Euro Continues Closing in on Key Chart Support

Those of you who have been following this blog for a while should be familiar with my view that the currency world has been rather erratic of late. Many of the majors are in trading range market without any clearly defined trend.

The Euro is no exception. It has been contained in a range bounded by 1.370 on the top and 1.350 on the bottom for the last 6 weeks. It has begun moving lower towards the bottom of the range this week however and is setting up therefore for an important test.

I have felt that the European Monetary Authorities are not comfortable with the Euro near the 1.40 level in relation to the Dollar. That was made abundantly clear by Draghi's talking down of the currency in early May when he first broached the topic of lowering interest rates and potential forms of monetary stimulus that might be employed by the ECB to get the Eurozone economy moving.

Traders took their cue from him and responded by selling the unit. However, the bears have as of yet been unable to take it down below 1.35 for some time now. This level is once again proving to be a key chart level that should be monitored.

Neither of the indicators noted are near their respective oversold zones so IF (and this is unknown ) the Euro can break below that zone, it has the room to run down another full point initially and perhaps as low as 1.330. If it does, it will confirm a trending move as it will have broken out of its range trade.

Time will make it clear.

Downed Malaysia Airline Boeing 777 drops US Equities

How very tragic that so many innocent lives were taken in a moment. An otherwise routine flight turned into a horrible scene of death and devastation.

Equity markets reacted strongly lower with many investors fearing this incident could result in a flaring of tensions and an escalation of conflict on a larger scale. The jury is still out on that but it certainly introduces another new unknown and if it is one thing that markets hate, it is unknowns.

The old trading adage, "Sell first and ask questions later" was on display in full force in today's session.

Safe havens were in vogue as the Yen moved sharply higher and US bonds put on more than a full point with the Ten Year yield sinking to 2.475%. That is the lowest it has been at in six weeks.

I must say I am a bit disappointed in the gold price as the metal could not even stay above the $1320 level. With the backdrop of an Israeli ground operation against Hamas, and with this commercial airliner incident, one would think it would have garnered some more upside. Tomorrow is going to be an important day for the metal therefore. At least the HUI was very strong, a positive sign.

Take a look at the Russell 2000, again, a very good barometer of risk appetite among investors/traders.

The index closed below its 50 day moving average for the first time since early June.

The two particular indicators I have chosen to display are both in bearish modes as well confirming the move lower.

In looking at the chart I get the sense of a market trading in a broad range. It lacks the necessary momentum to get through the double top ( TOP of the RANGE) near 1220 but so far it has had enough buying to hold its support at the bottom of the range near 1080. Based on the chart pattern, and especially if events globally continue to unnerve investors for the short term, odds would seem to favor a move back down towards that support level once again.

The Russell could chop around in a range for some time. It does not have to necessarily either fall out of bed and collapse lower nor does it have to go rip roaring higher. Trading range markets can trip up a lot of traders as they tend to get bearish as price moves to the bottom of the range and bullish as it moves to the top. However, unless we get a clear breakout from either side of the range, odds favor a continuation of the consolidation pattern.

US Treasury Releases International Capital Flows Data for May 2014

This data, which is released once a month from the US Treasury Department, gives a fairly good sense of the appetite for Dollar denominated assets among Foreign investors and Foreign Central Banks.

It is dated however and one must remember that. Today's data is for the month of May so you can see it is not especially timely. However, it still has value in my opinion.

I am still eagerly waiting for the June data during which Treasury usually makes the adjustment from the country in which the Treasury transaction was completed to the country of origin.

In looking over the Major Foreign Holders of Treasuries data ( broken down by country), a couple of things stand out. First, China and Japan, the two largest holders of our debt, both INCREASED their holdings during the month of May.

China bought $7.7 billion worth while Japan bought $10.4 billion. Chinese holdings are down $26.4 billion from the same month last year. Japanese holdings on the other hand are up a staggering $116.4 billion from May 2013.

