Last night I did some reviewing of weekly charts and feel that there is evidence building in favor of the bulls. The key, however will be the action in the dollar. One day, down the road I think, the dollar will again weaken and that will benefit soft market prices. We did see a weaker dollar today, and that combined with the rally in crude prices, led to gains across the board. The oil market is fuelig moves in other commodities and softs are no exception. That continued evidence that we do not trade in a vacuum leads me to be wary of this latest move up.

I like cocoa, I do not trust the long side in cotton, coffee or sugar still. I continue to think the short side will again receive attention. I suspect crazy thin trading action to dictate until at least year’s end. Markets will provide opportunity, but profits should be realized quickly cause they can easily disappear. Therefore, I advise keeping positions small and flexible. I continue to feel long volatility, (long options) is the best method of approach regardless of which side you play from.

While bearish in my head towards the coffee, cotton and sugar, I am begining to have a sense that bulish seeds are being planted. timing will be the key and I do not see now as the time to get bullish. The markets are reacting via short covering bouts to that oversold condition, but we are not out of the woods yet.

Where is demand?
Demand is the key and for cotton I just don’t see any. Sugar has abundant supplies and coffee, well fundamentals are building in favor of a bullish posture, but it isn’t trading on its own merits.

This morning soft markets are responding to a weaker dollar and may gain strength should other outside influences provide positives, yet I still think the time to be overtly bullish is a ways away. Watch trend lines.

Jurgens H. Bauer

As year end and the holidays approach it appears as if decision making is at hand. Soft markets responded to outside influences, moving lower in early dealings before finding support and staging rallies. Some were more successful than others, depending upon traders expectations as well as their fears. Coffee prices found support and had the biggest rally, triggering buy stops in March above 110 and 110.65 (fears that the short side wasn’t the right side?), so that March made it swiftly up to 112, but there was no follow through which led to another sizable retreat. March backed on down to 1008.50-ish before chopping away between 10950 and 11070 into the close. Direction positioning seems to be a real issue, especially with option expiry on Friday.

At today’s auction, T-Bill rates were zero, which speaks volumes about investor fears.

Coffee Resistance 111.65-112, 114-115. Support 106.80, 105.10-104.90, 101.35. Looks headed lower, but watch for violent spasms like we saw today.

Cocoa Resistance 2310-35, 2410-20 Support 2220-2200, 2135-2115, 2050.
I like this market and favor the long side, but use caution and own calls.

Sugar Resistance 1138-44, 1155-60, 1205 Support 1085, 1060, 1044 The H/K spread narrowed signaling to some that business apparently may be getting done.

Cotton Resistance 4500-4550, 4640-60 Support 4270, 4200, 4100-3923

Cotton prices dropped slowly throughout the session. Cotton may need to retreat to stimulate business. The recent strength in NY hasn’t been felt in foreign markets. I remain bearish on cotton

In contrast to recent bearish price action the soft markets all blasted off upward in Monday’s trading. The sharply weaker dollar, combined with stronger equities and firmer oil prices encouraged short covering and attracted some fresh buying into the soft markets. Having already been stoked by tales that large index funds have liquidated positions in preparation for January redemption’s, and that the pressure from such liquidations has abated, values of most commodity markets rebounded causing some to question whether a bottom is near.

I agree that commodities have been over done on the downside and have been talking about the vulnerability to bouts of short covering for some time now. Today was one of those days. These markets may continue to correct from oversold conditions, so be mindful. Watch for stop hunting.

Serious traders are concerned over the relative thin conditions that exist which sets the tone for fueling additional short covering, but stops may also be near underneath should prices fail to follow through.

Economic conditions haven’t improved and the situation remains scary for many. As a result there are a lot of producers looking to raise cash. The volatility seen in these markets warrants attention and makes it difficult to see the potential to sell options. Instead owning options makes prudent sense especially when you can limit your risk.

I do not trust one day of strength amidst bear market conditions. The short side doesn’t disappear overnight. So while the attention and glamor seen from today’s action be wary and know that in most cases the trend is still down. Therefore, I look to give long puts a try on any further upside push.

Coffee: Support: 106.75-106.50, 105.1, 104, 102 Resistance:110.75, 111.35, 114.50

Cocoa: Support: 2200, 2120 Resist: 2310-2320, 2410-2420

Sugar Support: 1121-1110, 1080, 1060-1044, Resist: 1144-1152, 1188-1200

Cotton Support: 4300-4280, 4100, Resist: 4540-4560, 4605, 4750

I welcome your comments

Jurgens H. Bauer

With the exception of cocoa the soft markets on Thursday broke sharply lower, with coffee and sugar breaking down below support in their ranges, and cotton closing limit down at 4360, (synthetically going out 4310/4320. So, the short side provided a good ride and this even while the dollar was weaker. In fact, because the dollar is so much at play in the cocoa market, perhaps that’s what kept cocoa from falling along with the rest of the complex.

More likely we will continue to experience weakness and lower overall prices. Why not, the trends are down and we all know the trend is your friend, right?

Regardless of how oversold these markets may appear from time to time, more weakness is apt to be in store since the economic outlook sucks…(can I use that word?).

