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With the summer behind us and most traders getting back to work, we should see the volume start to pick back up in all sectors. This is music to our ears because the erratic movements and increased volatility should die down and allow more defined trends to form in commodities. This week should be interesting as we see the market digest 2 possibly 3 hurricanes , a monthly jobs number, 3 central bank meetings and some position squaring ahead of a much anticipated OPEC meeting. There are very few opportunities that we see that don’t have an abundant amount of risk, so you may want to wait on the sidelines until a higher probability opportunity arises. Although we don’t wish to discuss politics, history will be made in some fashion whether it is the first African–American president or the first woman vice…time will tell.

Energy

October Crude oil managed to gain 77 cents last week, closing at $115.46, which was about the median of the trading range. To date it appears that there was a lot of fuss about Gustav, but it was a classic case of buy the rumor and sell the fact since little to no damage was done. Oil violently sold off Monday to start the week nearing the 200 day moving average. We haven’t traded below that level since August of last year and this week it will be key to see if that level holds. If $109.96 was to give way, we could see the $100 level in a hurry so we would stay away for now. The inverse relationship to the dollar continues to play out and the next catalyst should be what course OPEC takes on September 9th.

October heating oil was higher by 2.69 cents last week to close at $3.1919 just below the 9 day moving average. For now prices will look for guidance from oil, but it appears the path of least resistance is down with next support at $3.05 followed by a gap at $2.97 from early April. RBOB gained 6.72 cents last week, but lost its luster Monday as prices retreated almost 10 cents to find support at the 200 day moving average just above $2.73. The technicals support a breach of that level and we could see a fall back to $2.50 or levels we have not seen since Q1. We would stand aside for now and let the dust settle before looking for either a long or short entry.

Natural gas was up 3 cents last week, but that was not the story as extreme volatility beat many traders up.  The trading range last week for 1-10,000 MM btu contract was $10,900, so unless you have staying power don’t even think of treading into these waters. Gustav looks like a false alarm and traders that got long for that sole reason got taken to the wood shed. If you are looking to establish longs for next month, current prices serve as an extraordinary long entry. We have positioned long with mini-futures and also a long futures and short call option play, looking for prices to find some traction in the immediate future.

Both daily and weekly charts are extremely oversold and being that we are still in hurricane season we are long and looking to add on confirmation of a bottom. For now, we would recommend a light long until the market proves you right. An additional note is that natural gas futures are currently trading at the steepest discount to crude oil in the past 18 years. This means that either crude is too high, natural gas is too low or perhaps both.

Metals

December gold traded $4.10 higher last week, but has been unable to muster a trade back above $850. As of this writing we sit $35 above the recent lows, but I cannot say with certainty that we will not revisit those lows before prices move higher again. To start this shortened week, it appears we are getting another commodity liquidation most likely led by a higher dollar and weaker oil, we will see how long that lasts. Over half the consumption of gold, on any given year, can be accounted for by the jewelry industry. Preparation for that generally begins in September, which means we ought to see demand from here through the end of the year pick up. Being that we are long silver with clients, we are still shopping for a better entry on December futures and options. We have first support on December at $790 with resistance at $825.

Silver has tended to decline into mid month as deliveries are made against September futures. But then the market has often enjoyed a surge into September, perhaps as harvest and wedding festivals begin in India, a large consumer of precious metals. We have clients positioned long mini-futures and December bull call spreads looking for prices to make their way back to $17 by December. In the short run we would like to see a close over the 20 day moving average and recent highs at $14.10 to confirm a bottom.  On a weekly chart you will see last week we had a higher high and higher low, what will this weeks chart tell us?

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.

Source: Weekly Market Outlook: Sept. 2 - 5