at the 20 day moving average at $5.85 helped by colder weather in the Mid-west and Northeast and the recent withdrawals on inventory. We currently hold February $7 calls with an average cost of $600 and $8 calls with an average cost of $1400. Assuming the intra-week low last week holds at $5.25 we would expect momentum to carry prices higher, meeting resistance at 6.14, 6.42, and then 6.70. Looking at the weekly chart we see a bullish engulfing candle that should support a move back over $8 in the next 3-6 months. We will be looking at longer term plays over the next few weeks. Weather remains the focus; the weather so far this year appears to be the most extreme in the last 8 years.

Currencies

Prices slid in the March Japanese yen by 182 ticks due to concerns over the 27% decline in exports and talk of possible intervention by the BOJ. This was the first weekly decline in 8 weeks, but we felt it was largely telegraphed by selling at the highs of the previous two weeks. We expect a decline to at least 1.08 and are a bit surprised that we did not see any intervention last week, being that it was a thinly traded week and it would have taken far less effort to see price manipulation. On a sharp break we will be looking to get long via futures and options. We support between 1.06 and 1.07 with resistance at 1.1145; the 9 day moving average.

The March Euro was 165 ticks higher last week and had its third consecutive positive week. The last 4 weeks have been truly spectacular, gaining 16 cents or 13%. Assuming the contract high at 1.57 and the contract low at 1.24, we’re at the 50% Fibonacci level as of the close Friday. We currently have no exposure with clients and could see the Euro go to 1.44 or 1.36 this week or the next. We see resistance at 1.4200 followed by 1.4375 and support at 1.3870 followed by 1.3650.

The March Swissie gained 300 ticks on the week, an impressive 14.5% in the last 3 weeks. If you view our most recent commentaries, we have voiced that we liked the Swiss Franc in the low 80s; the current price is .9400. On a setback to support we will look for an entry. The most recent move may have been too much too quick so we would not be shocked to see a violent correction. We may start buying as high as .8925 so follow our recommendations on our daily blog, MB Wealth’s Commodity Blog.

The Australian dollar was 428 ticks higher on the week, but virtually the entire move can be attributed to the last few hours of trading on Friday. Being that on Sunday night most of that move was retraced on the open, most likely there was a big order or a trading glitch. There was a partial fill of the gap from early October that we would expect to be filled completely in the coming months on a trade up to .7668, but we first should see a trade back down to the .6400 area. We will be looking for a long entry, but from lower levels. We want to see if the market first respects the .6700 level.

The Loonie gave up 26 ticks and even though we currently have no exposure with clients, we are looking for a move down between .7800 and .8000 in March. We chose not to play the short side but instead will be looking for a long entry on the ensuing setback. The recent move up to .8400 did allow us to trade out of the futures and options trades we recommended in prior weeks for clients at a profit. See previous commentaries.

The March Cable has been lower the last 7 days and lost 283 ticks last week. If the contract low at 1.4500 is able to hold this week we may look for a long trading opportunity. Our objective, if all things line up, would be between 1.55 and 1.60. After a 25% reduction we certainly could see a bounce, stay tuned. Support is seen at 1.4500 with resistance at 1.4750 followed by 1.4850.

The Kiwi was only 5 ticks higher last week, but we did manage to hit our 60 cent objective that we forecasted 2 weeks ago. We anticipated it to take much longer to arrive at that level, but sometimes we are lucky enough to be at the right place at the right time. Prices could go either way for now and we would suggest the sidelines. We see support at .5590 followed by .5490 with resistance at .5825 followed by .5950.

The US dollar index lost 34 ticks last week and had its third consecutive losing week, but prices were down far less than the 2 previous weeks. We expect to see range bound trading between 79.00 and 83.00 the next few weeks with a bearish bias. The key will be to see if the 100 day moving average remains the line in the sand. Last week we made 4 attempts to cross that line and failed. On a close above the 100 day moving average, which is currently 82.48, look for a trade back to 83.00, but on further weakness look for mild support at 81.25 followed by 80.00. Look for trades in the dollar to help in positioning in other trades; dollar up should equate to commodities down and vice versa.

Metals

March silver closed 36 cents lower last week, and looking at the weekly chart we experienced lower highs and lower lows, so we should see prices fade in the short term. We managed to stay above the 20 day moving average last week at 10.25, but on a breach of that level expect a trade below 9.50. We would use a setback to get long futures at those levels in addition to purchasing $15/20 bull call spreads for December '09 looking to pay approximately $1600. In recent pricing when silver was near $11.50 in March this spread was well above $3000 and ultimately we expect this spread to make its way to $10,000. The closer prices were to $8.50 the more aggressive we would suggest being. We still expect to see prices near $12/ounce early '09. If this level looks to hold and we do not get a break we will look to lengthen our long position for customers as silver remains our top bullish play.

February gold was $31.80 higher last week; much of that came on Friday as prices gained $23. We see resistance at 880 followed by 930 with support at 829 followed by 808. The key here still remains the dollar as an inverse relationship should continue to play out. We would suggest using any setback to buy June $100 call spreads. One week means little, although pay close attention to see if in future weeks we continue to see a divergence, as gold gained and silver declined last week. We are longer term extremely bullish in gold but have been seeing some credible evidence that we could get a sizeable pullback in the neighborhood of 200 plus dollars, so tread lightly and do not commit too much margin. You could see this type of move that would do little damage to the longer term bull market so it isn’t totally impracticable. We will explore this in more detail over the next few weeks.