Don’t Miss The Commodity Market Breakout
Monday, May 18, 2009
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
In my last column on May 4, I noted that the oil market had finally found its feet and appeared to be building up a head of steam to the upside.
Specifically, we saw a move above $55 a barrel as the trigger for a quick move to $70 - and oil completed the first part of that equation, not only rising above $55, but breaching the $60 mark within a few days, too.
Since then, the market has pulled back slightly (common after a large move) to the $56 per barrel level, but the retreat could merely be setting the stage for the next run higher.
The current 200-day moving average sits at the $68 per barrel level (basis June 2009 futures) - and that could be the mark that traders are gunning for.
If you’re considering playing the oil market to either the bullish or bearish side, you can do so…
through United States Oil (NYSE: USO) - the very liquid and popular ETF that mimics the moves of crude oil futures on the NYMEX.
Because USO trades like a stock on the NYSE, you can buy and sell it through a normal stock brokerage account. It also has options contracts available.
Currently trading around $32.60, USO is a very good “cheaper” alternative to the high-priced futures and futures options arena, while still benefiting from the same moves as the underlying oil market. If crude oil moves to the $68 per barrel area, USO could see the $47 mark at the same time.
Upside Breakout For Natural Gas
It looks like the lows are finally in for the natural gas market.
Having set a low of $3.25 per MMB/tu on April 30, natural gas has enjoyed an upside breakout over the past two weeks - to the tune of 1,300 points on the front-month futures contract and tagging $4.570 per MMB/tu on May 13.
If that move was similar to oil’s breakout, so too is the slight pullback since then. But this could merely be the launching spot for the next leg higher.
As we mentioned in the last update: “If the natgas futures can get above its 20-day & 50-day moving averages, then there’s a good chance that the end of the long downswing might be over, and we can see the start of the new bull run.”
Of course, we still have to contend with the lack of demand for natural gas trading and the large underground supplies in storage, which may keep the rallies at bay for a short time longer. But with a market as volatile as natural gas, once a move gets going, the speculators come out of the woodwork in droves, especially now that we’re getting close to hurricane season in the U.S.
Just like the crude oil market, there’s an equivalent exchange-traded fund for natural gas - United States Natural Gas (NYSE: UNG), which you can play in lieu of natgas futures and futures options. If you’re considering bullish strategies, UNG offers options contracts as well.
A Trio Of Grain Gains
The last time we checked the grains market, (corn, wheat, soybeans), all three looked poised to embark on a run higher. Here’s what we wrote:
“All three look to have found near-term support and may be ready to make an upside move over the next few weeks to months. In fact, in the last week alone, soybean futures have rallied almost $1.50/bushel from low to high. They have convincingly moved above the 200-day moving average, which gives it credibility to keep the bull party in play.
“Corn and wheat futures have moved to the top of the recent ranges and could be ready to take off at any time just like soybeans. And, with any forecast of potential drought over the coming summer months, we can see these markets propel skyward.”
True to form, today is the first day that we’ve seen any sort of pullback. As you can see on the chart below, soybeans have moved above their 200-day moving average.
The corn and wheat markets look set to follow in the next few weeks, too. Right now, the best way to participate in these markets is through the use of limited-risk futures option strategies that available on the CBOT exchange.
The Bulls Are Running In These Two Markets
Over the past few months, we’ve highlighted cotton and orange juice as two markets set up for some great potential buying opportunities as they approached some long-term historical lows.
Neither one has disappointed, with both markets bottoming out at almost the same time in early March. Cotton has tacked on almost 2200 points (an $11,000 move), while orange juice has vaulted almost 2700 points (a $4,050 move).
Both have also managed to trade above all three widely followed and respected moving averages - 20-day, 50-day and 200-day.
From here, both markets look set for another run higher after their brief pullbacks - a move that would solidify their bullish price action.
Good trading,
Lee Lowell
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