Make Quick Commodity Gains In A Slow-moving Market
As we begin 2010 and look forward to the year ahead
, its important to know just how important commodities will be to any type of recovery. What types of commodities are hotwhich ones are being boughtwhich ones are selling well (and which ones arent)which ones have the best value
Investors would be wise to know the answers to these queries, as they can gauge not only what commodities in which to invest, but also what sectors of the overall economy are surviving and maybe thriving.
The Single Best Move for Quick Commodity Profits
A topic Ive been stressing lately is the relative importance of macroeconomic market moves keeping a strict eye on the overall health of the financial market.
You see, the economic recovery in prices started in EVERYTHING last March but to be clear, the overall market and the profitable commodities market are inextricably tied together.
The S&P 500, my proxy for the stock market in general, has been a leading indicator for commodities. With stocks up over 50% from the lows it provides insight into future moves in other markets.
The CRB Index, Commodity Research Bureau, recently broke above the 267 level making new yearly highs. Its now on target for a new near-term goal, which represents a 50% rally in commodities since last years dip
Higher Oil prices are also a good sign that the global economy is on the mend. In addition, it is supportive of stocks with Exxon and Chevron adding major points to the DOW sending it above 10,000.
Add it all up and its easy to see that the CRB, and other commodities in particular, are on target for now.
The Best Opportunity for Commodities Profits
My commodities travels last autumn took me to the West Coast to revisit acquaintances made during the July National Chicken Marketing convention.
My big takeaway from the exhaustive chicken information was that corn was deemed undervalued by most of the presenters and professionals in attendance. And I trust these guys; after all, its their business to know the cost inputs from the egg to the bird on your plate.
The corn crop at that time looked set to make it through the summer months in great condition with no fears in sight to disrupt high yields.
Though my view on trading weighs heavily on technical analysis I learned long ago not to ignore important fundamental information. The upside was greater for corn to rise than drift below $3.00 on perfect growth.
How to Turn Price Charts into Quick Gains
Corn prices were low (just over $3 a bushel), and thats exactly when I told readers of Resource Trader Alert to get into a corn play. Over at RTA we use options to directly play commodities themselves options help limit our risks while giving us a nice risk reward payout.
(I normally dont give out the specifics of my trades but Ill make a special exception for todays article.)
For our corn option play the maximum risk was a little over $1,100 dollars with six full months of fundamental factors to boost prices to $4.00 a bushel. Chicken convention consensus was that our goal should be reached by the end of 2009 but in fact it was much sooner. The high on our RTA option play by the end of last October was around $2,400 which represents more than doubled our initial investment.
Thats just how quickly the commodity options can move.
The price of corn rallied 25% but our corn options ended up doubling in that same time. By using options we were able to maximize our profit potential and completely limit our risk.
The Charts Know More Than the Farmers
The reality of fundamental trading on weather, planting intentions, yields, exports or crop disease is that the information does not flow freely to everyone at the same time. The farmers, seed salesmen and grain elevator operators use their legal inside information in the market before others. The price charts are one way of seeing what people know without having to really know.
At the July chicken conference the major fundamental support of grain prices was slated to be ethanol demand. But the present grain rally connection to ethanol is difficult to prove at best. In fact, the correlation with crude oil gains has just now only started to kick in as prices rise above $80 a barrel.
With that in mind its fairly safe to say that the combination of weather premium and dollar weakness started this grain move instead of the much-anticipated demand from ethanol and biofuel production.
The chicken men were right on price but maybe wrong on the reason. This is a perfect illustration of focusing on what the market is going to do, not why.
And although huge chicken-related profits arent quite hatched they are definitely on the right path to growing healthy, big and strong.
In the meanwhile, its always good to know why commodities are moving as they do. You might not be able to know every little detail about a given option, etc., but you can be as informed as possible in order to anticipate the markets next move. And then you can make your gains.
And keep in mind, movement in the commodities isnt just a domestic issue. Commodities prices are affected by worldwide events. Whats happening in overseas markets has a very profound impact on the prices of everyday products. (Think about it; most of what we use in our daily lives is imported from points all over the globe.)
