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The Windy City Trader 10/23/17

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Just for fun….. I talked to a homeless man this morning and asked him how he ended up this way He said, “Up until last week, I still had it all. I had plenty to eat, my clothes were washed and pressed. I had a roof over my head, I had TV and Internet, and I went to the gym, the pool, and the library. I was working on my MBA on-line. I had no bills and no debt. I even had full medical coverage.”I felt sorry for him, so I asked, “What happened? Drugs? Alcohol? Divorce?”
“Oh no, nothing like that,” he said. “No, no…. I was paroled.

This Week’s Commentary

Metals: Gold and silver still look to have more downside as do palladium and platinum while copper is the one in the group which can be bought after dips.

Gold; Now that December gold broke the 1280 level I would expect to see at least 1260 and possibly 1240. As long as the prospect for a rate hike in December continues we would need some sort of major world event to see much upside other than short covering for gold.
Silver: December silver has held above 16.80 support so far with the low currently at 16.89 but that isn’t likely to hold. 16.80 may offer minor support but more likely we will see 16.60 once 16.80 is broken. The strong stock market will give some fundamental support but gold is likely to drag silver down along with it.
Copper: After the temporary blow off top at 32590 last week December copper has seen dips to 31400 both last Thursday and Friday. We are still overbought as the move occurred too quickly I believe so I would hold out for at least 31000 and possibly even 30500 if looking to buy.

Currencies and Financials: Despite talk from pundits everywhere about a US Dollar crash, I see no reason for that at this time. We continue to speak of higher rates and we have the economy heating up to support higher rates. Most talk today will be of buying the $ after breaks and selling non $ currencies after rallies.
I will leave last week’s words intact as the Dollar has pushed to recent highs and the non dollar currencies to recent or new lows since last week. Again I expect the Dollar to lead the pack for at least the next 1 ½ – 2 years and expect to see 10500 by the end of 2018.

British Pound: The December Pound took out 13150 by a bit, reaching 13100 last week before rebounding. We are back to 13220 now and I expect to see 13350 by the end of the week. The Pound won’t be as strong as the US Dollar going forward but should be the next best currency if you are looking to buy. If fortunate enough to see another test of 13100 I would be a buyer of futures and possibly call options.
Swiss Franc: As expected the December Swiss has weakened further with the drop from 10320 last week to 10156. Euro zone currencies will continue to fall as the weak economies there will not allow for rates to be raised. In fact Europe is still in the QE mode which we abandoned 2 years ago before starting to raise rates. Use a correction to 10280 if thinking of a sell.
Japanese Yen: Sure enough the Yen has also followed expectations with the drop Sunday night to 8784. We were pressing against 9000 last week and so far this 8800 level shows it wants to hold the first time around. The Nikkei reached a 21 year high last week so Japan may be in a position to begin upping their rates so we may not see much lower than 8800 short term. If we do not solidly drive below 8800 I believe a range from 9000 – 8800 may be the norm for at least for the next few months.
Euro Currency: The December Euro tried to push through the 11900 resistance last week but fell just short two days in a row with 11895 highs. That failure paved the way for a break to 11767 so far. There is no support before 11700 and that is likely to be tissue thin support. The Euro zone is in trouble economically and once 11700 fails we should see 11550 with a few days after. I will be watching for some minor corrections higher this week to try to find a nice entry point for what could be a long term short position.
Canadian Dollar: The December Canadian Dollar made one last attempt to break through 8050 last week but fell short. It broke major support at 7950 and from the current 7912 further down to at least 7850 is expected. If 7850 fails to support 7775-7800 is likely shortly after. I would not buy before 7775 and would consider a short on a pop back to the lower breakout point of 7950.
US Dollar: The Dollar has fallen from highs at 10300 last January to lows near 9100 in mid September. When you consider we have higher rates than most of the Euro zone or Japan, it seems that the Dollar is being artificially held down. After the lows at 9100 recently the December Dollar did advance to 9410 last week before pulling back to 9259 last Friday. I like the 9250 level as a buy as I am looking for the Dollar to continue to climb steadily higher during the next 2-3 years at least. I will send out a trade dip if we test, and hold, the 9250 level.
No need to change the words from last week. The Dollar did fall shy of our 9250 objective and has made it to 9389 so far. A slight drop back to 9320 would be a buy now and if that doesn’t happen, it likely means we have blown past 9400 where the next target would be 9500 and it would come quickly.
Eurodollar: This market remains locked in a tight range where 9847 has capped the down side while 9858-9862 has stifled upside. We need to pay heed to any Fed comments pertaining to rates. If we do not see a hike in December futures probably push to 9865-9875. If we do get a hike we probably stay right near 9850 as the 9850 trade is already pricing in a rate hike at the December 12/13 meeting.
30 Year Bonds: December bonds failed at 15406 last week and I was looking for 15428 to initiate a short. Once 15400 failed it was BANG = ZOOM as 15124 was seen within two sessions. So far bonds have come back to 15220 but we may not see much more up short term as the December rate hike is looming. If 15124 cannot hold I expect further down to 15108. A move to 15308 may offer another shorting chance.
S&P 500: After rising to lifetime highs above 2560 The December S&P saw a one morning 20 point correction to 2542 with the Spain/Catalonia drama last week. This is yet another Euro Zone problem as the UN and progressive push for worldwide globalism continues to be defeated at most turns. By the end of the correction day last week futures were right back at 2560 again and made it to new highs the next day above 2577. I see nothing short of a world conflict to stop futures from rising to and through 2600 in the weeks ahead. We probably see support at 2560 now without any unexpected shocks.
Dow: The December Dow also climbed to lifetime highs after the one day correction and pushed over 23300. We probably won’t see 23100 tested again but if so consider a long. For now 23400 should be no problem and if momentum builds we may see 23500 by year end.

