RJO FuturesCast

Gold bugs can always find a reason to buy gold, but the best reason to own gold is because we are entering another commodity bull market. The precious metal is typically the first to move. Gold is a great inflationary hedge! I know what you’re thinking. Gold rallied $1,280 to $1,450 on a “dovish” Fed. Gold rallied the idea that the Fed is concerned about the global economy. It’s true that gold is a safe- haven trade. It’s also true that U.S. Dollar weakness has contributed to the gold rally and that a “dovish” Fed was the catalyst of the rally. However, gold rallies take on a life of their own. Gold is that rare commodity that creates greater demand as prices move higher. Typically, higher prices in commodities are how we curb demand to ration supply. The opposite is true for gold. The higher it goes the more people NEED to own the precious metal.

The closer we get to next week’s highly anticipated rate cut by the Fed, the more traders begin to question whether or not a rate cut is appropriate based off of the “data”. The U.S. economy is not in need of stimulus!

Gold is consolidating for the time being and waiting to get past next week’s FOMC meeting. So, you can talk about safe-haven trade, currency trade or inflationary hedge, it doesn’t matter as long as the price of gold is moving higher, people will continue to buy. Just use the charts to determine when to enter and exit…or add.

Precious metals appear to have found a bottom. While silver has rallied $2 per ounce over the last two months, roughly 13%, it is still relatively cheap with the potential for substantially more upside. There are a few factors fueling this fire. The stock market sitting at all-time highs with a lot of uncertainty on china and interest rates is making buyers cautious. Based on the fed funds today, the probability of a rate cut at the next FOMC on July 31^st is priced in at 100%. The odds of a 25pt cut is 74.6% with the odds of a 50pt cut at 25.4%. Over the last month, these odds have been all over the board. With investors cautious to purchase stocks and bonds, where will the money go? Precious metals. Investors are historically bullish on metals and now have a reason to start buying again after getting burned over and over. One of the benefits of investing in the precious metal futures is that you don’t have to get out if this isn’t the bottom. Traders have the ability to take delivery and hold it till the prices increase, where this is something that they cannot do or not easily do with other commodities. 

I believe silver has the most upside potential out of the metals complex.  Silver has been lagging gold and is starting to play catch up. The price ratio of gold/silver reached 93:1 and is currently at 87:1. I believe this ratio will narrow to at least 75:1, with silver trading $20 an ounce and gold at $1500 ounce.  I recommend limited risk long term bullish option strategies. This not only limits risk but increases the leverage and gives you more bang for your buck. The monthly chart broke out above the $16.20 double top from back in January and February of this year. The next upside target is $17.41 with $19 above that. 

As of Thursday, the September WTI crude oil contract is trading $56.40 per barrel, up 52 cents as yesterday’s EIA showed another large draw and the September crack spread grew stronger, moving to today’s highs. As the market weighs running at an oversupply that necessitates production cuts and quotas as well as tensions around the Strait of Hormuz and Iran.

Looking to the charts and technical, it is interesting to not the levels marked by the Fibonacci retracement from the high to low move from late last year. In addition to the Fibonacci and moving average levels in the chart below, it may be of interest to note the trendlines and chart formations from the recent price action. I have recently looked at options at the strikes coinciding with the 58.50 and 55 levels below. Trading a breakout from such levels may be a strategy as it seems the market is coiling between the 38.2 and 50% retracement levels (referred to as the box by some) and a trend decision or trendline break potentially imminent.

Natural gas is again in a $.10 range between $2.200 and $2.300.  Traders love round numbers, so it looks like the $2.200 handle should hold as support.  A close above $2.346 should signal a return to the bull camp taking the prices to a higher range. Turning $2.400 and above open to the next resistance levels.  Pivot numbers show the market right at the pivot, $2.259 and $2.274 are the next levels up. $2.217 and $2.190 show up as support numbers. However, I don’t think the price will breach $2.200.  Moving averages and momentum studies seem to be going sideways. 

The injection today is estimated at 40 bcf. The weather is drying out and a muggy weekend and higher temperatures are predicted. China getting back into the trade with reduced tariffs and a small purchase of beans should give some support to the markets. Gas is fairly cheap now, this may bring in some bargain hunters and also give some support to this sideways market. A slightly bullish tint is the way I read this with bottoms around the $2.200 mark.

