Commodities Suffer A Monday Mauling…
Commodities Corner: Commodities Suffer A Monday Mauling… Here’s What’s On Tap For These Volatile Players
Monday, July 7, 2008
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
Welcome to another installment of “Commodities Corner” - our bi-weekly roundup and analysis of the most influential commodities markets.
There aren’t many guarantees in life… but the commodities world always provides at least one: Action! And pretty wild action, too, so let’s get right to it…
Two Reasons For Oil’s Downturn (Yes, A Drop In Price!)
As always, we kick off with the biggest player: Oil - a market that continues to blow everyone away, including oil market veterans who thought they’d seen everything the market could toss their way.
When I last wrote you, I pointed out how the crude oil futures chart was making a bullish flagpole pattern - considered to be one of the most reliable bullish signals. True to form, the oil market blasted higher out of that pattern to set multiple new all-time highs.
Following last Thursday’s surge to a record $145.85 a barrel, oil prices have backed off a little, as the US dollar has gained strength from European Central Bank talk that suggests its interest rate hike last week will be the only one for a while. That’s because dollar strength reduces the need for investors to seek a hedge against inflation - a hedge that the oil market provides.
Oil is also benefiting from a perceived shift in Iran’s stance over its nuclear arms program. Iran, the world’s fourth-largest oil producer, has “shown signs of improved lines of communication,” according to Barclays Capital, with Iran pointing to a “new environment” for talks after its response to an incentive package from the West.
Iran has stated that it won’t be forced into abandoning its uranium enrichment program, but signs that it’s willing to be more flexible is a big reason for oil’s drop today.
As you can see from this chart, the front-month futures contract currently trades around $142.
But don’t be fooled… oil seems to have a mind of its own and keeps wanting to push towards the $150 mark. The Iran situation is still very fragile and dollar gains are likely to be short-term. Most economists are calling for that and it seems only a matter of time before it does. What odds on it happening before my next column here in two weeks?
How about oil’s gassy cousin?
Atlantic Winds Could Whip This Market Higher
Relentless.
That’s the only way to describe the natural gas market. Sure, the price declined a bit today, but even so, the fact remains that the market hasn’t seen a serious break in bullish action since mid March. Check out this chart for proof.
And with Bertha rumbling away in the Atlantic, it’s merely a reminder that hurricane season is gathering momentum. Weather factors could have a huge impact on the natural gas market at any time this summer, so it’s unlikely that we’ll see any sort of sustained pullback in price until the late fall.
That’s energy. Now onto the food markets…
Corn And Soybeans Surge On Midwest Flood Fallout
In my last update, I commented on the devastating effect that the Midwest flooding had inflicted on grain crops.
Given that it was such a monumental event, the government is still assessing the full extent of the damage and each week will bring a clearer picture of how much has truly been lost.
It’s no surprise to see that corn prices have remained high over the past two weeks, setting more record highs in the process. The soybean market has also taken its cue from corn, with futures prices recently eclipsing $16.50 per bushel level.
As for the wheat market, it trades on slightly different growing fundamentals than corn and soybeans, so it hasn’t joined the bullish party as much. However, it’s recently recovered from a steep drop that saw it lose about $5 a bushel from mid March to early June and seems to be attempting to consolidate around the $8.50 area.
Until we know more about the full damage from the floods, corn and soybeans should continue their bullish ways.
But beware of nasty pullbacks if any bearish news is released.
The Coffee Bull Gets A Beating
Americans are seeing higher prices at the grocery store these days - a fact reflected in the bullish trend among the “soft” commodities.
Coffee, sugar, cocoa, and orange juice have all seen bullish moves over the past two weeks. Let’s update all four markets and see if we can gauge the future price movement…
Coffee: When I last wrote to you, coffee had just blasted 700 points higher. This is the usual result of a market that’s been trapped in a trading range for a long time - and was a move I’d predicted in recent updates.
Up to today, the market had continued to tick higher. But in keeping with today’s general commodities theme, coffee futures got hammered today, as the stronger dollar led to lower oil and a broad-based commodities selloff.
And as stop-losses got hit, the decline continued.
In addition, growing conditions in Brazil are favorable at the moment, so the catalysts for the drop were evident.
Sugar Follows Coffee
Like coffee, the sugar market has also enjoyed a solid upside blastoff recently - a welcome break after a relentless price pounding.
But like coffee, it also suffered a drop today, as its month-long, 300-point upward crusade that culminated in a three-and-a-half month high late last week ended not so sweetly.
Having recaptured all the losses it incurred from mid of April to mid June, sugar gave up some ground today, along with the other commodities. Again, there were no fundamental changes in the market, merely a pullback after the long upward run. But it just goes to show how things can really turn on a dime in these markets.
From 28-Year Highs To A 3-Week Low Amid A Furious Selloff
Just a few days ago, the cocoa market looked super, continuing its record-breaking pace by once again setting newer 28-year high marks.
But last Thursday, it succumbed to a furious, 10-minute bout of profit-taking towards the end of the day. The price fell a whopping 140 points during that short span and traded in that lower range for the rest of the session.
I’ve included the 5-minute bar chart here so you can see the manic action.
This was likely just traders locking in profits before the holiday, but the market hit a three-week low today, as it also felt the wrath of the commodities market selloff.
While it’s still too early to tell whether this market has put in a top, some analysts believe that the market is overbought and due for more downside.
Now, from a huge loss to a huge gain…
A 2,000-Point Surge For OJ
You see that remarkable rally in orange juice? In case you didn’t, check out this chart, showing a massive 2,000-point move.
That’s a very large move in such a short period of time. Watch out for this market as the players might be gearing up for an active hurricane season.
One market that remains solidly in the doldrums is cotton - as you can see here. Until the price really breaks out one way or the other, it’s business as usual - with the path of least resistance pointed lower for now.
That’s all for this edition. I’ll catch you back here in a couple of weeks.
Lee Lowell
P.S. Almost forgot about the metals! With crude oil’s fall back today, both gold and silver took their cues by dropping, too.
As you can see, gold clearly broke out of its consolidating pattern a few days ago and despite falling today, its next target is the $960 an ounce level.
Silver is also set to blast higher, too, and needs to bust through the $18.50 an ounce level. Today’s drop has set it back a bit, but it should reach that mark shortly.
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