A Market Review and Opinion Report For March 4, 2012

Energies
A sharp top was seen on Wednesday in crude oil despite ongoing geopolitical concerns in the Middle East. Some may question how oil prices can retrace during a period of perceived risk in the Middle East, however geopolitical premium is only likely to see large shifts when significant changes occur in the underlying fundamentals. Once the premium has been established in the market, whether it be from Syria, Iran or elsewhere, that premium remains relatively static until a trend shift occurs in the underlying fundamental structure of the geopolitical risk. The market is then free to trade off other factors like supplies, U.S. dollar relationship, global economic outlook impacting demand growth, etc. A close below 104.80 on the April contract confirms the downtrend. RBOB and heating oil are both solid shorts. Natural gas remains a strong buy with straight calls to play a volatility spike to the upside.

Financials
The stock market has held trendline support, but at the same time the S&P500 has clearly leveled off the impressive momentum it had that ran the market, nearly without pause, 15% higher since December 19th. A close below 1360 this week should lead to a strong market retracement, and I recommend establishing straight put plays, deep out of the money, to trade volatility expansion to the downside. A short futures in the S&P500 with a stop above 1384 is also a solid play. Bonds are a buy on the anticipated stock market selloff. The dollar should push higher again this week after regaining some bullish bias last week. The euro is expected to test 130 shortly.

The Japanese Yen is in a clear liquidation event, with longs running for the exits amid monetary easing and general profit taking. So is this the end of the yen bull move or just a violent retracement? It is unlikely that the yen will just quietly top and fail, and I see this sharp selloff as an excellent opportunity to develop long call positions for a big run-up. This type of liquidation brings in shorts and a quick squeeze could occur on a sharp recovery, helping to create a massive volatility event to the upside – one that could make this selloff seem subdued by comparison. I continue to stand by my forecast that:

The Japanese Yen futures will hit 140 before it hits 80 or I will quit writing the Weekend Commodities Review...forever.

Grains
Wednesday seemed to create a topping pattern in commodities as a whole, with crude oil reaching a spike high top and markets like corn following suit. Soybeans diverged and not only set new near term highs but actually increased momentum to the upside during the latter half of last week. Overall grains are exposed to a volatile planting season, with participants once again focused on supply when they should be looking towards the global demand picture. That being said, events like India freezing cotton exports without notice today certainly shows the exposure the markets have to supply squeezes and panics.

Meats
Cattle ran up and tested last Wednesday’s called top and pulled back on Friday, suggesting strong resistance has formed there. A close below 128 confirms the bear side, but the gut says jump on this projected top with straight puts. Hogs remain an avoidable short.

Metals
A big spike-high top in silver helped setup a reversal that should continue this week amid a strong dollar and topping commodity prices. Gold should piggyback this move and help setup a big selloff week in metals.



Softs
Coffee has been congesting after a big technical breakdown, but I believe the congestion is temporary and the market should see sub-190 prices this month. Cocoa is a strong short. Cotton should see a violent rally on news out of India that they are banning exports. The mystery behind the ban should be short-lived and this is probably a case of the panic being worse than the reality, however futures have not been a place to be in cotton for some time. In fact cotton should be questioned as a tradable market. OJ, another questionable market, is in a chop after setting a clear technical top, likely to see more downside in coming weeks. Sugar remains a short on bounces.


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