I expect further weakness in equities and that weakness could spill over into select commodities…trade accordingly. February Crude is having trouble making new lows. If we do not see a lower trade in the next few days we will likely reverse and exit all remaining shorts and start scaling back into longs…stay tuned. A new low would drag prices back near $89/barrel…trade accordingly. Natural gas is within spitting distance of $3 and could break that level, though I cannot see much more downside from here. On signs of a bottom we will be advising longs in March contracts. Traders with small sizes already in should stay the course but should not be adding until we see signs of a bottom.
Both the Dow and the S&P are down just over 1% below their 50 day MA’s and clearly the momentum is shifting back to the bears. From here we think a slide back to 1150 in the S&P and 11000 in the Dow is likely by year’s end if not early 2012. Gold closed marginally lower back under $1600/ounce while silver gave up just over 3%. Outside market influence will most likely continue to pressure metals as we should chop lower into year’s end. Mixed signals in forex though we think there could be more pressure on the European currencies and commodity currencies we would stand aside until we get a clearer picture.
Continue to scale into longs in cocoa as long as last week’s lows hold. Cover bearish plays in coffee only to sell again after the ensuing rally. Bullish trade continues in Treasuries though we are nearing contract highs and we think the tide will be shifting very soon. Until it does trail stops and expect higher ground. It could be early 2012 before we’re advising reversing in 30-yr bonds and 10-yr notes…stay tuned. On the short end traders can be short 2013 contracts with stops above the contract highs. We should get at least a tradable bounce in grains as traders could work long in soybeans, corn or wheat as long as we do not make fresh lows. Risk to reward I see 2:1 if not 3:1 potential trading the March contract. The trade higher in livestock is likely under way with live cattle higher by 2.4% today and lean hogs adding 1.25%. We’re suggesting bullish exposure in February 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.