Craving Coffee, Costly Cocoa

Cocoa and coffee are among the hottest commodities. Prices have continued steadily higher over the past several weeks, and show no signs of any price abatement anytime soon. These two charts of the daily price action for cocoa (top) and coffee (bottom) show a steady and unaltered bullish trend in prices for the two commodities that began in late October of last year!

Cocoa

Coffee

Wheat, Soybeans Rebound into Close

Both wheat and soybeans have traded within wide ranges today. As a swing trader, this is my preferred style of trading. Soybeans hit new all-time high prices, and have just closed at another new all-time closing high price. Wheat has closed flat for the day, but also within a very profitable trading range. The two grains have recently been trading in very similar patterns, as can be observed from these two charts.

Soybeans


Wheat

Retail Sales Headline Somewhat Misleading

Excerpt taken verbatim from the RGE Monitor:

U.S. Retail Sales: Strong or Worrisome?

The headline strength – up 0.3% m/m – in the latest U.S. retail sales numbers (January) surprised on the upside, but was it really all good news? Auto sales were up a solid 0.6%, which is at the least very hard to square with the latest data reported by the car makers and the Commerce department which showed a 7% fall in U.S. auto sales between December and January. Even excluding autos, U.S. retail sales were up 0.3% m/m on the wake of strong gasoline sales – that were up 2% m/m – explained by the increase in prices. Note that retail sales numbers are reported in nominal terms. If we take a deeper look at the core numbers – excluding gasoline, food and autos – nominal retail sales were actually flat, meaning they were negative in real terms. And other data on retail sales – such as the weekly reports from Redbook Research, ICSC/UBS securities as well as monthly reports from major retail chains and department stores – suggest softness in discretionary spending in January continuing into February.

Grains Prices Back Off

Grains prices have taken a much-needed breather, after reaching more record-breaking high prices in the past few days. This chart for soybeans today is deceptively bearish. Considering that soybeans hit new record high prices three times overnight, including one at the market open this morning, this chart seems beguilingly inverse to those records. Still, this is most likely an illusory and temporary retracement, since the bullish trend is still firmly on track. Surprisingly, a pull-back like this is typical behavior following a new record high price.

U.S. Government bonds continue to sell

Interest rates, despite promises by the Fed, have begun to rise. In this graphic image, the three charts on the right side all represent U.S. government treasuries, which are falling in price (rising in yield). Only the international bonds, shown in the chart on the far left, are rising (lower yields).

Auction Rates Article

Here is an article that I highly recommend reading. It was sent out over the weekend by John Mauldin in his free weekly newsletter. John Mauldin is not a bear, but is becoming increasingly bearish in the tone of his newsletter. John was ranked by Motley Fool as the world's best investment adviser, second only to Warren Buffett, for the year 2007. I value his insights! In this one, he sent out a write-up by Nouriel Roubini, who paints a scenario, based upon what he sees as the next economic shoe to fall. Strange that this forecast would come out just a few days before the news hit the fan!

Twelve Steps to Financial Disaster

Crude Oil Headed for $100 (Again!)

During a time of year when crude oil prices tend to be at their lowest, crude oil prices are rising instead. Traders on CNBC this morning said that crude oil is soon headed for $100/barrel -- again. This is disconcerting, considering that the highest crude oil prices usually don't hit the market until the summer months, when Americans tend to drive the most. It is also a troubling sign, given that lower demand due to slower growth hasn't caused the price of oil to drop significantly. This daily chart shows how the price of crude has surged in the past several days, and it shows no signs of letting up soon! If crude prices are at $100/barrel now, what price level should we expect in May-August? $120-$150? Gasoline prices could easily reach $4/gallon by then!

Soybeans: 3 New Record Highs Since Last Night

Soybeans prices have reached new record highs three times since evening trading began at 7:00 pm EST last night. Thats three new records in just over 12 hours!

As is typical, prices have since backed off somewhat, but there is no reason to expect prices to fall precipitously. The bullish trend is strong and intact.

Wheat prices have also been strong overnight and this morning.

PPI Shows Inflation Rising

The latest inflation figures, released today, show that producer prices increased by 1.7% during January. While that may not sound like much, it represents a price increase for a single month! If prices continued rising at that rate throughout the year, it would represent an inflation rate of 20.4% (1.7% mo. X 12 mos. = 20.4% annually). While this number tends to be quite volatile, when combined with PPI figures for the past few months, it is not above the trend. Here is the Bloomberg story:

U.S. January Import Prices Rise More Than Forecast

Commodities: Oil, Gold, Grains, Softs All UP sharply today

Commodity prices continue to surge higher almost across the board today. Gold, which prices have been somewhat subdued the past few weeks, are showing heavy buying activity on the daily chart (see the blue circle, bottom right section of the chart). Prices have yet to surge explosively higher, but the buying volume indicates that prices are likely to follow soon if the buying volume continues.

