Multi-Market Outlook: Ags, Metals and Energy

by Ken Hughes

I'm going to provide an outlook for several markets that have been on my radar screen lately and that I think provide good trading opportunities. Let's take a look at corn, wheat, soybean, live cattle, gold, silver, crude oil and RBOB gasoline futures.

Corn

This market has staged a slight recovery after taking a tumble on the June 29, 2007. U.S. Department of Agriculture report. If key support breaks, I still see a little more downside. The USDA's planted acreage estimate came in at 92.88 million, larger-than-expected and the highest in 63 years. The USDA also estimated above-average corn stocks at 3.534 billion bushels. Following the report, corn sold off sharply, now down near a $1 from its mid-June peak. I'm looking for support to hold in the December futures at $3.36 a bushel on a daily chart. That's about a 61.8 percent Fibonacci retracement off the September low.

If that level breaks, I see further support on the weekly chart at $3. I recommend aggressive traders get long near this level. Less aggressive traders could buy futures and buy the $3.50 put (currently priced at 23 cents, or $1,150 plus commission costs), or just buy the $3.00 put outright (currently priced at 5 1/4 cents, or $263 plus commission costs) and hopefully get a bigger pullback, and buy the futures under $3.10 or lower. December option expiration is November 20, 2007.

As we enter the pollination period for corn, the weather has been quite favorable. While we've had a mini heat wave recently, the forecast is calling for cooler mid-week weather. During the next two weeks, rainfall is forecast normal to above-normal in Iowa and Nebraska and above-normal in Illinois, Indiana, and Ohio.

Soybeans

The USDA report on June 29 elicited the opposite reaction in soybeans as it did in corn. Soybean acreage was pegged at about 65 million, less than expected and bullish for the market. We've certainly seen acreage in corn taken away from beans, so soybeans have rallied, and continue to extend gains. In several contract months, soybean futures saw new contract highs Monday, July 9. July futures settled at $8.70 and September futures at $8.80 1/2. Weather doesn't come into play for soybeans really until mid to late-August, when we have pod filling and setting. This market has had a nice run, and I see support at $8.47 to $8.28 on a possible correction. I see price action as choppy in soybeans, and I'd recommend buying the September $9.20 call and the $8.40 put to play the ranges. If this market rallies, sell futures against the call option, and if it sells off, buy futures against the put.

Wheat

This market looks neutral to me at this time, and I've been looking for levels for my clients to get short for a short-term trade. On the flip side, a gap near $5.99 in the December contract may be a place to get long. The market's had a good run lately, so I see two-sided action in this market and am more or less waiting for a stronger signal to recommend strategies other than short-term day trades.

Live Cattle

Live cattle futures have been moving up, as cheap corn prices fare well for this market. CME August live cattle ended up 2 points Monday, July 9, at 92.52 cents per pound. On a daily price chart, we see a clear head-and-shoulders bottom. This market saw a big jump in prices recently as Japan dropped strict inspections on U.S. beef—it's certainly good news for farmers when Japan starts buying again. I see more upside for this market, and recommend buying August futures around 91 – 90.60, and put a stop under 89.45.

Gold

A strong U.S. and global economy, high crude oil prices, and U.S. dollar weakness (now approaching 2005 lows) are factors that have sparked buying interest in gold. If you trade gold, watch the U.S. dollar, as the two tend to move in opposite directions. If the dollar breaks down, we could see a rally in gold, and the funds coming back in. However, with core inflation in check and global tensions relatively tame right now, it's hard for me to see $700 gold, unless those factors become more problematic and the dollar breaks hard.

From a technical point of view, turning to the daily chart for December gold, there's a double bottom with a head-and-shoulders pattern, as the market slumped to a new yearly low under $660 an ounce in the last week of June, but has recovered somewhat.

As far as a trading strategy, I'd recommend buying calls, or consider a December $680/$700 vertical spread. Look for a near-term pullback to $670 off recent gains before the market resumes a more bullish trend. December COMEX gold futures settled higher at $674.50 on Monday.

Silver

This is an industrial metal, so a good global economy is supportive to silver. After notching a key reversal Friday with a lower low and higher close, September futures are trading above their nine-day moving average and posting notable gains during today's session. Watch for a close above $13.04 to signal a new leg up. I'd consider the December $13.00/$13.75 call spread, or buy September $12.50 puts against long positions in the mini silver contract. I see $12.50 as good support for this market.

Crude Oil

On Monday, crude oil prices fell for the first time in eight sessions, and the NYMEX August contract ended down 62 cents at $72.19 a barrel after topping briefly at $73, an 11-month high.

Supplies are on nine-year highs, but this market has seen a big rally. While the financial press blamed the price jump on Nigerian conflict, it isn't exactly new news. This market isn't facing the same troublesome issues as last year, and I don't see a return to last year's peak above $78. I think we'll have a hard time seeing that this year without an extraordinary geopolitical or hurricane event.

RBOB Gasoline

Turning to RBOB gasoline, this market has a supply problem and to me, its rally seems more justified given fundamentals. This market has had a nice breakout to the upside with followthrough gains. The August NYMEX contract rose 3.5 cents to $2.3446 a gallon on Monday, and is so far extending those gains. On the weekly chart, this market has shown trouble getting past $2.45- $2.50. We are halfway through the driving season and slowly rebuilding stocks, so I'd recommend looking to get short futures on a move to $2.50, or consider buying puts as I see the market poised to correct in coming weeks.

Ken Hughes is a Senior Market Strategist with Lind Plus. For more information on this topic or others, he can be reached at 866-284-7124 or via email at khughes@lind-waldock.com

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