August 17, 2018

Volume 12, Issue 33

Feature Article

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Wednesday, August 22 at 7 p.m. CT

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Trade War Costs to Consumers, Companies and Nations

By Erik Norland, Senior Economist, CME Group

Trade War Costs

Highlights

  • U.S.-China trade war could trim company profit margins in both nations
  • Companies likely to pass on a portion of the higher costs to consumers
  • Tariff impact on U.S. companies will be modest relative to corporate profits
  • Weaker renminbi to partially offset negative impact on China’s economy

The level of U.S. tariffs on Chinese products and the number of goods they cover are constantly changing as the trade dispute between the world’s two largest economies escalate. To help investors evaluate the possible macroeconomic impact from the trade war, we put together a back-of-the-envelope economic analysis (Figure 1). Like any similar approach, it contains many simplifying assumptions and will not fully capture the complex reality of the dispute’s economic impact, but it will provide a framework for evaluating the effects on inflation, corporate profits, Federal revenues and Chinese GDP. As is the case with monetary and fiscal policies and currency movements etc., there are many second and third order possibilities to consider. Let’s break down the assumptions into their four categories:

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Metals - Gold

Is Gold Putting in a Bottom?

Nicholas DeGeorge

In the early morning trade, October gold is currently trading slightly up at $1,181.1 and it’s still trying to find a bottom after over a $200 selloff since the high was made back in January of $1,386.0. However, gold did snap back over $20 off its lows from yesterday but has failed so far this morning to show signs of it continuing. The possible near-term low in gold yesterday was slightly due to a weakened US dollar and rhetoric that US/China trade talks were back on for next week was seen as a positive.

Picking a bottom in any market is never easy, so for me to get bullish on gold again, I would need to see it get and close above a bearish trendline that started back on July 9 and comes in roughly around $1,210.0. If the shiny one can do that, then look for a rally up to $1,250-$1,275 an ounce. I highlighted these levels below on my RJO PRO daily October gold chart.

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

Gold Oct '18 Daily Chart

Gold Oct '18 Daily Chart

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Metals - Copper

Washout in Copper Futures Continues

Alexander Turro

Copper continues the range down washout, down .115 or 4.29% on the day, trading at 2.567. This comes amid bearish supply/demand news as well as the extension of wage negotiations at the Escondida mine in Chile. Chinese industrial production and retail sales came in softer than expected yesterday while stronger Chinese House prices were released in the overnight. Chinese demand continues to be weaker amid the ongoing trade conflict. The industrial metal has fallen to oversold levels and is poised to enter bear market territory falling to over a yearly low, which may be sign of an impending global economic slowdown.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-826-1120 or aturro@rjofutures.com.

Copper Sep '18 Daily Chart

Copper Sep '18 Daily Chart

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Energies - Crude Oil

Could Crude Oil Crumble?

Michael O'Donnell

As of Thursday morning, the October crude oil contract was trading near the $64.50 price level following Thursday’s EIA report which featured a build in inventories of 6.9 million barrels.  This report coupled with an increasingly stronger dollar and diminishing supply and demand prospects amid increasing geopolitical risks has lead the contract to a bearish posture.

Of course, this is visible in the daily chart below as the market has made lower highs for the last month and a half and has also traded to at the lowest levels in that timeframe in the past 48 hours.  Should the bear trend continue, it will be interesting to see if the $62.50- 63.60 level which coincides with the 200-day moving average and the June 18 low.

Eyeing whether the trendline support pictured below holds may provide guidance in addition to monitoring other factors such as:

  • Currencies, especially dollar index strength as well as Lira contagion
  • Geopolitical risk amid United States/Turkey, United States/China, Turkey/EU, and GBP/Eu
  • An extremely high refinery capacity rate of 98.1%

To discuss this market in greater detail and put together a trading plan customized to your account, please contact me at your convenience.

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

Crude Oil Oct '18 Daily Chart

Crude Oil Oct '18 Daily Chart

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Energies - Natural Gas

Natural Gas Trapped in Temporary Stall

Jeff Ratajczak

September Natural Gas is trading sideways to a short-term up pattern.   It seems trapped in a range between $2.900 -and 3.000.  Momentum studies are high and are starting to move downward.  The moving averages are trending higher but should start to turn over soon.  As the prices reach toward the $3.000 level buying pressure should abate.   Support is apparent at $2.900, maybe a little below.  There is strong resistance just below $3.000.  A close above $2.980 should signal another leg higher, but I personally don’t think so.   A close below the $2.900 level may signal a move to the next range lower. 

In today’s EIA report we saw a smaller than usual injection of 33 bcf introduced into the supply chain.  Moderate temperatures are expected in the coming days of the short to medium-term.  Coupled with the low injection this may cause prices to drop if the $3.000 level is approached.  I would recommend exposure to the short side of the market. Caution should be used until momentum studies show divergence to the price level.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 888-874-8110 or jratajczak@rjofutures.com.

Natural Gas Sep '18 Daily Chart

Natural Gas Sep '18 Daily Chart

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Softs - Cocoa

Is Consolidation Leading to Breakout in Cocoa?