Klinger Volume indicator

The Klinger+ATR volume indicator is a leading indicator, so when buying volume picks up, as shown above by the green rising line in the subgraph inside the blue circle, prices are likely to soon follow. The indicator has even crossed powerfully above its yellow moving average line. Look at the times when the line turned green/up or red/down in the past on this chart. Note also that the trend changes in this indicator usually occur shortly before prices turn up or down (hence, it is a leading indicator). It suggests that gold is currently being bought in record volume, and that prices are likely to soon rise as well.

Broad Commodities Indexes

I have also posted here the chart for the ETF symbol "DBC", which is the Powershares Liquid Commodity Index. Note the surge in price activity resulting from further promises of Fed rate cuts. Likewise, I have posted the chart for the GSCI (Goldman Sachs Commodity Index) March 08 futures contract, which is showing similar price strength. The charts for these two instruments represent broad commodity prices, so they should appear very similar.

Soybeans: Fresh All-Time High Price

New high set minutes ago at $13.78/bushel.

The Fed and Commodities Prices

If anyone has any doubt about the impact that Fed Chairman Bernanke's testimony had on commodities prices today, here is one of many examples that could be shown. This is today's chart for cotton. Note that the price of cotton exploded much higher at precisely the hour the Ben Bernanke released his prepared statement and began testifying before the Senate Banking Committee. Many other commodities prices reacted similarly (see grains and crude oil charts in my previous posting today). All Americans need to understand that the Fed is a primary cause of inflation.

Grains Ebb and Wane, Close Much Higher

Each of the three grains that I trade showed their distinct personalities today, but all closed at significantly higher prices than yesterday. Soybeans closed at a new all-time high closing price, just a few cents from the record all-time high price ($13.74 4/8) recorded just six days ago. Soybeans also literally closed at session highs, reaching new records in the last gasps of the session. This chart shows the daily prices for soybeans on the left, and a 15-minute chart on the right. Corn is also nearing its all-time high closing price ($515) that was reached on 1/14.

10-Yr Treasuries Sell Off, Pushing Rates Higher

What an interesting phenomenon that even while the Fed continues to promise lower interest rates, 10 year treasuries continue to sell heavily, pushing real interest rates higher. In this daily chart of the 10-year treasury futures, the circled volume indicator shows heavy selling and interest rates remaining relatively flat to slightly higher since they (interest rates) bottomed 1/23/08.

Commodity Inflation Showing Strength Today

Meanwhile, commodity prices across the board have surged again today on the weakness of the USD that has resulted as a market reaction to the Fed Chairman's comments this morning before the US Senate Banking Committee. Chart 2 shows the USD Index 120-minute chart sinking over the past few days with the expectation of further rates cuts emerging from the Fed's dovish tone.

All the major commodities, including crude oil (my last posting), sugar, cotton, coffee, cocoa, and all the grains (corn, wheat, soybeans, etc.) have all moved higher today with the expectation of a continued blind eye by the Fed toward price inflation. This, as evidenced in my previous posting earlier today showing the grains complex surging significantly and universally higher this morning. Similar charts could be posted for most other commodity prices, including all the ones I have mentioned above. It wouldn't matter which chart I posted, since they all appear similar today.

Fed Denial of Inflation

One certainly must wonder about the wisdom of ignoring inflation on a determined path to further weaken the currency, when it (inflation) continues to push persistently higher even in the path of recessionary fears. Economics 101 teaches that inflation wanes with lower commodity prices as a recession dampens demand. The Fed leadership must know that if the US economy rebounds in the second half of 2008, the surging demand (as the economy quickens again) will only increase inflation pressures. Still, they continue a mantra of expecting inflation to moderate, as if they can simply talk down inflation and its expectations, while simply ignoring its reality. The markets just don't believe the mantra any more! If inflation is this high during a weak economy, then what should be expected if the economy rebounds later? Hyperinflation?

It is also a fascinating phenomenon that while all the central banks of the industrialized Western nations continue to express concern about inflation and talk of higher interest rates, with their stronger currencies, why is the central bank of the United States, with its progressively weaker currency, the lone voice in the wilderness claiming that inflation is contained or low?

