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Hello all and welcome to the weekly resource brief where we break down opportunities in the dynamic commodities markets. The mandatory use of options allows us to control risk and take advantage of longer term trends in the true Supply and Demand markets.
These futures options have many advantages and offer a more pure play with leverage on leverage benefits not available with typical equity options plays.
In addition to identifying profitable option plays the intention is to educate, inform and even entertain with our discussion about the vital economic building blocks, Commodities, that are the underlying basis for all investments.
Briefing for January 3 - Euro Demise Surprise and Gold Wave Hello
Psychology plays an important role in the markets as it drives the decision making process for many investors. The discipline of proper money management and probability are often overlooked when A LARGE number of market participants have the same opinion where they think things a headed in the future...
The masses may be right, but more often than not they, as a group, get it wrong.
European History ?? Lesson
The Euro Currency, (not to be confused with EuroDollar that is the high volume short term interest rate product), was created in 1997 and launched in 1999. The economic union to compete with the U.S. economy had challenges from the start with different cultures and economic fundamentals. Individual countries had sharply different rates of employment, inflation, debt and almost as importantly work ethic and worldview.
The Euro Currency is sometimes seen as only as strong as its weakest link. The combined might of the Euro Zone compares with the US in population and global GDP. Fundamentally the on again/off again Greek crisis has pressured the financial markets in both 2009 and 2010. Concern that contagion would bring the Euro Currency down and take everybody else with it was front of mind and a psychological weight that the markets are only starting to get past.
Prices hovering around 130 are solidly above the 1999 launch at 125. That fact is often neglected when the often mentioned Death of the Euro is greatly exaggerated, to borrow the phrase.
Only a few short years ago there was talk was about the Euro replacing the Dollar as the world's reserve currency. The all time highs made in 2008 at 160 is not that far off from current levels. An 18% drop in the three year period does not demonstrate the catastrophe or crisis that the pundit class fan the flames daily.
Anything CAN happen... that doesn't mean there is a high probability that it WILL.
The current Euro fall is half of the turmoil seen soon after the currency creation. Prices traded blow PAR against the Dollar for a couple of years when perceptions were much much different. The world did not come unglued at that time and only in late 2003 did the Euro rally above the so-called IPO price.
With a very limited history to actually evaluate for the currency, note the hundreds of years of political discord and infighting, the 120 level is the key area to watch. It has been the pivot from bearish to bullish and the halfway point of the 160 highs to 80 lows. The 50% retracement is a technical support level to watch.
The crowded market Euro bears are susceptible to strong short covering rallies. The overwhelming negative sentiment can be viewed contrarily as a sign some of the worst may be past.
Trying to pick the turn is dangerous and expensive. As a trader the critical downside support at 120 to lean on is still 8% lower. The Euro bark has been much louder than the bite so far.
Dollar Rally Really
The price action last week was very close to a KEY Reversal in the Dollar Index. A surge to new highs that finishes with a negative close often marks the last gasp in an overextended trend.
One of the most encouraging things was the fact that Stocks and Oil have held ground while the Dollar has been a default buy. The fundamentals in the United States are improving but it only makes the Dollar a little more appealing than other currencies. Something had to rise if the Euro is to fall.
Dollar unwinding and Bond Buy exits will put more money to work in other risk assets. Stocks and Commodities should benefit from the return to a chase for yield and an end of the bunker mentality. The reversal from lows has seen some positive follow through to being the 2012 New Year.
The hardest hit commodity sector by the Dollar rally run has been in the Metals. Gold and Silver, denominated in Dollars around the world for trade, limped to year end with washout sales.
Many factors from fatigue to portfolio positioning held metals down after an extensive multi year trend. An eleven year rally with prices nearly 20% off the ALL TIME HIGHS looks glass half full to me. A 10% gain in 2011 was the smallest increase in the last three year to disappoint Gold bug buyers.
One observation from last weeks light volume sessions was a similarity with the Thanksgiving week sessions. The late November stock plunge was one of the worst drops in history for Stocks. A flush out rankled the markets but providing the cleansing to move higher.
Metal action last Thursday saw Silver approach year lows before turning higher on the day. Gold washed out the October lows below $1550 to recover quickly. A solid base makes both of these commodities attractive as they play catch up to other assets.
The highly watched Gold Miners Index (GDX) did have the Key Reversal formation to signal a possible change in course. New yearly lows Thursday below $50 with a positive close over a dollar higher on the day signal the worst may be over for the big boy producers like Barrick Gold (ABX) and Newmont Mining (NEM). Bullish divergence with implied volatility not marking highs as the index made new lows added support to the bottom turn.
Snapshot below from last Thursday as it was happening.
GDX prices have since rallied over 5% in a less than two sessions. The negative sentiment had pushed the Gold producers down more than the pure metal play. A snap back from extremes in the undesirable group gives positive momentum to the beaten down sector.
Turning Over Fresh New Soil
In an illustration of how quickly a Bull Trend can grow you only have to look at the Grain market run from December 14th. Corn is up nearly a full dollar with Beans closing in on a $1.50 increase in two weeks. A renewed Dollar decline will only add to this breakout bonanza.
The July Corn spread has recovered and today sits profitable after a tough stretch. This play is a great example of option staying power when you buy "enough time to be right". The whole growing season is ahead as weather volatility becomes a huge factor as we get closer to the actual planting.
The rally October resistance level is encouraging but a breakout above the ominous $6.66 a bushel level for front month March Corn is necessary to test the $7.50 highs. A run to $8.00 corn projects a double digit target and a maximum spread potential of $7500 per position if July Corn finished above the $8.50 level
The appeal of biofuels at low prices compared to $100 Crude Oil may spark more grain demand as well. New stories like the one below show once again that the cure for high prices are higher prices to find alternatives that can meet resource demands.
