The Resource Super Profits tax

Like many contemporary political issues, everyone has a very strong opinion regarding the proposed Resource Profits Super Tax (RPST). But as it was with the proposed emissions trading scheme (ETS), very few of us have a comprehensive understanding of how exactly it works. Fewer still are able to appraise the situation from a perspective that does not relate specifically to their own self interest. But such is the nature of these things.

Rather than get lost in the detail of the proposed tax, let us instead evaluate the situation from a broader perspective. The first thing to appreciate is that the current tax regime for mining companies is in dire need of reform, something both sides of the debate acknowledge. A tax based on the principle of economic rent is one that most experts agree is not only fairer, but also encourages investment (in essence, economic rent is the level of profit in excess of the bare minimum required to make a given economic venture worthwhile). Here too both sides are for the most part on the same page.

Where opinions start to differ is with the detail. Essentially, the miners argue that the rate of tax that is levied is too high, and the level it kicks in is too low. The Government maintains that this is very reasonable and that the miners have just gotten used to paying very low taxes for too long. They also argue that the proposed system will provide significant benefit to those projects that turn out to be unprofitable, or not highly profitable.

As is often the case, both sides have some valid points, but both are guilty of exaggeration and spin. I tend to think that a rent based tax is a great idea, and that although the details may need some adjustment, it will be of great benefit to the mining sector over the long term. Especially so when the resource boom eventually and inevitably starts to wind down.

The point I want to discuss though is the broader issue with Sovereign debt. Australia is lucky enough to have escaped the worst of the GFC, and indeed we are the envy of the western world. But the fact remains that, like so many countries, we need to ensure that our debt levels remain reasonable and under control. If we don’t we will eventually end up like Greece, and of course no one wants that.

However, there are essentially only two ways to reduce budget deficits and Government debt: cut spending or raise taxes (or both). Neither is politically palatable, as we have seen with the reaction to the European austerity measures. But be that as it may, it is unavoidable.

The Government of course knows this, and knows it needs to act sooner rather than later. The Henry review seemingly provided an answer on a silver platter: tax the super profitable miners and avoid the angst of the general population. Well, obviously it hasn’t played out like that, but only because the Government has been very bad at explaining the issue, and the facts have been tainted by very powerful and well resourced interest groups.

People opposed to a higher tax regime for the miners must understand that if it doesn’t go ahead, the Government will need to raise money elsewhere, and that could well be in the form of higher personal tax. No one will be happy with that and it will be political suicide. Otherwise the cuts to Government spending will need to be far more aggressive. Again though, voters probably won’t appreciate significant cuts to hospitals, education, welfare, infrastructure and the like.

So let’s all take a step back and understand that although the RPST is far from perfect in its current form, it has the potential to reform the mining tax regime and raise significant funds in one stroke. The miners will always and should always do what they can to maximize returns for shareholders, so we can expect them to fight tooth and nail against this, but the fact is that they can afford to pay more tax and still remain very profitable. Even in its current form the RSPT will not decimate the Australian mining industry, despite claims to the contrary.

Let’s not forget too that what they are profiting from are the natural resources that are collectively owned by every Australian, and we need to extract a decent return for ourselves. One day this boom will be all over and we will ask ourselves who reaped the lion’s share of the benefit. Most likely it will be corporate interests, and indeed they are entitled to make a decent return from their hard work. But citizens should understand that the current regime means that the country itself is not getting anywhere near its fair share.

Somewhere between the two ends of the spectrum of this debate the truth lies. Rather than get hysterical over the extremes, let’s debate the issue in a calm and objective way. This issue is a big one and requires strenuous debate, but let us first establish the facts before we all go off half cocked.

Precious Investment

Precious metals have been strongly demanded during the last few months: gold prices jumped above $1,000, silver and palladium prices reached recently a new 12-month high.

What about platinum? Have a look at the chart: the medium-term bullish trend in place since last November may above soon. A correction is expected.

Indeed, 11 months of up-trend have driven platinum price to a technical resistance that is likely to prevent a further rise. The historical high price (point A on the chart) posted in early March 2008 at $2,308 was followed by several months of correction and consolidation. The real plunge started at mid-July last year. In just 3 months, platinum prices fell from $2,059 to $752 (point B, down 63%).

