My technical indicators show the S&P 500 futures have been recently correcting, but trade is tricky right now. The dollar should remain weak, which could provide a prop for some commodities markets. I’ll take a look at the short-term term technical picture for the dollar, S&P 500, crude oil, heating oil, natural gas, corn, and soybeans. Keep in mind, my analysis is dynamic and my opinions can quickly change as conditions change, but this is what I see right now.
Dollar Index
Let’s first look at the ICE Dollar Index futures, which track the dollar against a basket of six global currencies. The blue line on the chart of the December futures contract below is my “bull/bear” line, a proprietary indicator that incorporates high, low and closing prices. When prices are above the blue line, the bulls are in control and I’d expect further short-term gains. When prices are below the blue line, bears would be in control.
Based on this indicator, I am looking for continued weakness in the dollar index, as the market slipped below the line near 77.20. I could see by a possible test of the lower end of the range by October 19, at about 76. The high of the pattern is 77.75 and the low is 76, representing a range of 1.75. Subtracting that from 76 gives us a downside target of 74.25. I’d like to see the market break the September 23 low near 76, but the chart depicts a major breakdown with the close below the bull bear indicator on Monday.
If prices rally above 77.75, near the twin peak highs of September 29 and October 2, my market outlook would change. I’d then be looking for higher levels and opportunities to buy. I don’t see the longer-term fundamentals behind the dollar, not until the U.S. government gets its fiscal house in order.
S&P 500
The December E-mini S&P contract is right at the bull bear indicator, closing below it last week and then correcting to 1012. The market saw a nice bounce on Monday, October 5, 2009, which is making the outlook tricky for trading in the next couple sessions.
Adding in pivot points can add some insight. The pivot for Tuesday’s session comes in at 1031.50, so if the market can maintain trade above that level in the early session, I’d be encouraged. A simple trendline connecting highs projects a move to 1050 if Monday’s rally can continue. We’re entering the third-quarter earnings reporting period so we’ll see what the market thinks about early results.
In early October, the S&P has been in a corrective mode and Tuesday’s price action could be a determining day for the near-term trend. I think a good sell area for “permabears” would be against the trendline, above at 1053. A close under 1012 could bring a test of 985 on the downside. Volume is also an indicator of the strength behind the trend, so watch participation. Volume on the rally Monday was less on the recent sell-off (see the last bar on the bottom half of the chart below). So that seems to indicate the rally might have been lacking conviction on Monday.
Crude Oil
Crude oil futures have been choppy so far this month. Looking at technicals, drawing a trend channel connecting recent highs and lows shows a well-defined trend channel for the November contract, with a lower series of highs and a lower series of lows. Fundamentally, fourth-quarter demand is typically strong for crude oil, so we might see a floor under the market. I recommend looking to sell near the upper end of the trend channel at $72 a barrel, and put a stop around $78 if you do decide to get short. Crude oil is above my bull-bear indicator line (at $67.92 on Monday), so we could see a test of $72 or slightly higher before another wave lower within a choppy range. We have some mixed signals in this market from a technical and fundamental perspective.
The dollar’s decline has been a prop for crude oil, but also keep an eye on crude oil inventory data. The American Petroleum Institute releases data this afternoon, and the Energy Department’s weekly report will come out on Wednesday. Analysts are expecting an increase in stockpiles.
Heating Oil
Winter is approaching, and this is of course the key season for heating oil. According to inventory numbers, we have a lot of heating oil in storage. Last week’s report from the Energy Department showed supplies were 400,000 barrels above the five-year average. However, heating oil is rather cheap on an historical basis, and I think extremely cold weather in the months ahead could cause prices to surge.
I’d be looking for inventories to show a pick up in demand in coming weeks, and could see a possible target of $2.25 to $2.50 a gallon on the upside. A bitterly cold winter would make this range realistic. Keep in mind, speculating on Mother Nature is a tough business, because she can be fickle. If you have a longer-term outlook, a $2/$2.20 call spread for February could buy some time, and would be a relatively inexpensive strategy to trade a longer-term rally. Shorter-term, a move under $1.75, my bull-bear indicator, could bring $1.68. But I expect $1.75 to hold as support in the November contract.
Natural Gas
Natural gas is another weather-driven market, which has been severely depressed all year but has seen a bump higher recently. A close above $5 per mmBtu in the November contract would be psychologically positive for this market. This market is breaking out on strong volume, which is a positive sign. I would remain bullish on closes above $4.85. Taking the high in the pattern of $4.99 and the low of $4.35 gives us 64c; adding that to the breakout level projects a possible move to $5.63. We could see a quick move to $5.65. A close under $4.65 could bring a test of the lower end of the recent range.
Soybeans
This market is clearly in a downtrend from a technical point of view, and the pressure is coming mainly from a robust harvest. On the fundamental side, yields have been good, and the USDA is expected to increase its 2009 soybean production estimate in a report out on Friday. Right now, I think this market could test $8.40 to $8.20 per bushel by the end of October. I think $7.85 should hold as support, but I see more near-term pressure coming for soybeans. We do see a high-volume sell-off bar on the chart for November soybeans, which implies more downside. On the flip side, a move above $9.40 due to some unexpected development would change my view on this market. November CBOT soybeans closed unchanged at $8.85 on Monday.
Corn
Corn futures are rangebound, but any close above $3.50 a bushel and I think we could see $3.76 in the December contract. If you are bullish corn, you are probably factoring in harvest delays due to possible cool and wet weather. I believe corn will see a lot of producer hedging that could keep prices sideways for the intermediate future. December CBOT corn closed up 8 cents Monday at $3.41.
Feel free to contact me with any questions you might have about these or other markets. I'd be happy to help you develop a customized stategy based on your unique situation.
Blake Robben is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-266-0551 or via email at brobben@lind-waldock.com.
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