October 05, 2018

Volume 12, Issue 40

Feature Article

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Metals - Gold

Gold Looks to Rebound Next Week

Phillip Streible

December gold futures are up over $10 on the week with last Friday’s close at $1196.20/oz and this morning trading around $1208.00/oz.  With the U.S. Dollar index up this week and looking to have formed a short-term top, this may be an indication of some support for gold since typically gold is correlated with the dollar by about 85 percent. 

With the anticipation of another rate hike in December, the attitude of gold is somewhat tempered as higher rates draw investors to the U.S. dollar. This draw will make U.S. denominated assets, like gold, more expensive abroad. 

U.S. hiring slowed in September, only adding 134,000 jobs, compared to August which showed a revision and added 270,000.  Unemployment is at a low that has not been seen since 1969, which further extends the thought of more tax hikes to come as people will be borrowing more due to a strong economy and increase in jobs. These factors add to the sentiment that gold is somewhat tempered.

Below is the December Comex Gold futures chart.  We have our support levels at $1198.00 an ounce and resistance at $1208.00 an ounce.  We have been range bound since the middle of August and look and anticipate trading out of this range, going with a trade outside of this breakout range.

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.

Gold December '18 Daily Chart

Gold December '18 Daily Chart

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Metals - Silver

Silver Trying to Hold Two Year Low

Eli Tesfaye

December silver traded flat yesterday, with the equity markets down significantly ahead of today's payroll number. Silver also didn’t see any lift by way of flight to quality trading. Looking at the weekly chart below, the last two weeks corrective rally has come to a bit of a slowdown as the market is trying to find fresh news before taking further direction. Additionally, short covering type of trading is likely with silver with the market hitting a two-year low, a technical improvement is showing on the charts; it is expected that further gain in silver may be possible as long as silver holds above 14.20.

In the my last article, I mentioned that the gold/silver ratio is at a 25-year high, with gold worth about 85 times more than silver. Due to that fact alone, it could interest some silver speculators to want to own silver at these levels. 

From the technical perspective, silver is fighting to hold above 14.00. For now, a close below 14.20 will signal further weakness. From current levels of 14.60, mid 15.00 is likely if the market manages to stay above last week’s low of 14.20.

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 Weekly Chart

Silver Weekly Chart

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Energies - Crude Oil

Crude Oil Head and Shoulder Pattern Setup

Phillip Streible

Crude oil futures hit a 3-year high this week on concerns that sanctions on Iran and falling output from Venezuela would stress the global supply, creating a squeeze. I find this latest rally quite impressive because I feel the bearish headlines lingering in the backdrop should outweigh the bullish headlines. First, the dollar is incredibly strong which should be a drag on commodities and the Fed is not backing down on raising interest rates. This should essentially slow down business development and demand for oil. Secondly, U.S. production is continuing to rise as well as Saudi Arabia offsetting any shortfall OPEC nations not delivering. I believe crude oil is setting up for a sharp correction back down to the mid 60’s and put spreads out in June 2019 is the best approach to try and capitalize on this.

However, the technicals paint a very different picture with crude oil pushing up and above every major moving average and while MACD and Stochastics are in overbought territory confirming the upward bias. ADX which measures the strength of the upward trend shows the bull move is continuing to get stronger. Support is down at $72.36 where we should see consolidation and the right shoulder of this head and shoulders pattern created. Once a break occurs below $71.50 a washout down to $67.50 will complete the pattern.

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.

Crude Oil Nov ’18 Daily Chart

Crude Oil Nov '18 Daily Chart

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Softs - Sugar

Sugar Rush Increases Volatility. Can Market Hold Higher Ground?

Joe Nikruto

This week’s comment finds the March sugar futures contract back into the 12.00’s after 4 solid days of upside price action. In the last 20 days, sugar has traded from below 11.00, to above 12.00, back down below 11.00, and back up over 12.00.  The March sugar futures contract is acting like my kids when I give them sugary snacks.

