U.S. Economy: GDP is the latest report to disappoint the markets. The Q1 figure was revised down to an annualized pace of 2.7%. In my opinion, of the four major categories in the GDP report, personal consumption spending was the greatest disappointment. Consumer spending is rising, but not necessarily at a brisk enough pace to stoke demand and carry forward an economic recovery. This leaves very little margin for error and further disappointments could really begin to pressure downside momentum. The market seems to be on much less solid footing week over week. The New Home Sales didn’t help out and the FOMC seems to have acknowledged we’re going to need more help. I wonder if this Friday’s Employment data will be the tipping point.

Last week I penned, “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….. 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).” The early week rally fell just short of the 50 DMA (1134.44), stopping at 1129.5. The subsequent price action may trigger a bearish crossover early next week of the MACD, which remains under the zero line. Trend followers will likely shift to bearish again as the market closed below the daily parabolic. I would expect the first target to be the May 25 low of 1036.75. Should the market gain enough downward momentum to break the key support, sell-side pressure could be strong.

 Here are some of the reports to watch for this week: Monday, Personal Income and Outlays (0.5%); Tuesday brings ICSC-Goldman Store Sales, Redbook, S&P Case-Shiller HPI, Consumer Confidence (63.3); Wednesday, MBA Purchases Applications, ADP Employment Report, Chicago PMI (59.7); Thursday, Motor Vehicle Sales (8.9M), Monster Employment Index, Jobless Claims (450K), ISM Manufacturing Index (59), Construction Spending (-0.5%); Friday, Employment Situation (-100K), Factory Orders(-0.5%). 

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Currencies: Loyal readers will know my focus on correlations. At the beginning of the year, the inverse correlations (200 DCS) the DX had with the S&P, Crude, Yen, Aussie Dollar and Gold were very strong. Over the last six months most of the correlations have moved into positive territory. Looking specifically at the DX/GC relationship, it moved from -74% to 72%. I think this trend may be reaching its peak. Friday’s trade may potentially serve as an example. The DX was down more than 40 points, yet Gold mustered a move up of over $9.00. Now remember, one day does not make up for a 200 day correlation study! However, since correlations are not static I think it is important to watch for the early changes. Perhaps last week’s Fed stance on low rates is not great news for the dollar, yet sustained global economic worries bode well for gold.

The correlations between both crude oil and the S&P vs. the DX are falling back to neutral. In my opinion, both the S&P and crude oil chart patterns are showing a potential bearish picture in the near term. Does that mean the dollar will push higher? If not, then these correlations may begin to turn positive once again. Stay tuned.

 Data for correlations studies provided by Esignal.

Foods and Fibers:  Last week I penned, “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.”Corn fell for 5 straight days this past week as the weather turned cool and dry. Similar to last week’s bearish news being discounted by weather woes, this week’s bullish news is being trumped by favorable weather. I think it is still too early to tell and I am not convinced one way or another yet. It will be interesting to see the market’s read on the Quarterly USDA report next week. Unfortunately, there is risk of loss in trading. Should the report send futures lower, those with long exposure should monitor the $3.43-4 low for individual risk tolerance as written about in the June 14, 2010 Options Pro Report.

In the June 9, 2010 Options Pro Report I penned, “Technically speaking, the longer term trend is down. Shorter term indicators are potentially oversold. Implied Volatility rests at a discount to Statistical Volatility and is showing signs of turning higher recently. October Sugar contract prices have shown possible bottoming action since setting YTD lows in May at 1367. Yesterday’s close above the 20 DMA and today’s follow through may trigger short covering. Possible expansion may benefit the option buyer.” While implied volatility remains discounted to its statistical counterpart, sugar futures have climbed over a penny buoyed by speculation that demand will continue to be robust. Presently, there are discussions that the market may have sugar shortages as early as the third quarter. While all of this sounds promising, it is important to remember all known news and events are already factored into the market’s price. It is the change of that news that may have lasting implications. This week the 20 and 50 DMA had a bullish crossover, as did the MACD on the weekly chart. In my opinion, the charts look favorable for a move to the mid 17 to low 18 cent range. Since there is risk of loss in trading, those with long exposure should monitor the uptrend line from the May low for individual risk tolerance.

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Energies: The Department of Energy announced another unexpected build in inventories this past week in Cushing, OK. The 2 million barrel increase brings storage levels to 365.1 million barrels for the week ending June 18. The one bit of hope that energy bulls were granted from the data came from the unexpected draw in gasoline stockpiles. According to AAA, Americans are expected to drive 17.7% more than a year ago over this coming July 4 holiday weekend. One would think that with this potential boost for gasoline demand and the unexpected draw, crude would have battled its way higher. Despite the news, crude futures embraced the lows for most of the trading session. The downward pressure in crude lent a helping hand towards the contraction of call premiums discussed in both the 5-29 Wire and the June 4 Options Pro Report.

Following up on last week’s wire when I penned, “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…..Since there is risk of loss in trading, it is advisable to monitor coming economic data for any bullish news specific to oil.”  The early week declines in crude oil resulted in a bearish crossover of the 50 and 200 DMAs. However, oil bulls had their moment in the sun as shorts rushed to cover ahead of the weekend with hurricane concerns brewing near the Gulf of Mexico. With a low likelihood that this storm will threaten oil infrastructure in the Gulf, and the recent economic data less rosy, those with a bearish mindset may view this price spike as another opportunity to write covered call premium above key resistance levels.

Metals: Gold set another new high this past week with the metal reaching $1,266.50. Last week I penned, “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”.” I have to say that I was feeling pretty good about the follow through action as gold was hitting new highs overseas. I thought we would see the run to $1,300, but instead it spent the week trading on both sides of the $1,250 strike to close at $1,255.80. I find it uncanny how sometimes the futures seem to gravitate towards the highest open interest strike on expiration (strike price drift). Let me be clear on this, this does not always happen, but in my opinion it is certainly worth watching out for. 

Looking forward, the correlations between the DX and GC seem to be inverting again (See Currency Section). The FOMC commentary seems to have removed thoughts of rate hikes any time soon, and may push the dollar lower. This, coupled with sovereign-debt concerns across the pond are buoying the metal.  I remain with my target of $1,300 as I don’t expect major changes coming from the G-20 meeting this weekend to take effect anytime soon. Those that are bullish may consider pullbacks as opportunities for put based premium collections. As I think the DX/GC correlation inverts, dollar based hedges may be considered.

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