Anyway, tomorrow is Friday after a down week and therefore some short covering is perhaps in order. This will be especially true if assistance is provided from oil and equities. So be prepared for such price action and strongly consider using it to re-establish fresh shorts. Oh yeah you might have to hold shorts over the weekend and that can be scary when things seem to change at the drop of a hat, so use options….In fact using any strength to get short has been an excellent method of obtaining a potential profitable trade in the softs. I look for a potential bounce in sugar, basis March, from 1070-1050 back to 1100, and maybe even 1130-1150. I’m looking for 1050, then any lower and we’ll probably see some opportunities to sell puts. But boy will I seek to get short on any significant strength because there is too much sugar around and in the hands of folks who need cash.

In my opinion the short side is the right side in these markets, just don’t find yourself getting married to any positions. Exchanging vows with a positions in these markets is grounds for a messy divorce.
These markets are thin as can be and vulnerable to serious short term moves. We saw that today and we’ll see it again, in either direction, but the trend is your friend, follow it until it tells you not to.

Favorite trades: Seeking to buy some F, yes Jan coffee puts. I like the 110′s and maybe even 100′s. why, because of the limited risk and large potential. If you like hedge up with some futures. Sure you can choose to use another month, but the leverage is available there. The key is being long volatility and you do that by owning options. Longer term I might seeking to leg into some Sep coffee back spreads, (long term the market may avail itself to positive fundamentals) if you’d like to explore that call me. I also like buying cocoa straddles, yes you’ll have to pay up, but I think that market will move and move big.

As for cotton, the export numbers were terrible and you can access them via a link provided below. Cotton has no demand and I still aren’t heard comments back on the H/K spread. Come on guys what do you think?

Anyway, must go, need some rest. Jurgens

Coffee too did drop in sympathy and visited the 110.30 level before staging a rally back to the plus side and 113 in the March contract.
The recovery from the lows and subsequent rally was made possible from a combination of roaster buying and day trader short covering (helped along of course by a recovery in crude and equity values). That buying, in an environment where selling was reluctant, served to brighten the mood among those traders who are holding the opinion that supply side concerns should result in coffee prices making a significant recovery. That theory however was later put to the test when values drifted in light volume back down through 112.20, (an area which earlier held a decent size bid) and then unchanged. The disappointment confused some, but late trading saw March back on the ropes not far from the day’s low. I remain a bear and think 108 and
105 are not far enough away to go unnoticed.

Cotton as well showed signs of improvement as it too had a nice bounce before backing off and settling in the middle of the day’s 200 point range. The March/May spread which has gone a bit past flat has many scratching their heads. Here’s a thought though. Years ago, before interest rate markets, back in the late 70′s and early 80′s traders used to perform cash and carry transactions in the metal markets. It was purely an interest rate play. Well, with T-bills in such high demand, (safety) isn’t there merit to parking money in an area where your return is simply getting your money back? Or are there other reasons for the shift in this spread? I’d appreciate and encourage your feedback.

Cocoa didn’t really provide anything new. There remains evidence that supply problems exist, yet the key really seems to be the victim of the dollar and economics.

Anyway, I suspect Coffee will make a stab below 110. There will be buying and prices may receive outside assistance, so be fleet of foot, but approaching the entire soft complex from the sell side seems the proper path. Sugar ought to find some volume underneath, but as sell stops get elected I also expect buying to emerge, thus I don’t think it’ll fall apart.

Jurgens H. Bauer

With stocks up and oil prices down on Tuesday the soft markets on balance experienced a pretty neutral day. Coffee prices did slide down more than the rest of the group, dropping March to 111 at one point.

Sugar options saw some action in the July 9 puts, with over 5,000 trading. July straddles went for 235. Yet Sugar is trapped in a range still between 11 and 12 in March, and will likely be influenced by outside markets until that range is broken. Buy stops are likely to be found above 1210-30. As a break below 1130 might uncover sellers.
Otherwise trade the range.

Coffee too is range bound between 111 and 116.50, and while fundamental reports suggest supply tightness, technically, a probe of 110 is too close to let pass without a visit. Should 110 get penetrated there ought to be some scale down buying, but sellers may also appear, so any move down there should provide excitement. It still looks to be to advantage to sell into strength as that pattern continued today. However, be mindful of outside influences, especially oil and stocks.

Cocoa looked headed for lower levels but didn’t sink. and as much as I would like to be a cautious buyer (via call options), I remain on the sidelines.

Cotton headed down late in the session. That market has received a play from being so oversold, but now will likely correct as it verifies support underneath. Some interesting option trades with 1 by 2′s trading in May and July. There was size done in the July 85/100′s at 2 and 3 points. While that trade seems crazy isince July would need to move up substantially, traders interested in obtaining some upside were willing participants. Yes values did rally over a dollar back in /april, but remember you had reason to expect a better economy and funds were throwing money into commodities.

I really don’t see any solid opportunities for long term positions in these markets since they change now at the drop of a hat, or the next new bailout proposal, (or failure). But it looks like more weakness ahead and a lack of committment in terms of direction for the balance of this year. volumes are low and participation is too. However, I continue to hear talk of markets finding the ability to respond upward if the dollar breaks sharply. In other words there are a lot of people thinking commodities have been beaten down too far. We did see cotton respond to being oversold. So be mindful that these markets can respond violently to oversold conditions with short covering rallies.

Jurgens H. Bauer