U.S. Economy: Consumer Confidence threw another disappointing blow to the markets this past week with follow up punches coming from Pending Home Sales and the Employment Situation report. Looking specifically at the Consumer Confidence report, the regional weakness seems to be tied to the Gulf with both the East South Central and the South Atlantic regions accounting for the biggest drops. I would feel better about the numbers if the drops were isolated to just those regions, but there are low levels of confidence in many places. When I look at the Employment numbers, it is easy to understand the lack of confidence and corresponding market weakness. In the 1-30-10 Wire I penned, “With the unemployment rate still besting 10%, the weight bourn by the remaining consumer may prove too much to bear. Weekly claims in unemployment will need to ring in sub 400k before stabilization will be felt in payrolls and ultimately the consumer.” Stabilization has yet to come in fact the most recent 4-week average is 466.6K, which is the highest level since March. Let’s hope this is not a trend reversal, but rather a blip on the radar.

Looking at the technicals, it seems that a head and shoulders pattern was confirmed in the S&P with the break below the 1040 neckline. The 50 and 200 DMA had a bearish crossover on Friday, which is, thought to be highly bearish. Despite all the negative technical patterns and fundamental data the markets found support at the .382% Fibonacci retracement of the “risk asset rally”. If price action can hold here, a rebound up to the downtrend line from the April ’10 and June ’10 highs may occur. Those with bearish mind frames may consider rallies into the 1050-1080 area as potential opportunities to sell call spreads above 1100 or to purchase puts. Please call the office for a detailed explanation of risks and individual suitability.

Here are some of the reports to watch for this week: Monday, US Holiday - Markets Closed; Tuesday brings ISM Non-Manufacturing Index (55.0); Wednesday, MBA Purchases Applications, ICSC-Goldman Store Sales, Redbook; Thursday, Chain Store Sales, Jobless Claims (465K), ISM Consumer Credit ($-2.0B); Friday, Wholesale Trade.

Currencies: The dollar bulls had a very rough week. The greenback dropped through key support levels and may be in-store for fresh lows. In the June 6 Wire 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 and the 5/21 low at 8532.” The DX/SP 200 DCS is now down to 18.74%. I am looking for a pause in this relationship as the 50 DMA is starting to turn higher which may be suggestive of a short-term paring. I say short-term because both the 100 and 200 DCS are still sloping down. The Evening Doji Star from early June has built into a much stronger bearish pattern. A head and shoulders top seems to have been confirmed with Friday’s break below the 8530 level. A failure on the monthly chart at the 100 MMA may also confirm a move lower. I would expect 8162 to be the first technical target. The second target would be approximately 8019, the 1.382 Fibonacci extension and the 200 DMA.

The GC/DX 50 DCS is indicating a possible breakdown of the positive correlation. The 100 and 200 DCS are flattening out as well. A decoupling of the two would likely mean a weakening dollar and a strengthening gold’s price based on the longer-term trends of both these markets. Keep in mind that correlations are not static and are ever changing. While they do not hold the answers to direction, they may provide clues to either hedge with or help choose a directional bias. Contact an Options Pro team member for further explanation.

Foods and Fibers:  Monsoon rains in key growing areas of India are below the norm and are a source of concern for traders. If this continues, India may have to step aside from the sugar exporting business this year. Meanwhile, China’s sugar growing areas are having flooding issues. Their sugar demand has been strong over the last two years, resulting in a deficit. While they are not strong importers of sugar, continued rain concerns may change that.

The challenging weather sent sugar futures climbing, closing at their highest level since the May low of 1367. The price action is also flattening out the 50 DMA. If the price can remain north of 16, the 50 DMA should begin turning up this coming week. Bulls will want to see the .382% retracement and the 100 DMA both just above 17 cents offer little along the lines of resistance. If sugar can muster up the legs to break out above the aforementioned resistance, the target becomes 18 cents, the April highs. Implied volatility remains discounted to its statistical counterpart. While price direction has been helpful for trades discussed in the June 9, 2010 Options Pro Report, it is important to remember that options are time wasting assets. Those with long exposure will want to monitor challenges at resistance levels and fundamental data in determining profit objectives or individual risk management discipline.

The USDA shocked the corn market with a booming increase of usage in the third quarter. It was reported that Q3 consumption was 3.338 billion bushels. That is an incredible jump in usage of over 25% Y-o-Y. Pro Farmer suggests the increased usage is too huge of a number and the more likely story is an overstatement of last year’s actual crop size. Either way, this puts a lot of pressure on this year’s crop to produce. The news sent corn futures limit up. The strong follow through action on Thursday and Friday took futures back to the upper end of the channel. Bulls will want to see the 100 DMA and upper channel resistance pierced. A breakout above the levels may offer a good fight at cracking the psychological $4.00 level. A failure to push higher could send futures back to $3.45. Perhaps the July 9 USDA Corn Feed and Residual Use report will provide the momentum needed to push higher. It is exactly this type of head-scratching environment that has me favoring the ratio back spread discussed in the June 14, 2010 Options Pro Report. More information on ratio back spreads may be found on page 53 of my book, Options Pro Essentials.

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Energies: Negative economic data continues to plague the energy markets. The combination of Chinese manufacturing, housing data dropping sharply and weak employment numbers was just too much weight for the bulls to bear. Let’s remember though that all known news and events are already factored into the market’s price. So, what is going to change this gloomy picture and the threat of a double dip recession? I’m not sure I can think of anything positive. Until we have a sustained draw in inventories or promising numbers, I would view any oil market bounces as opportunities to fade rallies. Similar to last week when I penned, “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 with 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: It seems that many stars lined up this past week to shock the gold bulls. The main culprit may have been equity related margin pressure selling. The drop may have been caused by the abandonment of gold as a safe haven. I’m leaning towards the former. Some may say that I’m a stubborn long. This couldn’t be further from the truth. I will never adhere to a market bias if I feel it has changed. Let’s look at some of the facts to help assess the recent decline. Tuesday’s equity market sell-off came on the heels of a weak Consumer Confidence report. Gold’s $40 drop happened two days later on follow through equity selling. As stocks dropped below key support levels, margin calls may have prompted the need to raise cash. With Gold still hovering near $1,240, it may have seemed the logical source of funding for equity margin calls. They say one man’s trash is another man’s treasure. Last week I penned, “Those that are bullish may consider pullbacks as opportunities for put based premium collections.”

In my opinion, the drop to $1,200 could be the pullback that was hoped for. Unfortunately, there is risk of loss in trading, so only time will tell if it is a pullback or a breakdown. Looking at the technicals, I think it will be just a pullback. The move also prompted a spike in implied volatility, besting its statistical counterpart. With support resting at the trend line from the October ’08 lows, the 100 DMA near $1,170 and the May ’10 swing low of $1,165, all the “write” ingredients for put premium collections below aforementioned support levels may be there. Specific trade examples and volatility graphs may be found in the July 2, 2010 Options Pro Report.

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

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Trading futures and options involves substantial risk of loss and is not suitable for all investors. All known news and events have already been factored into the market's underlying commodities. Past performance is not necessarily indicative of future results.