by Lee Lowell, Advisory Panelist
Tuesday, August 25, 2009: Issue #1075

If you’re looking for what I call a “blast-off” move, look no further than the sugar market.

Since April, the commodity has embarked on an extreme upside move, shooting to highs not seen since sugar hit $0.45 per pound in 1981. The chart below illustrates it perfectly…

Sugar Chart: http://www.investmentu.com/images/sugar_082509.gif

The main reason for such a large jump was news from India, which indicated a potentially low sugar crop.

Over the past couple of weeks, the sugar market has surprised many analysts by trading even higher. I say that because while fundamental news like this often results in impressive-looking moves, its impact has a limited lifespan.

So be warned. Moves like this usually indicate that the news is factored into the price and we’re entering the last phase of the bullish run.

Based on my experience in the commodities markets, where I’ve seen this type of pattern many times, I believe we’re headed for an inevitable turnaround for the sugar market. Here’s what you can do to profit form this, and two other commodities to keep an eye on.

How to Play the Sugar Market to the Downside

If you want to play the sugar market to the downside, I suggest you buy put option contracts, or by selling limited-risk call option spreads. At the moment, the October 2009 and March 2010 option contracts are the most active.

As you can see on the chart of the October 2009 futures contract above, the price surpassed the $0.2300 per pound level twice, moved back to $0.2150 per pound, then trotted past the $0.2300 mark again.

This is what technical analysts call a “triple top” and if sugar doesn’t move above $0.2300 again, we can seriously count on the market having a big retracement lower – most likely between $0.1900 and $0.2000 per pound.

So if you play the downside and it does make that retracement, I’d suggest taking profits at that $0.1900 to $0.2000 level.

Oil Heading For $80… And Beyond: Three Ways to Play the Move

Given the historic rise and fall of the oil market and the current state of the global economy, you’d never think that it could even consider the idea of moving higher again.

But the market continues to amaze everyone with its resilience and strength, with the current price hovering around the $74.50 per barrel area.

And with conflicting reports on the global demand for oil over both the near term and long term – plus weekly inventory reports that show a strong buildup of supplies one week, followed by draw-downs the next week – it’s easy to see how this can be a very treacherous market.

Here’s the deal: Regardless of what statistics are released and how Congressional attempts curtail oil trading limits, it’s clear that the oil market continues to bring in speculators from all levels – and will most likely keep trekking higher.

Check out the oil chart below. The price is currently trading above all three main moving averages (20-day, 50-day, 200-day) and is now looking to pop above the recent high of $75.27 from June 11. If that happens, we could easily see oil shoot to $80 from there – with $90 probably right behind.

Oil Chart: http://www.investmentu.com/images/oil_082509.gif

There are a couple ways to play the oil market – be it on the long or short side…

• The futures and futures options that trade on the floor of the NYMEX. This is usually best for experienced commodities investors.
• Through an ETF like United States Oil (NYSE: USO), which tracks the price performance. This gives you broad exposure to the market through one investment, rather than playing individual companies. It’s also a less expensive way to play the market and doesn’t require a commodity trading account.

You can either play the USO shares directly, or the options on the ETF. No matter whether you’re bullish or bearish, pick an option expiration period at least three to six months in the future, as that will give your directional call ample time to mature.

The Grain Markets: Summertime Means We’re on “Grain Watch”

Finally, let’s hit the grain markets (corn, wheat, soybeans)…

During summer, these markets can really turn to the upside, as the growing season can be extremely volatile, particularly if the weather is less than ideal.

The June-October period typically sees more speculation in the grain markets than any other time of year, purely because of the prospect of more volatility. Regardless of what any fundamental data may show, nothing can compare to the sheer panic-buying when we receive weather reports that show how a drought could wipe out a year’s worth of crop.

And some of it doesn’t even need to necessarily happen… it’s merely the potential for it happening, based on previous history. Fortunes can be made or lost in just those few summer months.

Buy Corn Commodities Low… And Ride the Bullish Move Higher

This year, for example, we’ve seen corn and wheat prices shuffle around their annual lows, due to government reports that show ample planting, high carry-over levels from last year and crop production that is ahead of schedule.

Corn Chart: http://www.investmentu.com/images/corn_082509.gif

With corn currently at its lows, if any potential weather disruption does occur over the next few months, taking a bullish position here could be a low-risk way to get involved.

Like with the sugar market, the best way to play corn is through limited-risk option strategies. Stick with expiration months of December 2009 or March 2010, so that you give the market plenty of time to mount a bullish move.

Good trading,

Lee Lowell

Editor’s Note: Lee Lowell has worked in the commodities markets for almost two decades, including a six-year stint as a market maker on the trading floor of the NYMEX, where he helped set the daily prices for oil and natural gas. He now runs a successful commodities trading service – The Triple-Zone Profit Trader – where he runs down the moves in all the main markets – and shows investors how to take profitable advantage through specific recommendations. Find more information about The Triple-Zone Profit Trader.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…

by Lee Lowell, Advisory Panelist
Saturday, August 1, 2009: Issue #1056

I’d like to focus today’s segment on the markets that typically see heightened activity during the summer months, due to the fact that it’s their prime growing season.

