Questions or Comments on This Article

We are looking to enter a long position in the EUR/USD. The long position should be entered at 1.3387 (yellow arrow), and the stop loss should be placed at 1.2965 (blue arrow). The take profit should be placed at 1.4269 (green arrow).

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 312-373-5081 or jshelton@rjofutures.com.

With a deep freeze gripping a large portion of the United States, we have watched natural gas test price levels last seen in September. While weather models continue to forecast bitterly cold weather over the next 1 – 5 days (Dec. 14th – Dec. 18th) and 6 – 10 days (Dec. 19th – Dec. 23rd) across much of the Midwest, East and South, the natural gas market is looking forward. The 11 – 16 day (Dec. 24th – Dec. 28th) forecast shows temperatures normalizing across much of the United States, which should reduce demand. Prices have run into resistance at the 4.600 level.

The 3.725 trillion cubic feet of supply continues to hang over the natural gas market, and will continue to do so until we see a significant reduction. At these supply levels we are 9.8% above the five-year average for the week ending December 3. The Department of Energy (DOE) report for the week ending December 10 is forecast to show a 166 billion cubic feet draw on inventories, according to median analyst estimates compiled by Bloomberg. Even with continued draws on inventory, it is going to be difficult for the natural gas market to break the 4.600 – 4.700 level due to the supply overhang. The average estimate for natural gas prices for 2011 is 5.060, according to Bloomberg. If production continues to outpace demand, which I believe we will continue to see, I think prices will remain depressed throughout 2011.

Any rebound in natural gas prices back to the 4.500 – 4.600 price levels should be seen as an opportunity to sell this market. Weather will continue to be one of the keys to price levels in this market. With the market looking forward to more normalized temperatures we are seeing prices fall. With 14 days left until expiration, I like selling January 4.100 puts, buying the January 4.000 puts to collect $600 if the market gives us the opportunity.

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.

Options Scenario Analysis:

Source: Bloomberg

Crude oil has been hemmed in a relatively tight range between 8700 and 9000 for the last five sessions as it searches for direction. Typically this type of consolidation presages a big move once the market breaks out of the range. Thus look for a close above 9000 or below 8700 for a better feel regarding direction. Fundamentally, as was stated in the last eView, one must pay particular attention to the demand emanating from the US and China. Looking at the latest economic numbers, with the exception of the Monthly Unemployment Report, one could make the argument that things are looking up in the US. As for China, they are grappling with inflationary forces, but don't seem to be making any rash decisions in order to slow down their growth.

Technically look for the 8550-8575 area to be good support if we break to the downside. This area was formidable resistance on the way up. Once crude oil broke through the 8550-8575 resistance on 11/29 it was off to the races up to 9067 by 12/7. Below that would be 8250-8300, which is a good trend line support area as well as a former value area. On the upside we may see a significant move higher if we close above 9000. It is a bit harder to forecast, but the 9329 high on 5/03 is certainly attainable within the first month or two of 2011 if the fundamentals continue to improve in the US.

The 7700-9200 strangle that we sold two weeks ago looks like it will be a winner as the options expire tomorrow. Going forward we would look to buy breaks in the areas mentioned above. Or one could set up a bull call spread today above the 9000 level with the February options, such as buying the 9000-9200 bull call spread for $800, and selling a 9700 call for $550 to help fund the trade. Thus the total cost would be $250 with a potential profit of $2000. The risk would be crude blazing above 9700 within 32 days.

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.

By midday Tuesday December 14, the February Comex gold future, GGCG11, is trading just above $1400/ounce, at or near 14025. Both Feb gold and March silver contracts have rebounded from session lows reached shortly before the US equity market open, and stand slightly higher for the day.

After an initial morning spike in strength, the US dollar has resumed its bearish move, continuing a downward trend that ensued with the Asian opening Sunday evening. Even a favorable Retail Sales number right away Tuesday morning couldn't buoy the dollar beyond an hour or so. Attention focuses once again upon the FOMC Tuesday afternoon and whether any revised growth forecasts result from this meeting. No major Federal Reserve announcements are expected beyond some acknowledgement of longer-term effects of QE2.

Pay particular attention to the $14100 resistance level, but the FOMC announcement, along with any compromise regarding the Bush-era tax cut extensions, will propel the metals in later afternoon trading.

If you'd like to learn more about futures trading or the metals market specifically, please contact RJO Futures Trading Consultant John Kennedy at 866-397-8194 or jkennedy@rjofutures.com.

"The US cotton crop will be 0.8 percent smaller than forecast a month ago, the government said, as hail damage to plants in Texas may lower yields. Production will total 18.27 million bales in the harvest that is just finishing, down from the 18.42 million projected in November, the US Department of Agriculture said today in a report, lowering its estimate for the second straight month. The previous harvest totaled 12.19 million bales. Eight analysts surveyed by Bloomberg News were expecting 18.49 million bales." http://www.bloomberg.com/news/2010-12-10/u-s-cotton-output-projection-cut-0-8-after-hail-damages-crops-in-texas.html

Looking at the weekly chart below it is hard to be bearish cotton, but most traders know that what goes up, must come down (spinning wheel, got to go round). Weeks back we mentioned some $300 March puts. Looking for some now, closer to the current strike, might provide traders with a nice hedge should this market look to retrace. Given the activity though, bullish waters appear to be ahead.

