U.S. Economy: The latest in GDP figures will be released this upcoming Friday. In my opinion, this will be an important report to watch as last month’s figures showed promise even with the slight downward revision. Recent data releases suggest that this pace of growth was expected through the first 6 months of 2010. Looking through the GDP data, I find stimulus induced gains, specifically in retail sales and worry that growth won’t continue. While the April numbers were indeed impressive, closer inspection shows that building material accounted for 6.9% of the increase. With the Obama tax credit for first-time-home buyers already expired and weekly jobless claims unexpectedly back peddling, how will the improving trend find the strength to continue? The Housing Market Index slipped over 5 points and Housing Starts slipped 10%. Looking ahead to this coming week’s New Home Sales data, I would expect another disappointing read.  Don’t get me wrong, I’m not preaching gloom and doom. I’m not even suggesting that it will send the S&P lower right away. What I am suggesting is that should the market rally, as I expect it to, the absence of supporting fundamental data will add all the more reason to short rallies at key resistance levels.

In the 6-5 Wire I penned, “…the 200 DMA seems to be the Key Master for the bulls. Over the last two weeks, the S&P has flirted with the moving average, unable to sustain a move above it.” The S&P managed to muster a close above the 200 DMA this past week, which may entice buyers back into the market. However, in my opinion, the chart suggests caution as potential rallies will be challenged at the downward sloping 50 DMA (1139) and the February high of 1150. Aggressive traders may view a test of resistance at the aforementioned levels as possible trade location for put based purchases. More patient traders looking for trade location may consider waiting for possible rallies up to 1218, the 200 WMA. Remember to keep a watchful eye for the crossing of the 20 and 50 WMAs as it may be indicative of the next bear cycle within this Secular Bear Market (1/10/2010 & 6/5/2010 Wires).

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Here are some of the reports to watch for this week: Monday, 4-week, 3-month, and 6-month Bill Auctions; Tuesday brings ICSC-Goldman Store Sales, Redbook, Existing Home Sales (6.2M), FHA House Price Index and the start of the FOMC meeting; Wednesday, MBA Purchase Applications, New Home Sales (400K), FOMC announcement; Thursday, Durable Goods Orders (-0.5%), Jobless Claims(465K);  Friday, GDP (3.0%), Corporate Profits, Consumer Sentiment(75.5).

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Currencies: The Eurocurrency rose sharply against the greenback for the second week in a row. EC traders found comfort in robust Spanish bond demand and the agreement EU leaders shared on disclosure policies regarding bank stress tests. Last week I penned, “First, the 200 day correlation study between the DX/SP is down to 33.92%. If I am correct in thinking the inverse relationship between the two will return, then perhaps the DX chart pattern may hold some clues as to the equity market’s direction. Tuesday’s price action on the DX left an Evening Doji Star, which is thought to be a bearish topping formation. If the DX can break below 8710, then the near term target may be 8511, the 40 DMA” Since the Doji was recognized the DX has fallen over 300 points, stopping at the 40 DMA. From here, I would expect a temporary bounce to occur, yet be contained below the May high of 87.62.  Should this occur, then my theory on the inverse relationship between the DX/SP returning will temporarily stall. The 50 day correlation study of the pair seems to support this temporary pause as it is starting to turn up.

In my opinion, these moves are just corrections within a trend. From a macro perspective, turning points will be met at 126-131 in the Euro, 78-81 in the DX and 1139-1218 in the S&P. If any of these targets are met, I encourage the close monitoring of the intra-market correlations for hedging opportunities.

(Blue - 50 Day) (Red - 100 Day) (Gold - 200)

Foods and Fibers:  The EPA decision to yet again delay the ethanol blend rate until fall of 2010, seemed to take a back seat to weather concerns. This seemingly bearish bit of news was unable to manifest itself into anything significant as concerns over Chinese dryness persisted. The U.S. Midwest weather pattern also buoyed traders’ desire to add risk premiums to grain prices. The concerns left corn ten cents higher on the week. I suspect that weather watching is the key to price clues in the coming weeks as corn enters its key pollination stage. Those with tick-for-tick exposure should be mindful that favorable weather may send futures back down in a hurry. While I think the upside potential is there, I still favor the back ratio spreads discussed in last week’s Wire and Options Pro Report.

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Energies: Crude inventories in Cushing, OK continue to build and are now near record highs, besting 30% more than a year ago. The inventory data released last week took traders by surprise, showing a build of 1.69 million barrels. Traders were initially looking for a draw of 1.3 million barrels. Adding to the mix, Valero Energy expects the McKee refinery, connected to Cushing by a direct pipeline, to be offline for 30 days. Even with all of this tug-of-war fundamental data, oil prices still topped $78. In the 5-29 Wire and the June 4, 2010 Options Pro Report I penned, “With implied volatility up to almost 40% from under 30% in the last month, those not believing in the rally may consider call premium collection strategies above the 61% retracement.”  Since the original writings, crude’s initial reaction was a sharp drop, followed by a steady climb. The resulting price action has caused implied volatility to contract and is now resting near 30%.

Looking at the August chart, I see a convergence of resistance levels near the $80 level. Should crude find the strength to rally it may encounter challenges at 79.98, the 50% retracement of the May drop. Slightly above, both the 50 and 200 DMAs reside near 80.50. A failure to climb higher would likely result in a bearish crossover of the two extensively followed moving averages. This type of crossover is thought to be highly bearish. The overhead resistance and volatility contractions are favorable for the previously discussed call premium collections. Since there is risk of loss in trading, it is advisable to monitor coming economic data for any bullish news specific to oil.

Metals: Gold set another new high this past week with the metal reaching $1,263.70. The metal is just $36 from my target of $1,300.00 within the first 6 months of 2010. When I initially set the forecast it was partially based on inflationary concerns. Those concerns, at this point, seem almost non-existent. In fact, the deflationary camp may have a valid argument as evidenced by the latest CPI data. To be clear, I am not touting the deflation story. With China releasing the Yuan from its two year peg, commodities may get a boost in demand. A strong Yuan may reorient demand to an already commodity hungry nation and may skew future CPI data.

I think the real culprit of the move higher is neither deflation nor inflation, but rather stability. Central banks and individual investors alike seem to have lost faith in fiat-based currencies. The dollar, the euro, the sterling are all plagued by problems of their own. In Russia there is chatter of adding gold to their reserves. Should China take the plunge and beef up their reserves with additional gold holdings that could be the catalyst for a move to $1,400. Presently, Chinese gold accounts for just 1.6% of the total FX reserves. What if they doubled that to 3.2%?

Technically, the close above the highs of Dec’09, May ’10 and June ’10 is bullish. Follow through action next week may test $1,300. The 40 DMA seems to be the pivot trend line. The Bollinger Band, measured from the 40 DMA, also shows support and resistance. I would watch for a sharp reversal off of the top BB for a sign of a potential top. With option expiration this Friday, I would look for a possible run to the $1,300 strike and then a pullback to $1,250. These two strikes have large open interest and may be a draw for “strike price drift”. Should implied volatility continue with its recent climb, coupled with a move to the $1,300 target, I would monitor call premiums for potential collection opportunities. Stay tuned.

Questions or Comments?  Please email: al.abaroa@optionspro.com

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