Specifically, that means the grains and orange juice markets.

As we’ve mentioned before, these products are heavily dependent on the weather for their yield. So if erratic weather patterns affect the crops’ growing cycles, it’s very likely that their prices will rise.

These products aren’t just consumables either. The farmers and food/drink companies that are front-and-center of their production use these markets for income production, too. They do this by using commodity futures and options contracts as hedging mechanisms.

So let’s hit the grains market first…

How To Play The Grain Market Upside With Commodity Futures

A few weeks ago, we keyed in on corn and wheat, stating: “Most of the speculators who play these markets are bullish in nature, so a majority of them are placing bullish bets, either in the form of outright long futures contracts or long call option contracts.

“Right now might be one of the best times to get into the grain markets on the long side because not only are we right smack in the middle of summer, but the prices of corn and wheat have just undergone a five-week massacre to the downside.”

Both commodities markets are still meandering around their lows, which offers another good opportunity to get in on a speculative bullish move. Here’s how to do it…

Take a look at the daily charts below for the corn and wheat December 2009 futures contracts.

If you believe in the seasonality of bullish moves for the grains, and are willing to take a speculative bet, now is a good time to consider a trade.

Your best bet is to hit the futures options contracts that trade on the floor of the Chicago Board Of Trade (CBOT). But make sure you do so in a way that gives you limited risk and unlimited reward possibilities.

For example, that could include entering a call option spread or just buying call options.

For call options, look to play the December 2009 or March 2010 options expirations, which will give enough time for any major weather scares to produce a good upside run.

• Corn: Specifically, consider December 2009 & March 2010 call options with strike price levels from $3.50 and higher.
• Wheat: Use the December 2009 and March 2010 call options that have strike prices between $5.60 and $5.80, or higher.

You can also trade these contracts through the Chicago Mercantile Exchange’s electronic platform, where you can bypass the brokers in the option pits. These contracts are exactly the same as the other, so you can trade them whichever way works best for you.

The Orange Juice Markets – A Hot Spot For Speculators

Having last broken down the orange juice market one month ago, this market has become a hot spot for speculators, as hurricane season got underway.

At the time, the market had carved out a low and we mentioned that it was shaping up for a “potentially lucrative seasonal trade.”

It certainly didn’t disappoint. Over a two-week period, orange juice futures launched higher to the tune of 2700 points. Usually, a move like that will take a good portion of the summer to develop, but with the oversold conditions that existed, it was stronger and quicker than normal.

This served all call option buyers well – especially those who took our advice to buy the January 2010 $85 cent call options. At the time, these options were available to buy for roughly 900 points or lower. And with the 2700-point surge, they tripled in price, fetching prices of over 3000 points.

So what now?

At this point, we wouldn’t advise buying these options anymore. The feverish move has already happened now and OJ prices are beginning to fall back. This is usually a one-time event every year, and unless orange juice drops back down into the low 80-cent area quickly (based on the January 2010 futures), we don’t recommend buying calls at this time. Markets move fast and timing is very crucial.

Let’s take a quick look at our other favorite “weather-prone” commodity – natural gas…

Commodity Futures – Waiting on a Natural Gas Bull

We’ve been bullish on natural gas for a while now, as it slinks along the lows it’s carved out since it reached manic highs last summer (along with many other commodities).

Natural gas will eventually hit a bottom, as it’s an in-demand natural resource that will be around for a long time. We just have to wait patiently for the turnaround, as the market grapples with high underground storage supplies.

Like with the orange juice market, though, we know hurricanes can cause huge upside moves, as the majority of drilling rigs are centered in the Gulf of Mexico. If a few storms go rumbling through that area, it could be the impetus that eventually brings this commodity out of the doldrums. But until then, we’ll bide our time.

One of the ways we’re playing this market in my Instant Money Trader (IMT) service is by selling out-of-the-money naked put option contracts on the natural gas exchange-traded fund – United States Natural Gas (NYSE: UNG).

This ETF tracks the movements of natural gas futures contracts, giving investors a lower cost way to enter this market.

And by selling put options, it allows us to collect the option premium, while having an opportunity to buy natural gas at unbelievably low historical levels. Check out this article for more information on how to sell put options.

That’s all for this time.

Good investing,

Lee Lowell

P.S. If you’d like to find out more about profitable option transactions, take a look at The Instant Money Trader.

by Lee Lowell, Commodities Specialist, Mt. Vernon Research
Wednesday, August 15, 2007: Issue #701

Editor’s Note: Lee Lowell is one of the smartest commodity investors I know. For six years, he worked on the floor of the New York Mercantile Exchange as a market maker, and for the last 11, he’s been making a living trading his own money in commodities. He’s exceptionally good at it, too
More than 80% of the trades in his commodity advisory service have been profitable.