By now, nearly everyone who knows of the changes in the calculation of CPI a few years ago, must realize that the government's methodology for calculating inflation is seriously flawed, understating the true inflation rate to the point of laughability. Even if someone weren't aware, one only need go to the grocery store (or buy anything but a house) to realize that inflation is rising rapidly. Can anyone be of such mental dullness that they can't see inflation -- except a few Fed heads? This mental blindness suggests an intentional benightedness by them. Certainly, Fed governors Plosser and Lacker have the intellectual acuity to have seen and acknowledged it within the past week or so. No doubt they have expressed those concerns to the balance of the FOMC.

An Intentional Blind Eye to Inflation?

This appears to underscore a strong concern about the credibility of the Fed and its motives for seeming to turn a blind eye to the reality that everyone else, including the commodities markets, sees. This question of motive, and a therefore unacknowledged agenda at the Fed, is an honest response, too, given past statements by Mr. Bernanke acknowledging the influence of Fed monetary easing on stoking the fires of inflation. Doesn't Mr. Bernanke remember his own famous speech (he must regret that one by now) in 2002 about intentionally inflating prices through cash helicopter drops (like the just-signed "stimulus" package passed by Congress and signed by the President this week)? If not, he can read the speech again on his own Fed website. That's where I found it recently. Why would he now deny the very inflationary influence that he boasted about just a few years ago? A selective memory, indeed.
But the better question is, "Why is he now denying the inflation he formerly blustered and gloated the Fed could create?"

"The question speaks to motive, your honor!"

Crude Oil Higher

The price of crude oil has now surpassed $95.00 once again (April 08 contract).

If other commodity prices remain strong, it would only make sense that gold would continue to move higher also.

Most of the price strength this morning in all commodities is a response to Fed Chairman Bernanke's continued dovish talk as he testifies before Congress today, resulting in expectations for lower Fed Funds rates and an even weaker US Dollar.

His denial of inflation seems to be a failure to recognize rising prices, due in part to the government's faulty inflation calculations. This seems odd, since Mr. Bernanke's own comments in past years would be in conflict with what he is saying today.

Grains: Up, Up, and Away

Strong buying across the entire grains complex is driving prices significantly higher this morning. Additionally, the USD is moving lower against most major currencies, including the Euro, Yen, British Pound, and Canadian Dollar. It is relatively unchanged against the Australian Dollar.

Corn


Wheat


Soybeans

Gold Buyers Step In on Dips

Note in this (daily) chart that buying volume has picked up again over the last two trading sessions. The blue circle in the sub-graph shows that gold is being bought on dips, but at progressively higher price levels. It is also being sold at lower levels; the last dip only lasted a day and a half. This pattern will force a break-out -- either up or down -- fairly soon.

I have also marked two tightening trend lines; one is the long-term gold trend, and the second is a weakening price trend. This bullish trend is marked as a pair of light blue lines, and the more recent bearish sentiment is marked with a burgundy trend line. Due to the long-term bull trend in gold, its safe-haven status, and the dogged devotion to the precious metals among gold bugs, I personally suspect that the gold trend will continue, and that buying will push gold prices to new highs. It is hard to imagine a scenario in which gold prices would fall, unless economic activity falters significantly. From a statistical standpoint, this pattern has a high probability of an eventual break-out to the upside. I could always be surprised, however.

Soybeans Go Flat, Wheat Stays Volatile

Wheat - I CAN trade this!

Soybeans - but I CAN'T trade this!

Soybeans Rally Also

Soybeans have rallied with wheat, and are well above yesterday's settlement price. Soybeans have now displaced wheat as the most volatile grain today.

And Then Turns Up Again

Wheat has now turned up again.

Wheat Appears to Bottom

This appears to be the bottom of the recent wheat sell-off. Prices are marginally, albeit insignificantly, higher than when the rally began more than a week ago. I am now preparing to take long trades again. Note the higher lows on all three time frames of the triptych. If a higher low and a higher high define a trend, then a new uptrend has begun on the two charts on the right (tick, 3 min).

Change Contracts Tonight

I change my contract months when the added total of Open Interest plus Volume for a given contract becomes greater than the front month contract. It appears that this condition will likely occur today.

[OI(n) +V(n) > OI(f) + V(f)], where:
OI - Open Interest
V - Volume
n - new month
f - front month

If I am forced to make a choice when it is a close call, I will usually trade the contract month with the greatest volume. Volume, for me, represents liquidity!