Belgium, the center of the so-called "conspiracy" ( among the gold perma bulls ) for surreptitious buying of US Treasuries unloaded $4 billion of the things. I guess someone forgot to tell them this month that they are supposed to be buying the Treasuries that the US Federal Reserve has stopped buying for its QE program. Remember, the theory is that the tapering has not actually stopped even though the Fed has announced that it has begun tapering and is slowing its purchases of US Treasuries. You see, the Treasury buying is really still going on. It is just being done through back channels using Belgium as the epicenter.

Sigh! It never does end does it with some of those folks.

Overall, there was a pretty healthy increase among all of the buyers for May. They increased their holdings of Treasuries to $5.976 trillion, up from $5.960 trillion in April. That is a $15.1 billion increase.

Compared to the same period last year ( May 2013), Treasury holdings are up $318 billion ( $5.976 to $5.658).  So much for the demise of the US Dollar.

Keep in mind that this particular data set is the "Holdings" data.

As far as the NET PURCHASES DATA goes, Total NET Foreign Purchases for May increased by $25 billion. That is a big improvement from the previous month ( April) when the number was a negative $13.589 billion. A negative number means foreign investors, official institutions, etc. were selling ( there was a net OUTFLOW of capital instead of a NET INFLOW).

NET PURCHASES of US equities showed another increase for May ( $10.78 billion). That comes on the heels of a net increase for April of nearly the same amount ( $10.19 billion). Foreign appetite for US stocks remains strong.

NET PURCHASES of US government agency debt jumped to $4.169 billion after falling the previous month by $2.082 billion.

The loser this month, among foreign investors, was US corporate debt. There were NET OUTFLOWS of $5.385 billion for May. That follows net outflows of $8.509 billion in April. This category is especially volatile however.

All in all, demand for US dollar denominated assets among foreign investors/institutions/official sector was strong in May.

One last thing for this set of comments - gold is moving higher today on news that the US has introduced a new set of sanctions against Russia over the Ukraine situation. Russia is not happy about it. Also, the escalation in tensions and the conflict over in Israel and the Gaza region with Hamas has fueled nervousness in stock markets and is bringing selling into equities, buying into bonds, and buying into gold. Gold is being driven of late by headlines.

It looks as if it might want to run up into the former resistance zone ( $1330- $1340). Geopolitical tensions have put a "13" handle in front of it and is offering psychological support.

You can look at the ADX and see the muddled mess on the chart. There is no clearly defined trend at the moment.

As I have been writing this, news has come out that a passenger plane has been downed over the Ukraine. That is really fueling the safe haven bids...We'll have to get the details on this as they come out.

Godzilla Destroys Tokyo

I thought that might be a catchy title because what happens across the markets, whenever we get one of these Fed Chair Testimony days, is more like what happens to Tokyo every time Godzilla goes on one of his rages.

Most people think they know what is going to be said and when the Fed Chair surprises or disappoints, then we get all sorts of market reactions.

The "surprise" today ( and I am hesitant to call it that) was that Janet Yellen and the rest of the Fed do not seem particularly worried about inflation. Ms. Yellen rightfully ( in my opinion ) pointed to the labor markets and the slack that remains in there. Frankly I wonder why anyone was the least bit surprised about that. It is widely known that while the labor markets are slowly, incrementally improving, they are anything but robust right now.

Also, take yet another look at the Goldman Sachs Commodity Index, which I have been keenly focusing on for the last week or so. It is plunging lower.

With the collapse in grain prices, and now with the crude oil complex surrendering much of its "geopolitical or fear" premium, energy prices are moving lower.

Those two big sectors have pulled the entire commodity index into negative territory on the year. With slack remaining in the labor markets and with sinking commodity prices, it is difficult to make the case that inflation is a serious concern.

This is what has concerned me about gold. It has moved higher recently solely based on geopolitical fears ( I am including the Portuguese bank situation in there) but as far as an inflation hedge, how can one argue that one needs to buy gold to protect against inflation right now when the commodity sector as a whole is moving lower? Those geopolitical events can provide support for the metal but once those events fade from traders' minds, then there is not much left to support these higher prices.