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A rebound was initiated in November. Some momentum built up and eventually generated a bullish trend. Two weeks ago, the price action failed to break above $1,350. This level corresponds to the 38.2% Fibonacci retracement of the decline occurred between extreme points A and B. It also corresponds to a previous intermediary support zone, where the price action had bounced back in August 2008 (point C). Previous supports often become new resistances. That’s why some profit-taking has been triggered at $1,350: it was a technical opportunity to reduce risk and lock in decent gains.

From $752 to $1,350, it means that platinum prices have already bounced by 79% since last November. According to several indicators (Relative Strength Index but also Chande Momentum Osicllator), an overbought configuration was obvious at mid-September. The upside is very limited and the risk is clearly downward. Yesterday the price closed at $1,300, but there is more to come before bull players will take the opportunity to re-enter long trades. Technically speaking, there is probably 15% more to correct before the price action reaches a support line.

This target at $1,100 corresponds to a previous support area where the price action bounced twice (points D and E) in May and July this year.

In parallel with the stock markets, the commodities rally has reached its peak as the CRB Index posted a recent high at 269.18 points during the first fortnight of August. Actually the commodities benchmark has already retraced slightly as its current price is 249.63. That’s 7.3% lower than the high of August.

On the weekly chart, we see that despite the rebound generated in last March, only a small part of the huge decline occurred last year has been retraced…

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The rebound is, in terms of percentage, not so impressive. Remember, the plunge last year drove the CRB index from a historical high at 473.97 in early July 2008 (point A on the chart) to a low at 200.16 (point B) in late February this year. This was a correction of 58% that pulled back the index to levels not seen since 2002.

We have plot, between these two extreme points of this bearish trend (between points A and B), the Fibonacci retracement ratios. They typically act as resistance levels for the rally in place. The first one (the 23.6% ratio) has been hit twice during the last 3 months. This level is set around 265 points. In June, the index climbed at 266.17 points and, after a correction in July, it rose back to 269.18 points last month. This was a second attempt to clear the Fibonacci resistance. But it failed another time as the momentum was losing is strength.

The weekly MACD has peaked and already curved downward. It is probable that the correction will continue until the index finds some good support on the downside. The daily MACD has already crossed below its moving average, confirming the bearish outlook on the near term…

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It has also posted a bearish divergence as it did not confirm the new high posted by the price action.

The target is therefore on the downside. It may be the level of 230 points (almost 15% lower than the current level) as this is where the index found some support in last July. It corresponds to a previous high (in March and April this year) that became a new low.

The first currency offers some of the most compelling long-term buying opportunities in the world right now with healthy balance sheets, wealthy benefactors, and a positive long-term growth story.

The second…well, let’s just say it’s a great shorting opportunity if nothing else.

In fact, the only thing these two currencies have in common is they’re both considered commodity plays.

Let’s start with the buying opportunity. To go there, let’s head to the land of Samba and Feijoada first. Yes we are in Brazil.

The Australian dollar has leapt 15% since the beginning of the year (indeed, that’s one reason why the Aussie is my favorite currency over the next six months). But while the Aussie has climbed 15%, the Brazilian real has shot up 22.5% year to date. It is running hotter than all currencies against the U.S. dollar.

You can attribute a lot of this to the world’s insatiable demand for Brazilian commodities – especially the ones China and India are gobbling up. China’s influence in Brazil has reached such an extent that you could be buying a Brazilian stock as a China play these days.

In fact, a Chinese company recently granted a $10 Billion loan to Petrobas (Brazil’s largest oil company) in exchange for first rights to the oil that Brazil will drill at its newfound reserves.

The Australian theme, (China buying up the world’s commodity reserves strategically) is alive and kicking in Brazil too. As I have said before, as China continues its strategic grab for world power, Brazil will remain relevant in the global economy.

I would like to continue this month with my new series on Iron Condor (IC) trading and share some of the insights I gained in trading Iron Condors on the Russell 2000 Index (RUT). I traded the RUT for most of 2008 and am certainly back in the saddle in 2009.