The March Cotton 130/140 call spreads we were looking to exit at the 230 level last weekend following 50% depreciation are now trading 550/600, a little better than when we started. Again, those that did not exit the position fully at the time of the last eView should look to either hold their positions for potential upside, or if they'd like off this roller coaster look to cover the remainder at a tad better than what was paid to get in. Of course if you don't like roller coaster markets, you probably shouldn't be trading cotton.

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.

March Cotton, Weekly

Source RJO Vantage

The Hightower Group has reported that due to too much rain in Colombia and Vietnam, coffee is possibly sparking more buying from speculators. Colombian government officials believe that the coffee harvest may fall short of the estimated 9 million bags. In addition to some of these bullish fundamentals, the continued weakening of the dollar may also be lending some support to coffee. On the technical side, March coffee is quickly approaching what should be good resistance at the 221 level. This area of resistance, accompanied by bearish divergence in momentum (seen below) could have March coffee consolidating for a while before a move higher.

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.

There are bread riots in Mozambique. Price controls are being placed in China. In South Korea, a slashing of cabbage import tariffs is trying to keep the fiery national dish of kimchi on family tables. Here in the west we are getting warnings from consumer companies that our evening supper, weekend pint and cotton shirt are all going to cost (give or take) 6-8 percent more next year. Food and clothing inflation is back with a vengeance. Wheat has risen in price by nearly two thirds in the past six months and cotton by almost three quarters.

At no time can we remember a more important growing season for world crops than this coming year. Starting with the 2011 South American crop and our own North American season ahead, the world is hungry and there is not a lot of room for crop adversities. Amid drier-than-desired Argentine weather forecasts and this La Nina drought pattern continuing, we suspect that corn and soybeans will be the upside leaders. Brazil's cotton acreage is expected to be up 38% which most likely will come from highly-productive soybean acres.

Goldman Sach's $100 barrel forecast for the 2011 average price of oil should be indirectly bullish to corn and ethanol if realized. Money continues to flow into commodities and we think this will continue into early 2011. Happy Holidays!!!

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.

Soybeans, Weekly Consolidation

Source CQG, Inc. (c) 2010. All rights reserved worldwide.

After three straight months of surprises, December's USDA surprise was that no dramatic changes were made in revisions of their US or world supply/demand in the latest update.

With export sales 275 million bu. ahead of the five-year seasonal pace to achieve the 2010/11 forecast, the USDA did up their overseas demand projection by 20 million bu. to 1.59 billion this month. Despite recent dryness in Argentina slipping some private estimates, the USDA did not adjust its South American production levels in either Argentina (52.5 mmt) or Brazil (67.5 mmt) this month. They did up Brazil's domestic usage by 1 mmt, which decreased the world ending stocks to 60.1 mmt, but the USDA did not make any changes in the US domestic numbers. Overall, US soybean stocks were cut 20 million to 165 million bu. as was generally expected.

The biggest surprise may have been the USDA's decision to leave US ethanol demand for corn unchanged this month. The strong pace of the past two months and the sharp rise in last week's daily average output of 54,000 barrels likely pushed November's average daily output over 900,000 barrels a day. However, the USDA didn't increase domestic corn demand this month despite an annualized bio fuel usage level approaching 5 billion bu. Concerns about the blender's tax credit possibly being dropped or cut sharply may have been the reason for the lack of change, but the current US tax bill moving through the Senate includes a one-year extension of the current tax credits and tariff levels which the House will take up lately this week. Without a quarterly stocks reports (issued in January) and a modest pickup in weekly export sales recently, the USDA also left the two other major demand levels unchanged this month. They did raise corn's imports by 5 million bu., resulting in the latest carryover being upped 5 million bu. to 832 million this month. This suggests that next month's crop and S&D updates could have some significant changes if a smaller US output is determined and ethanol's corn demand continues at its current above-projected pace.

US wheat stocks had only a modest 10 million bu. change to 857 million when the USDA decreased its food demand level this month due to higher flour extraction reports from the 2010 crop. The USDA projected a rise in the world's output by 3.6 mmt to 646.5 mmt when they increased Australia (1.5 mm), Canada (1.0) & Pakistan (1.3) crops this month resulting in the world stocks being up 4 mmt to 176.7 mmt. Excessive rains further cutting Australia's milling supplies and dryness in the southwestern US Plains remain supportive factors for this food grain.

With the final 2010 crop and quarterly stock reports not out until next month, the USDA seems content to wait until these numbers are available before adjusting changes to the 2010/11 balance sheets. However, overseas soybean, wheat and corn ethanol demand might not wait for these numbers if South American weather does not improve.

