Avalon Commodities Trading

Copper Update - Plus Everything Else

2006-12-21T16:16:00.000-05:00

Copper, which broke down through key support yesterday has closed below $2.90 per pound and is behaving as I hoped.

I also thought I'd update some of the calls and observations I've posted here over the last few weeks.

The dollar index, the set up which I was most excited on Tuesday about has stalled over the last few days. But the setup is still valid and yet to be disproved.

Silver sold off hard last Friday and continued down on Monday. Has since been a small consolidation zone, but looks like it could continue down.

Gold is still not showing any clear trend at the moment, but if the other metals continue down, it could follow suit. This is counter intuitive to the dollar downage... so we'll see.

Cotton which broke out of a rough basing pattern last Friday on very low IV, is continuing to look bullish. Not a parabolic trend, but very workmanlike.

Orange Juice - Rumours of OJ's demise have been greatly exaggerated. I was a tad enthusiastic in calling a top there... buuuuttt at least it hasn't bolted higher and humiliated me.

Cocoa is still looking bullish, but some profit taking eveident.

Crude. You knew I meant NEXT Christmas, right?

Coffee. Made enough to pay off my tab at the local Cafe'.

This will be my last post before Christmas I think, so HAVE A GOOD ONE!

Copper Cropper

2006-12-20T10:57:00.000-05:00

Regular readers of this blog will notice that I have given a lot of attention to copper futures over the last 6 weeks or so. The reason is that I think it could be a good leading indicator for the health of the US/western economy - China story interplay. The precious metals have currency/inflation implications affecting price, and equities..... well in my opinion that's fantasy land affected more by spin than economic factors.

Copper is not greatly affected by these factors; BubbleVision doesn't talk about it much, if at all, so it is a pure supply and demand play... give or take the odd hedge fund trade.

For quite a few months I've held the view, and I'm not alone in this, that the copper story is all over for now, that we'll see lower prices going forward.

The thing is, since the low at around $2.97 per/lb printed during the retracement from the high of the year, copper futures have been doggedly supported at this, and points north.

On Dec 7, I posted up a chart of where I thought copper *might* go over the short term and this seems to be going according to script... at the moment anyway. March Copper futures today have broken below that $2.97ish support.

Now, it's not a convincing break by any stretch of the imagination and it could even finish the day back above support. I also fully expect buyers to show up at some stage over the next few days anyway, so this "scenario" will still need some time to play out and either confirm itself, or for buyers to come in and support it for a while longer.

In any case, this really adds to the hypothesis I'm working on and I think this, as a leading indicator, is looking just that bit more bearish for the overall western economy.

Just my opinion folks.

The Dollar - Sometimes Technicals Just Work

2006-12-19T14:49:00.000-05:00

What keeps us technicians faithful to the craft, despite bad calls, satire, ridicule, derision (OK it's not that bad, but the fundies do like to dish it up to us) is that at times, all the planets line up just right and the confluence of factors is so stunning that you just have to trade it. This setup on the Dollar Index has it all.

We have:
* old support becoming resistance
* reaction off the downward sloping trendline
* confluence of fib levels
* evening star candle pattern
* all occurring at pretty well spot on the 83.80 level on the March contract

...and it's taken a whopping off that level today.

To say that I like this setup is an understatement. They don't come any better than this, but that's only half the story. The next bit is the art of the exit... not to mention the small matter of it continuing in the right direction.

The bad news is that it doesn't look good for the dollar... or is that good news? I'm never sure any more in this increasingly Orwellian, bad news is good news world we live in.

Melt Your Pennies For Profit

2006-12-19T12:02:00.000-05:00

Apparently, the copper contained in US pennies and nickles is now worth more than the face value of the coin.

So it could be a profitable enterprise to cash in your life savings into pennies, melt it down and flog off the metal to scrap merchants in China.

Yeah good idea!! Except it could land you in the slammer.

Effective today, the U.S. Mint has implemented an interim rule that makes it illegal to melt nickels and pennies, or to export them in mass quantities.

