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CCI Futures Forecast for March 22, 2013
By Head Trader Dan Faretta
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Silver – Natural Gas – 30 Year Bonds
Silver
For one of the most volatile commodity markets on the board silver has been extremely quiet for the majority of a month. What does this mean? Is this a pause before the next leg lower? Or is the market building strength before the next rally starts? Silver has fallen approximately 15 percent from the high of last year. This market is very close to where the last rally started, right around 26. As traders we are conditioned to have a short term memory, forget the past and focus on the future. Taking a look back at July and August of last year what did the market do? The market had a large sell off from 36 down to 27, then consolidated for about a month before starting a large move to the upside. Markets in general move in repeatable patterns, it is just a matter of finding out what the pattern is and how it works. It is like finding out someone's tell in a poker game. It may not always happen the same way but once you find it, you have a better feel for when to bet big. Silver looks to be forming the same type of bottom it did last year near these levels. If this holds true, this market could consolidate for a few more weeks or even another month. If it does breakout to the upside be ready for a large move. The problem with this type of consolidation is that most people want to wait for confirmation. Once you get the confirmation the market is gone and never looks back. Yes there are times when a market retests its previous range but that is a gift that silver does not give very often. Positioning with options ahead of the break out could prove to be very profitable in the long run. The 36.00 dollar level is the most logical long term target for silver to reach this year, there will be resistance near 32 and 34.50. If the market gets above both of those resistance points look to take profit near 36 with whatever position you have on. Longer term option spreads 2 dollars wide for example in December playing the 33-37 range are appealing.
Past performance is not necessarily indicative of future results. Chart courtesy of Gecko
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Natural Gas
Here is the 4.00 level again, what is the best way to play it? Will it hold this time or finally break out to the highest levels since back in 2011? The market has had a huge run up since the beginning of the year and now it is stuck right at 4.00. The past 5 trading days the market has bounced above and below the 4.00 level without any convincing break either way. Option expiration for April natural gas options is on Monday. The market could be consolidating near 4.00 because there are a lot of options expiring at that strike price and once expiration is over…. boom the market takes off. The questions still remains which way is it going to move. Looking at a weekly chart the market has made a strong base just above 3.00. That was resistance and now it is support that has been tested twice and held very well. From a fundamental stand point there is a lot of supply out there and it is getting easier and safer to get out of the ground. There is more and more talk, especially from T. Boone Pickens, about a global conversion from crude oil to natural gas. Those traders that follow T. Boone know that he is usually early on his visions but in the past he has been correct. So, looking out 10-20 years yes the demand should more than double for natural gas based on the large conversion that could take place. The other fundamental view is that natural gas is too dangerous to transport all over the US much less that the world. So until there is a safe and cost efficient way to transport it, the market will be flooded with the stuff and this will keep the price depressed. I personally have no idea where the market is going but I do believe that there will be some volatile times in the coming weeks. Buying strangles around the 4.00 level is one of the best option strategies that I see on the board. For traders that are worried about the time element, go out 6 month with the strangles. I feel that volatility will come in as soon as April expiration is over, so the May options though short in time could be the best bang for your buck.
Past performance is not necessarily indicative of future results. Chart courtesy of Gecko
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30 Year Bond
There are a lot of traders out there that say buy and hold is dead. If you would have bought bonds 20 years ago and held until present day I believe you would beg to differ. The 30 year bond market has been one of if not the best uptrend in the futures markets over the past two decades. Especially over the past few years with all of the bond buying programs the federal reserve has implemented. Since 2011 the market has gone parabolic. Going back to the statement mentioned before about repeatable patterns in market, the bonds have a tendency to shoot straight up and fall just as fast if not faster back to where they originally started. Looking at a monthly chart of the 30 year bond market, the same pyramid formation occurs over and over in the past 20 years. Very rarely does the market make it below where the rally started from. Taking this information about the market returning to where is started, gives us a downside objective to where this market will stop falling. The time is upon us where the federal reserve is starting to figure out an exit strategy to all the bond buying programs they have implemented. While the federal reserve is exiting the market this very well could make the market fall back to where this initial rally started. In 2011 the bonds were near 122, now they are at 142. This is not a trade that should be traded with futures, the timing element will be very difficult to judge. Implementing put strategies that are at least one year till expiration possibly longer, could capitalize on the slide in bond prices. Going out longer than one year can get very costly, so implementing a put strategy that can be rolled out a few times a year seems to be the best strategy. Using spreads can help to offset the cost as well.
Past performance is not necessarily indicative of future results. Chart courtesy of Gecko
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***Be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors. Fundamental factors, seasonal and weather trends, daily news, and other current events may have already been factored into the markets. It is important to note that options and futures markets are separate and distinct and do not necessarily respond in the same way to similar market conditions. Options prices do not move in lockstep with changes in the underlying futures market price. Strategies using combinations of positions such as spreads and straddles are no less risky than taking straight long or short futures or options positions. Past performance is not necessarily indicative of future results.
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