Case in point: There was an announcement in late November 2009 about financial problems in one of the worlds emerging markets Dubai. Concern about this news rippled through many markets, including here in the U.S. But savvy investors have a way of using the bad news in the dollar and other markets to bring some good newsas long as theyre patientto themselves through commodities
Tipping the Markets Triple Top to Your Advantage
The Thanksgiving holiday had barely gotten underway when the futures markets took a hard hit with the carefully timed disclosure of the Dubai financial problems.
The Dow Futures were down 200 points the night of November 23 as everyone stateside was figuring out when the turkey dinner was planned to hit the table hopefully between football games. The heightened market uncertainty and excessive unrealized profits from long positions made for an easy housecleaning sell off in stocks around the world.
While the dollar amount of the exposure was minor in global terms, this drop-off reminds us of the fragile mental state of investors in 2009. The concern about a larger potential regional issue and speculation about whos tied to this Dubai debt caused banking and financial shares to decline sharply in panic selling that hasnt been seen in months. The downturn began in Asia then to Europe before the U.S. markets opened the morning of November 27.
From my perspective it was a healthy flush out after the largely unstoppable bull-run for the last eight months. Stocks had made new yearly highs November 13 but had made two failed attempts in the S&P futures to eclipse that 1112 mark. More interesting was how close prices got to those highs on the Wednesday before the holiday before backing off.
Tip Top Drop
Technically the charts were set up as a Triple Top and profit taking was already in the minds of technical traders before the news hit the wires. It also turns out that that 1112 level is significant because it is the 50% retracement from 2007-2008 which analysts are watching closely for future trend clues. As it turns out, the market may have been looking for an excuse to drop and this fit the bill precisely with the lack of transparency.
One advantage my Resource Trader Alert readers get from using options is the limited risk and the staying power of long-term positions. After gold had moved up 9 consecutive sessions making All Time Highs, common sense (if applicable to the markets) told everybody that a pullback was likely. Options allow us to ride through any down periods with a larger goal in mind.
As it turns out, the U. S. Dollar is still the worlds reserve currency in case anyone has forgotten. The late November event in Dubai sent Dollar shorts scrambling for safety and the ensuing buying frenzy was reminiscent of 12 months ago. The financial collapse last year led to a climb in the Dollar as protection in times of uncertainty.
Friday Floor Fun
My guest media appearances are planned at least a week in advance so I knew I would be on TV the day after Thanksgiving, which is usually a snoozer shortened session.
With a houseful of stuffed guests, my plan was to get out of the house and get a holiday from the holiday. My only concern was being informed so I can respond to questions with somewhat intelligent answers. This fear led to my Wednesday night uncovering of the pending problems for the morning.
My first stop was a morning grain update for Bloomberg about two hours before the open. The Looking For Support market analysis focused more on the Crude, Stock and Dollar markets for clues than any crop fundamentals. Corn and Soybeans held the Wednesday lows and rocketed higher to end the week strong.
Later that morning, the Fox Business Network had me stand next to the S&P pit for the open to give a traders reaction with most indexes opening down over 2% to start the day. So much for a quiet break, the selling roar snapped everybody back to attention. My analysis was, and still is, that the markets were overdue after the historic climb in almost every asset class.
As a trader I said that the damage may be largely done after the opening drop and as long as the markets stabilized and held the opening lows after the first 30 minutes then the worst may be over. The S&P open at 1080 also happened to be a 20-day moving average but next technical support below that lies way down at the November lows of 1025.
Where to Look for HelpTums
While stocks were the big news of the day, larger percentage moves were all around in the trading pits for commodities. Gold had dropped over $60 before recovery Friday while finishing still positive nearly $30 for the week. Unless you bought Gold Wednesday November 23, 2009 you were still a net winner overall. Silver and Oil were also some of the hardest hit mid-morning but much of it was forcing out of the weak hands.
I was fixed on the Dollar and Bonds to keep an eye out for new session highs signaling more fear and flight to quality as more facts came to light. The crowded short Dollar trade looked like the uncomfortable guy on his 3rd plate of turkey with all the sidesAfter stuffing and cramming in all he could he realized his limitations and the need for time to make more room.
A key to follow for future clues is the resumption of Dollar weakness Plain and simple, that will tell us if the trends are still intact and the market indigestion and burp can be excused.
by: David2
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