Commodity Trading Outlook: The Line in the Sand

Commodity trading can be a difficult beast to tame. Those who do choose to trade these highly volatile assets need to be up to date on their information while always keeping a watchful eye on markets. Those who do not closely monitor their positions or do not have a calculated goal with each commodity allocation can often end up on the receiving end of a sour trade. In an effort to help traders make the most educated decisions possible, we break down each major commodity by its technicals in the following table giving traders more insight into the developing trends of your favorite futures contracts. Note that this table is only relevant for the current week of 4/30 – 5/4.

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Is Gold Still A Safe Haven?

Markets are nearing a critical moment in the year as earnings season draws to a close. After a strong first quarter, a number of blue chip firms are reporting strong earnings, keeping optimism levels high for the time being. But with euro debt problems arising in countries like Ireland, Spain, and Portugal, it seems like 2012 may repeat last year’s performance. After a strong beginning of the year, stocks were battered as the Greek debt crisis and a downgrade of U.S. debts wreaked havoc on trading. Those who were unfortunate enough to have equity-heavy portfolios were invariably slaughtered to close out the year, leaving frustration where there had been strong gains [see also Three Reasons Why Gold Is Overvalued].

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Bad News Equals Positive Movement

Energy: On the week, Crude will finish higher by only $1 failing to make its way back to $105 in June. I had been short with some clients for several weeks and based on the action in Crude and outside markets, I advised clients to lighten up yesterday. A trade above $105 and I will likely exit shorts and reverse. Until then I remain mildly bearish. RBOB stayed in a nickel range for the entirety of the week. I’m waiting for a move and once we get out of the current range, I would expect  15-20 cents in the direction of the breakout. Heating oil will finish higher by almost a nickel but unable to take out the 100 day MA to the upside. This was the leader in the energy complex this week but without the help of Crude, heating oil will likely not appreciate much more than current … See the full story here

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When in Doubt Go to Cash

Energy: I do not like the action in Crude so I advised clients to cut their shorts in half. Do not misinterpret me; I am not getting long but rather lightening up on short trades. Though I do not agree with the acceleration of commodities that we are seeing, I refuse to fight it. Hedgers should also start to wade into longs in heating oil and RBOB to protect from upside spikes. My suggestion is a long future against a sale of out of the money calls 1:1. High to low natural gas moved 30 cents. Tighten up stops just below the 18 day MA which should ensure at least a small profit unless we gap down tomorrow. My take is if we break that level we may get a chance to get one more buy below the $2 level…stay tuned.

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Three Commodities Exhibiting Backwardation

Trading commodities in today’s markets has been nothing short of difficult. While the first quarter was relatively stable, Q2 has been anything but, with volatility returning to markets and unpredictable behaviors becoming the norm. Commodity futures are already volatile on their own, but throw in rocky markets and that effect is amplified. Rather than trying to make a speculative bet on day-to-day movements of commodities, investors can look to profit from backwardated futures curves. Backwardation is the process by which near month futures are more expensive than those expiring further into the future, creating a downward sloping curve for future prices over time [see also Invest Like Jim Rogers With These Three Agriculture Stocks].

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Commodity Trading Trends: When To Stop Shorting Natural Gas

As natural gas has continued its massive decline, a number of investors (myself included) have hopped into short positions, allowing most to receive handsome profits in recent weeks. NG futures have been under a fair amount of pressure as this past winter was extremely mild curtailing demand for this commodity. Adding to that, new advancements in fracking have led to even greater supply, depressing prices to levels that none could have predicted. But while a short position in this commodity has yielded strong results, its outlook is beginning to turn sour, as a seasonal trend is threatening natural gas [see also Why You Should Invest In Natural Gas: The Fuel of the Future].

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Natural Gas ETPs Head-To-Head: GASZ vs. UNG

At this point, there isn’t anything new to say about natural gas. Its massive decline has been well documented and it seems that most of the investing world has temporarily lost hope that NG will recover anytime soon. While it is true that recent losses have been attributed to an unseasonably warm winter as well as growing supply, natural gas has been on a slippery slope since the recession began. But despite its losses, it is also widely agreed that this commodity will play an increasing role in out world’s future energy supply, as the fossil fuel is being utilized in a number of new mediums [see also 25 Ways To Invest In Natural Gas].

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Commodity Trading Trends: Sugar Futures Slide

The past week was riddled with volatility as equities failed to establish any kind of meaningful pattern. With equities in disarray, commodities futures suffered, as they tend to exhibit a fair amount of volatility on their own, despite market conditions. A number of major commodities posted losses for the trailing week, as news from Europe coupled with a weak Chinese GDP report prompted some rough sell-offs. One of the hardest hit commodities came from the softs family. Sugar futures endured a bumpy week, as Sugar #11 futures lost 5.4% while #16 contracts tacked up losses of nearly 6.1% [see also 12 High-Yielding Commodities For 2012].

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What Is Contango?

When it comes to commodity investing and trading, contango is a dirty word. Many investors have given contango a bad name (and rightfully so) as it has the ability to destroy value in an underlying position with the blink of an eye. Now that the ETF universe has rapidly expanded and there are a number of complex products offering exposure to the commodity world, contango has become more prevalent than ever. A number of investors have fallen prey to this phenomenon often without realizing what it was and how it impacted their holdings. Contango is simply a part of the commodity world and is not necessarily a bad thing, as it can create opportunities for profit [see also Understanding Contango: Natural Gas Example].

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China, The 800 lb. Gorilla

A positive GDP number out of China influences commodities today. I think today was an overreaction, but a good sign medium and longer term. Crude picked up 1% today and has quickly pulled away from the very critical $100 mark with prices approaching $104/barrel. I maintain that if we stay below $104 on a settlement basis going into the weekend we will see a sub $100 trade next week. My target remains 97.50 in May futures. I believe, today, the case was the strength in the distillates lifted Crude.

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