Today in Commodities: Risk vs. Reward

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 |  Includes: COW, DBA, GRU, IFXAF, JJA, JO, MOO, SGG, TLT, USO
by: Matthew Bradbard

After 8 days of rest and relaxation we are back at it trying to figure out the best risk/reward scenarios in the commodities market. It is vital in our opinion to evaluate both before establishing positions, as many commodity traders just look at the reward side of the equation.

After approaching $86 in early dealings, Crude was off for the first time in three sessions, losing just over $1. For aggressive traders we are advising buying dips as long as the $83 level holds in June futures. On a spike higher in RBOB and heating oil in the coming sessions we would advise exiting longs or at least halving your position. We had hoped for more follow thru in natural gas today after the strong close to end out last week. Prices remain at the upper end of the recent trading range, but we continue positioning our clients to take advantage of higher ground. We suggest long futures trailing stops in June and will start pricing out July-September options.

New highs were rejected in indices across the board. This is likely due to profit taking ahead of the 2 day FOMC meeting. As we posted in our weekly commentary this morning, we would need to see settlements below the 20 day MAs to feel confident an interim top has formed.

Though clients have no exposure, aggressive traders could continue to sell rallies in the Treasury complex (10-yr notes/30-yr bonds) with stops above the recent highs. On a breach of the 20 day MA in Euro-dollars, look for more selling pressure.

It was an inside day in sugar; it may be premature to re-establish plays in sugar until a bottom is confirmed. We are pricing out spreads on futures but have yet to commit any client capital… stay tuned. July OJ was unchanged on today’s session; on a trade above $1.40 our objective for clients should be reached at a 15-20% profit on their July options. We started initiating longs for clients in coffee today; they bought September 15 cent call spreads to play a bounce in the coming weeks.

Clients were advised to lift their May short corn hedges today as the LTD is April 30. Those still seeking protection we advised to place sell stops below the recent lows in July against their December longs. Clients were advised to take any longs off in soybeans and soybean meal as prices are starting to look toppy. We are suggesting selling rallies in wheat but would prefer to be a seller of KCBOT or CBOT closer to $5 on the July contract… stay tuned.

Cancel any orders to short cattle at the moment as prices may grind higher, we should have some trading suggestions in the coming days. We’ve yet to make a move for clients but we may buy the 84/80 put spread in June lean hogs the next few days if they can pay $400.

Today was an uneventful day in metals, with gold slightly lower and silver slightly higher. Clients have NO exposure long or short gold/silver currently. We expect to see a correction of 75 cent s-$1 in silver and $40-60 before we have an interest in longs.

Clients continue to sell rallies in the Cable and Loonie expecting breaks lower. We would not recommend trading without stops to limit losses, if prices turn south our objectives are 1.5200 and .9825 in the June contracts.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.