Dollar’s day of Reckoning 10/26/10

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On a 3-5% appreciation in the US dollar how much can commodities correct? Inside day in December Crude with prices closing marginally higher. We may get a bounce off the inventory number tomorrow but unless prices settle above $84.50 we think a correction is in the cards. In our estimation in the coming weeks December Crude trades down to $77/78 and then a rally above $90 into year’s end. Doji star in December natural gas and a day later prices are 7% off their lows. If this proves to be a bottom we will re-establish longs in December and January natural gas looking to get back capital lost in the October and November contracts with clients. As of this post stocks are unchanged on today’s session. Again we’re expecting a trade lower and feel a settlement below the 20 day MA’s would be a sign of the beginning. Those levels come in at 10955 in the Dow and 1064 in the S&P. Today’s for option traders clients were advised to purchase December 1175/1100 ES put spreads. Today could prove to be a reversal day in cocoa and sugar with prices closing 1.9% off their highs in cocoa and sugar was off by 2.2%.  Some clients have bearish plays on in March 11′ cocoa anticipating a trade back near 2700. Bearish sugar plays are on our radar but we’ve held off of late as 30 cents could happen before we see a correction…stay tuned. Fresh record high in cotton as adverse weather domestically and abroad has this market pricing in major supply issues. The saying is the cure for high prices is higher prices but this move is parabolic and will likely end ugly. The sideline is our stance for now. Treasuries should continue tracking lower; 127’00 is our target in 30-yr bonds and 124’00 in 10-yr notes. A NOB spread, put options or synthetic shorts would be our advice. Aggressive traders are advised to trade bonds while more conservative traders should play 10-yr notes. Longer term we’re bullish lean hogs but with prices failing to get above the 20 day MA in the last three sessions and with cash prices declining we advised clients to book profits on longs. An interim top is likely in on live cattle; from here we expect a 2-3% depreciation that we will be buying for our clients…stay tuned. As long as gold remains below the 20 day MA at $1341 on a closing basis we suggest remaining short. Ultimately we anticipate a trade near $1250/1270. December silver bounced off the 20 day MA today gaining just over 1%. We expect more downside but this line is being defended…do not get discouraged. It is our opinion that on a settlement below that level currently at $23.30 we expect the flood gates to open to the downside. Agriculture was higher across the board with wheat gaining the most picking up nearly 3% today. We still wan to see a correction in corn and soybeans before establishing longs in 11′ contracts. The US dollar index closed back above the 20 day MA gaining 0.77% today. Our suggestion is to sell rallies in other crosses as we currently have a small bearish options position in the Loonie and Yen with some clients expecting .9550 and 1.2000 respectively.

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