With the soaring price of copper, a melted-down penny or nickel is now worth more than it would be in its regular state at face value.

Officials at the Mint say in recent months they have received numerous inquiries into whether or not it is illegal to melt coins.

"We are taking this action because the Nation needs its coinage for commerce," said U.S. Mint Director Edmund Moy in a statement.

The best ideas are always illegal :(

Meanwhile on the futures, Near month copper is hanging doggedly onto the ~$3 mark. Astonishingly, my pictoral hypothesis from the 7th Dec is playing out pretty close to the mark and now only need a break of support, to attain my copper guru stripes.

Copper To Come A Cropper

2006-12-18T15:20:00.000-05:00

Or so says ABN Amro Holding NV metals analyst Nick Moore in London. Apparently the fundamentals of base metals are deteriorating as the economy looks to be slowing down and more supply comes on-line.

Read all about it in this Bloomberg Article

However, in the same article analysts are bullish on Gold and Soybeans:

SNIP - Next year's commodity winners may include soybeans, which are poised to jump to a 15-year high as U.S. farmers, the world's biggest producers of the oilseed, devote more land to corn.

Gold may extend its rally as the dollar weakens and slowing economic growth prompts investors to seek a haven for their cash. JPMorgan Chase & Co. increased its ``long-term'' price forecast for gold by 9.5 percent last week on expectations for ``robust'' demand.

``Gold's going to be the phenomenon of 2007,'' said Michael Metz, chief investment strategist at New York-based Oppenheimer & Co., which has about $10 billion in assets. ``If I had to choose one commodity, I'd stick with gold.''

Folks really are bullish on the gold story and the gold bugs really do put up a convincing case. It's almost so universal I'm tempted to invoke contrarian theory and fade it. Buuuuuut gold can run up awful fast if something happens... options don't look that cheap to me either so I'll be holding off from anything rash for now.

Get Fired Up For The Day With A Haka

2006-12-18T09:58:00.000-05:00

TradeKing is suggesting that performing a Haka to warm up for trading might be a good idea. The Haka is a dance performed famously by the New Zealand All Blacks (the national rugby team) immediately before kick-off. Essentially, it is a war dance of the indigenous Maoris designed to scare the bejeezuz out of any adversary.

It works!

Check it out:

Perhaps all the gold bulls could do a haka and scare the crap out of the bears (or visa-versa) and get this thing moving. Just tell me which side is haka-ing so I can position myself on their side. lol

Gold Makes It to Wallstrip

2006-12-18T07:06:00.000-05:00

If you've never watched Wallstrip, you should get over there right now and subscribe... entertaining, educational, funny... Howard, Lindsay et al are doing a great job. I've never mentioned it here because, well, it's mainly about stocks, and this is a commodities blog. So it was really cool to see todays episode all about the yellow metal:

It's reminded me that I've been remiss in mentioning gold, apart from the odd quip here and there. Why? I suppose from a trend trading standpoint I am a bit underwhelmed with the pattern at the moment. I don't see anything that would have me plonking on the futures with a trend trade and I don't like the IV setup at the moment for any short gamma option trades.

It doesn't mean I've ignored it, Oh no, it still has useful little swings for taking short term trades, so yes have been jousting away at it. I note Howard has got in at a good spot though and Bill Rempel also has a well thought out article on his blog today and faces off the bulls.

Long term... hey, I don't know I'm just a trader. Both sides have strong arguments and I follow along pretending to understand all the concepts, but as a private trader I'm primarily a hitch-hiker, I'm just draw my lines and try to catch a ride whichever way it's going. At the moment I have no idea which way, so it will be tilting at windmills for me for the moment.

When They Sell Silver...

2006-12-15T13:32:00.000-05:00

...they really don't mess around. As it stands at this moment, silver is down >7%.

That is a big move in one day and represents a few dollars under $5,000 PER CONTRACT. Longs will nevertheless be happy with their gains since the October low, but it's still a lot of money to give back. (presuming not liquidating)

Gold has also put in a bearish day, being down a point and three quarters.