Corn is Dead Flat!

This tick chart from today looks a lot like my daily chart for corn that I posted Tuesday. They both show corn prices as dead flat!

Wheat Begins to Sell Off Again!

This is a much more modest sell-off than those of the past few days, and are close to the prior session lows. Wheat prices have now nearly reached price levels approaching the pre-rally prices of last week. The tick chart is shown here, and the daily chart, showing the reversals of this week, is shown below.

Grains Trading Relatively Subdued Today

Corn, soybeans, and wheat are all relatively subdued in their trading today. On days like this, I still make healthy profits by taking short-term trades using the tick charts. I can usually make as much money swing trading this way, as I would on a day when there is a distinct trend or mood to the market, as the last two days have been.

It's somewhat like comparing the length of a winding river bank to the length of the shore line of a lake. Does a lake have a longer shore line because it is a larger body of water? Or does a winding river have a longer shore line because it meanders over a much larger land mass? They are both different, but both cover a lot of territory. Likewise, both can be traded, but the trading is somewhat different.

The CME pre-market commentary suggested that there is much mixed news this morning and overnight, even saying that news in the soybean complex "was a little bit slow", so this suggests to me that consolidation and erratic trading might occur. The charts in this posting are wheat and soybeans for the first 1/2 hour of today's session. This erratic trading could also perhaps be a signal that the plunge in grains prices (over the previous two days) has found support.

Gold Erratic, Difficult to Trade

Gold prices are down over the past few days, currently just above $905/oz in the futures. I am waiting for prices to stabilize somewhat before buying again. Last time gold prices fell a few weeks ago, they found support around $890/oz.

The Shanghai Exchange has announced that it is going to begin trading gold futures soon. I suspect that additional gold trading in the world's most populous nation will likely drive gold prices even higher in the future. It will also ad additional liquidity and perhaps even make gold trading more stable and make technical trading more reliable. Gold may reemerge as the world premiere currency despite the effort of the world's central bankers.

Coffee Prices Continue the Trend

Cocoa: 24 Year High

Cocoa prices have reached a new 24-year high today, as shown here on the daily chart.

Wheat Nearly Limit DOWN

After locking limit up several days in a row, wheat has now nearly reached its down limit for today. What an exciting day for trading this has become!

Grains: Is This the Top?

Here are the daily charts for corn (bottom), wheat (middle), and soybeans (top, note the tweezer top pattern). Is this the top? I don't know. But the analyst that I quoted early today said that this had the look and feel of a blow-off top.

The flattening of the Bollinger Bands, showing as purple bands that are flattening in all three of these charts, is a sign of a consolidating market. It appears that's what's happening. From here, prices may either consolidate or turn down, perhaps if spring planting in the United States is abundant.

Gold, Grains Selling Off Today!

Here is the daily chart for gold. Look at the volume-based selling (see the blue circle). Grains are selling off quite powerfully, too!

The chart below is the 15 minute chart for gold today.

Very Difficult Grains Trading Today

All the grains are trading with minimal volatility today. Corn is stagnant! But circumstances could change at any time. Just from looking at my charts, liquidity look a bit scant, too.

Regarding Wheat Plunge Yesterday

A broker friend sent me a lengthy explanation of what was going on in the wheat markets yesterday. It is interesting, but obviously, no longer of any use. These are just short excerpts:

"Trapped short position holders are exacerbating a furious rally in Minneapolis Grain Exchange spring wheat futures, and the market will fall hard once the shorts are able to escape, analysts said."

"...wheat futures have hit the daily price limit in a series of recent
sessions, with the March contract closing limit up for the past six days. The market's dramatic ascent has exceeded expectations and caught shorts, or holders of sold positions, in a raging bull market, analysts said."

"Once MGE wheat hits a peak and the shorts are able to escape from the market, "the ride south will then be almost as steep as the ride north," the technical analyst said."

There was much more, but we all get the gist of it.

USD Still in Range Trading

This chart of the US Dollar Index futures show that the US Dollar remains in a consolidation phase since about Thanksgiving 2007. Sometimes we tend to look at the USD in isolation, as a barometer only of the health of the US economy. However, we often overlook the conditions around the world that also affect capital flows into and out of a currency. For example, the value of the USD is affected by decisions by Mr. Jean-Claude Trichet and monetary policy of the ECB and the state of the economy in Europe. The value of the USD may also be impacted by geopolitical events, the price of oil, etc. There are so many variables that can affect its value, I have found that trying to predict currency prices can be very troublesome and expensive. This is why I do not trade based upon fundamentals alone. How much to weigh each variable, the possibility that other variables are affecting the markets that I may be unaware of, etc. can move the market in a different direction that what I have judged. I just go with the flow. When a new trend manifests itself, I'll take the trade.

