Into the Futures May 16, 2016
Into the Futures – May 16, 2016
If the dollar is the key, what is its next move?
• As earnings wind down what will be the catalyst for equities?
• Now that crude has touched $47 will it go higher?
• What will it take for gold to stay above $1300?
• Will this weekend’s below normal temps in the northeast rally natural gas prices?
Earnings season while not over is winding to a close. Most of the big names have reported and while beats are ahead the bar had been set fairly low. The bright spot is that revisions for future earnings have been higher and that is the first time in years that has happened. On the not so bright side, the pattern with this recovery has been; expect good numbers and then revise down. We witness this each time a GDP revision is released. Consumer confidence has been up and that’s positive because retail sales have suffered recently and in an economy that’s 60% consumer driven confidence means more spending. It’s not that consumers have stopped spending it’s that they are much savvier and conscience of their purchases. The dollar has been hovering near the low end of its recent range and I don’t see anything that will push it higher. Economies around the world; Europe and Asia in particular are weak but neither of those places have any large scale stimulus plans (other than what’s in place) which would weaken their currencies and the Fed probably won’t raise rates in June. There are headwinds but there is also the continuation of cheap money and that has been the stronger factor in determining where equity prices head. While there doesn’t seem to be a lot of faith by experts in the economy the market grinds higher. Much of that has to do with the fact that money managers need to show positive returns and where are they going to get that? It’s a global market and while not perfect the US is doing better than most. The CPI numbers, housing starts and the FOMC minutes will be the key economic reports investors will have their focus on. It will be interesting to read what was said at the last Fed meeting. My bias is neutral to slightly bullish. The market has been choppy and in a market that moves up and down with no clear direction technical numbers become important because traders have very little to look at.
Crude oil traded $47 on a delayed reaction to the Canadian wildfires, continued strong gasoline demand and a weakened dollar. There is every reason to believe that 2 of those factors; gas demand and the weakened dollar will continue. Gasoline has been the big surprise because as prices have gone up demand has not subsided and is running about 10% higher this year than last. And when you factor in the efficiency of new cars replacing the old ones it really is remarkable that consumption is running so much higher. School ends in most of the country in about a month and the full summer vacation season will be started. Dollar weakness should continue with a few pauses as the Fed won’t raise rates in June and maybe not the rest of the year. The Saudis and OPEC continue to pump at record rates but production in the US dropped again last week and is now below 8.9 million barrels per day. That’s about 800,000 lower than the peak. If there is any disruption to supply due to geo issues crude oil could trade to $50 fairly quick. The latest COT report shows that managed money still held many more long than short positions, but the short positions did grow by 20,000 contracts over the last week. If that pattern continues it could be a signal they believe prices are peaking. My thesis is crude will be supported throughout the summer but if production from OPEC continues at the current pace prices will begin to fall in the 4th quarter. When I say prices supported, I don’t necessarily envision them trading over $50, unless supply is disrupted, but at the same time I don’t see them headed below $40 either. My bias continues to be buying the dips and I will trade from the long side.
Even though equities have firmed and the dollar has bounced from its lows gold prices remain strong. While there is not a threat of economic calamity there is the uncertainty created by the Fed in having to explain why they cannot raise rates each time a deadline has passed. And by missing those deadlines it signals to gold investors that what they have believed all along is true in that the Fed will never be able to raise rates. There is a saying on the trading floor and that’s “add $20 dollars to the price of gold every time the Fed misses an opportunity to raise rates”. Gold has followed the pattern of make new highs and then pullback to strong support wait for a Fed decision and when it’s a non-decision make new highs. The dollar trading in the 93 handle is supportive for gold and if it breaks into the 92 handle that could be the catalyst that keeps gold above $1300. Managed money has slightly reduced the number of longs held according to the latest COT report but they still stand at 246,000 vs. 29,000 shorts a skewed ratio to the bull side to say the least. There is no reason to believe in the uncertain climate that the Fed has created that gold prices will drop below $1200 in the near term, in fact $1225 seems to be a strong bottom. My bias is higher but I will wait till gold trades to areas of strong support before I enter into longs.
Weather wise the month of May has been a disappointment for the eastern part of the US as temperatures on many days have been below normal. Some people living in areas north of NYC had to turn on the heat over the weekend as temps briefly dipped into the 30s overnight. That won’t be enough to put a huge dent in natural gas supplies but could be enough to rally prices back to the high teens or low 220s which in my opinion would be a good area to short. Natural gas supplies came in as expected when the number was released Thursday and on the season supplies are about 20% higher than last year at this time. Temps will moderate over the next week but are still in the comfort zone and consumers won’t be turning on the A/C. My bias is to sell rallies the latest COT report shows that managed money still holds a bearish bias and seasonal now is not the time to be long.
These are the numbers to watch:
The e-mini has resistance starting from 2047 to 2053 and includes the 50 day MA above this there is resistance from 2068 to 2076 which includes the 21 day MA. Above these levels there is resistance from 2090 to 2096. Support in the e-mini begins from 2030 to 2024 below this there is support from 2011 to 2005 and includes the 200 day MA and below this support runs from 1992 to 1986. My bias is neutral and I will explore whether to buy or sell near strong areas of support or resistance.
Crude oil has resistance starting from $4670 to $4720 above this there is resistance from $4800 to $4860 and above this the resistance is from $4990 to $5040. Support in crude oil begins from $4560 to $4510 below this there is support from $4420 to $4370 and under this the support runs from $4310 to $4250 and represents an area of a quadruple bottom. My bias is neutral to higher but I will wait for a dip in prices to enter into a long.
Gold has resistance starting from $1283 to $1289 above this there is resistance from $1298 to $1307 and above this the resistance runs from $1316 to $1321. Support in gold begins from $1266 to $1259 and includes the 21 day MA below this there is support from $1251 to $1245 which includes the 50 day MA and under this the support runs from $1236 to $1230. My bias is neutral to higher but I will wait for a dip preferably between the first two areas of support to buy.
Natural gas has resistance starting from 216 to 224 which includes a number of tops as well as the 200 day MA, above this there is resistance from 231 to 237 and above this the resistance runs from 248 to 254. Support in natural gas begins from 204 to 199 below this there is support from 197 to 191 and includes the 50 day MA and under this support runs from 187 to 182. My bias is neutral to lower but I will wait for a small rally before I sell.
Government reports scheduled for release this week will include:
May 16 8:30 AM Empire Manufacturing
May 16 10:00 AM NAHB Housing Market Index
May 16 4:00 PM Net Long-Term TIC Flows
May 17 8:30 AM CPI
May 17 8:30 AM Core CPI
May 17 8:30 AM Housing Starts
May 17 8:30 AM Building Permits
May 17 9:15 AM Industrial Production
May 17 9:15 AM Capacity Utilization
May 18 7:00 AM MBA Mortgage Index
May 18 10:30 AM Crude Inventories
May 18 2:00 PM FOMC Minutes
May 19 8:30 AM Initial Claims
May 19 8:30 AM Continuing Claims
May 19 8:30 AM Philadelphia Fed
May 19 10:00 AM Leading Indicators
May 19 10:30 AM Natural Gas Inventories
May 20 10: AM Existing Home Sales
Before deciding to participate in the commodity futures market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is substantial risk trading commodities.
Past performance is not necessarily indicative of future results. There are no guarantees of profit nor of avoiding losses when trading commodity futures contracts. No representation is being made that any trade will or is likely to achieve profits similar to those in the past. No part of this letter may be reproduced without the consent of Anthony Grisanti