It could have a lot to do with the US dollar which has been staging a rather impressive recovery over the last few days. No sign of the dollar doom the bona-fide gold bugs have been getting excited about.

My view on the dollar; if I'm bearish, I'm bearish on all the western currencies, so nil effect in reality. Just the normal turns and round-abouts common in any instrument over time.

Cotton Breaks Out

2006-12-15T10:46:00.000-05:00

On Tuesday I highlighted some low IV conditions in cotton futures.

Snip from Tuesday:
Well, yesterdays bar might have the bulls sitting up and paying attention, but ostensibly sideways.
What is of interest to option traders is the multi year lows in implied volatility. In the last few days, IV mean has finally decided to collapse below 20% to basically be on a par with statistical volatility, making them look like fair value for the first time in quite some time.
I wouldn't go calling them cheap or underpriced, but buying could finally be considered in my opinion

We are now looking at a breakout of a bit of a ragged basing pattern and including Tuesdays big up day, this looks pretty bullish.

Options at fair value and at multi year IV lows looks like pretty good conditions for a straight out plonk on calls in my opinion.

Kopper Kwicky

2006-12-13T15:59:00.000-05:00

Copper is once again testing key support at the close of trading today. I am more convinced it will break support sometime soon rather than another bull leg up.

Chart

Death of the Dollar?

2006-12-13T10:43:00.000-05:00

Former wall street broker, Max Keiser, files this report on the English version of Al Jazeera.

I post it here for interest only, and do not necessarily endorse his comments. However it is topical in light of the recent dollar dumpage.

Analysts Bearish on Base Metals

2006-12-13T04:25:00.000-05:00

From TickerSense:

2007 Expected Commodities Price Changes
The table below highlights the consensus opinion on where commodities prices will go in 2007. The estimates are from numerous analysts polled by Bloomberg. The expected percent change for each commodity is calculated by the difference in the year-end 2007 consensus and the current price. Interestingly, the only three commodities that are expected to rise in 2007 are the three tracked mostly by the mainstream media -- oil, natural gas, and gold. All other commodities are expected to decline, with lead expected to fall the most.

Cotton - Low Volatility Heads Up

2006-12-12T13:23:00.000-05:00

Cotton futures have been doing very little in the last 10 weeks apart from trade in a range from about 51 to 54.4 c/lb.

Well, yesterdays bar might have the bulls sitting up and paying attention, but ostensibly sideways.

What is of interest to option traders is the multi year lows in implied volatility. In the last few days, IV mean has finally decided to collapse below 20% to basically be on a par with statistical volatility, making them look like fair value for the first time in quite some time.

I wouldn't go calling them cheap or underpriced, but buying could finally be considered in my opinion

Price Chart (delayed 20 min)

Orange Juice - The Bear Approacheth

2006-12-12T07:30:00.000-05:00

Orange Juice futures have been in a solid uptrend since the middle of 2004 where prices stated at around 55c per pound, raising to a lofty $2.10ish just a couple of days ago.

Then... yesterdays 9.75c dumpage:

Now, as is obvious in this 5 year continuous chart, it is insignificant and not even enough to get near any trend lines one might draw in... not enough to be even immediately visible on this chart.

However, the fundamental news which precipitated this fall could be significant:

The U.S. Agriculture Department's monthly supply-demand report pegged Florida's
2006-07 citrus output at 140 million (90 pound) boxes, up from the 135 million
projected in its October report, which is a 17-year low.
The trade had been
expecting the data to be flat to 3.0 million boxes lower and were surprised by
the USDA's increased estimate.
"We were pricing in a smaller crop. Instead,
it got bigger so you saw people bail out like crazy," a dealer said. ===>>More<<===

Trends *usually have some underlying fundamental/sentiment reason for reversing and I reckon this could be it; so I'll be looking to see how this develops and perhaps for a low risk opportunity to short.

For the moment, just a heads up.

Cocoa Bull Going For A Romp

2006-12-11T08:46:00.000-05:00

On December 5, I pointed out on this blog some overpriced volatility on Cocoa Futures, and suggested that selling some premium over this contract could be a good idea.