Strength in the Brazilian Real and the potential for political change in Brazil, highlighted in today’s Hightower comment, are supportive to sugar. Not to mention, the continuing strength in the energy markets. Sugar market watchers have been issuing forecasts for less sugar production in countries that have been producing sugar hand over fist. At some point, lower prices should disincentivize production, but to this point we have not seen that. I am always mindful of being fully committed to my understanding of the fundamental landscape at major market turning points. I am suspicious of market forecasts for less sugar and cannot think of a fundamental change that will alter the supply/demand balance. So, that makes me extra vigilant of my fundamental bias and mindful of price action, I don’t want to be smarter than the chart.

It is very possible that the major sugar producing countries will produce less sugar this year. It is very possible that a new Brazilian president, as suggested by Hightower, will focus more on the production of ethanol than sugar. The market with a large speculative trader category, short position, and the possibility that the fundamentals are turning, should see profit taking and trimming of short positions causing the market to go higher. However, these fundamentals don’t win the day if supply does not decrease. I still want to be positioned for downside price action in the coming weeks, but fighting the tape here is not going to be profitable. I like put spreads that cover the next 2 months, but don’t want to rush into having them on just yet.

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 Mar '19 Daily Chart

Sugar Mar '19 Daily Chart

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Softs - Coffee

Coffee Starting to Perk Up

Michael O'Donnell

The recent price action in coffee offers a number of lessons in market analysis as the market has undergone a classic short squeeze following a long-term downtrend and net short commitments of trader’s reports.

Pictured below, the break of the trendline corresponding with the previously mentioned downtrend can be seen with the pronounced price action Friday, continued on Tuesday, and up to this point Wednesday morning.

While there are a number of other outside market forces such as the currencies of producing nations such as the Real of Brazil, it is also interesting to note the strength of this market and others, while the U.S. Dollar has gained strength.

Also noteworthy is the range of these strong days compared to the others pictured below. While the market spent a good amount of late September below $1, it also spent mid-August to mid-September downtrending from $1.10 to the lows near $0.95, although, it has shot up from the $1 level to $1.10 within a week.

Longer term traders may be looking to consider a bottom while those interested in a shorter time frame may be interested in the market’s high today coinciding with the technical price action from early August and the lower trade since.

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.

Coffee Dec '18 Daily Chart

Coffee Dec '18 Daily Chart

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Agriculture - Grains

Daily Market Update - Grain Futures - 10/05/2018

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

Are the Best Days of the U.S. Dollar Rally Behind Us?

John Caruso

As we venture into the 4th Quarter of 2018, the U.S. dollar has fortified itself as a haven of safety and stability amongst the ongoing emerging markets crisis around the world, and furthermore the divergence in growth between the U.S., China, and Europe that began late last year. 

The Chinese Shanghai Index peaked in January and has steadily declined to the tune of -21%, and shows no true sign of a bottom – Germany has also been in remission with the DAX -10% since January.  In conjunction with Europe and China slowing, the ongoing crisis in EM currencies (see Turkish Lira, Argentinian Peso, Brazilian Real, South African Rand etc.) has contributed to a large flight of capital out of such countries' currencies and into the U.S. Dollar.

On top of all of this, the United States has seen an ongoing (9 consecutive quarters to be exact) acceleration of growth. The U.S. has been on a historic run, but can it last?  Is the U.S. insulated from the rest of the world’s problems, and trade war with the Chinese? We’re starting to fall into the camp that believes the party may be drawing to an end in the near-term. While the U.S. Dollar has enjoyed a more than 10% rally since May on accelerating U.S. econ data, based on our findings and predictive models moving forward, we’re expecting both a q/q and y/y slowdown in the U.S. economy.

Much of what we’ve seen in recent weeks, including an acceleration in wage data, an ultra hawkish Federal Reserve, and an official end to their “accommodative” economic policy at the September Fed meeting – is consistent with late cycle/peak cycle behavior.  Whether the USD has seen its best days or has more room to run, is still up for debate as the market trend remains “bullish” and the lagging data still coming in from Q2 and Q3 remains largely positive.