At the time of writing we are experiencing a sideways to slightly bullish market – perfect for this strategy! There is a lot more to take from this article than just ways to trade the IC because really it is just 2 short spreads (or credit spreads), sold far OTM with the view that they will erode in value and be able to be bought back cheaper than they were sold.

Given that credit spreads are part of other strategies we know (condors, butterflies or just single credit spreads), the trader should be able to incorporate some ideas from this article into other areas of their trading. Let’s revisit the period from December 2007 to September 2008, when the RUT was trading in a range.

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Let’s assume we are legging into the trade and are therefore placing our spread orders separately.

When we sell a spread, our broker will give us a quote (a bid/ask) on the actual spread. Single options have their own bid/ask spread, but strategies (spreads, butterflies, calendars etc) also have their own bid/ask spread. For example if we wanted to sell the 810/820 call spread on the RUT, and we pulled up this spread on the order screen, there would be a bid/ask quote for the spread. For example the bid may be 50 cents and the ask 60 cents and would look like 0.5 / 0.6. This means at the worst, we could sell this spread for 50 cents and at best we could get 60 cents.

We know that we are never going to get the best price otherwise there would be nothing in it for the market maker. But there is a way we could still get the 60 cents - or even more, which I will discuss later. But commonly on the RUT I am filled at the midpoint, which means the price right down the middle of the bid/ask. In this case that would be 55 cents. On some broker platforms when you bring up a quote for the spread, they default in quoting the mid-price for you. If I need to get out of a trade quickly, or I want to sell a spread quickly, I will take 5 cents off the price to increase my chances of getting filled. If the market is moving fast or volatility is very high (making bid/ask spreads wider), I may have to take 10 cents off the price.

Either way, I always try to get more for selling my spreads than just the mid-price. It doesn’t take much market movement for the option prices to move around and if the RUT moves enough intra-day then my spread price will move as well. So commonly in the example above, I will actually place a limit order to sell the spread for 60 cents. I won’t get filled straight away but if the market moves a little in the direction of the spread then that 60 cents may now become the mid-price of the spread, meaning I have a fair chance of being filled.

The catch here is that if the market moves in the other direction for the entire day, then I will never get filled and will probably wish I had taken the mid-price originally. Regardless of this, I think the strategy is worthwhile. 5 cents may not seem much, but that’s $5, and if you had 5 contracts, and then the same for the put side that’s $50 in total. Doing this at the exit of the spreads would mean another $50 in your pocket, or in this case, $100 so far. Now if you sold and bought back your spreads twice in the month, potentially that’s an additional $200 that you’re better off. Now we all know it’s not as black and white as that, but it’s amazing to see how fast those 5 cent’s all add up.

I hope that has given a new way to think about placing orders and getting filled. Happy trading, but please remember trading this strategy carries a great deal of risk, relative to the reward you can make. Please don’t go out and trade these if you don’t understand the strategy, risks, rewards, breakevens and both winning and losing adjustments like the back of your hand.

Let’s have a look today at a metal that recently cleared an important level and that should continue riding its bullish trend. I’m talking about lead. From the lows posted in December last year, lead price has more than doubled. It jumped from $880 (per tonne, point A on the chart) to a last closing price of $1,774.

The retracement on the upside from the lows of last December has been made quickly and without significant consolidation phases. The bullish trend in place is characterized by regular higher lows and higher highs. Both on daily and weekly basis, the current uptrend looks strong and durable.

Actually the price action crossed above two important levels in late May and early June. Those levels were technical resistances. The first level cleared was a previous low (point B, posted in early July 2008) that became then a new high twice (points C and D). It corresponds to a tight zone between $1,525 and $1,550.

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The second breakout occurred as the price action rose above the descending line that goes through points 1 and 2, two highs posted in October 2007 and March 2008. It could have been a major prevention of a further rally, but obviously the bulls hold firmly. As those two resistances did not trigger any correction, the price action jumped quickly in June until $1,796.50 (point E).

The pull-back move that followed tested the two resistance levels previously cleared and the price action found some support there. It’s a confirmation that the near future is likely to be on the upside. The indicators remain well oriented and also suggest a continuation of the bullish trend. The medium-term momentum indicator (180 days) has crossed above its 100 line and the MACD is on a positive configuration. The RSI does not show any overbought alert.