I also thought that the volatility skew and seasonal tendencies suggest risk on the upside. By implication, and if that risk is accepted as real, delta should be kept long. In other words, sell puts, bull credits or whatever.

That risk turns out to be materializing as Cocoa goes on a bit of a bull romp.

It broke out of resistance drawn on the chart immediately and put in a big bull candle on Friday.

It would have been nice to be long the futures as this contract can rise awefully fast, and it was interesting in that the IV predicted the move.

How to Prove Yourself Right About Crude

2006-12-08T06:37:00.000-05:00

I have already stated how to prove yourself wrong in trading; simply make a public call and the market Gods will do the rest.

However there is a way to prove yourself right about a call.... well two ways actually.

1/The first method is to aquire a television or radio program, make a plethora of predictions, and then only highlight the winners. This method is already well known and suffers frequent exposes' from on-the-ball bloggers and other citizen journalists. (You know who you are ;-) )

2/The 2nd method requires a little more effort but it's worth it if one wants to attain guru status on the cheap. Make an initial prediction and then change that prediction as events dictate. This way the original call for oil to go to $67 before Christmas, can metamorphose into a call for oil to tank to $47 by Halloween if necessary; claiming that the realized scenario was what was really meant all along. lol

Anyway, lets have a look.

Before we start, lets get one thing clear. I think Fibonacci retracements, candlestick patterns and other technical analysis techniques are all bunkum...

...unless of course, they support my hypothesis. lol. So now we have tweezer bottoms at exactly the 38% fib, we have hammers, spinning tops, the whole shebang. We also have a a breakout of the flag/pennant/whatever in the electronic market early this AM.

Far from changing my mind, so far I'm sticking to the original call. But the Gods will not be pleased with this, so I tip my hat to the $64 resistance, perhaps do some burnt offerings; maybe they will turn a blind eye.

About Copper

2006-12-07T12:41:00.000-05:00

Did You Know?

Copper is man's oldest metal, dating back more than 10,000 years. A copper pendant discovered in what is now northern Iraq goes back to about 8700 B.C.

The H.M.S. Beagle, used by Charles Darwin for his historic voyages around the world, was built in 1825 with copper skins below the water line. The copper sheathing extended hull life and protected against barnacles and other kinds of biofouling. Today most seagoing vessels use a copper-containing paint for hull protection.

Paul Revere, of Revolutionary War fame, produced the copper hull sheathing, bronze cannon, spikes and pumps for the U.S.S. Constitution, known as "Old Ironsides." Revere was one of the earliest American coppersmiths.

The boilers on Robert Fulton's steamboats were made from copper.

One of the famous Dead Sea Scrolls found in Israel is made of copper instead of more fragile animal skins. The scroll contains no biblical passages or religious writings - only clues to a still undiscovered treasure. ===>>MORE<<===

So where are we going with copper?

Well after that tremendous run up that climaxed in May of this year, copper has been in a retracement/consolidation/triangle with what appears to be key support at around $2.97.

My hypothesis based on todays action is that we again test that $2.97 support and see what happens there.

I leave public predictions out of the picture for a while and wait to see if I'm a guru or a bum on my oil call (which was not all that serious by the way, I'm not a predictive trader).

If she blows through support, there are not a lot of technical levels to trade from. I won't say it would go all the way to the next obvious support levels, but stranger things have happened. Folks are so universally bullish on the China/base metals story, it's almost a classic fade.

It will be interesting to see the effect on stocks suck as Freeport, Dodge Phelps and BHP if there is a bit of copper tankage.

Investing?? In Commodities?