Tops are processes, not specific points, so this is likely not a trade that would develop “overnight”, but the technical view below does look quite ominous with a developing “Head and Shoulders” reversal patter on a 10-year Monthly Chart of the USD.  As always, we remain data dependent and will pivot on this call if proven wrong.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-669-5354 or jcaruso@rjofutures.com.

10-Year Monthly Chart

10-Year Note Monthly Chart

Source: ThinkOrSwim

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Interest Rates

Interest Rates Looking Forward and Review

John Caruso

Q3 in Review:

Markets continued to climb steadily throughout Q3 from July thru September despite obstacles from Chinese tariffs and the ongoing Emerging Markets crisis. The Dec SP500 futures contract marked a new all-time high on Sept 20th at 2947.00. The Dow Jones Industrial Average futures contract also marked an all-time high the following session at 26,820. A historic quarter nonetheless. Markets were driven by the Q2 GDP estimates which came in at a multi-year high of 4.2%. Markets drafted further support from the August Non-Farm Payrolls data that showed rising wages for the American worker (+0.4% vs +0.3% prior m/m & +2.9% vs 2.7% prior y/y). Relating to our quantitative and fundamental process, the aforementioned data is consistent with a pick-up in Growth and Inflation A very buoyant formula for US equity prices.

Moving forward into year end, our predictive models suggests that that we could begin to see some signs consistent with a deceleration of US economic growth on m/m and y/y basis. The Q2 & Q3 economic data, coupled with a contracting 2-year yields vs 10-year yields (yield spread), and ATHs in equity values, and rising wages, is consistent with late economic cycle behavior.

Federal Reserve Open Market Committee 9/26/18

The FOMC met on Wednesday 9/26 to discuss its future plans for US Monetary Policy. The meeting concluded that it was appropriate to raise its benchmark interest rate by 0.25% to a target range of 2.00-2.25%. This was widely a consensus view in the market. Furthermore 12/16 Fed officials were in favor of another 0.25% increase at the December FOMC meeting. The Fed also removed the word accommodative when referring to US Monetary Policy relating to the US Economy. In other words, the Fed is NO LONGER ACCOMMODATIVE towards the US Economy and Markets. The meeting yielded no real surprises and was widely viewed as a hawkish meeting towards US Monetary Policy.

Looking ahead:

We continue to express the opinion that the backwards looking economic data and market price action seen in Q3 is consistent with late expansion cycle behavior. The base effects that we look at moving forward has the US Economy exhibiting a growth slowing and inflation slowing environment when compared on a year over year basis. We have this market cycle outlook well into Q1 of 2019. The interest rate cycle in the US is now 3 years old, and as aforementioned, the Fed is no longer accommodating to market conditions. The Fed has signaled to the market that 1 more rate hike in 2018 is likely, and as many as 3 more (per the Feds dot plot) are expected in 2019. This is consistent with market expectation, and we are of the belief that a hawkish Fed is priced into interest rate markets. Remember, the Fed is reactive to the cycle and not proactive, or in other words, the data will change before the Feds policy does. As always, we remain subservient to the incoming economic data, and will change the above thesis if proven to be incorrect.

If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-669-5354 or jcaruso@rjofutures.com.

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Equities

Stocks Down as Treasury Yield Rises

Jeff Yasak

Overnight markets were generally mixed with most of the world seeing declines and the exceptions being some of the pacific markets.  It finally seems as if the higher treasury yields are giving investors another option besides the stock market.  We haven’t seen these treasury yield levels since 2011 as it broke 3.2%. Jerome Powell, the Fed Chair, stoked the fire by saying the central bank had ways to go before interest rates hit neutral. This suggests that there will be more rates hikes in the future. There will be some key earning reports this afternoon with Costco, International Speedway, and Constellation leading the way.

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 Dec '18 Daily Chart

E-Mini S&P 500 Dec '18 Daily Chart

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