September cocoa traded higher to start the week before erasing those gains in Tuesday’s trading session. European demand remains soft with a lower than expected grindings number for the second quarter and a new low in the euro. Asia and U.S. demand remains strong with higher than expected grindings. The market is watching the weather in West Africa’s Ivory Coast growing region where it has been dryer than normal over the past couple weeks which is driving talks that production numbers could falter but there is forecasts of rain and average temperatures over the next week. In the near term it looks as there will be some choppy trade ahead but if global demand remains strong there is potential for a run back to the upside. Resistance comes in at 2500 and 2538 and a close above 2538 would point to a test of the high at 2589. Support is at 2450 and a break of the 2410 level would reverse the trend to the downside.

Momentum continues to trend higher as the violation of the 10440 area has prompted follow-through selling in September coffee prices. The main issues still revolve around the bearish supply and demand outlook for September coffee, and a lack of any “new-news” is bearish as well. The recent rally that took place in July was primarily based on scares of frost, which ultimately was mitigated by the reality that the damage done was not as bad as traders had earlier anticipated. In addition to the bearish fundamental outlook for September coffee, there is also a continued underlying story in the currency issue. Our friends at The Hightower Group have reported that “Tuesday’s nearly 1% pullback in the Brazilian currency has put significant pressure on coffee”. Lastly, it continues to look as though favorable weather is on the horizon for key growing areas of Brazil, which could add further pressure to September coffee prices.

From a technical perspective, September coffee prices have aggressively sailed way south of the 61.8% retracement, measured from the 9625 low of 6/09, to the 11565 high of July 5^th. Until a major threat of the existing large supplies are realistically threatened, I remain neutral on September coffee prices, and would be surprised to see some continued pressure in the near term.

The market's recovery this morning above 15-Jul's 64.09 minor corrective high confirms a bullish divergence in short-term momentum shown in the 240-min chart below.  This mo failure confirms 18-Jul's 61.66 low as the END of a textbook 5-wave Elliott sequence down from 01-Jul's 68.35 high and our new short-term risk parameter from which shorter-term traders with tighter risk profiles can objectively base non-bearish decisions like short-covers and cautious bullish punts.

Taking a step bac to consider the past week's recovery relative to the past quarter's collapse, the daily log chart above shows that the market remains below a good amount of former support from the 64.70-to-65.50-area that would be fully expected to hold as new resistance if the market is still truly weak down here and still requiring a bearish policy.  Commensurately larger-degree strength above 01-Jul's 68.35 next larger-degree corrective high and our key risk parameter remains required to break the long-term downtrend.  But waning downside momentum on a weekly basis below amidst the lowest, most pessimistic levels in our RJO Bullish Sentiment Index in nearly 13 YEARS warn us to beware a base/reversal count that could be major in scope.

The next reinforcing evidence of a larger-degree correction or reversal higher will come from proof of strength above the 65.50-area, with a recovery above 68.35 confirming the deal.  IF the past week's recovery attempt is merely another interim corrective hiccup, we would expect a recovery-countering bearish divergence in short-term mo from the 64.70-to-65.50-range.

Finally, traders are reminded that from a very long-term perspective, the monthly log chart below shows the recent descent to the lower-quarter of the past 7-year lateral range where a continued bearish policy becomes an increasingly slippery slope given how skewed the huddled masses are to the bear side.  Such a bearish skew is quite OK and can sustain itself indefinitely as long as the market also sustains its simple downtrend pattern of lower lows and lower highs.   Its failure to do so, first above the 65.50-area and certainly above 68.35, will combine with these historically bearish sentiment/contrary opinion levels to present a base/correction/reversal environment that would be sure to surprise the masses.

These issues considered, shorter-term traders are advised to move to a neutral/sideline position as a result of today's bullish divergence in momentum.  A cautious bullish policy will be advised if the market proves corrective behavior on a retest of last week's 61.66.  Long-term players are advised to pare bearish exposure to more conservative levels, pare down still more above 65.50 and jettison the position altogether on a recovery above 68.35.  Needless to say, a relapse below 61.66 mitigates any base/reversal count and reinstates the major bear trend ahead of potentially steep losses thereafter.

RJO Futures Senior Market Strategist Stephen Davis discusses the grain futures markets.  If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-367-7181 or sdavis@rjofutures.com.

The corn market has been a crazy mess this spring/summer. It started with major planting delays and what did get planted, was planted on wet ground. This makes for shallow roots and unhealthy corn. This was followed by a dry spell, which lasted so long it became burdensome to corn yields. Weather is improving, and the market is pulling back because of this.

On June 30^th, the USDA released projected planted acreage and somehow came up with 91.7 Million acres. These numbers were from a June 1^st survey and at that time most farmers “intended” on planting.  The USDA flat out said they messed up and began to re-survey 14 states, which they will release August 12^th.  We believe the 91.7 million will drop below 85 million acres, and some research companies are pegging their numbers at 81-82 million acres.  On top of this, the stress on the crops should drop yields into the 150’s, which is just another bullish factor.