In this scenario, the objective now may be $1,950, which correspond to the 38.2% retracement ratio of the decline occurred between points 1 and A (extreme points of the bearish trend). Of course, on the other side, the support is the level of $1,550 points.

Don’t Jump Into This Commodity Just Yet

As many other commodities, wheat prices have peaked in June. A bit earlier actually: at 677 US cents a bushel on June 1st, while stock indices and the CRB index posted a high on June11 or 12.

Over the long term, we can identify several technical patterns on the weekly chart. The current one is an uncertainty triangle built by the green ascending support line and by the red descending resistance line. Those two lines are the lower and upper limits of the trading range since last October. This trading range has been narrowing for the last 9 months. The price action found some support around 475 cents in last December (point A), but some new support higher, around 500 cents, a few months later (point B).

The recent resistance level has been around 675 cents (point C). It is set on a line that comes from August 2007. This line was actually the neckline of a “head-and-shoulders” pattern built by points D (head), E and F (right and left shoulders).

Once cleared, this neckline which was a support level has become a new resistance level. On a weekly basis, the current price action looks bearish. The Commodity Channel Index has just crossed its zero line, showing that there is no medium-term momentum. The 20-week Williams %R is also oriented downward: this oscillator had detected an overbought configuration in early June.

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On a daily chart, the Relative Strength Index confirmed this overbought configuration and the following bearish signal. The Money Flow Index indicates that the peak posted at 677 cents triggered some profit-taking as money has gone out of the Wheat futures during the whole month of June.

Because those indicators reach low values, a bottom on the price action may be possible. That’s why we expect a further correction of the price action towards the support line (the lower band of the triangle). The current target could be then the area around 530 cents. Then it would become an opportunity for a new bounce.

Last month, in our previous update on the CRB Index, we were mentioning that the rebound generated in late February/early March would have the 265 and 305 points as main targets.

The first target has actually been reached two weeks ago, and as expected a corrective move has been following. The rebound has driven the price from the low of 200.34 points (point B on the chart, posted on March 2) to the recent high of 266.17 (point C, posted on June 12). That was a 33% jump in 3 months and a half that failed to break above the first significant resistance line.

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This resistance line was the first Fibonacci retracement of the decline occurred last year, between points A and B. Most of the technical indicators were peaking to high values, and that’s why many traders found logical to sell back commodities as the CRB was approaching a resistance level.

From the recent high of 266.17 points, the price action has already corrected by 7.5%. The index is currently trading around 246 points. Is it a pause a bullish trend or could this correction send back the CRB index towards the low levels around 200 points?

With the current indicators, we reckon that the current bearish move is likely to remain a temporary technical correction. We expect a further correction in the near-term, but there are several supports that should back the price action and eventually constitute a basis for a continuation of the trend started in March.

The indicators are all bearish as they have been correcting from their peak points. The MACD curved downward and crossed below its moving average while the 30-day Commodity Channel Index (CCI) has plunged and crossed below its zero line. However, two intermediary supports at 245 points (the current level) and lower at 230 points may become opportunities to become “long” again. Those levels correspond to previous high points the may become the new lows.

The 10-day moving average is also still above the 40-day moving average (it had crossed above it in March 20, which was a medium-term bullish signal).

The area between 245 and 230 points will probably see a lot of buying interests, but a crossed below 230 points would be clearly a door opened towards the low of last March.

Asian markets closed broadly higher Wednesday, with oil and metals stocks leading the charge as commodity prices extended their rally, supported by wagers on global economic recovery and recent weakness in the U.S. dollar.

Japan’s Nikkei 225 finished 2.1% higher at a fresh eight-month high of 9991.49. Hong Kong’s Hang Seng Index added 4.0%, Australia’s S&P/ASX 200 closed 2.3% higher and South Korea’s Kospi Composite was up 3.1%. Taiwan shares closed up 0.8% and New Zealand’s NZX-50 rose 0.2%.

In Asia, “leading and coincidental indicators like PMI, industrial output, production output, consumer spending and consumer confidence have turned around and in some cases, have been on the up-climb in the past three consecutive months,” said Gabriel Yap, senior dealing director at DMG & Partners.