You can point to the Dollar but like so many of the major currencies right now, it is stuck in a range trade and is certainly not collapsing lower.

Some will buy gold as protection or a type of safe haven against falling equity prices but so far, stocks while they have bent, have not broken.

As to be expected on a day during which gold is falling in price, we will get the usual " someone is dumping huge quantities of gold" nonsense, as if somehow that is evidence that the feds are knocking the gold price lower,  but if the market perception, aided by the Fed Chairwoman, is that inflation is not a serious problem, then it is to be expected that gold would be sold off. If the entire commodity complex is moving lower, why not gold? We could all make the same breathless exclamation, "Someone is dumping huge quantities of crude oil on the market". Does that imply that some nefarious evildoer is working to depress the price of crude oil? Of course not!

These continuous, simplistic notions that pop up like mushrooms after a summer rain every single time gold makes a sharp move lower, do a huge disservice to objective market observers and betray a naivety that borders on ignorance. Markets are constantly in a state of flux and perceptions change daily, sometimes within the day. Why should we expect markets to be stagnant? That is what makes trading/investing so very challenging. Perceptions are constantly changing and we have to adjust to these changes if we are to be successful. One gets the idea in reading the stuff from some of the gold perma bull sites, that nothing ever changes in markets in regards to how players see things on any given day.

When markets change - good traders change. It is that simple.

Take a look at the weekly chart of corn and you will see what I mean when I speak of falling grain prices. Corn prices are at a near 4 year low. There is a good possibility that they could fall even further as it has now entered what was a former congestion zone back in 2010. The bottom of that zone is near $3.40.

This will have big implications for food costs as it will work to eventually bring down meat and poultry prices later this year and certainly by Q1 2015.

Crude fell below the psychologically important $100/bbl level today. It just so happens that this level coincides very closely to the 200 day moving average, a big technical level, so the downside breach of $100 is not only a psychological blow to this market, but it is also a big technical blow. Crude is currently holding in the first support zone noted. If it loses the lower edge of that and cannot recover it, it should fall another $1.00.

I will get some more up later on... it is a bit busy right now....

USDA Crop Conditions Ratings

USDA reports from the field are in for this week.

It might be hard to believe but the corn crop actually improved even more. Last week it was rated at 75% Good/Excellent. This week, that category increased to 76%. The improvement came at the expense of the Fair category which dropped 1 point to 19 from 20. That one point drop in the Fair ended up in the Excellent category which increased to 22% from 21%.

Improvements came in the Missouri crop. The big three, Iowa, Illinois and Indiana remained the same at a healthy 108, 111, and 108 on the ratings table with 100 considered normal.

34% of the crop is silking compared to last year's 15% and the 5 year average of 33%. The crop is way ahead of last year but right about on schedule.

On the soybean front, the percentage of the crop rated Good/Excellent remained the same at 72%. There was a 1% increase in the crop rated Excellent at 16% compared to last week's 15%. That came out of the Good category which dropped one percentage point to 56% from last week's 57%.

The Fair category lost 1% to the Poor category. 22% of the crop is rated Fair this week, down from 23% last week. 5% of the crop is rated Very Poor, up from 4% last week.

41% of the crop is now blooming, way ahead of last year's 24% and compared to the 5 year average of 37%. That earlier bloom period is important as it puts the crop a bit ahead of schedule meaning the current benign weather will keep it supported ahead of any potential heat/dryness issues that might arise in August.

There is a bit of chatter that this week's Polar Vortex (yes, you are reading that correctly) which is expected to hit the Mid-West later this week bringing unseasonably cool temperatures with it, might slow the crop down somewhat due to the lower overnight temps but I am not so sure about that. It takes soil a long time to cool off and a few days of cooler weather, along with sunshine I might add, is not going to impact soil temps all that much in my opinion. Mild day times temps will continue to eliminate any heat stress issues for these plants.