Energies: Most here have pushed to the higher end of their respective trading ranges during the past two weeks. I do not expect any major moves for any in this group as we continue in the aforementioned trading ranges except for one possibility. We may push slightly above the highs and stay slightly above old low end ranges which means staying in the range at higher prices on each end.
I will leave last week’s words as is since market action is confirming that this is the path we can expect going forward.

Heating Oil: From last week’s high above 18300 December heating oil dropped to 17600 and is sitting right in the middle of a 18500-17400 range at 17925. The rise from 14200 in July to the 18500 high accounted for the seasonal tendency to rally and for now, with abundant supplies we would need a very harsh cold spell soon for much more than 18500 on top. Because of that I would consider a buy on a dip to 17200 but not attempt the short side at 18500 if it is weather related.
Unleaded (RBOB) Gas: December no lead took out highs from last December and early September with the recent push to 16550. We may have some upside left to perhaps 16800 but I would use that as a possible selling chance. This market is oversold, supplies are ample and we are exiting the summer driving season. Let’s see what happens this week and if we do see that 16800 tested or maybe just shy of 16800, I would be recommending to short futures or buy a put option.
Crude Oil: I know this seems unusual to describe trade in crude oil but action has been slow and boring of late. The main reason is the same reason why crude has managed to drop, sometimes harshly after moving a few dollars over $50 a barrel. There is no shortage of crude and a few months ago we saw the highest supplies of crude reserves in history. To run to much more than $54 or $55 on top is assuming that we will see huge demand for the foreseeable future. That just doesn’t look to happen and with the big supplies coupled with higher US production whenever we reach near $50, the days of $100 plus crude may never be seen again. OK in futures you never say never so let’s just say it would be highly unlikely. In the meantime I feel comfortable buying near $47 and shorting near $54 from the current $52 for December crude.
Natural Gas: Natural gas in general remains saddled with a big supply issue. This market goes in waves where it may drift lower or do nothing for months but has short periods where demand pickup and seasonal tendencies enable significant rallies. We recently saw December futures push to a blow out bottom with the trade to 3020. A look at last year’s chart will show a rise in natural gas from 304 in early November to highs at 37500 by mid December. This was due to the seasonal buying we see in anticipation of possible cold weather in the US. I suggested buying last week for the December futures and was filled near 3110 with a stop at 2995. We are currently at 3120 so that recommendation remains intact.
Since last week’s action only confirmed what was written we will leave the commentary alone. In fact since last week we did see one last dip to 3020 on Thursday followed almost immediately by a rise above 3200 Sunday evening. From the current 3170 I do not expect any break until 3240. If 3240 fails to resist, first 3350, then 3400 would be the next targets. A pull back now should be well supported from 3090 to 3100.

