Questions or Comments on This Article

In several markets, we seem to be at a decision point. Are the trends changing? The recent rally in equities seems to have boosted some confidence in the market. The US dollar and gold market have sold off aggressively as the flight- to-quality buying has dried up.

The housing market appears to remain stable to slightly improved based on recent housing data. New home sales increased slightly to 330,000 from 300,000 last month off of the slowest sales pace since 1963. The existing home sales also came out better than expected at 5.37 million versus 5.26 million units. Home prices seemed to have bottomed as well with the Case Schiller Home Price Index showing an increase of 1.2%. Unfortunately, the supply of homes on the market has increased to 8.9 months versus 8.3 months previously. Housing starts continue to lag as well indicating that the market will likely remain depressed for a quite a while.

The leading indicator and consumer confidence reports both show concern in the jobs growth. The expectation that the budget deficit will rise to $1.4 trillion in 2011 from $1.267 trillion has consumers on edge. Many believe that we will need to cut spending to improve the health of our balance sheet. We are watching the demand of this week's 2-year, 5-year, and 7-year note auctions to determine if investors are increasing their appetite for higher-risk investments or continue to play it safe.

Technical Update for September 30-Year Bonds:
We are at an extremely critical level for the 30-Year bonds. The simple trend line appears to have been broken. However, to confirm bearish divergence in the market, we need to break through the 125-08.0 support level. At this point, continue to risk long exposure to 125-08.0 basis September 30-Year bonds. If the market breaks 125-08.0, look for a rally to initiate a short position risking any exposure to new highs.

If you'd like to learn more about futures trading or the interest rates market specifically, please contact RJO Futures Senior Trading Broker Donna Heidkamp at 800-535-4396 or dheidkamp@rjofutures.com.

Questions or Comments on This Article

The euro has been in a narrow trading range of 127.00 to 130.50 on less volume. I remain cautiously bullish toward 133.00. However, expect less volume and volatility for the remainder of the summer. This presents the opportunity to sell out of the money options above and below the underlying futures contract.

Sell the September euro 137 call at 14 for a credit of $175.00 versus the September euro 120 put at 14 for a credit of $175.00 and a total credit of $350.00 per position. The September euro currency option expires on September 3rd.

A simple risk management tool/stop loss would be to cover your naked call option when the option inflates to 200% of the credit. If one option inflates the other will deflate which will minimize the loss.

If you'd like to learn more about futures trading or the currency options market specifically, please contact RJO Futures Senior Trading Broker Carlos Aspiazu at 312-373-5316 or caspiazu@rjofutures.com.

EUR/USD has been trending up since the beginning of June and is starting to approach some key resistance levels. We are looking to sell at 1.3122, the 38.2 Fibonacci retracement level. We recommend placing a stop loss at 1.3412 and taking a profit at 1.1876. If the trade goes in the money we recommend moving up your stop or placing a trailing stop based off your risk tolerance.

If you would like to receive some of my short-term and day trade recommendations in the currency markets feel free to contact me at 312-373-5881 or jshelton@rjofutures.com.

Crude oil looks to continue on its current upward slope as equities both here and abroad gain steam. The overriding factor keeping a lid on crude prices has been the threat of a double dip recession and a concurrent global slowdown. It is noted in the Hightower Report that open interest in the September crude oil contract has been decreasing in the latest run up, indicating that funds have been covering short positions rather than adding fresh longs. Hence the rally has not been confirmed yet by the smart money. The ample supply of crude may temper any rally, so expect pullbacks and be poised to take advantage of buying opportunities. The 7650-7700 area in crude is a good spot to get long as it lies in the lower third of an upward channel that is forming. Sell stops limiting downside risk should be below 7616. Profit objectives should be in the 7950-8000 area. We also like the October 7000-6700 bull put spread which would give you a credit of $500+ with 52 days till expiration. There is very strong support at the 7000 level, so this credit spread is supported by fundamental as well as technical factors.

