U.S. Economy: Anyone that knows me will certainly tell you that I am an optimist. At least, I am optimistic that they’ll say that! I say this to preface my next point. If I had to summarize the economic data of the past week into one word, it would have to be “depressing”. Expanding from a one word summary, the following are threats to the economic recovery. Tuesday, the budget deficit was bigger than expected and imports rose faster than exports. Furthermore, the deficit may grow even larger should dollar based commodities rebound. Wednesday, the retail sales were disappointing, revisions were worse, which has to make you wonder about the GDP figures later this month. Wednesday, the FOMC downgraded their forecast on the economy by lowering projected growth for both 2010 and 2011. They also raised their forecast for the jobless rate and lowered their sights on inflation. Thursday, the PPI dropped more than expected and Empire State showed slowing growth in manufacturing activity. Batting for the cycle, Friday, Reuters/University of Michigan Consumer Sentiment had its worst reading since March of 2009 and CPI dropped more than expected. The only place I can find a possible uptick will be in the “therapy index”, as fellow optimists will be booking extra sessions to deal with the disappointment! If only there was a futures contract for that, I’d write an Options Pro Report loaded with put premium collections approaches! All kidding aside, this is what I meant last week when I penned, “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.”

The early week rally, led by earnings, indeed tested the S&P 500’s 50 DMA and actually eked a move of 10.5 points above it. After a 7 session winning streak the rally stalled just below the psychological 1,100 level. The 96.5 point rally was just shy of the 50% retracement from the May high. The head and shoulders top pattern remains intact and targets a potential drop to as low as 856. On the weekly chart, the 20 WMA (1122.79) narrowed its distance to the 50 WMA (1092.37) and may be in jeopardy of a bearish crossover in the coming weeks (6-5-10 Wire). I expect a retest of the 1002 low and a possible failure. Those with short positions may consider covering some exposure should the market fall near the first target. It is advisable to monitor the 1109 level for individual risk management discipline as outlined in the July 7, 2010 Options Pro Report.

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Here are some of the reports to watch for this week: Monday, Housing Market Index; Tuesday brings ICSC-Goldman Store Sales, Housing Starts (0.58M), Redbook; Wednesday, MBA Purchases Applications, Ben Bernanke Speaks; Thursday, Jobless Claims (450K), Ben Bernanke Speaks, Existing Home Sales (5.26M), FHFA House Price Index, Leading Indicators (-0.2%); Friday, No Data.

Currencies: Last week I penned, “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 81.69 (the 200 DMA), should the corrective rebound be contained under 85.50.” The DX continued with its downtrend this week, slipping to 82.25. The chart still seems a bit oversold to me and I still suspect that a corrective bounce is in order. I do remain with my target of 81.62, which is the 100% extension of the head and shoulders’ top and where the 100 WMA is resting. Sharing real estate on the chart with the two resistance levels is the 50% retracement (81.65) of the rally from the November 2009 low to the June 2010 high. Perhaps, it is here that we’ll see this rebound rally I seek. 

Foods and Fibers:  The corn bulls are getting some help from the weakening greenback. Exports priced in U.S. dollars become more attractive as the currency slides. This may be the reason that corn was one of the few commodities printing green on trading screens this past Friday. Last week I penned, “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 in July and August. This cooling of the sea surface temperature may limit the amount of rain fall the Corn Belt gets. Remember, the key word is “may”.” Forecasts are continuing with hot temperature readings for the remainder of July and into August. Dry weather could potentially reduce crop yields on shallow-rooted corn. The markets’ reactions to these types of concerns are extremely difficult to predict, if possible at all. To me, trading is hard enough without attempting to predict weather. That seems more like gambling to me.

The current risk premium factored into corn’s price seems to be offering a buffer should weather intensify. However, I think prolonged heat in the Corn Belt will be necessary to push corn above $4.50. Should the September futures contract find the wherewithal to push above the 200 DMA, $4.10 - $4.25 seems a likely target. The 20 and 50 DMAs’ bullish crossover occurred this past week, and with both averages sloping up, the target seems attainable sooner than later. However, a failure here could send futures back down to the $3.43 - $3.75 trading range. As such, those with long exposure may consider modulating position size by fading this rally (June 14, 2010 Options Pro Report).

Energies: Crude seems to be at the mercy of the equities’ markets and the large inventory overhang. The 100 day correlation study shows the two paired at 81.20%. The risk-on, risk-off trade mentality seems to be alive and well between these two markets. If you think about it you can probably see the logic. In my opinion, inventories held in Cushing, OK seem high for any season. Demand just doesn’t seem to be there and the market will probably remain uncertain should economic numbers continue to disappoint here domestically. Furthermore, with the Chinese economy cooling, where will demand thirst spring from to drink up the excess inventories? I know this seems repetitive in my writings, but I think if it looks like a duck, walks like a duck and quacks like a duck…..it’s probably a duck. I think until proven differently, it may be prudent to fade positions should the market rally above resistance levels through premium collection approaches.

Click Chart to Enlarge

Metals: Of the many hats that gold can wear, right now I think it wears none. Global economics have been mixed, so the “safe haven” hat is off.  Its “hedge against inflation” hat seems to be shelved thanks to lowered CPI data and the fact that we may be dealing with a bout of deflation or disinflation. Its “flight to quality” hat seems more “old hat” and not presently in vogue with European jitters at bay. The lack of economic clarity, coupled with the threat of a “double dip’ hat, seems to be keeping gold’s price in a holding pattern.

In the short-term, it seems gold is becoming uncorrelated to equities as its price is rising from a negative correlation and the dollar is declining from a positive correlation. I think the widespread concern is that the DX has fallen over the last 6 weeks, yet gold’s price has not sustained its rally. While past performance is not necessarily indicative of future results, historically the two have shared an inverse relationship. Benchmarking moves in gold against equities may further burden the metal in the short-term due to margin pressure selling and no real incentive to purchase the metal. However, as mentioned, economic uncertainties coupled with the eventual inflationary pressure may re-inspire some safe haven buyers and buoy the yellow metal near longer-term support (100 and 200 DMAs). Technically, the bulls will want to see gold’s price trade north of $1,225 to gain momentum. Otherwise, gold seems temporarily dull which may explain the recent contractions in implied volatility as the metal trades in a range.

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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.