Edward Rooster's  Instablog

We now update our recent notes about coffee futures and see buy signals, or the very least, strong short-term exits to any short positions in the bitter bean.  At this time, we urge speculators to consider going long coffee.  While technical traders are talking about 1.3750 per pound as a point of resistance, we adhere to the notion that there are no intrinsic special numbers in prices. However, we do believe that others believe in a variety of "magic" prices for resistance and support, and so we can't ignore such figures.

We've had the beginnings of a long in coffee futures stir on September 11, and now it could be short covering and other technical and mechanical traders who have changed course and gone long coffee.  We will do so accordingly. There is no magic entry point but we will continue to recommend trailing stops.  Here, we recommend a trailing stop of about 6.5 to 10 cents per pound. That works out to be about a maximum loss of $2,400 to $4,000 per contract, a hefty sum, so very few small retail investors will participate in this future.

We don't know if interested parties are observing the alleged Gold/Silver ratio, but this shiny semi-precious/industrial metal is doing well.  Futures are outpacing the yellow dog and while we are trading both, we may very well add to this position from a short-term trading point of view. The biggest worry is keeping an eye on the USD and the dollar index. If we see USD's resurgence, then we should do our best to take profits as quickly as possible. Trend traders will sit back, on their hands, and let the price tell the tale.

We have tended to see more selling than buying signals.  We do not know if there is a bottom at hand, but we tend to think more often yes than no lately.  Every 6 to 8 weeks, we've seen false dawns in natural gas pop-ups. We saw "bottoms" in May and July but they were mere restbreaks as natgas prices drifted further down.  There is no sense in picking bottoms or tops, it's just too hard and too dangerous.

At this writing, we see most recent data for natural gas inventories up less than expected, for a week over week increase of 69B cubic feet for September 4, according to the EIA.  Estimates had the figure at closer to 75B to 80B cubic feet, but there is still ample supply at hand.  It now comes to the question of estimating forward demand.

For energy, fuel and production feed-stock purposes, if the economic recovery proves to be extended, or at least a very robust inventory rebuild, then we see a trading opportunity on the long side.  If indeed agricultural production spending increases, then so will demand for fertilizer, and therefore natural gas.  But will farmers be able to access the necessary credit to enable spending and investment?  As for seasonal heating demand, we cannot say if this will be colder than average winter, and we are not yet sure about a proper estimate reflecting restrained consumer demand, due to a still bleak unemployment situation in the United States.

We see a pause in sell signals for the October 2009 futures.  And if traders dare to go long for a prolonged position, then we recommend somewhere between a 0.40 to 0.60 trailing stop in the price.  The futures have broken 3.00 again, on the upside but we are uncertain as to how solid this change is.  We don't like UNG, and the concomitant problems associated with CFTC, at least for a "long" play in natural gas.  Equity traders should give serious consideration to businesses leveraged to this idea, and investors should consider handing their equity investment risk to either Aubrey McClendon, who is down (from last year's margin call) but not out, and invest in  Energy (CHK) or more interestingly with the Tisch Family at Loews (L).  Share prices are up, along with the rising tide of reflation, and so daring investors can carefully (as in very modestly) buy the dips but only with spare cash that is no subject to margin calls.

We think the massive drops in the week ending September 4, 2009 should not have been surprising.  Just a cursory glance online revealed since August that many had misgivings regarding the sharp ascension in sugar futures.  Egged on by news about India's drought and the Diwali holiday, as well as excess rains in Brazil, we weren't surprised, except perhaps by the ferocity of the decline.  Any conventional stops we recommended in our earlier posting would have been triggered before the Labor Day holiday accompanied by a month "low" in the futures price.

Where from here?  We see news that Indian imports may resume. We watch the price action and believe this is a period of backing and filling, as weaker hands have been pushed out, and longer term, bigger, earlier money continues to hold.  If raw materials are experiencing a post-bailout, reflation recovery, then sugar will participiate, after awakening from a relatively "quiet" period in the mid-teens per pound prior to late spring 2009.

