Gasoline (RBOB) and U.S. Dollar Index futures are two trending markets that look poised to continue along their path. The best way to go about establishing positions in these trending markets is by waiting for corrections.

RBOB

June gasoline futures (RBOB) should continue to trend higher because crude oil prices have remained firm and recent refinery problems have led to supply problems. This has enabled the market to shrug off any concerns of sagging crude oil demand. A weakened U.S. economy could lead to more interest rate cuts by the Federal Reserve. If rates are cut, rising inflation fears could put pressure on the U.S. dollar and thus push prices of commodities, such as RBOB, higher.

It also appears that several refinery glitches are underpinning the market, including a major fire at an Exxon refinery near Los Angeles on April 4. With refiners significantly decreasing their operations because of spring maintenance, gasoline stocks could show a major decline in this week’s inventory report from the Energy Information Administration. The reports are scheduled to be released on Wednesday and Thursday, April 9 and 10.

Reduced supplies could spark a rally in the June RBOB futures. You may remember that on Wednesday (April 2) of last week, gasoline crude supplies had a surprising 4.5 million barrel draw down, which led to a rally.

Lingering concerns over demand for crude oil may provide some upward price resistance, but with refinery rates low and summer driving season ahead, a new supply problem could easily push RBOB futures to new highs. On Monday, April 7, June RBOB futures reached an all-time high of $2.7903 a gallon. The market has crossed a very bullish indicator, which is why I’m recommending buying this market. I would recommend buying at $2.7420 with a $2.7120 protective stop.

Many of the fundamentals that have fueled the commodity bull-run over the last six years are still in place. Middle East tensions and demand from China and India are still strong fundamentals driving the energy markets and other commodities. In bull markets like this I recommend buying any corrections to establish positions that can catch the next push to the upside.

U.S. Dollar Index

The U.S. Dollar Index, which measures the U.S. currency against a basket of six counterparts, has been in a bear market for quite a long time. It’s a very mature trending market (as you can see from the chart below). This market has a little more risk associated with it. I’m a firm believer in trading in trending markets by looking for corrections in those markets to establish positions. After establishing a position in a trending market, I believe a trader should strategically place protective stops to protect against losses, but also to protect realized profits.

The U.S. dollar started the second quarter higher because of a shift of focus to growth risk in Japan and Europe, along with fears that the U.S. credit crisis could spread into European banks. The dollar’s rebound is limited because of uncertain economic prospects as job growth decelerates and the credit problems continue. Non-farm payrolls for March fell by an unexpected 80,000 on Friday, April 4. January and February job losses were also revised upward. So the economy has seen three months in a row of job losses, measuring about 240,000. These numbers have many believing we are currently in a recession, event though the traditional definition of recession defines it as two consecutive quarters of negative growth, which we yet to see. March unemployment rose to 5.1 percent, from 4.8 percent in February.

The dollar traded lower in reaction to the March employment report, but has remained steady in trading early this week. This report increases the chances of an official recession and could influence the Federal Reserve to aggressively cut interest rates at their April 30 Federal Open Market Committee (FOMC) meeting.

This week’s focus has turned to the policy meetings of the Bank of England and the European Central Bank (ECB). The G7 meeting of central bankers and finance ministers from the seven wealthiest nations is scheduled for this weekend and will also be closely watched. Look for a small bounce in the dollar this week due to some short covering ahead of these important events. Look to establish a position on one of these corrections, should they occur for a short-term trade. I would recommend selling any rallies in the U.S. Dollar Index this week.

The Bank of England is expected to cut interest rates by 25 basis points and ECB is expected to make no change. The question is how the ECB plans to deal with slowing European growth and record inflation. The dollar experienced a false rally in January, sparked by ECB rate cut speculation.

The risk of a widening gap between the dollar and the euro, yen undervaluation and global economic risk are expected to be on the G7 agenda this weekend. They are unlikely to agree on a plan to support the dollar because rising exports seem to be the only blessing of the weak currency and a slowing economy. Optimism for a dollar rebound is beginning to fade.

The dollar will continue to move lower in the next couple of months unless the U.S. economy improves remarkably. The Dollar Index is down nearly 6 percent in 2008 after dropping about 8 percent in each of the past two years. The dollar traded at $1.5655 to the euro in early afternoon trading on April 8. I recommend selling the June U.S. Dollar Index around 73.50 using a 74.50 protective stop.

Stuart Kaufman is a Senior Market Strategist at Lind-Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-924-1060, or via email at skaufman@lind-waldock.com.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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