The Atlanta Journal-Constitution December 26 - "Smyrna Aims To Fuel Fleet With Cooking Oil
The way Smyrna's fleet of city vehicles is headed, starting next month the air will be a little cleaner and occasionally residents might catch a whiff of french fries or fried doughnuts when a truck drives past.
The trucks will be running on a fuel mix that includes biodiesel, which is repurposed cooking oil the city plans to collect from as many as 150 restaurants that fry food. They will donate the oil rather than pay to have it disposed of.
Smyrna is joining at least two other Georgia cities -- Roswell and Tybee Island on the Georgia coast -- in making use of Department of Energy federal stimulus funds to start and run biodiesel programs for their fleets. Biodiesel can be used interchangeably with petroleum-based diesel with little or no modifications to vehicles.
City officials said the $208,000 DOE grant that entirely funds the program is almost as beneficial for city sewers as it is for the air. "We modeled our program after one in Hoover, Ala., and they started it to get the oil out of the sewers," said Ann Kirk, executive director of Keep Smyrna Beautiful. "That's one of our main goals, too."
Smyrna will use the federal money to expand an existing public works building to accommodate two 55-gallon biodiesel processing plants with storage tanks and containers. It aims to have the operation up and running by the end of January.
The city already is asking residents to donate used cooking oil (not grease) in sealed containers, such as milk cartons, at the Smyrna Recycling Center, 645 Smyrna Hill Drive.
Once the program is up and running, it will be phased in as supplemental fuel for the city's fleet, with the idea that eventually some of the city's trucks will run entirely on the repurposed cooking oil, Kirk said.
Smyrna projects biodiesel will reduce the fleet's consumption of fossil fuel diesel by 25 percent and save the city about $25,000 a year." Full Article link here: http://www.ajc.com/news/cobb/smyrna-aims-to-fuel-1274523.html#.Tv4Un0S4WKo.email
Now let's take a look at our current positions...
For new readers of the Resource Alert Briefing the portfolio positions are limited risk long options in the dynamic Commodities/Futures markets. The maximum risk is the premium paid on our directional plays that have a minimum of three months for development to capture gains on the larger resource trends. A careful balance of option entry level and time put probability on our side to position for success.
Follow Resource Alerts for specific recommendations and trade management instructions.
Current Positions (Prices as of market Monday, January 3rd)
March 2012 Aussie Dollar (ADH12) 105/110 call spreads at 160 points ($1,600): The recent highs above 102 were reclaimed with a run to 10350 to mark the New Year Tuesday. The 102 then 100 levels below are the stair step support supports. The last Dollar move back to near 78 December 9th had pushed the $AD back to our 10250 entry area. The resistance above at 104 highs sets up attack on 106.50 then 110 highs. The position closed at 132 points ($1,320), which represents a 17% loss. HOLD.
July 2012 Corn (CN12) 700/850 call spreads at 32 points ($1,600): A nearly $1.00 cent rally in the past two weeks sets up an attack on key resistance. The asset crush had taken corn back down to $6.00 weekly pivot before reversal. July corn prices had rallied to monthly highs at $6.85 resistance before the downfall. A move back inside the range from $6.80 to $6.50 lows Oct 11 is a very good sign to test recent highs again. The breakout above that highs at $8 projects a run to double-digit $10 Corn. The position closed at 33 points ($1,650), which represents a 3% gain. HOLD.
October 2012 Sugar (SBV12) 25/31 call spreads at 135 points ($1,512): Sugar prices have risen to the highest levels in more than a month. A bottom will be confirmed with a run above 24 cents after a month long base. Sugar prices sheld at the critical quadruple bottom at 22.5 cents here and at September and October three-month lows. This support base also coincides with the June breakout that rallied to contract highs at 26 cents. The previous upside resistance levels at 24 and then 24.5 are now areas to watch for breakouts. The position closed at 121 points ($1,331), which represents an 11% loss. HOLD.
March 2011 Canadian Dollar (CDH12) 100 call at 160 points ($1,600): Half of this play was sold at 100% profit to reduce the trade risk to the ZERO exposure level. CD$ prices had rallied to the 101 area to fill our standing exit order months ago. The upside resistance sits at the highs above 99. Support sits at the 96 area for now. A renewed push down in U.S. Dollar Index to 78 again sends the CD$ to par. The first upside target at 102 puts this play deep IN THE MONEY. The highs at 106 and low at 94 near term upside objective at 100, which is our strike price. The position closed at 145 points ($1,450), which represents all profit after the 1st half sale. HOLD.
February 2012 Gold (GCG12) 1850/1950 call spreads at 16 points ($1,600): Too little time has eaten up the premium. The breakdown to the $1600 channel bottom warrants attention. Crude and Stocks have held as Dollar strengthened but it has hit metals especially hard. New relative highs at $1800 weeks ago still target a goal above $2000 an ounce on a breakout of the trading range. Gold pushed through crucial $1,680 last month resistance with force and needs to recapture it again to resume rally. The move above previous congestion at $1,680 sent prices higher to the $1,750-plus and a resumption of the upward trend. The position closed at 2 points ($200), which represents an 87% loss. HOLD.
March 2012 Silver (SIH12) 47/48.5 call spreads at 32 points ($1,600): This limited risk Silver option can only get better from here. New Silver relative lows below $30 have buried the metals. Only a bullish move above $35 again revives trend. An almost three-month trading range between $44-38 led to a price breakdown to $30 in a few quick days. The extreme low hit $26 before bouncing back to above $33 again after a stall a couple weeks ago. The position closed at 3 points ($150), which represents a 90% loss. HOLD.
It ALL Comes Back to Commodities!
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