These Three Commodities Are Set to Move… Are You Ready to Profit?
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.
