The Futures Report

Trading the World’s Markets             March 25, 2007

   Matthew Caruso, CMT                                                          

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Metals

Gold (Short): Gold has been in a strong uptrend since early 2001. In this period the yellow metal has climbed from $255 to $730. Figure 1 shows the approximate 10 month cycle in Gold which has been displaying right translation throughout the past 6 years. Right translation occurs when a cycle peaks more than halfway through the cycle, thus showing the peak leaning to the right; this is a characteristic of an uptrend. The blue lines above the price in Figure 1 show this phenomenon. After 6 years of higher highs in each cycle a change is occurring, the last cycle top seems to have formed a lower high. This is the first major signal that a large trend change is occurring. It is too early to confirm that the Gold uptrend is truly over, but this current change of momentum in the monthly cycle will have bearish implications for shorter term investors. 

     Gold has also been displaying a strong 15 week cycle. It can be seen that when Gold’s larger monthly cycle turns lower such as in May of 2006, the weekly cycles display lower highs and lows as can be seen in Figure 2. With the 10 month and 15 week cycle now in bearish positions, a sell signal on a daily chart would be an optimal entry point.

     Gold now has a sell signal on its daily chart based on the momentum oscillator (Walter Bressert’s double stochastic oscillator) in the bottom panel of Figure 3. Traders can look to initiate short positions based on the change of momentum. Also, a break of the red up trendline in Figure 2 would also be a place to enter short positions. With weekly and monthly cycle pointing lower, the daily cycle should make a lower low which would result in prices falling below $634 from the current levels of $657. 

     It is important that all trades have an exit in case the expected result does not occur. A recommended exit would be above Thursday’s high.

     There is a similar setup for Silver (SI).

Figure 1 Gold's 10 Month Cycle -- January 2001 to March 23, 2007         

Figure 2 Gold’s 15 week cycle -- July 2005 to March 23, 2007

Figure 3 Gold Daily -- January 2007 to March 23, 2007

Grains

Soybean Meal (Short): The price of corn has dramatically increased in recent months due to the recent rise in the use of ethanol in the U.S. in an attempt to become more environmentally friendly. This has led to an increase in corn acreage and reduction in acreage for other grins; the result is higher prices for all grains. Soybean meal has appreciated rather dramatically in recent months as can be seen in Figure 4. However, it seems that the uptrend may be reversing and a short trade is possible. The red line in Figure 4 is the net position of commercial traders for Soybean Meal. The action of these traders is very important because they are essentially the smart money in the market. As you can see, they are relatively   bearish. The last time they were close to being this bearish was mid-2005 and as can be seen in Figure 4, Soybean Meal greatly depreciated in value.

    Apart from smart money selling heavily, the trend is demonstrating some signs of a reversal. The past two rallies in Soybean Meal were met with selling pressure and as a result, have not made new highs. The inability to make new highs in the market is indicative of an over-extended trend. As well, momentum as represented by the blue oscillator in Figure 5 is showing that prices are overbought as well and in a good position to sell. A fall below Friday’s low would most likely lead to decline below the early March lows.

     A fall below the early March lows would be rather significant because it would establish a pattern of lower highs and lower lows which is a characteristic of bear markets.  The faster a market rises, the faster it will fall and therefore it is important to watch the grains for a sell signal in order to capitalize on the eventual strong move down.

     As always, a protective stop must be used to prevent large losses in the case that the trend does continue higher. An exit above the March high is recommended.

Figure 4 Soybean Meal weekly with COT data -- January 2005 to March 23,2007

Figure 5 Soybean Meal Daily – November 2006 to March 23, 2007

Market Setups

Softs

Sugar (Long): After a precipitous climb through 2004 and 2005, Sugar met a steep fall in 2006 as seen in Figure 6. The commercials have been buying in recent months and now have one of the largest long positions in recent years after having one of their largest short position in mid – 2005 which can be seen in Figure 6 as the red line. This means that the smart money thinks that Sugar is a bargain and they are enthusiastic buyers.

     Sugar’s monthly momentum and longer-term cycle is also coming to a bottom as seen in Figure 7, and will likely lead to much higher prices in the near future. The combination of bullish commercial traders and a bottoming cycle are a powerful combination.

     Although there are many longer term bullish factors in Sugar, shorter term factors are still bearish, as seen in Figure 8. The cycle represented by the red momentum indicator in Figure 8 shows that the weekly cycle is still in its corrective phase. If the weekly cycle can bottom without declining below the cycle low in September 2006, then the monthly bottom will be confirmed and much higher prices will be expected.

Figure 6 Sugar COT data – 2000 to March 23, 2007

Figure 7 Sugar Monthly Cycle & Momentum – 2000 to March 23, 2007

Figure 8 Weekly cycle – February 2006 to March 23, 2007

Disclaimer: The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. Opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein.