U.S. Economy: On Monday the Housing Market Index kicked off the week to a poor start. Homebuilders reported the weakest conditions in over a year. Despite another bout of bad news data from Housing Starts, earnings’ reports sparked a 30 point rally in classic turnaround Tuesday fashion. Wednesday, Ben Bernanke’s somber reminder that the economic outlook remains “unusually uncertain” quickly pared the previous day’s gains. More promising earnings gave recovery efforts the footing needed to stage rallies both Thursday and Friday. Since the European stress tests gave little along the lines of a clear picture, I think they were discounted as a non-event until further review. The week-over-week gain was 40 points in the S&P. The last two weeks I’ve 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.” The late week charge proved too much to bear for the 50 DMA. In fact, the close was also above the psychological 1100 barrier. An attack on the 200 DMA now seems imminent. In my opinion, as mentioned, positive earnings may carry us a few rounds. However, with earnings’ season coming to a close, positive economic numbers will now be needed to support this move. In the absence of such positive numbers, I think the market will have no choice but to honor the downtrend. Bulls will want to see a new high above the 1129 June peak, otherwise the lower highs will signal that the bear marches on.

Here are some of the reports to watch for this week: Monday, New Home Sales (310K); Tuesday brings ICSC-Goldman Store Sales, Redbook, S&P Case Shiller, Consumer Confidence (51.0); Wednesday, MBA Purchases Applications, Durable Goods Orders (1.0%); Thursday, Jobless Claims (460K), Money Supply; Friday, GDP (2.5%), Employment Cost Index (0.4%), Chicago PMI (56.0), Consumer Sentiment (67).

Currencies: European Stress test results were unclear at best. The lack of consistency throughout the test phase leaves large gaps of confidence in its credibility. Of the 91 banks “tested”, most passed the test and the shortfalls in capital were far less than anticipated. This would be great news and return a much needed sense of calm if they could actually be substantiated. It will be interesting to watch price action on Monday as traders return with 48 hours of assessment time in their pockets.

Looking at the greenback, I’m torn between looking at the simple moving averages or the exponential moving averages. The DEMAs give reason to the bounce this week, as the DX found support at the 200 DEMA. Yet, both the 20 and 50 DMAs are sloping down, and the 200 DMA shows more room for a drop. With the Fibonacci retracement and the 100 WMA still resting near the 8162-8168 area, I’m leaning towards the potential indication of the simple moving averages. The Hungarian downgrade may bode poorly for the EC, but I think the key will lie with our own growth prospects. Since retail sales have been a disappointment (7-17-10 Wire Economy Section), I’m not putting a lot of stock in a promising GDP report this Friday. That may be reason enough for the DX to print in the 81 range. Stay tuned.

Foods and Fibers:  Last week I penned, “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).” If you hadn’t already faded the rally on Friday, Monday gave you very little opportunity to do that. Sunday’s Globex session traded down 7 cents and when the pit session opened Monday it was down 13 cents. Hot and dry weather miraculously disappeared from the radar screens and subsequently sent corn prices down back into the $3.43-$3.75 range with September futures closing the week at $3.71-2. To be clear, this is not me saying I told you so, but rather sharing my disappointment. The slide in price resulted in implied volatility contracting. This was not helpful to either of the trades in the June 14, 2010 OPR, but in particular for the back ratio spread. Unfortunately there is risk of loss in trading.

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Energies: Last week I penned, “Crude seems to be at the mercy of the equities’ markets and the large inventory overhang. The 200 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.” This past week’s sharp rise in the equities’ markets may have left oil shorts begging for mercy. Oil rallied to an 11-week high. The 3.7% gain on the week came on the heels of potential global economic recovery. The threat of Tropical Strom Bonnie helped to spook oil shorts as well. Let’s think about this for a minute. The oil inventory data that was released this past week showed that stockpiles increased by another 360,000 barrels. Gasoline stockpiles sprung 1.12 million barrels, which is the largest inventory amount since April. The jobless claims were higher than anticipated. Bloomberg reported that CME data of oil futures’ open interest over the last 60 days (May 20 - July 20) fell 13.2%. This is the greatest decline since Lehman filed for bankruptcy in 2008. To better understand this, let’s delve a bit deeper. In the month of April, crude oil open interest was climbing along side of oil’s price. On May 3, the September oil futures contract hit its most recent intraday high of $92.18. Over the following 3 days oil’s price dropped more than $10, culminating with the “flash crash”. However, during the same 3 day period open interest rose. I attribute this rise in O.I. to the initiation of short positions. The next 5 trading sessions saw stabilization in both crude’s price and open interest. On May 14, the next down leg in crude’s spiral began with oil dropping over $10 per barrel before setting its interim bottom on May 25. During this 8 trading session period, open interest had its sharpest decline. I will attribute this to long liquidation. At the point of capitulation, sell pressure had been exhausted and over the next 60 days a rally from $69.62 to $79.60 had ensued. It is during this time period that Bloomberg reported O.I fell.

In my opinion, the recent climb in oil’s price is neither supported technically nor fundamentally. While past performance is not necessarily indicative of future results, a rising market price coupled with declining open interest is out of character for a bullish move. The less than supportive fundamental picture seems to underscore this very point. As such, I remain negative in my bias and would be surprised to see oil sustain a move into the $80s.

Metals: After starting the week on a dip, Gold futures managed to muscle their way back above $1,200. The weekly close of $1,189.70 was offside by 40 cents week-over-week. It is this kind of action that I was referring to when I penned the following last week, “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.” I must admit, the early week lows that eventually bounced off of the 100 DMA had me nervous and were anything but dull!

The chart below shows Gold’s volatility over the last 4 years. Implied volatility (the blue line), which is presently resting close to 20%, is approaching a 3-year low. While past performance is not necessarily indicative of future results, looking back at the 2007-08 period, IV rose steadily when gold’s price pushed to all time highs as a safe-haven from the equity markets’ turbulence. IV experienced its sharpest move up after gold’s price set a lower high on its second challenge of the much anticipated $1,000 price point. Some will argue that the cause for the IV spike was based on fears that gold’s move up was done. In my opinion, the price spike in IV was based on gold’s possible move higher. Sure, I can say that now with the benefit of hindsight, but at the time the financial markets’ very existences were in question and fiat currencies seemed unreliable. Now that gold is testing the long-term trend line support, IV is attempting to perk up again. Are option traders looking for protection against a break down in price or are they indicating that another move higher may be on the horizon? I wish I knew with certainty. Even though the 20 and 50 DMA have recently had a bearish crossover, which could lead to a breach of support, I am still leaning towards the latter. The MACD and Stochastics have reached oversold levels and may soon give a buy signal. Concerned longs may consider adjusting exposure to below the 200 DMA. Either way, it is advisable to watch price action (bullish or bearish) as IV attempts to crack the 25% level, it has been a formidable challenge throughout 2010. Stay tuned.

Chart by OptionsVue Systems International

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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.