Grains: All grains have slid to new or recent lows since last week despite a very slow harvest. It seems as if lows are in for the season and we have to watch the now changing weather pattern in the Midwest to see if harvest pace quickens or is slowed by the rain and cold.

Corn: December corn tested the October pre report lows with the trade to 3.43 on Monday. Last week it was announced that harvest was only 28 % complete as opposed to about 45 % for this time of year. Weather was pleasant last week and progress was made but a new pattern has emerged where we have seen and will see much more rainfall than we have during the past 5-6 weeks. Add that to cold which may approach freezing temps by this weekend and we may see a late harvest rise. If 3.54 is bested further up to 3.62 is possible and if harvest is delayed enough 3.74 would be the next target.
Soybeans: Beans rallied 40 cents the day that the USDA lowered projected production from 49.8 to 49.4 bushels per acre. Since that October 11 report November beans fell from 10.05 to 9.75 after rising from 9.65 to 10.05 on the report day. In last week’s letter I wrote that the 9.75 price might be a buy. It popped back too quickly afterwards and we are now at 9.81. We must switch to January beans now as November first notice day is October 30. The equivalent price for November at 9.75 would be 9.85 as January beans currently sit at 10 cents above November at 9.92.Harvest pressure may be in play for the beans also so if the 9.85 continues to hold for January beans, we might look at a buy later this week.
Soy Meal: December meal also ran hard after the numbers pushing from 3140 to 3300 post report. We have pulled back to 3225 so far and if we see additional selling down to 3160, I would consider the long side of December meal as the same bullish conditions which affect beans will affect meal.
Nothing has changed here and December meal did make it to 3150 and sit currently at 3168. I don’t expect much more than 3120-3100 below so if 3150-3160 continues to hold a buy for December meal at 3150, risking below 3100 and looking for 3320 may be the way to go.
Bean Oil: December bean oil continues its rise and pushed above 3460. It was three weeks ago it made lows at 3225. This rise may have a bit more teeth in it but I believe 3500-3520 will be hard to beat on top. In fact that may be a nice short if December oil is unable to dent 3500.
Wheat: December wheat blew through lows at 4.28 and stop loss selling drove it to 4.23 ¾. Apparently that price was low enough to induce strong buying as futures surged to 4.38 within two hours. First resistance on top will be last week’s highs near 4.45 and if that fails to hold further gains to 4.62 are possible. A slide back to 4.28 may offer another chance to buy.

Softs: Coffee and cotton may be near temporary bottoms, cocoa seems poised for further advances and sugar may still have some downside to come.
These were the words from last time and this past week’s action confirmed with cotton, cocoa and coffee advancing while sugar took out last week’s lows.

