Futures Volatility…
And How You Should Play The Moves
The Smart Profits Report: Commodities Corner
Monday, April 28, 2008
by Lee Lowell, Futures Options & Commodities Specialist
If you were expecting the commodities markets to calm down since I wrote to you two weeks ago about crude oil and natural gas, you’d be disappointed. There’s been no let up in futures volatility…
We start with the big hitter - crude oil. As usual, it’s the largest mover and is leading the commodities pack forward. As such a vital part of our everyday lives, since it influences gasoline prices, home energy prices and even food prices, it’s no surprise that it gets the most attention.
Not long seems to go by without oil setting new all-time highs. In our last update, for example, oil futures had just eclipsed a new high over $111.50 per barrel.
But two weeks is a heck of a long time in the oil market - and the price has kept moving. As I write, oil almost touched the $120 per barrel mark - as you can see on this chart.
Until we see a more significant shift in the underlying trend, our stance remains the same: We’ll continue to see large pullbacks, followed by renewed upside momentum.
Regardless of Futures Volatility, Wherever Crude Oil Goes… Natural Gas Follows
Although they rely on very different fundamentals, both crude oil and natural gas continue to move in tandem.
And natural gas has kept pace just as well as oil. Take a look at the chart and you’ll see that the front-month futures contract just cleared the $11.400/mmbtu level after we showed it at the $10.000/mmbtu level just two weeks ago.
That’s a $11,400 move on just one contract. We believe the continued upside momentum is due to large hedge fund activity. It doesn’t look like we’ll see a long-lasting selloff in natural gas any time soon - not with hurricane season heating up in June.
Metal Futures Volatility Head Downward
While oil and natural gas prices continue to hum along relentlessly, two neighbors in the metals market have cooled off over the past two weeks. Specifically, gold has shed about $50 per ounce and silver has shed about $1 per ounce. That equates to $5,000 per futures contract on each commodity. However, this isn’t too surprising, given that they’ve both enjoyed huge increases recently.
Both markets have retraced back down to near-term lows which, which were carved out on April 1. Let’s see if that support can hold or give way to more selling.
The Breakfast Club: Two Forces That Could Drive Coffee And Orange Juice Futures Higher
All the “softs” market (coffee, sugar, cocoa, orange juice & cotton) continue to hold at near-term lows. All except cocoa.
The cotton market is currently sitting right on its 200-day moving average, which is typically a very reliable support level. Let’s see if it can hold here.
Coffee and orange juice both seem to be carving out a bottom here. Coffee is coming up on the Brazilian “frost season,” which will last the next few months. And like the natural gas market, you can always rely on the orange juice market to experience some volatility during the summer hurricane season.
The frost season in Brazil and hurricane season in the United States may are two events that could cause these commodities to find a near-term floor.
Breaking Down The Three Major Grains Movers
Lastly, we’ve seen divergent moves in the three main commodities of the grains market - corn, soybeans and wheat.
Since hitting its peak at over $12.50 per bushel back in March, wheat has given up over $4 per bushel. That’s a $20,000 move on one contract alone. Although it’s not shown on this chart, the price is now making its way lower towards its 200-day moving average line.
On the other hand, corn has found its footing and continues to trade near the top of its recent range - as you can see one this chart.
As for soybeans, the market continues its volatile behavior, jumping both up and down. When volatility like this occurs, it can be tough to get a good handle on its next move. One day it looks bullish, only for the bears to dive back in the next day and knock it back down.
My advice if you want to get involved with these markets is to stick with limited-risk option strategies.
Catch you again here in two weeks.
Lee Lowell
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