I talked to Lee this morning, and he’s looking at three possible trades right now. So as stocks continue to ricochet down Wall Street, here’s a way to make some money in commodities

A. Williams
Managing Editor, Investment U

I’ve been an active commodities trader for 16 years, both on the floor and off. And one of the reasons I like this market so much is that there are only 15 to 20 commodities that are truly worth trading.

When the number is that small, you really get to know the market’s behavior and seasonal tendencies. This allows you to become intimately familiar with each commodity, and that makes trading them much more profitable over time.

I’m always scanning these 15 to 20 commodities to see if any new trading opportunities exist. And at the moment, there are three I’m close to pulling the trigger on. But first, let’s look at how the commodities market works, and the best way individual investors can play it.

The Commodities Market is Pure Supply & Demand

The commodity markets tend to move in more predictable and smoother patterns over the long run, compared to stocks. That’s because they truly end up making their moves based on supply and demand

There are no firms and CEOs running the commodity markets. There are no quarterly earnings reports. And the Fed isn’t trying to intervene.

Many physical commodities are food-based in nature and tend to move according to growing patterns, seasonal tendencies and weather. We’re talking about corn, wheat, soybeans, coffee, sugar, cocoa, orange juice, crude oil, natural gas, etc. Prices are based on how well the crops are growing and how much supply of the product is currently in storage.

Although there are some government reports to contend with, they typically only give us a clue as to how the crop is progressing in the growing cycle. Even though you may read about a hedge fund or two trying to control a certain futures contract, the commodities market is so large and so deep, that the hedge fund may only have a very short-term effect.

With that said, if you’ve never traded commodities before, you may be wondering how you can get involved. It’s actually pretty easy

How To Buy and Sell Commodities

Commodity trading is actually just as easy as stock trading. The best way to get involved is through futures contracts and futures options contracts. Purchasing and selling these is the same as trading stocks or stock options.

Other than buying orange juice or coffee at the local grocery store, speculating on the future movement of physical commodities can be done by buying and selling futures and futures options contracts that trade on one of the designated commodities exchanges around the U.S.

The most notable futures exchanges are the New York Mercantile Exchange (NYMEX), the Chicago Board Of Trade (CBOT), the Chicago Mercantile Exchange (CME) and the New York Board Of Trade (NYBOT).

You can trade both futures contracts and futures options contracts at these exchanges. The only thing you would need to do is open a commodity trading account with a registered commodity broker. (See today’s Crib Sheet for a list.) This is no different than opening a stock trading account.

Once your account is open, you can trade commodities the same way that you trade stocks. Do your research, look at the charts, check the fundamentals, and then enter the trade. For me, the only way to play commodities is through the use of options contracts, for a couple of reasons

• Options keep your risk limited at all times, but the gains can be unlimited. This lets you sleep soundly at night, as you never have to worry about unlimited risk, like the risk associated with short selling stock.
  
• With options, you don’t need to be correct on your directional assessment of the market to have a profitable trade. It’s true. You can be totally wrong on the direction, but your options can still produce a profit. (Selling “option credit spreads” is the strategy that can do this.)

Now let’s take a look at three potential plays I’m keeping my eye on right now

Three Ways to Play the Current Commodities Market

1. Natural Gas

The natural gas market has taken a big beating to the downside over the last two months. My sources in the option pits tell me there might have been another troubled hedge fund that was liquidating futures contracts that led to the big decline.

The other reason is that the large amount of natural gas supplies in storage has been weighing on the market. But, as we have learned over the last few summers, we’re about to hit the major portion of hurricane season, and not too many people want to get caught short this market when hurricanes do decide to come our way.

The chart below shows that natural gas futures have most likely made a bottom and will probably trend higher from here, or at least not retrace much lower.

2. Coffee

Here’s a chart of the December 2007 coffee futures:

Although a major portion of coffee is grown in South America and its winter season is winding down, we’re seeing a push here to the upside that may keep going. If it can stay above the resistance line that I’ve drawn for the next few days, it might be ripe for a bullish trade.

3. Orange Juice

Lastly, we have the orange juice market

Although orange juice is not known for its high volume or huge following, we do know that during hurricane season we can see major moves to the upside.

This is a highly speculative play, but if Florida gets whacked with a few hurricanes over the next two months, we could see the orange juice futures move to all-time new high levels. Considering the massive drop the orange juice market has endured since the spring, taking a limited-risk bullish option position could be the smart play.

Good investing,

Lee

Editor’s Note: To learn more about Lee’s commodity advisory service, and to get his recommended trades delivered to your inbox, here’s how it works.

Today’s Investment U Crib Sheet

Here are three commodities brokers you can use to get started. All of them know Lee, and are familiar with his strategies. We receive no compensation from these groups. This list is for your benefit only:

• 5perside.com
  www.5perside.com
  800.523.7357
  If you contact them, ask for George Sampogna or Chris Brooks.

 

• RMB Group
  www.rmbgroup.com
  800.345.7026
  Ask for Bob Meier or Steve Belmont.

 

• Foremost Trading, LLC
  www.TheFuturesBroker.com
  888.262.6455
  Ask for Bob Miller.