2006-12-06T15:15:00.000-05:00

An interesting case for "investing" directly into commodities from Jim Rogers of Quantum Fund fame, and despite my best efforts, I cannot think of the slightest connection between commodities, Jimbo, and any hot looking woman, so no gratuitous photographs for this post (Hey, what about an aesthetically pleasing lass who has obviously done some commodities investing of her own... who cares if her name isn't Emmanuelle Chriqui. Yeah that works) . :-)

Investing in the Commodities Market

SNIP:
Whenever I mention commodities in public, someone always points out that we now live in a high-tech world where natural resources will never be as valuable as they were when we had a smokestack economy. But if you read your history you’ll discover that technological advances are as old as history itself: The introduction of the sleek and beautiful Yankee clipper ship dazzled the world in the mid-nineteenth century, loaded with cargo, sailing down the trade winds at 20 knots and more, averaging more than 400 miles in 24 hours and able to make it from U.S. ports around Cape Horn to Hong Kong in 80 days; within a decade, the clippers had been replaced by the steamship, no faster but not dependent on wind power; and before long the next big thing in transport had taken over, the railroad, which, of course, was the original Internet - and prices in the commodities market still went up.==>>MORE<<==

I've never thought of commodities as an "investment" vehicle, apart from rare cases such as Crude Oil as we coast down the wrong side of Hubberts Peak. I've always considered them as a trading vehicle... find an opportunity, exploit it, and get the hell out... just like any normal business. I can make an excellent case of commodities over stocks in this regard.

But an investment? An interesting case put forth by Jimbo, but I don't buy it. An investment to me is something you can stash in the bottom drawer (or the scrip, or bill of sale anyway) and forget about for a while, like a Google IPO or those Goldman Sachs shares bought last century.

The long term charts of most commodities don't inspire me to do this, but hey, anything to keep the liquidity up is fine by me.

How To Prove Yourself Wrong About Crude

2006-12-06T13:40:00.000-05:00

Proving yourself wrong is a relatively easy thing to do in the commodity markets (or any market for that matter). Simply make a public prediction. lol

The Gods will ensure that said prediction goes spectacularly wrong, particularly when accompanied will self-assured arrogance and self-aggrandizement. Which is why I'm trying a bit of humility and self-deprecation, perhaps this will appease the trading Gods.

Anyway as detailed in the days succeeding the US mid-terms, I'm bullish on oil and remain in a convoluted tangle of option legs which I'm pretty sure is bullish lol. In fact oil is the only market followed by the great unwashed masses (a.k.a. those people who believe all they hear on BubbleVision, a.k.a. the mums and dads) that I'm actually bullish on.

As a further offering, I haven't even put a lot of thought into this and will be short on verbosity. So here goes:

Oil is in a bullish pennant, has bounced of 38% fib retracement level and is set to go to ~$67 before Christmas in a measured move.

That's it.

Trading Gods, do your stuff!

Cocoa Addendum

2006-12-06T07:14:00.000-05:00

As mentioned in the previous post on Cocoa and its Implied Volatility, I said that I perceived the risks to be on the upside (for option writers). Well here is one view from Optimus Futures that lends a bit of weight to that hypothesis.

Cocoa: Trouble in Cote d’Ivoire and Ghana

Political problems have plagued West Africa including the Cote d’Ivoire and Ghana for years now. Cocoa producers in these two major producing countries (60% of world production combined) also have to contend with diseases to their crops, namely the swollen shoot virus. This virus defoliates and can potentially kill cocoa trees in many parts of West Africa. According to a BBC News report on October 13, 2006, some cocoa plantations have been abandoned as the virus continues to spread. The increasing costs of fertilizers (derived from petroleum) and the high cost of anti-virus sprays combined with low prices for cocoa on the open market have made it difficult for farmers to maintain their crops. ===>>More<<===

While this news doesn't appear to be a new revelation, it's worth keeping in mind.

Cocoa Implied Volatility

2006-12-05T12:24:00.000-05:00

...is up in the upper reaches of it's yearly range at around 29-30% at the ATM strikes with a nice volatility smile in the near expiries.

By contrast, statistical volatility has been grubbing along at about 20% for 2 months. IV's are well in excess of 10 points higher tan SV in the OTM strikes, so unless we are anticipating a sudden spike in realized volatility, it seems like a good time to me to write some options.

I wouldn't dare suggest which side to write or indeed that one should write options at all(risk disclaimers an' all that), but looking at the history of this time of year in the cocoa market, there seems to be more risks on the upside, which of course is reflected in the skews. I'll be watching to see if the resistance around about here turns out to be resistance.