Peter Mooses

Recently, cocoa futures have been range-bound, 2100-2200 in the December contract. The currency trade, specifically the euro and pound, have held down prices in cocoa due to their weakness. Supply concerns may be able to push the market higher, above 2200, but with demand always in question we will have to wait and see. Also, global factors and an overall weak market tone has harmed all commodities across the board. The wet weather coming in West Africa is needed due to the previous pattern but shouldn’t be enough to affect prices in the short-term. Until some substantial supply/demand data breaks, look at the techincals for direction. A close above the 9-day moving average and a close above 2150 should help December cocoa breakout.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-826-4124 or pmooses@rjofutures.com.

Cocoa Dec '18 Daily Chart

Cocoa Dec '18 Daily Chart

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Softs - Coffee

September Coffee Continues Downward

Adam Tuiaana

The major pressure currently being added to coffee prices is the somewhat impressive rebound of the US dollar. Inversely, this has put significant pressure on Brazil currency, along with those of other major producing countries. The supply outlook is still very bearish, so nothing new fundamentally has been able to lift coffee prices. At most, we may see short covering bounce, but that will only present a good opportunity to establish new short positions. On the technical side, a violation of the downside 106 corrective low from August 2 was violated with Monday’s price action, and subsequently, we have seen three consecutive days down in follow-through selling. Once these areas are violated, we tend to see a pullback (typically around 50% retracement), which may be a good place to re-enter short positions. For now, we’ll continue to hold a bearish outlook but hold off on new positions until we see a rally back to approximately 107. Consider using put options to manage risk effectively.

Listen to my recent #TechnicalTuesday - Trend Lines & Trend Channels discussion with Futures Radio Show where I talk about the technical analysis process in the coffee market.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 866-536-8601 or atuiaana@rjofutures.com.

Coffee Sep '18 Daily Chart

Coffee Sep '18 Daily Chart

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Softs - Cotton

Cotton on the Brink



The extent and impulsiveness of Mon's decline following last Fri's bearish divergence in momentum below 86.10 reinforces our bearish count discussed in Mon morning's Technical Blog and puts the market on the brink of breaking 06-Jul's obviously key 81.75 low. As a result of this weakness we are trailing our short- and longer-term risk parameters to 03-Aug's 86.76 suspected minor 1st-Wave low and 01-Aug's 89.98 larger-degree corrective high.

The daily log scale chart below provides a textbook example of our three key reversal requirements:

1. a confirmed bearish divergence in momentum on 18-Jun needed to break the previous uptrend
2. trendy, impulsive 5-wave behavior down and, most importantly
3. proof of 3-wave, corrective behavior on a subsequent recovery attempt (that also happened to peter out around the (89.83) 61.8% retrace of the initial 94.82 - 81.75 decline.

To read the full article RJO Futures clients may login here to the client portal and access all RJO Market Insights.

Cotton Dec '18 Daily Chart

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Agriculture - Grains

Daily Market Update - Grain Futures - 08/17/2018

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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Currencies

Temporary Knee-Jerk Reversal Action Should Be in USD And Yen

Tony Cholly

With the Turkish lira and euro snapping back overnight off a combination of hope for negotiations in at least one trade battle, and Qatar promising assistance to Turkey, it would appear as if risk on sentiment is set to remain in place for today’s trading session. The calm geopolitical front should allow the focus of the currency trade to shift directly onto an extremely active US scheduled report slate this morning.  Unfortunately, the US schedule data set looks to be mixed unless US housing starts and permits data surpasses expectations for minimal expansion.  However, the data from claims and Philly Fed Business Index are expected to be weak and it could be tough to come away from the data with positive USD news.  Resistance comes in at 96.70 and 9695, while first support comes at 96.40 and 96.29

With the Yen from the July lows shifting into a safe haven instrument and the risk off vibe reversed this morning, the path of least resistance shifts down in the yen and a return to 90.30 could be seen.  With the July Japanese Yen trade balance shifting from a surplus into a deficit overnight, one could suggest the Yen is facing more bearish news this morning.

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

US Dollar Sep '18 Daily Chart

US Dollar Sep '18 Daily Chart

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Equities

Volatility Continues in Equity Markets

Phillip Streible

There have been two main catalysts driving equities right now. The first is the continued diplomatic dispute between the United States and Turkey. Trump had announced U.S. import tariffs on steel and aluminum from Turkey doubling the previous tariff to 50% and 20% therefore forcing companies that use Turkish steel to go elsewhere. This economic crisis in Turkey could spread to Europe and other emerging markets causing a spike in interest rates and negatively impacting equities. The second black cloud hanging over the equities is the continued trade dispute the U.S. has with China. On Thursday we saw trade talks reopen and the effects on equities are immediately felt with a 350-point surge in the Dow. Continue to monitor for progress in these two developments which any resolution could cause the next surge in equities. Looking at the S&P 500, resistance is up at the current contract highs of 2860 while support is down at 2800. With this large of a range between support and resistance it may be more beneficial to use options over futures contracts with limited risk.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-438-4805 or pstreible@rjofutures.com.

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

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

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