Sugar; March sugar has tried to hold up but each rise is lower than the one before and each low a bit lower and this pattern looks to continue. It is said that this year’s crop will be solid and after once last gasp to 1440 last week sugar has pulled back to 1388. The 1375 level may offer minor support but it looks to be temporary. More likely 1350 will be tested and bested this month. I would not look to buy until at least 1320 at this point.
Cocoa: The perfect stair step higher pattern remains for March cocoa since the bottom at 1850 in mid August. After holding at 2040 last week futures made it to 2150. I am watching for a correction to 2060 and will be looking to initiate a long if we see that this week.
Cotton: In mid August December cotton bottomed just above 6650. During the early hurricane threats in September the idea of severe damage in the Southwest enabled a rise to 7575 in just weeks. When the damage was not as severe as expected futures fell below 7000 and since then has bounced up and down between 6700 and 7000. We are back to 6755 now and with a little more patience I believe you may have a chance to purchase close to 6625-6650.
I was a little too greedy here in looking for 6625-6650 after the long drop from 7575 since early September. After bottoming at 6675 Friday December cotton soared with the push to 6979 in one session. If 7000 is taken out a speedy run to 7200 looks possible. A slight pull back to 6775 may offer another buying chance as demand has seen a pickup of late.
Orange Juice: November juice has settled into a volatile range since flying from 13000 to 16200 within weeks during this busy hurricane season. So far 14500 held down below while 16500 capped the top. From the current 15250 I would use further weakness to 14500 for a bullish trade. The full extent of damage from Maria is yet unknown and we tend to see a seasonal tendency for advancing prices during the winter freeze season. On a trip to 14500 I will be suggesting at least to buy a call option or long futures but that would entail more risk in this often time volatile contract.
Coffee: December coffee appeared to bottom last month near 12800 and managed a run to 14400. Apparently the bottom was not in yet as futures made it back to 12300 and we need to watch the 12200-12300 level for a possible bottom. If so a buy, risking below 11900 may pay off.
Futures did hold at 12300 last week and we did see a nice run to a double top at 12800 as well. December coffee did come back to 12435 so if considering a buy wait for further down to the aforementioned 12200-12300.

Livestock: Hogs failed just shy of contract highs and cattle managed to rebound after a lower start after Friday’s bearish cattle on feed numbers.

Live Cattle: December cattle pulled back to 11450 after the 11900 top two weeks ago. Since the 11450 bottom futures have attempted to rally almost daily but each time were rebuffed near 11740. Last Friday showed heavy placements to the feedlots and cattle pushed to 11500 from Friday’s 11660 close. The rebound as the day wore on stopped at…. 11737 so that area is still resisting future advances. The on feed report actually showed placements fairly high but this would likely affect feeders more than live cattle and probably most prevalent from the May until August time period being most bearish. This may lead to bull spreads of buying close in months and selling further out months.
Feeder Cattle: The same time frame brought a move from 13900 to 15800 for august feeders. Solid demand pickup carried futures higher and while we may see more upside, a correction is necessary here as well. So far futures held at 15300 but if broken a drop to 15100 and possibly 14900 might get longs back into a buying mode. Wait for at least 15100 – 15000 from the current 15420 if looking to buy.
The words from last week came to pass as August cattle did drop exactly to 15000 on the open from Friday’s 15307 settlement price. We did see a speedy rise back to 15307 and from the current 15265 another rise to 15400 may be a
nice shorting chance for August futures. Another possibility would be the bull spread I spoke of with buying front month August and selling May 2018 feeders. I may put out a recommendation on that trade this week after watching a day or two of post report action.
Lean Hogs: Usually when we see a large discount for futures against the cash market, it is temporary and cash tends to slow down to match up closer to the closest in futures month. This hasn’t been the case here and instead of cash dropping December futures have continued their rise to match up to higher cash values. Strong exports to Japan is one reason as well as future months projecting less hogs coming to market. December hogs bottomed at 5610 less than a month ago on September 25. We have pushed to 6450 now and the highs above 6550 from mid June are approaching. We may make it there but this market is vulnerable to a hefty correction after the sharp push higher. This might be volatile and I would not buy the December hogs unless we see a correction to at least 6050.
Sure enough December hogs took a shot at the 6550 contract highs but fell a tad short, only reaching 16532 before flushing almost 200 points to 6345. There is minor support at 6250 and major support at 6050 so don’t be in a rush to buy.


Questions? Ask William Frejlich today at 312-264-4356

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About the author

Mr. Frejlich began his futures career in 1982. After crafting his trade at a small futures firm, Bill moved to the Chicago Board of Trade in 1985 where he worked until joining The PRICE Futures Group in early 2011.

William specializes in numerous futures & options strategies and combination strategies using both the futures and options in tandem. Bill’s counseling has touched traders from the novice to the most sophisticated investor as he has both managed and assisted with their trading.

On a weekly basis since 1995, Bill writes the The Windy City Trader newsletter to help his clients and subscribers better understand the inner workings of the futures markets.

Contact William Frejlich: (800) 769-7021 or at

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