We are looking at getting some long exposure through the August 12^th report.  December corn support comes in at 427 and below there at 420.  Resistance comes in at 435 and 438 today.

Volatility has taken hold of the currency markets, as monetary easing has become a focal theme for central banks around the world. It is no secret that global economic growth is slowing, and a manufacturing recession has taken grip of developed economies. PMI data was disappointing across the board this week. Inflation remains subdued, and central banks are attempting to stimulate borrowing and business investment via interest rate cuts. ECB President, Mario Draghi, announced Thursday morning that they would not be cutting rates this month, surprising the markets. The euro sank to new lows on expectations of a dovish ECB, then bounced high off the 1.110 level and was positive 0.4% Thursday morning. This established an engulfing candlestick on the daily chart and could signal a short-term reversal. The move sparked safe-haven liquidation out of other currencies, most notably the U.S dollar - despite stronger than expected durable goods sales and a reduction in the negative trade balance and fewer jobless claims. If the euro sees a bounce, I believe it will only be in the short term.

Relatively speaking, the euro zone economy is still weaker than most. The market is expecting a rate cut from the FOMC meeting on July 31, which would weaken the dollar and rally the euro and foreign currencies alike. The Japanese yen and the Swiss franc are bullish trend vs the USD, with the yen apparently forming a double bottom on the daily chart. A bounce off the 50-day moving average at the 92.41 level would confirm bullish momentum in the yen market. The real question is which central bank can ease monetary policy most effectively. This comes down to a question of interest rates. European and Japanese rates are already hovering around or below zero. Given the fact that the U.S. interest rate remains the highest in the world, it makes sense that the US has the most leniency in cutting rates. The U.S. has the most “bullets in the chamber” when it comes to monetary easing, and for that reason, I believe the U.S. will win the war of currency devaluation. As all foreign currencies trade against the dollar, there is reason to be bullish on the yen and the franc given their technical patterns and historical safe-haven interest.

September bonds sit right on multi week highs this morning and we expect that bullish bias is mainly the result of expectations for dovish news from the ECB meeting that is underway as of this writing.  However, what traders expect could be ahead of reality, as expectations for the next ECB cut were set for a September and market talk this morning has suggested the potential for a move today.  The ECB has some added incentive to act now as it appears that the UK is going to exit with or without a deal. In other words, the ECB might want to take out insurance like the U.S. fed against the potential for a negative political/economic event in October.  However, there were predictions of an earlier than expected Bank of Australia rate cut and bank of Japan is supposedly considering a cut next week.

Ongoing Jobless claims are expected to have minimal weekly increase from the previous 1.686 million reading. June wholesale inventories look to hold steady with May’s .4% reading. Resistance is this week’s high at 155-11 in September with support coming in at 154-24 today.

Stock markets showed mixed action this week as investors searched for direction amid slowing global growth and better-than-expected corporate earnings. It’s understandable that investors are weary about layering into a market at all-time highs considering the current volatility of U.S. governmental action. While political testimony may stir the market in the short-term, facts are what dictate true market direction. For the most part, U.S. data this week was better than expected. Durable goods data and jobless claims helped boost U.S. economic sentiment, in addition to Friday morning’s GDP report coming out at 2.1%, beating expectations of 1.9%. Furthermore, the IMF downgraded global growth forecasts while raising expectations for the

U.S. Housing data lagged, accompanied by manufacturing data from every corner of the globe. There’s no denying the manufacturing recession that has gripped the world economy because of the tariff war raging between the world’s two largest economies. This production slowdown is no doubt aiding Federal Reserve dovishness going into next Wednesday’s FOMC meeting. The Fed has all but guaranteed a quarter point cut, supporting the market at elevated levels. It is now a question of how dovish the Fed will be next week.

Bank earnings kicked off the earnings season stronger than expected, followed by revenue beats by Amazon, Google, and Intel on Thursday after the market close. Analysts were calling for slowed Q2 earnings, given last year’s accelerated growth due to 2017 tax cuts. But so far, growth remains strong. Almost half of S&P companies have reported thus far, so the story is not yet finished, but investors do not seem to be worried. Given strong data this week in conjunction with strong earnings, will the Fed adopt a “one-and-done” policy? Or will they satisfy market expectations and indicate a path to further rate cuts in Q3 and Q4? The rhetoric of officials at next week’s Fed meeting will be the directional dictator for stock markets. Tread carefully, one misstep just might cause a landslide.