“Today, such phenomenon is reflected in commodities’ prices up-climb - particularly, oil, energy, copper and steel,” he said.

And traders in Asia took their cue from the buoyant commodities market, feeding a rally in resource stocks.

In Tokyo, oil developer Inpex closed up 3.5% and Japan Petroleum rose 4.3%, while Sumitomo Metal Mining was 6.9% higher.

In Sydney, Rio Tinto closed up 3.4% and BHP Billiton finished 3.3% higher, with the duo helped by Merrill Lynch raising its commodity price forecasts. Woodside gained 1.5%.

In China, Jiangxi Copper added 2.2% and Datong Coal Industry was up 0.6%.

Crude-oil prices climbed to a level not seen since late October of last year, with July crude tapping a high above $71 per barrel on Globex. Prices had climbed 2.8% in New York, helped by a weaker U.S. dollar and some expectations for a drop in U.S. oil inventories.

Right now, the dollar is a “huge driver for commodities in either direction, especially energy,” and given that, “the rally in oil prices is quite precarious right now,” said Kevin Kerr, president of Kerr Trading International.

July copper rallied 5% to finish at $2.366 a pound in New York, and was up at $2.381 on Globex. Prices for August gold were at $959.40 per ounce, up $4.70 from the New York close.

“Copper and rest of the base metals are riding high on sharp rise in investment demand and a weaker U.S. dollar,” said Chintan Karnani, an analyst at Insignia Consultants. He expects prices to sustain gains in the medium to long term, but a “10% to 15% correction cannot be ruled out as and when there is bearish news on global economy.”

In China, data from the National Bureau of Statistics showed that China’s consumer prices fell 1.4% in May from a year earlier, while producer prices for the month eased 7.2%.

But there was some gloomy news on the capital spending front in Japan: April core machinery orders fell 5.4% from the month before, against a 0.8% rise tipped in a Dow Jones poll of economists.

Still, Yumi Nishimura, an analyst at Daiwa Securities SMBC, said positive figures in the electronics and auto segments were offsetting the headline number, with orders from the auto sector up 10.5%, for the second-straight month of gains. Toyota shares rose 1%.

Kawasaki Heavy Industries jumped 15.7% to hit its highest level for 2009, after the Nikkei reported it and National Institute of Advanced Industrial Science and Technology had developed a nickel-hydrogen battery that recharged in less than 10 seconds.

Shipping shares were higher even as the Baltic Dry Index shed a further 3.5% Tuesday, with China Cosco up 8.5% in Hong Kong. In Japan, Nippon Yusen rose 4.4% with Mitsui O.S.K. up 5.5%. Credit Suisse lifted its stock ratings on the country’s three major shippers to outperform from neutral given an expected earnings recovery, saying “any short-term reduction in share prices is an investment opportunity.”

Retailing shares finished higher in Seoul after reassuring May sales data from Shinsegae, which gained 6.6%. Lotte Shopping climbed 7% with Hyundai Department Store adding 9.4%.

“Consumer sentiment has improved on the back of low interest rates and spending is expected to continue to pick up into the third quarter,” said C.G. Koo at Samsung Securities.

Taiwan shares found support from technology stocks, as TSMC Chairman Morris Chang forecast the global chip sector to return to 2008 levels in 2012. TSMC rose 3.7%.

Trading firm Li & Fung fell 4.1% in Hong Kong, after saying insolvent German retailer Arcandor owed it outstanding commissions totaling $5.4 million.

China’s Shanghai Composite Index closed up 1% and Philippine shares gained 1.4%. In afternoon trade, Singapore’s Straits Times Index was up 1.8% and India’s Sensex tacked on 2.6%.

In foreign exchange markets, the U.S. dollar was slightly higher against the yen after its Tuesday losses, at 97.60 yen from 97.32 yen late in New York. The euro was at $1.4090 from $1.4083, and at 137.47 yen, from 137.06 yen

The commodities markets have been bouncing back for 3 months. After the huge plunge occurred last year due to massive deleveraging and soaring risk aversion. The CRB index lost 57% of its value when it sharply fell from an historical high of 474 points to a low of 200 points in 7 months (points A and B on the weekly chart).

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The last price of the price action is 245 points, which means that the CRB index has already rebounded by 22.5% since the low of last February (point B). On the current levels the index may find some resistance. There is indeed a technical line that could prevent the price to go higher immediately. This long-term resistance line joins the lower highs posted in 1988, 1996 and 2003. The break of this resistance 6 years ago triggered a strong bullish signal and generated a massive move upward. It was the beginning of the commodities boom.

The index fell below this line in late November last year. Now the rebound has driven the index back to this previous resistance line. Despite it has been cleared in the past, it may become a new opportunity for traders to sell commodities.

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On the daily chart, the Chande Momentum Oscillator (CMO) argues for a potential continuation of the current uptrend. The CMO can also be used to measure the degree to which a security is trending. The higher the CMO, the stronger the trend.

TH CMO has also not entered its overbought area (this is confirmed by the RSI) and no bearish divergence appears in the chart pattern.

The 30-day moving average has just reached the 100-day moving average. A crossover would confirm that a further momentum is possible and would drive the price above the resistance line. In this scenario the next targets could be the levels of 265 and 305 points, which are the 2 first retracement ratios of the decline occurred between points A and B.

australia stock market

Trade Ideas Direct from the Desk of the Swarm Trader

Come-Back Towards The Highs?

The most famous stock (ASX: BHP) here in Australia is on the rise again. The price action has already retraced half of the decline posted last year. Now the momentum could break above a resistance line that would open the door to new high horizons.

The daily chart shows the current trading envelope in which BHP has been trading since the low posted in last November (point B). This trading triangle is built by an oblique support line (in green) on the downside and by an ascending resistance line (in red) on the upside. Those two lines build a bullish pattern. They have been narrowing and suggest therefore that the price action will exit this pattern soon.

We expect an exit from the upside. In other words, a breakout above the resistance line appears to be the more probable outcome. First, the triangle built by the two lines is a medium-term bullish pattern. The support is built by regular higher lows (points C and D) whereas the resistance line is made of regular higher highs (points E, F, G, H and I).

Second, the price action cleared the 50% Fibonacci ratio of the decline posted last year. The sell-off occurred between May and November 2008 (between points A and B) drove the price from the high of $50 to the low of $20. This was a perfect 60% drop in 6 months. Half of this fall has been retraced when price jumped to $35.76 two weeks ago (point I). Despite the following correction, it was a signal that the bulls should attempt to lead the stock higher.

The Bollinger Bands suggest also that the price should test the recent of $35.76 in the coming days. Price is currently on the moving average and should rise towards the upper band. The MACD has also found some support on the current levels and has started curving upward. A cross above its moving average would be a clear bullish signal.

If the price action clears the resistance line, we can expect a move to $40 then $42, the probable next targets. They both correspond to previous highs. On the downside, a break below the support line therefore below $33 would trigger a correction.

The trading idea is therefore: BUY BHP at $34.40, with a stop-loss at $32.5 and a take-profit at $39.80.

Sell the Aussie/Kiwi!!

That’s the nick name of a very popular currency pair: the Australian Dollar against The New-Zealand Dollar (AUD/NZD). It’s popular because one of the most volatile pairs of the G10 universe. This means quick moves, sharp reversals and eventually big money opportunities!

You probably know now that the FX market is the one where technical analysis is the most accurate. Macro data (especially interest rate differentials) that drive the long-term capital flows within currency markets do not evolute on a daily basis. The “noise” created by short-term moves is clearly driven by technical analysis.

There is a good opportunity now to sell to the AUD/NZD as the pair just hit a high level where it has already failed twice during the last 12 months. Selling the AUD/NZD means actually being short AUD and long NZD.

The resistance that has been reached in late April is the level around 1.2950. Actually the price action posted twice a high at 1.2938 (points B and C on the chart) while the high posted in last July (point A) was 1.2967. The pair made a nice come back when it rose from 1.0625 (point D) to 1.2938 (point B). This 22% rise followed straight away the decline posted last year, between July and October (between points A and D).

A first correction has pulled the price back to the 38.2% Fibonacci level where a short-term double-bottom (points E and F) found some support and generated a rebound. Since the beginning of May, the price action has slightly corrected then bounced back, but it has failed to reach the resistance another time. Currently the rate is around 1.2750.

The technical indicators are all turning bearish. We just plotted two of them that illustrate the trend reversal which is coming. The 21-day Momentum indicator peaked in early may and has weakened significantly. On the very short-term, the Stochastic oscillator has also peaked and just curved downward. Those signals are confirmed by bearish divergences on other oscillators.

A correction towards the intermediate support of the 38.2% level is expected. This means that 1.2050 is likely to be the next target, and 1.18 (50% retracement ratio) is potentially another objective. Of course, this bearish scenario would become invalid if the price action eventually jumps above 1.30.

This commodity has benefited from a nice rebound for a few months now. The price action is about to reach a level where uncertainty may lead to a correction.

The long-term trend remains negative as the price fell from a high posted in February 2006 at $27 to a low at $11.21 posted in last October (down 59%). The rebound generated in December has only retraced a small part of this decline. Actually the price action has just reached the first Fibonacci ratio, which is the 23.6% retracement level, at $15.

The rebound started in December when a double-bottom technical pattern was created (points A and B on the chart). This is a typical trend reversal signal. However there is now a resistance line that could prevent prices moving higher. A correction is possible as prices bounced by 36% since December. The resistance is an oblique slope that comes from the high of 2006 (point C) and goes through the lower high of March 2008 (point D).

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The intraday high posted at $15.27 two days ago might be a second lower high and become an inflection point.

What do reveal the technical indicators?

Actually they argue for a weakening momentum and for a potential trend completion. The 50-day Commodity Channel Index (CCI) and the Momentum indicators have jumped to extreme high values. The RSI is about to enter into its overbought area.

That’s why we expect a correction of sugar prices. The medium-term bullish trend generated in last December is backed by an oblique support level that goes through higher lows regularly posted during 4 months. That may be the new target in the near-term.

However if the Bears don’t succeed to contain the recent spike, a breakout above the resistance line at $15.50 would give a fresh bullish signal. In this scenario the current “bear market rally” would become a new trend and would drive the price significantly higher.

Buy, Sell or Just Leave Alone - Which Commodity is Too Hard to Trade?

This commodity seems to have an endless bearish trend. All the other commodities (oil, gold, base metals, agricultural) have more or less benefited from a renewal of risk appetite among investors and eventually prices rebounded after the lows posted everywhere in last December. Prices had declined so sharply in just a few months that it created investment and trading opportunities.

This scenario has been similar for all commodities, except one: natural gas.

The chart is indeed really ugly, and the perspectives for both short and medium-terms are not better. From the high posted early July last year ($14.84, point A on the chart), prices declined by 77%. Last Friday, price closed at $3.4020. If we calculate from the high of October 2005 at $24.47, it’s a fall of 86%!

Natural gas prices have been traditionally positively correlated with oil prices, but a clear discrepancy has appeared in last February between the two energy futures.

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Indeed, oil prices (red line) have rebounded from February 18 whereas natural gas prices continued their fall. This widening spread between the two prices does not even represent a trading opportunity for hedge funds that design their systems on statistical data. A strategy would be to go “long” on natural gas and to go “short” on oil at the same time to bet on a potential spread tightening, on a probable mean reversion towards a more statistically “normal” ratio.

But obviously nobody wants to take that risk first. Technically, the fall has accelerated on natural gas when the price action broke below $8.5 in early September 2008. This support was built by two previous low points posted in September and December 2007 (points B and C). Prices quickly jumped back above this level (false break) but eventually plunged from October last year.

It’s difficult to analyse the technical indicators (especially the oscillators) as the bearish trend is so sharp without any rebound that prices can remain oversold for a very long period of time. This is typically a market that you should avoid then. You can’t really sell on the current levels. But you can’t take the risk to buy neither. You would then wait for at least a consolidation phase, but mainly for a beginning rebound to potentially bet for a further bounce.

Metals getting carried away?

But my cautious head has been asking are markets getting a little carried away? You see, economically things will get a lot worse before they get better and what the punters are banking on is that this is the beginning of the new world. Alternatively those punters that got this run up may at some point in time take some profits. They are not there for life.