I have no position here yet, just a heads up.

Holy Crap, Holidays are Expensive!

2006-12-05T11:33:00.000-05:00

I already knew that. You already knew that too. I just felt I to confirm that particular theorem by going on another one. Free accommodation provides no relief from the inevitable diminution of the bank balance as the theorem (which surprisingly, is nameless) provides other methods of totally unnecessary expenditure.

If you are wondering what a photo of Christie Brinkley is doing a here. It seems to be what all financial bloggers do... post a hot photo with the most tenuous link to the topic at hand (in this case the fact that Christie appeared in National Lampoon's Vacation lol) in a cynical attempt at getting search engine hits... great idea! lol

Anyhow, I'm back now in the safe confines of my cave, ready to do battle with the market Gods once again... and I need to do so in Ernest; what with Christmas approaching an' all. :-o

I Think, Therefore I Am

2006-11-28T15:30:00.000-05:00

I love delving into esoteric mysteries, but in these days of mass marketing and the "New Age" , what was originally intended as profound and enlightening, becomes trite and banal. Thats why I often like a bit of black humour with my enlightenment. Hence - "I think, therefore I am depressed". :)

I am actually on the road at the moment; a mission to remind my relatives why they should not visit me for extended periods... achieved with minimal cost by me visiting them. lol

So sans the luxury of my office, multiple monitors, broadband connection, etc, my blog offerings will reside more in the whimsical than the rational for a few days... if indeed, my posts are ever rational.

*So in keeping with the esoteric theme, some musings on Gann, time & price from an old internet adversary and flame warrior, Grant MacDonald. Well past me I'm afraid, but this guys views are always challenging to the prevailing dogma, and therefore interesting.

*Not exactly esoteric, but mysterious nonetheless, Adam Warner shads some light on the workings of the VIX over the last few days. Here, here & here.

*As a token commentary on the futures markets, coffee is looking bullish once more, prompting some interest from at least one brokerage blog.

*The stock indicies and the Dollar Index are keeping things interesting for economic prognosticators (*click any financial link for comments on that)

Cheers

Dollar Dazzler

2006-11-24T13:34:00.000-05:00

Not too long ago, I saw a video of a presentation by Larry Kudlow that was floating around the web. Basically he was a lone Dollar bull in a hostile room full of bears. He put on a great show, and was even quite convincing. But nobody believed him anyway. lol

I'm not formally educated in economics so I rely on articles and opinions that are sufficiently dumbed down enough for me to understand. So what I'm saying here is I'm no expert, not even well versed in the principles of economic managent.

But I must say I am most impressed by the case presented by the bears... both on the dollar and on the economy (that includes us in the rest of the English speaking world as well).

So I guess I'm saying that I'm not shocked that the DX is testing some important support levels on the chart. My only lament is not taking the trade.

Where my bemusement lies is in the the stock indice's, where apparently any news is good news, so long as rates stay paused... a slowing economy is apparently bullish... but I won't put the kibosh on that one.

Gold is Just a Commodity

2006-11-23T12:19:00.000-05:00

This news seals it for me:

Pressure grows on IMF to sell some gold stores
SINGAPORE: The International Monetary Fund, one of the world's largest holders of gold, should sell some of its hoard to cover projected operating losses, say a growing number of the fund's executive directors.

The Washington-based lender predicts that it will lose $87.5 million next year and $280 million in 2009. Some directors say the fund should sell a portion of its 103 million ounces of gold, which are valued at $64.7 billion, and invest the proceeds in interest- bearing assets.

"We would support the use of fund gold as part of the solution to IMF financial needs," Tuomas Saarenheimo of Finland, chairman of a group that coordinates the position of European Union members on the fund's 24-member board, said during an interview in Washington.

The prospect of gold sales highlights the crunch faced by the fund as countries like Uruguay repay loans early, reducing interest income, and demand for fresh credit ebbs. Proponents must overcome opposition from the United States, the biggest owner of gold, which wants to keep prices high.... MORE ====>>