In this chart, I am watching to see if the value of the USD Index futures remain above the 50-day moving average (light blue) and the Exponential Moving Average (changing from blue to red). These would indicate to me that a new bull trend for the USD has begun. Note that the 50-day moving average shows a slight upward tack in this chart, as does the EMA.

Grains - Volatility Falls in Overnight Trading

After a trading range of 80 cents yesterday, wheat and other grains volatility has fallen dramatically (1st chart, a tick chart showing overnight trading), trading within a range of only 13 cents of yesterday's settlement price thus far today. Yesterday's settlement price appears as a faint burgundy-colored dotted line about 1/3 way up from the bottom. I can be used as a point of reference for overnight trading.
In the 2nd chart below, a daily one, corn has been trading flat now, within a range of $4.95-$5.20 (and around $5.00 this morning) per bushel, for a full month. This seems to suggest that the bull market is over for corn, at least for now. Soybeans and wheat are not as clear. This chart is indicative of a consolidation. One can only wonder how long it will last. However, with the spring planting season in the Norther Hemisphere just about one month away, I am told that grains futures can often trade quite erratically as the prospects of weather constantly change; so do the plans of farmers as they make decisions regarding their land crop allocation. If grains trade within a range instead of continuing their bull trends, this will be beneficial to me, since I am a swing trader.

Major Reversal Today for Wheat

It appears that speculative forces may have overheated and overbought the wheat futures markets. Now, prices have not only reversed, but are approaching the daily lock limit down price, after having reached double the daily lock limit up price during night-time trading. The settlement price last Friday is the turquoise dotted line, and the lock limit up and down prices are shown in the chart as turquoise lines at the top and bottom of the chart. So far, wheat prices have reversed more than 80 cents today! Astounding!

The chart shown here on the left is the 15-minute chart today for wheat approximately 40 minutes before the end of the session. I do not personally expect this reversal to last very long, perhaps for a few days -- tops! I have learned that any price trend that rises or falls too rapidly often burns itself out quickly. Five days of lock limit up prices may have burned out the demand for wheat, especially the speculative demand. The increase today by the CME of margin requirements has also forced many long positions out of the market. (Personally, I never max out my margin account; this is one reason why.) Once the froth bubbles down, the trend may continue. We'll be ready if it does.

Grains Calm Down, Oil Surges

Fortunately, wheat and other grains prices appear to have calmed down and moderated somewhat mid-session today. It remains to be seen whether the Chicago Mercantile Exchange will return to the 30 cent daily lock limit, if prices remain stable. It would certainly be possible for renewed buying interest to push prices back toward the lock limit of $11.53, also. Both soybeans and corn are trading modestly down today. Here is the mid-session commentary taken verbatim from the CME website:

"Overflow support from Minneapolis is easing and sellers were active in Chicago and Kansas City and the markets quickly moved from sharply higher to sharply lower on the day for many contracts. A lack of new demand news and fears that the market is close to a top sparked increased selling pressures.... An increase in margin requirements added to the long liquidation trend."

Crude Oil Turmoil

Oil, on the other hand, has surged to higher prices, even following a significant jump in prices last Friday. Unfortunately, much of the world's crude oil rests in the hands of the world's dictators, and they have learned that they can talk the price of oil up by issuing threats. Hugo Chavez, Venezuela's socialist dictator, is creating more and more turmoil at home, confiscating more and more private property. His poll numbers are dropping, so he talks foolish rhetoric against the United States. This has driven the price of crude oil higher today.

Wheat: Hold Onto Your Hats!

The primary wheat exchanges over this past weekend agreed to double the daily lock limit for wheat from 30 cents/day to 60 cents/day. If prices stayed at the 60 cent lock limit up price, the lock limit would increase to 90 cents when trading resumes tonight for evening trading. If wheat prices lock limit up again tonight, then the lock limit will increase tomorrow night to $1.20, etc.

Fortunately (and mercifully) for short traders, prices have begun trading again in an amazing feeding frenzy (no pun intended) of volatility. Here are the 15-minute, 3-minute, and tick charts for wheat for the first hour of trading this morning. Conceivably, prices could still rebound to the lock limit price, so hold onto your hats for a wild ride in wheat today!