Copper is oft thought of as Noah’s white dove after the big storm and maybe that has some validity.

Copper like many metals and currencies has had strong moves and this may continue in the coming year or so – moves in both directions. Let’s look at a couple of charts for copper – the daily, followed by the weekly:

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The daily chart shows a classic wave four pullback – but we know that wave three can go right up to the projected wave five before we see a pullback. But you can say that all is fine and dandy with the short term projection. And it is sort of consistent with what we are hearing out of China.

But the weekly chart is still projecting a savage low and at this stage I remain open minded about that with an inclination to the view we will see that leg down.

But the key ‘takeaway’ from this is that there is movement at the station. And in fact there has been plenty of movement in futures. And so those traders who are ’sitting pat’ waiting for ‘mana for heaven’ you need to take control and become pro-active.

At Trading Tutors Newsletter we try to provide some training, a different point of view, some humour too, maybe a useful projection or whatever but you must take responsibility for your own guidance.

I will chance to say that proportionally, more money was lost in this bear market, by those that relied on ‘advisers’ compared with those that actively manage their own account.

There is a lesson to be learnt in that.

A Bullish Market for Lead

After Copper yesterday, we focus today on another metal that took advantage of the optimism recovery that drove the equity and commodities markets up since early March. This metal is lead.

The long-term bearish trend that really started in October 2007 seems to be over now. After a low posted on last December 19, lead prices have corrected by 61% in three months. They bounced back from $882 per tonne (point A on the chart) to a recent high of $1,425 (posted 2 days ago).

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The industrial metals index (GSCI) which includes copper, zinc, aluminium, nickel and lead prices, is typically a good indicator which gives a global trend on those commodities. Technically, this index has cleared the upside of a horizontal trading channel that was valid since last December. It’s a first sign that a further global bullish move may be possible.

Since December 2008, the different bullish waves followed by consolidation phases have been building a “clean” chartist positive scenario. A bullish trend is indeed usually exhausted in 2 types of situation:

When the price action is unable to post new highs and eventually break below a support line, which typically triggers a bearish countertrend
Or after a new high has been posted and that the price action falls back below the previous high
Here, none of those two possibilities occurred. Oppositely, the price action has been posting regular higher highs (points A, B and C) and higher lows (points D, E and F). Another important indication is that the new low of late March (point C) was higher than the previous high (point D). This means that the pull-back was just a correction and not a new trend on the downside. As a result, prices bounced back and should reach the new target around $1,550.

The MACD is well oriented and is backed by an oblique support line (in green).

This level is just 9% higher than the current level and it corresponds to an area where a previous low was posted in July 2008 (point G). It then became a new high in late October/early November (point H).

Which Metal is Set to Bounce?
The recent rebound on the equity markets also drove the base metals prices slightly higher. Some of them are now testing intermediate resistance levels. The zinc is one of these commodities.

The long-term bearish trend between November 2006 and October 2008 has seen zinc prices declining by 77%, from a historical high of $4,620 (point A on the chart) to a low at $1,062 (point B).

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The apogee of the bearish trend occurred in early October last year when the price action broke below the support line of the declining trading channel (point C). As a result prices fell by 27$ in two weeks and a low was eventually posted at $1,062. It is potentially the end of the long-term bearish trend.

Indeed, prices have been moving within a horizontal trading channel since this low. The current rebound took off on February 20 as prices bounced on the lower band of the horizontal trading channel, at $1,060 (point D). However this technically-driven move is likely to lose its momentum as prices approach the upper band of the trading channel. This level corresponds to the level around $1,350

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It also corresponds to the long-term resistance line (red line). That’s why the area around $1,350 should prevent a further move on the upside.

The MACD and the RSI remain well oriented but the technical Momentum indicator is posting extreme high points. Therefore we do not expect a sharp swing or reversal move but more a flagging price action before an eventual pull back.

As long as $1,350 is not cleared, the target towards the intermediary support of 1,175 is favoured, and then potentially a further retracement to the support level of $1,060. However, if the price action breaks the resistance of $1,350, it would give some fresh new momentum. It would be the end of the bearish trend and the rebound would drive the price to the next resistance level, at $1,630.