July 13, 2018

Volume 12, Issue 28

Feature Article

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Metals - Gold

August Gold, We’re Not Done Sliding

Joshua Graves

August gold futures have been selling off just about the past month since June 15 with the break below 1280. I believe that gold will continue to selloff and test 1225 and possibly the all important 1200 level before a rebound could take place. There are several factors working against gold right now and they’re putting substantial pressure on the bulls. The first and most obvious has been the stellar economic data we’ve seen over the past few months. Jobless claims reported yesterday fell to a two month low of 214,000 vs expectations of 225,000 with unemployment at multi decade lows. The US dollar index’s strength has been another obvious reason for gold’s slide as the front month dollar contract once again marches toward the high of 95.255. Another factor is the resilient US equity markets, and a quite hawkish Fed (with the semi annual monetary policy report coming out today). The only thing the bulls can bank on right now is the trade war could likely get worse before it gets better.

Technically, the August gold contract has no reason to rally back to 1300. We would need closes above 1270 before any kind of bull case can be made. The trend is sharply lower and it’s likely to get worse as the lack of geopolitical issues and strength in emerging markets and our US economy gets stronger. Until we see the brake put on in gold it’s a continued sell.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-435-4805 or jgraves@rjofutures.com.

Gold Aug '18 Daily Chart

Gold Aug '18 Daily Chart

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Metals - Silver

Silver Downside Momentum is building

Eli Tesfaye

September silver is trading 15.77, down 20 cents on the day. The dollar is materially strong once again, setting up on the charts what appears to be a setup for another leg up. The strength of the US dollar leaves metals very weak across the board. The technical outlook for silver looks to extend silver down to low 15.30 range. A close above 16.50 is needed to turn momentum up. It is Friday the 13th and horror is upon silver as it takes out previous weeks’ low.

The US-China spat over trade is still ongoing. Aside from exchanging words, there hasn’t been any clear policy and sitting down on either side working out any meaningful resolution. In other words, things will get much worse before they get better. It’s human nature to drag this out as long as possible before the leader's sit down and iron out the differences.

The weekly chart below in silver shows more weakness likely. Surprising energy is very strong but it doesn’t seem to spill over to the other markets. As I have stated in previous writing, “Silver needs to trade above 16.50 to get the bulls excited. If the dollar recovers, low 15.00’s are likely.” 

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-367-7290 or etesfaye@rjofutures.com.

Silver Sep '18 Weekly Chart

Silver Sep '18 Weekly Chart

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Energies - Crude Oil

Profit Taking in WTI Crude Pulls Back Price

Dan Hussey

This week the EIA Petroleum Status Report surprised the market with a massive -12.6 million barrel draw, plunging inventories to 405.2 million barrels (18.2% below their levels one year ago).  While the drop in inventory numbers are substantial, (and represents a fundamentally bullish report for crude prices) the over 5% selloff in WTI crude futures price is likely the result of “buy the rumor - sell the news” profit taking from technical price targets.  US refineries were operating at an incredible 96.7% of their capacity, slightly below last week’s capacity, but still near record levels.  Refineries operating at near maximum capacity means the demand for WTI crude may be nearing its highs as refineries are physically incapable of processing more crude.   At this time, the draw on inventories is more representative of slowdowns in crude oil production, as reprocessing levels have been running at near maximum levels for several weeks.  One final note, is that crude oil imports have also dropped form last week, suggesting that refineries and processors have slowed down their purchasing as well.  With all that taken into perspective, it seems clear that a slowdown in oil purchasing by processors translated into a near-term drop in crude prices.

From a technical perspective, momentum indicators showed a clear loss of upside momentum into the $75.00 technical price targets, and once a reversal began, reversed sharply and are now confirming a pullback is underway.  WTI crude prices found support into the $65.00 Fibonacci inflection zone, and while it remained above trend line support at $63.00, had technical upside price projections into the $76.00 area.  I mentioned this scenario as the path of least resistance in m previous articles, and the next logical progression of the trend is for a pullback to find the next supportive inflection zone.  The selloff in WTI crude prices the last few days has gotten a reaction from $69.34, a 50% Fibonacci supportive price level drawn from the June 18 low to July 3rd highs.  While the market remains above $67.50, this price level projects upside technical targets of $76.40 to $78.70 in the near-term. Below $67.50 at this time, would suggest a retest of last support at $65.00 inflection zones, and below those levels the continuation of the current multi-week and multi-month uptrend may come into questions.

