U.S. Economy: Earnings Season kicks off on Monday with Alcoa opening it up. Analysts are looking for positive earnings from many of the reporting companies. Last week was the first week in a while that didn’t provide much disappointing news for the market. That is, of course, if you discount the 20 plus point slide on Tuesday after the ISM Non-Manufacturing Report. Sure, the Retail Sales’ number was good, and the Jobless Claims were less than expected. I guess the thought of a double dip is gone. I think one analyst said it best, “The macro risks may not have disappeared, but we believe they are amply discounted.” In my opinion, this makes a lot of sense. The world isn’t ending, but the market has had a sharp sell-off from its yearly highs. Here’s what I make of it. The domestic numbers paint an ugly picture without further stimulus. China’s economy is cooling and Europe isn’t fixed. Loyal readers will know my opinion that all known news and events are already factored into the market price. We’ve sold off and now we are rallying, without “macro risks disappearing”. We are in a fundamental trading range in which positive earnings may carry us a few more rounds and push the S&P up to test the 50 DMA. This, to me, may be an opportunity to fade rallies. The 20, 50 and 200 DMAs, along with the downtrend line, offer resistance. For those that are bearish, trade examples may be found in the July 7, 2010 Options Pro Report.

Here are some of the reports to watch for this week: Monday, Multiple Bill Auctions; Tuesday brings ICSC-Goldman Store Sales, International Trade (-$39.0B), Redbook, Treasury Budget     (-$70.0B); Wednesday, MBA Purchases Applications, Retail Sales (-0.2%), Import Export Prices, Business Inventories (0.2%); Thursday, Producer Price Index (-0.1%), Empire State Manufacturing (18), Jobless Claims (445), Industrial Production (-0.2%/74%), Philly Fed Survey (12); Friday, Consumer Price Index (-0.1%), Consumer Sentiment (75).

Currencies: Last week I penned, “A head and shoulders top seems to be 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 DX continued with its downtrend this week, slipping to 83.835 where it found support at the 100 DMA. The chart seems a bit oversold to me and I would suspect that a corrective rebound is in order. I will remain with my projected target of 8162, should the corrective rebound be contained under 85.50. While the 20 and 50 DMAs have had a bearish crossover, the 50 DMA is still not sloping down. 

Foods and Fibers:  The corn battle wages on. The USDA released estimates that corn reserves will be 1.373 billion bushels by August 31, 2011. The forecast topped the average trade estimate of 1.292 billion bushels. This type of news would ordinarily have me thinking bearish thought, but with the recent big revision the USDA gave on June 30 I don’t put much stock in the number. Apparently, neither did the market as corn closed down 1 cent on the day. In my opinion, with corn in its key pollination stage the main focus should be on the weather. NOAA is reporting that La Nina is likely to occur in July and August. This cooling of the sea surface temperature may limit the amount of rain fall the Corn Belt gets. The key word is “may”. Weather phenomena are not easy to predict, nor would I venture an attempt to. What is easy to see is that cash bids are rising relative to futures in Chicago. To me, this shows that farmers are reluctant to sell. Perhaps they are more inclined to think that all of the rain fall will lead to crop deterioration. It seems traders are slower to jump on the bandwagon this year as the last two years have sung a similar tune.

Looking at the technicals, the crossroads are before us. The sharp run up since June 30 has left the daily chart looking overbought. However, the weekly chart is flirting with the bulls. If they can muster a close above the 50 WMA at $3.97, the 2010 highs may come within grasp. A failure here could send corn fleeing back to the lower end of the channel. This is why last week I penned, “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: Oil rallied off of its $71.47 low this week to close at $76.63 just off of its $77.03 high. That is an impressive rally. The IMF helped the price action with their World Economic Outlook revision. They suggest that the global economy will now grow 4.6% in 2010, the biggest increase since 2007. Bloomberg reported that China increased net crude imports to a record in June. Net purchases jumped to 22.14 million metric tons up from 17.65 MMTs M-o-M. Before we get too excited about China buying up huge amounts of oil, let’s take into consideration that their average purchase price was $77.20 per barrel in June compared to $85.20 in May. When you look at the April/May comparison you’ll see that imports were off by 16%, a four-month low. Does that mean that north of $80 we see demand destruction? Those numbers sure seem to depict that, don’t they? With car sales in China slowing it serves as further evidence of their cooling economy. What other than their strategic oil reserve stock piling will sustain that June pace if prices rise? When I look at the chart I am still bewildered from trying to answer the previous question. The MACD and Stochastics show more upside potential. However, the trend line and moving averages offer a strong bearish argument. Maybe this explains the 4 Doji Stars in a row! This rally has not convinced me to think differently (6-26-10 & 7-3-10 Wires) than to fade rallies. Remember, there is risk of loss in trading so watch for the unexpected. Stay tuned.

Metals: Last week I penned, “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.”  Gold’s sideways price action, as well as the time erosion and volatility contractions on the options, are helpful to the previously discussed put premium collections. However, I must admit that the early week slide down to $1,185 had me nervous that it was not just a pullback, but rather a breakdown. The strong rally to close the week at $1,211.20 has me feeling somewhat better, although I’m not sure we are out of the woods yet. This is not me waffling, but rather showing concern at a potential market crossroad. Let me explain. Every Friday the CFTC reports data on positions held by both long and short market participants. After having reached a record high of 262,331 net longs in November, this week’s data showed a decline to 209,042 net longs. The key words, to me, are “net long”. It’s not that large traders are reversing positions and going net short, they are just lightening the load. My next concern is that we’ve seen physical demand stall as gold trades north of the psychological $1,200 price point. The India Bullion Market Association cautions that imports into the country may wane by as much as 36% this year. If you throw in that European debt jitters once again seem tamed, at least temporarily, the safe-haven appeal for the metal seems dulled. Remember all known news and events are already factored into the market’s price. It’s the change of that news that may have meaningful impact on the market’s direction. Physical demand may see a boost as we enter the religious and wedding seasons in India. Earnings’ season here on U.S. stocks may be littered with revised outlooks as consumers still seem unsure about the economic recovery.

From a charting perspective, my concerns are in a holding pattern until price action trades below the trend line dating back to the October ’08 lows. Adding additional support and coinciding with the trend line is the 100 DMA at $1173.10. While past performance is not necessarily indicative of future results, a breach of this level may trigger a deeper and more prolonged corrective move towards the 200 DMA, similar to what was witnessed in late 2009. This is what concerns me the most. However, a close above the 50 DMA would abate my concerns and may be the spark needed to get the bulls running towards new highs. Hey, maybe market participants will follow the lead of the actual “running of the bulls” in the streets of Pamplona, Spain this week celebrating the legendary Festival of San Fermin! All kidding aside, those with long exposure should monitor the 100 DMA closely for individual risk management discipline as discussed in the July 2, 2010 Options Pro Report.

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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.