If you'd like to learn more about futures trading or the energies market specifically, please contact RJO Futures Trading Consultant Tarik Husseini at 312-373-5461 or thusseini@rjofutures.com.

Natural gas has been trending higher in a tight range. Ample supplies of natural gas have held September natural gas prices below the $4.700 level. Second quarter earnings have kicked off and thus far a majority of companies reporting have met or exceeded Wall Street's estimates on the top and bottom line. Companies have been fairly optimistic and are guiding earnings higher for the third quarter and full year. This bit of optimism has some thinking that demand could increase as we move forward through the rest of 2010. Weather remains a key factor in the natural gas market. Tropical storm Bonnie passed through the Gulf of Mexico, targeting the major natural gas and oil production areas. Fortunately, the key production area escaped unscathed and little to no damage was done. According to the government, approximately 10% of natural gas production remains shut down due to storm evacuations. In some of the key natural gas consuming regions of the country, temperatures have been well above average, thus spurring demand for electricity to run air conditioners. Weather models continue to point toward a hot August in many parts of the country, which could keep demand strong through the summer season. I am still bullish natural gas, and I am looking to buy natural gas on a dip back to the $4.520 level. My risk on this trade is back to the $4.388 level while targeting a run back to the $4.800 level. Favorable earnings and economic conditions as well as supportive weather conditions should help support the market. The looming threat is supply, and this will have to be monitored closely.

If you'd like to learn more about futures trading or the energies market specifically, please contact RJO Futures Trading Consultant Kevin Craney at 312-373-5354 or kcraney@rjofutures.com.

The major concerns over the weather conditions in the Ivory Coast continue to add pressure to the supply of cocoa beans. The heavy rains and additional moisture continue to wear on the crop.

The dollar weakness along with positive outside market action continues to add strain to the market. When the dollar fails it tends to be a bullish indicator for cocoa, while other commodities tend to get cheaper.

The market appears to be in a consolidation period while it tries to decide which direction to take. Bulls should be interested with a break above the 3210 level. Until then, possible trading options may be short strangles and/or credit spreads.

If you'd like to learn more about futures trading or the cocoa market specifically, please contact RJO Futures Trading Consultant Kathryn Fischer at 800-453-4494 or kfischer@rjofutures.com.

After making new lows not seen since late February and close to a two-and-a-half-week consolidation, cotton appears to have reversed itself and is heading back to the upside, a resistance level of 7990. The recent pop also coincides closely with a 61.8% retracement level at 7719, but is currently hovering around the 50% retracement level at 7640.

As the Hightower Report mentions "The Census Bureau released its monthly Cotton consumption report 7-22. It showed factory consumption in the US at 331,684 bales in June, up from a revised 274,517 in May."

The Hightower report also says it best regarding the Trend Followers. "Trend-Followers (managed funds) were net sellers of 4663 contracts, which further reduced their net long position to just 17,650. Their net long position in cotton had until recently been one of the largest net longs among all agricultural commodity markets. Now it is one of the smallest." Again the 50% retracement falls around 7640, with 7719 being the level of the 61.3% retracement. Bears can be short in this area and risk above 7719, where bulls can follow the short-term uptrend.

If you'd like to learn more about futures trading or the cotton market specifically, please contact RJO Futures Trading Consultant Mike Rataj at 800-453-4494 or mrataj@rjofutures.com.

It looks as if tight near-term supply levels have lent some support to prices, but long-term fundamentals are bearish. The Hightower Group reports that even though Vietnam exports are up nearly 70% from last year, decent weather in Brazil may result in strong resistance at the 170.00 level.

On the technical side, failure to break the 169.80 corrective high from July 16, along with price action trading at the top of the channel in place since June 24, suggests that the coffee bears may be in the driver's seat, at least for now. Consider put ratio spreads, such as:

Buy the December 160.00 put and sell the December 150.00 and 145.00 puts for net debit of $465. For complete downside move protection, consider adding a further out of the money short 135.00 put for an additional 126 credit. Consider closing the position out with a break below the 152 level (if more than 40 days are left to expiration).

