The Softs Pit Review

For the week of November 2nd, 2009

By PitGuru Jurgens H. Bauer

In trying to make sense of the price action among the Soft markets this past week (as well as predict the week ahead), first look at the price action in the dollar. The US Dollar index (DXZ) rallied four of the five trading days last week (its been a long time since that's happened), and while DXZ remains below its downtrend line it did eliminate an oversold condition and begin chasing shorts. The Dollar index (DXZ) defended 75.00 well and stayed above the twenty day moving average and above 76.00 on Friday. Still need to see DMZ close above 76.60 for two consecutive days before becoming convinced that the dollar is capable of jeopardizing its well-established downtrend. Otherwise, most ought to continue to view any rally as nothing more than an oversold bounce.  Obviously, dollar shorts may decide that abandoning their positions makes sense (nothing wrong with taking a profit), especially heading into the final two months of the year. Be alert to significant movement in the dollar and its inverse relationship with the Soft markets.

Since dropping below $1.40 KCZ has remained on the defensive, yet coffee prices remain able to hold key support at 133 and remain able to settle above 134. News stories raise concern regarding the impact of rain as it is causing flowering problems. The potential is for damage to the crop. Here is one such link: http://www.bloomberg.com/apps/news?pid=20601086&sid=apKjNE0kSNRE.  Please understand that volume has also been playing a role with volume mostly light on moves down, but heavier on moves up. As markets tend to head towards volume that may mean better values possible, and while friendly towards the market I'm standing aside at present.

Cocoa prices have looked as if they might reverse from their uptrend, but need to fall below 3200 basis December before any real technical damage is clear. While there remains a bullish school of thought towards further tightening causing a run upward, the recent price action in the dollar has raised profit taking among bulls and prompted short selling to increase. Still, price dips have all held pretty well and better than some others in the complex.

If ever there was a market seeking to move higher the cotton market fits the bill. Participants will be mainly focused upon the rolling of positions out of December into March during the next week, so look for that spread to potentially widen. Volume has been decent and open interest continues to grow. I, however, remain skeptical that with all the damage to the late crop prices have not exceeded 70 cents in the CTZ. Therefore, I will consider buying puts.

Sugar is the one member of the Soft complex that I see as having upside potential over the near term. I like that prices have cleaned the market of weak longs. Fundamentals really haven't changed, but they’ve purged the market and made it leaner. Friday, sugar values held quite well in lieu of the stock market drop. I anticipate seeing a return to challenge higher levels and think it wise to consider owning wide call spreads. Look for reasonable setbacks as long sided entries.

OJ may gain interest as the cooler weather approaches, but it too ought to be subject to outside influences. Supplies are adequate and the crop appears moving along without any major worries.

In sum, look towards outside markets for leadership in the softs.