July 27, 2010 at 19:17 PM EDT
Weakness in Commodities
Weakness in commodities what to do? Here are a few ideas...get short, exit longs or be prepared to buy from lower levels. We think Crude oil and the distillates have put an interim top and expect prices to fall back....

Weakness in commodities what to do? Here are a few ideas...get short, exit longs or be prepared to buy from lower levels. We think Crude oil and the distillates have put an interim top and expect prices to fall back. We reserve the right to change our mind if September closes above $79.50. We expect a $3 pullback in Crude and 10-15 cents in the distillates and then we would re-evaluate where from there. Exit ALL remaining longs. In terms of an allocation in this sector we prefer bullish exposure in natural gas via October and November 50 cent call spreads. As of the action today prices appear to be breaking the down sloping trend line previously mentioned. The next hurdle will be a settlement above the 50 day MA; at $4.57 in September.

As of this post indices are slightly higher but the bulls seem to be running out of gas. On a further appreciation of 1.5-2.5% clients will exit their August ES 1150 calls and buy back their September ES 1000 puts. We cannot rule out a probe of 1130/1135 but we do not feel those levels are sustainable. Was a top made in sugar today? We've been calling a top for the last week and exited clients long perhaps a little premature. Prices in October closed 3.4% off their highs today. If this is the start of a correction we think a trade back to 16/16.50 happens quickly.

Treasuries broke their 20 day MA with 30-yr bonds and 10-yr notes destined for lower ground. IF we can turn a profit on our clients Euro and Swissie shorts we would like to be in NOB spreads expecting September 30-yr bonds to track back to 122/123. Metal traders fled for the exit doors today with August gold breaking nearly 2% dragging prices to three month lows. We think the 200 day MA will be in play in the coming sessions at $1147. How prices respond there will determine movement in the next two weeks. Clients would be content buying from lower levels. September silver was lower by 4% today; we would exit futures and/or tighten stops as a close below the 200 day MA may mean lower ground. Traders holding December call spreads are losing money but once this correction concludes we may buy back their top legs. Nothing has changed with our year end target as we still anticipate a trade to $20/21 ounce.

Copper failed again to take out the 100 day MA; if prices fade from here then prices should head south. If corn trades 2-3% lower in the remainder of the week we suggest buying December and covering all remaining shorts in September. Additionally we still feel November soybeans and December soy meal are buys but from lower ground; $9.40 and $270 respectively. Some clients remain short the Euro which is unchanged as of this post and short the Swissie which is down by just over 1%. Our targets remain $1.25 and .9200. If energies and metals continue to depreciate we may have some bearish suggestions in the Loonie. A failed rally today has prices looking like we could get a correction back to .9400.

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

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