For short-traders eager to go long, be patient and hold your fire.  Eager beavers may try but the trailing stops are very high, about 2 cents per pound, and very volatile. Small accounts may still consider the SGG exchange traded fund or other blended raw material ETFs, such as DBA, but we are uncertain as to what the CFTC will decide next, in light of what has happened to unrelated ETFs such as the nat-gas fund UNG.

We paraphrase Jim Rogers' observation that sugar has been quiet but will likely experience very higher prices.  We believe that we will pass from deflation to inflation. As the recovery prompts financial intermediaries to release torrents of fiat from their reserves, and as regulatory authorities and central banks the world around work to keep credit rates low and continue their rescue efforts. This pressures fiat currencies but it also means excess liquidity will find it's way towards various asset classes, and that includes sugar.

With persistent long signals for treasury futures, across the whole curve, we'll enter 2 and 10 years, nothing fancy, recommending trailing stops from 2 to 3 dollars.  Perhaps it is a growing market unease about equities, a self-fulfilling prophecy about how the markets behave in the fall season, or a lingering phantom pain from the amputations suffered during last fall's market decline (which seems to have been forgotten lately according to almost all market sentiment indicators) that is behind this move.

Again, this is a trading call. In terms of the secular change in the bond market, the cream is gone, or the bloom is off the rose for both U.S. treasuries and for the currency they're denominated in, the greenback.  At some point, we believe we'll be making money from shorting treasuries again, as a persistent and consistent feature, should sovereign bail-out efforts begin to lose their efficacy. For now, we are long bonds, as opposed to shorting equities. On the whole we wish to avoid shorting equities strategically. All equity shorts would likely be short-term. The rising tide of fiat will prompt inflation and crush longer-term short equity stances.

The other seasonal "long" trade will be in the precious metals complex. Thanks to today's dramatic spike in gold prices, we will begin to build a potential long position, but we do expect some backing-and-filling on this trade. With gold futures in the 970s, we may see profit taking, and a drop back down initally to 955-960+ per ounce, almost as a brief pause before the yellow dog resumes rising.  In any instance, we suggest an approximate trailing stop for futures traders of 30 to 45 dollars per ounce.  Silver futures, at this writing, are at 15+ dollars per ounce. It is a volatile and less liquid trade, but don't be shocked if we begin serious discussions about the merits of a silver trade as it nears 18-20 dollars per ounce. If you insist on jumping in on the long side, consider at least a 1 to 1.75 per ounce trailing stop for silver futures.  While some may simple short USD, we are wary about that idea and prefer trading gold and other precious metals, as the USD may yet experience a bounce, which would impact upon the value of gold held favorably (in the near-term).

We will draft a more detailed article, regarding tickers and risk management stop loss suggestions over the next few days.  If we are correct, there should be ample time to capitalize on these asset classes over the next few weeks. If not, there is still plenty to trade and we plan to revisit at length trades in sugar, softs and grains. In addition we will give consideration of how to grapple with natural gas, as well as select individual equity ideas.

We have a buy/long signal at this time for the Australian dollar. And the question in our minds is whether the Australian Dollar rise continues, after more than six (in fact soon to be more than seven) months up?  We don't know but this favorite "risk-trade" proxy (i.e. recovery, emerging markets, China and Gold) currency might continue it's upward march, from our trend-following perspective. Does it break the mid-80s or will it tumble below 83.5 or so?

At the time of this writing, the "story" of this trade is that it depends on the markets' reaction to the Reserve Bank of Australia's determination as to whether or not inflation, as a symptom of recovery growth, must be met with higher interest rates, making the Aussie more attractive.  Although we take our cue from our rules and risk management systems, one can only hope that we get more noise from people like Glenn Stevens (Governor of the RBA since September 2006) about raising interest rates, but we'll let the market tell us what to do.

For equity speculators, some ideas are to trade the Australian Dollar ETF, the CurrencyShares Australian Dollar Trust(FXA), or perhaps the country fund,
iShares MSCI Australia Index ETF (EWA) (a strong word of warning however, EWA, as a "risk-trade" long in the middle of a very buoyant super optimistic market ripe for correction, appears to be very overbought). For stop orders in these ETFs, we recommend 1.75 to 2.75 for FXA, and 0.95 to 1.45 for EWA, but that's up to your risk management rules and equity.

More »