In my opinion, the rally that has taken WTI crude prices above the $66.66 continuous contract highs (into the end of 2017 and start of 2018) is still a very important “break out higher” indicator for the market.  The fight over trend seems to be all but won by the bulls, which has continued to take the market price higher since June of 2017.  The recent pullback is currently testing supportive price levels that suggest bulls are still buying this market in pullbacks to continue trends higher.  The trend is still up until it’s not, and I believe a break below the $64.22 price level would constitute a reversal at this time. Technical upside targets were hit, which has resulted in profit taking from the $75.00 to $76.00 inflection zone, and the market has simply pulled back into its next supportive price level.  With WTI Crude prices above prior multi-year highs, the trend is up until it’s not (and I like to think, trend is my friend).  When a market speaks, you must listen, and WTI crude may be telling us this is the beginning of a much larger trend being born.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-367-7290 or dhussey@rjofutures.com.

Crude Oil Daily Continuation Chart

Crude Oil Daily Chart

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Softs - Sugar

Sugar Breaking Down to New Lows, Again

Joe Nikruto

This week’s comment finds the sugar market in a familiar technical and fundamental situation.  After dropping about 70 points from where we were before the July 4 holiday, the October sugar futures contract was again consolidating near the lows of the recent move, 11.24.   As of July 3, the fund trader category was short almost 31k contracts.  This leaves plenty of fire power or room for the funds to extend their short positions. Remember, in May of this year the funds were short over 170k contracts. News out of Brazil, highlighted in recent Hightower commentary, shows the use of sugar cane for ethanol is now upwards of 60% in the Center-South region and possibly increasing. This is a supportive factor and not insignificant. The more sugar cane is used for ethanol the less that will be left for sugar production and ultimately less for export. The challenge for sugar bulls is the sizeable global surplus that remains and looks to continue into next year and possibly the next. Technically, the sugar market is oversold. The chart still looks heavy and one could guess that in the October sugar futures contract new lows for the move are likely to happen before a move back to the 18-day moving average, 11.94. Without a new fundamental input, it is difficult to see what might allow for a sustained rally.  The 18-day moving average comes in fully 84 points overhead in the October contract, 11.87.  Sugar is carving out new lows on lower volume and bounces should not surprise. But traders will likely view any move higher as an opportunity to add to profitable positions or enter new short trades.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-453-4494 or jnikruto@rjofutures.com.

Sugar Oct '18 Daily Chart

Sugar Oct '18 Daily Chart

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Agriculture - Grains

Daily Market Update - Grain Futures - 07/13/2018

Stephen Davis

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.

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Agriculture - Livestock

Hogs Trade Sharply Lower on the Week

Tyler Herrmann

August hogs closed higher for the first time this week on Thursday, closing up to 1.625 to 70.300, off its highs of the day at 71.050. The market fell from Monday’s high of 75.850 down 7.325 to this week’s current low of 68.525 which was hit on Wednesday. The hog market is searching for support as it tries to price in a surplus of product and a loss of US exports. Uncertainty in tariffs and trade war fears continue to be the driving force as in so many other markets right now. The hog market was already forecasting an increase in production for the second half of the year and now there is a possibility of a decrease in exports to Mexico and China, who combine for 40% of US exports annually. The USDA estimate for hog slaughter was up from both last week and this same time last year. August hogs traded to a 13-cent discount to the cash market this week, down from the normal 4.5 cent discount. The large discount to the cash market and some short covering explains yesterdays bounce, although falling from the highs does not give confidence to the bulls. The selloff this week has lowered momentum studies to oversold levels which could also provide some support. If the move lower continues look for trade down to Wednesday’s low of 68.525, with some support coming in at 69.50. Resistance comes in at 71.30 and 72.50 with a close over Thursday’s high needed to reverse the trend back to the upside.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-826-2270 or therrmann@rjofutures.com.