If you'd like to learn more about futures trading or the coffee market specifically, please contact RJO Futures Trading Consultant Adam Tuiaana at 800-453-4494 or atuiaana@rjofutures.com.

The agriculture markets at the CME are steady as wheat, corn and soybeans are all trading slightly higher. Fresh news is hard to find, and the US weather model overnight is unchanged and still non-threatening through August 9. Spot corn and bean futures have retraced nearly 50% of late June and early July's rally and a pause is due. A longer-term trend is not expected to develop until after the release of the August 12th crop report. Japan was reported to have bought 69,000 metric tons of US wheat, but also bought additional modest tonnage of Canadian wheat. Japan is a routine buyer of all origin wheat and there is no evidence of a large scale shift in demand amid projected losses in Kazakhstan and Eastern Russia. China has also questioned the quality of recently purchased US corn. There are no further imports expected of old-crop US corn We are technicians here at RJO Futures and it gets a bit challenging during the summer months to project price discovery when the weather is such a big influence on the trade.

We rather enjoy looking at daily, weekly and monthly charts to come up with trade ideas. This month we are working on a monthly reversal up in soybean oil. We recommend buying December soybean oil at 3925 with a stop loss at 3825 and a profit objective of 4200. Also we like bullish corn strategies this fall and would recommend to everyone to buy corn calls early this September.

If you'd like to learn more about futures trading or the agricultural market specifically, please contact RJO Futures Senior Trading Broker Stephen Davis at 800-367-7181 or sdavis@rjofutures.com.

Soybean Oil. Monthly Continuation

Source CQG, Inc. (c) 2009. All rights reserved worldwide. www.cqg.com

This year's June 30th third quarter corn stocks continue to reverberate within the trade as questions continue to swirl: (1) were some stocks missed, (2) how can this year's feed usage level be so high when this year's cattle and hog numbers are lower and (3) was last year's crop size smaller than previously estimated? Here is our explanation of how this situation possibly developed and what it might mean for 2010/11 crop year.

The USDA's surprise 4.3 billion bu. June 1 corn stock level, 303 million bu. below the average trade expectations, prompted the head-scratching around US agriculture. Reports circulated that some stocks might have been missed at ethanol plants that began receiving their first direct request from the USDA for their June 1 corn stock level. However, given the substantial time before its release, state officials likely were able to secure their needed numbers on follow-up requests or they checked with warehouse officials to get this data.

So where did this year's large corn supplies go? Given the ability to monitor overseas shipments through our ports and utilizing Department of Commerce and Energy information concerning our industrial and ethanol demand, these commercial demand levels are relatively known on an ongoing basis. However, feed demand, with a portion of each year's crop walked off the farm instead of sold through commercial channels, has been determined as the difference between commercial usage and remaining stocks at the end of quarter and the crop year since the USDA began issuing data. Because of this situation, quarterly stock levels both on and off the farm are important to determine this usage.

Utilizing this approach, in the quarter of March to May, the 35% increase in the difference (feed) over 2009 (to 1.3 billion bu.) doesn't seem appropriate when this year's hog and cattle numbers are lower. Looking back at this year's stocks reports, what stands out is a 1.0 billion bu. larger decline in on-farm stocks from last December to this year's June 1 level. What might have occurred involves how American producers normally handle and store their crops each year. Very few producers weigh or test their crops for quality before they store supplies in on-farm storage. In many instances, they rely on the normal output these bins produce when they deliver this output to commercial channels later in the crop year to determine their crop size. Last year's slow maturing crop (lower test weights) and excessive October rains (high moisture) added to last fall's crop issues. This led to numerous reports of undeliverable or reduced bushels being sold from their full bins. In many cases, 5-10% differences occurred, as crops are sold by weight and not by volume, which could be strong reason behind this year's sharp fall in on farm stocks during this year.