Questions or Comments on This Article

With the year end quickly approaching and the likelihood that, with the exception of Congress, most of 2010's business is now complete, volatility markets are likely to remain quiet for the balance of the year.

With 20-day realized volatility for the SPX hovering around 15% for the past several weeks, implied volatility has steadily drifted lower with the front month CBOE Volatility Index® (VIX® ) future settling Monday December 13th at 18.30.

The time-series or forward curve for the VIX futures has flattened modestly but remains historically steep. Steepness in the forward curve would appear to be part of the "new normal" at least as it applies to volatility markets.

The post-election, end-of-year calm may provide long equity investors the opportunity to buy volatility cheaply however, with an attractive risk-return profile particularly if longer-dated futures can be bought in the low 20s.

The year of 2010 has been very good for trading volatility, specifically VIX futures. November proved to be the most active month on record with 751,481 contracts, triple the 184,588 contracts traded in November 2009. The CFE (CBOE Futures Exchange) also experienced record weeks and record days during the month, with the highest volume day on record -70,754 contracts traded on November 16th.

Questions or Comments on This Article

Volatility in the Treasuries remains fairly high. Over the last couple of weeks, the 30-year rate rose 27 basis points to 4.39% while the 10-yr T-Note rate jumped an impressive 45 basis points to 3.29%. The main impetus for the continuing decline in Treasuries is the apparent bargain struck between President Obama and the Republicans regarding tax and unemployment extensions. A calming of the European sovereign debt storm and generally better-than-expected economic data contributed as well.

Hourly 30-year U.S. Treasury Bond Futures [Continuous Chart]

Source: Ameritrade Think or Swim

While most market participants were expecting some sort of extension of the Bush tax breaks, the overall package can be viewed as more stimulative of economic growth than many anticipated. In addition to the Bush tax breaks being extended across the board, the proposed estate tax was definitely on the low side. It also extends a slew of other tax breaks. It reduces payroll taxes for most workers for one year and extends jobless benefits another 13 months. All in all, it is projected to cost approximately $858 billion over 10 years. This negatively impacted Treasuries on two fronts; (1) the increase in forecast economic growth, which ultimately leads to higher inflation, and (2) the increase in the budget deficit, which ultimately leads to greater supply adding downward pressure and/or higher rates on sovereign debt concerns.

Stepped-up bond buying by the ECB last week and strong comments from the German Finance Minister Wolfgang Schäuble stabilized Eurozone bond spreads and sparked a rally in the Euro. In an interview with the Wall Street Journal last Friday afternoon, he said “his country is prepared to pursue bold action to preserve Europe's common currency, including deeper economic integration with its neighbors, and issued a warning to markets not to underestimate Berlin's resolve to protect the euro.” [Germany Vows Defense of the Euro, Wall Street Journal, 12/11/10]

On balance, recent economic data over the last couple of weeks has been good with mixed to slightly negative jobs news and Tuesday's Producer Price Index showing inflation popping higher. Better-than-expected data includes construction spending, pending home sales, the trade deficit, Michigan consumer sentiment and retail sales. Job–wise, the initial jobless claims were slightly higher the week before last but on expectations last week in what appears to be a very slow but steady downtrend. On a monthly basis, the ADP Employment report was better but the non-farm payrolls – both total and private – came in approximately 100k below expectations.

30 –Year U.S. Treasury Bond Weekly Chart

Source: Ameritrade Think or Swim

Technically, the March T-bond and 10-year T-Note are short-term and intermediate-term bearish with short-term momentum and intermediate-term momentum down. The short-term bear pivots are 122.10 and 121.28 in the 30-year and 10-year respectively. The intermediate-term pivots are 129.24 for the T-bond and 124.18 for the T-note. [One daily close beyond a S-T pivot is needed to change the S-T trend while two daily closes beyond an I-T pivot is needed to change the I-T trend]

The outlook for Treasuries remains bearish. The Treasuries have already reached and pushed to the low side of the longer-term targets of 122.00-120.00 in T-bonds and 120.00-119.00 in T-notes. As our regular readers are aware, the move lower in the Treasuries has occurred much faster than anticipated. We caught a good chunk of the initial move but basically were too conservative in our re-entry points and missed the extension down over the last month. It should not be surprising. The high volatility, which prompted the conservative re-entry attempts, also fueled the size and speed of the sell-off. While the outlook remains firmly bearish, a sizeable correction is overdue. Hence, while we may miss out if the sell-off continues without pause, establishing a position other than a short-term play on the short side would be a low probability/low reward trade. A low risk/high reward play would be buying at or out-of-the-money calls anywhere below 121.00, as long as the 119.24 area is intact. If bought, risk a clear break of the 119.24 area and target the low 126.00s on the upside. In the near-term, a move back above 123.00 would be constructive.

If these major support areas are broken, the next major supports are 115.30-114.06 in the T-bonds and 116.09-114.26 in the T-notes. Also, the long-term bull pivots on the weekly charts are hitting at 116.15 and 117.15 in the T-bonds and T-notes respectively.

Questions or Comments on This Article

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