Lean Hogs Aug '18 Daily Chart

Lean Hogs Aug '18 Daily Chart

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Currencies

Trade War and Global Growth Divergences Helps the USD Keep the Upper Hand

John Caruso

The US Dollar remains bid against all major foreign currencies, pushing to 95.00 overnight and + 1.4% on the week. President Trump announced another round of tariffs directed at $200B worth of Chinese products this week, sending a message to the rest of world that the US will not back down in it’s fight to reshape the global trade parameters.  In light of the US/China trade war, the Chinese have been proactive in devaluing the Yuan vs the USD which is a clear sign that the Chinese will continue to attempt to keep the upper hand in global trade.

Further contributing to the strength of the US Dollar was a nearly 7 year high in the y/y Producer Price Index reading, and what seems to be a widening divergence between the US economic picture vs. the rest of the world.  Which brings us to the outlook for Federal Reserve monetary policy. The Fed remains adamant about raising interest rates, and quite frankly, should be based on the recent growth and inflation data.  However, one cannot help but take notice in the flattening of the 2- and 10-yield spread which has been a harbinger for an oncoming recession for the past 50+ years.  In the simplest terms possible, the yield curve indicates that the Federals Reserve’s monetary policy may be too “hawkish” too late in the growth/expansion cycle. The short end of the curve (2-yr yields), is most sensitive to near-term monetary policy, while the long end of the curve (10-yr yields) adjusts to a longer term outlook of the growth cycle and how monetary policy will likely change.  While the FOMC remains hawkish on interest rates and the economy, this has kept the 2-yr yields buoyant, while the 10-yr yields have been steadily in decline (at a faster pace than 2-yr yields) since the YTD of 3.13%, which ultimately creates a flattening curve. So the essential question here is whether or not the FOMC is once again behind on it’s economic outlook.  We think so.  As long as the FOMC remains hawkish on monetary policy, the USD should remain in control vs all of the major foreign currencies around the globe. Recommendation:  Manage the Sep USD trading range of 93.60 – 95.25 with a bullish bias.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-669-354 or jcaruso@rjofutures.com.

US Dollar Weekly Continuation Chart

US Dollar Weekly Chart

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Interest Rates

Strong Footing for Treasuries

Tarik Husseini

Treasuries have been on strong footing since mid-May as trade war talk has added uncertainty to the markets, and the ability of the Fed to raise rates aggressively in such an environment is being questioned.  The yield on the 10yr note has spiked from a peak of 3.11 percent in mid-May to 2.86 percent this week. 

According to the CME group the scale has tipped in the options market decidedly to the bullish side.  The CME data shows that the purchase of calls has outweighed put buying by 2.4 million contracts.  Additionally, the CFTC has recorded asset managers increasing bullish bets on Treasury futures by 103,000 contracts to 926,000 for the week ending July 3.  The conclusion to be drawn here is the smart money is either buying insurance in anticipation of a stock market rout, or they believe growth and inflation will be more tepid than expected.  Either way, they aren’t necessarily concerned with what the Fed is up to, as rate hikes primarily affect the short end of the curve. 

Technically, 30yr bonds are still hemmed within a range since Feb, between the 140 handle and the 146 level.  Currently the Sep 30yr is trading 145’10, with a recent high of 146’11 on July 6.  I think it makes sense to continue trading the range until it is broken.  30yrs are near the high of the range.  With CPI coming out tomorrow it makes sense to get short exposure on a spike above 146.  Expectations are for a rise of .2 aggregate, with the core CPI at 2.3 per cent.  Of course, inflation will have to be lower than expected to get up there. Keep in mind this would be counter to the smart money, as noted above, but it makes sense in terms of price action. 

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-672-0664 or thusseini@rjofutures.com.

30-Year T-Bond Daily Chart

T-Bond Daily Chart

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Equities

Is the S&P Poised to Rally?

Jeff Yasak

The overnight global equity markets were mostly higher with the RTS index and the IBEX being the exceptions.  Other than the original complaints from China on fresh 200 billion tariff levy initiated by the US this week, the Chinese have not had an official response yet, and that has eased some of the investor anxiety.  Delta Air Lines and Commerce Bancshares will announce their earnings before the Wall Street opening Friday.  With the early action Thursday morning showing a positive track following a two-day high to low setback of 32 points, the E-mini S&P could be poised to start a rally back to the July high of 2797. The bottom of the anticipated near-term trading ranges looks to be 2764 and a near term resistance levels at 2800.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 888-861-1656 or jyasak@rjofutures.com.

E-mini S&P 500 Sep '18 Daily Chart

E-mini S&P 500 Sep '18 Daily Chart

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