Why didn't this situation surface earlier on the March 1 report? This likely occurred because of last winter's drop in prices after the USDA's final production pushed output and yield level, to a record, prompting producers to delay moving stored corn from bins and buyers to utilize their previous purchases, anticipating lower prices from the larger supplies. With only 6-7 weeks remaining after this report until the end of quarter, many producers hadn't became totally aware of this year's unusual shortfall in saleable supplies to adjust their on-farm inventory levels until the next reporting period on June 1. The USDA upped its 2009/10 feed/residual projection by 175 million bu. on its next supply/demand update on July 9 because of this higher disappearance. But, with 50% of this year's 4.3 billion bu. June 1 stocks still in producers' on-farm storage, some additional shrinkage in these supplies could occur in the summer before this year's ending stocks are totaled on September 1. However, this amount will likely be substantially less than last quarter's huge adjustment in corn inventories.

Because of the past year's quality issues reducing salable inventories and also reducing the feed efficiency of the 2009/10 crop, determining the real size of last year's harvest won't ever be known for sure. However, if you cut the crop output by 200 million bu., which seems like a conservative adjustment, last fall's national corn yield declines to 162.1 bu. from the current 164.7 bu. level. With the government and most industry analysts using yields from 1990 to 2009 to determine corn's per-acre trendline in the current era of GMO seeds, 2010's trendline yield is just 159.5 bu. vs. the universally-known 160.8 bu. the USDA used in its Ag Forum projections last winter. Because of this spring's rapid start to the plantings, the USDA upped its yield projection to 163.5 bu. earlier this spring, based upon its 2009 yield 164.7 bu. However, this level seems a bit optimistic when utilizing 162.1 bu. US yield for 2009, making me more comfortable with a 161-162 bu. yield prospect at best for this time of the crop year.

This year's strong plant population and rapid growth from more heat in the growing season will give the USDA more information to make their first yield projection on August 12, but the USDA has also never projected an August corn yield above last year's 159.5 bu. level. When using these adjustments, the USDA's upcoming August corn yield projection, which normally is based upon a plant population count from their observation plots and an average ear weight, may not be able to top the current 163.5 bu. yield currently being used for the 2010/11 crop. This season's ongoing excessive moisture in some regions of the Corn Belt could also lead to reduced nitrogen applications or even soil loss of this important nutrient, which could limit a field's best yields. Given the sizable demand projected for the upcoming year and the potential for more overseas demand if FSU, EU or Chinese crop problems worsen, the current US corn crop doesn't need a lower-than-expected yield forecast to add to its nervousness.

Until a more definitive idea of 2010's corn yield surfaces, new crop prices will likely trade within its recent $3.70 and $4.05 price range, basis December. After the recent downward adjustment in old crop corn supplies and smaller 2010 plantings, an acreage battle between the need for expanding corn and feedgrain areas and the recently revived wheat prices seems to be shaping up. This could limit corn's downside risk this fall into next spring even with trendline corn yields this coming harvest.

Questions or Comments on This Article

Last issue we discussed the unique shape of the VIX futures forward curve and how it was uniquely "humped" with the October future trading at a premium to both shorter and longer dated futures. The curve was neither its more normal contango shape, upward sloping over time, nor in backwardization , downward sloping, more common in periods of market turbulence. This hump indicates that the November S&P 500 (SPX) Index options are relatively more expensive than other months suggesting options traders view the period between the third Friday of October and the third Friday of November, a period containing the mid-term elections, to be more risky for the stock market.

With the recent rally in the stock market, short-term implied volatility has fallen sharply while longer dated volatility has remained relatively high. As a consequence the curve is now sharply contango in the short term and the October-December spread has flattened.

For the balance of the summer we suspect the relationship between the October VIX futures price and the December VIX future will remain dynamic and would look for opportunities for both flattening and steepening trades.

Traders of the opinion that expectations for volatility could increase nearer the elections may now consider selling December VIX future and buying October.

Should October return to a meaningful premium, traders may consider the flattening trade, shown above, of selling the October VIX future and buying the December VIX future.

Questions or Comments on This Article

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