As far as the big three go, the Iowa bean crop improved to 106, the Illinois crop improved to 108 and the Indiana crop remained unchanged at 105.

Beans popped higher today on thoughts that possible hot/dry weather in August could crimp yields but that remains a ways off and thus far I have not seen any forecasts calling for that. What likely happened is that some shorts decided to book some profits after the market spiked up off its worst levels on Friday after the initial reaction to the bearish Supply and Demand report had run its course.

Corn and wheat got bumped higher as well on ideas that the sharp fall in prices would generate some commercial buying interest.

Switching gears here I am noticing that the gold miners ( HUI) is closing very near its low on the day. Ditto for the GDXJ which is down nearly 4.8% as I type up these comments.

The long bond is a tad weaker today. Expectations are that Yellen, speaking on the behalf of the Fed and not herself, will sound a bit more hawkish view on interest rates. Some of this was also a factor in the gold price drop today.

Some longs got nervous looking at the sharp spike in the number of NET LONGs among the hedge fund category. That number leapt from 51,280 the week of June 10 to last week's reading of 136,929. That is a significant increase in a mere three week period as it almost tripled.

We'll have to see whether or not gold can remain with a "13" handle in front of it. Much will depend on Yellen's testimony and obviously how the market reacts to that or how it interprets her comments.

I think people are coming around to the consensus that interest rate hikes are inevitable. No one seems to have the time nailed down however. That is what will be the focus.

Today's comments

One just knew they were coming. By "they" I mean the usual hysterical screams about "massive amounts of paper gold dumped" in mere seconds, etc. Funny how none of these perennial hype-sters ( my word) said a single word about the massive surge in price back on June 19th of this year. That was the day that gold managed to soar $50 at one point before settling up some $47 on the session. Yep - "SOMEONE JUST SWALLOWED millions of ounces" is what the headline could have stated that day but you see, gold must always rise so when it gets slammed lower, it must by necessity be the work of nefarious forces. Let it accelerate higher in a mad short squeeze and that is just dandy as that is what "it should be doing if the world was fair". Sigh... it will never end.

Again, for the umpteenth time, welcome to the world of futures trading where wild swings in price are the new norm. Whether it is the bean market, the cattle market, the hog market, the coffee market ( just pick your market) enormous spikes in price, enormous collapses in price, are becoming more and more frequent. Computerized buying and selling programs have essentially taken over from thinking human beings. There is no thinking - there is just reacting and since these automatons react to the last change in price, they all tend to be on the same side at the same time. The result is enormous air pockets both over and under the market as they all rush to the exits at once or they all crowd in to gorge themselves simultaneously.

Gold could not extend past last week's high just above the $1340 level confirming that resistance. It fell all the way to the support zone noted on the chart and has thus far held above psychological round number support at $1300. There are still enough geopolitical fears around ( and some financial fears about Portugal ) that it looks as if support will hold from dip buying coming in but bears are flexing their muscles and are growling. Failure to hold $1300 sets up at test of the $1280 region.

The recent push high above 1340 was not confirmed by the momentum based indicator shown. It failed to set a new high and actually moved lower setting up the divergence which was confirmed by today's action. Bulls will now have to take out last week's high if they are going to attract more recruits to their cause and spook some of the new shorts that came in today. Some have expressed the concern that the recent surge in fresh long positions by large specs was too much, too fast.

By the way, I have not heard any news yet whether or not India has lifted that tariff on imported gold. Do any of you readers know anything about this? Some of the bullishness in gold was related to the assumption that the recently elected government was going to repeal that tariff. If that expected repeal is delayed, some of the premium in gold that might have been due to that will be wrung out for now.

It will be interesting to see if we get any updated numbers out of GLD today. Gold tonnage made it over 800 tons last week, the first time since April that we have seen it above 800. Currently, the reported tonnage is about 2 tons larger than the start of the year with the gold price approximately $100 higher.

Copper traders are awaiting data out of China this week ( Wednesday) detailing Q2 GDP growth. The metal should take its cue from that number. Looks like there is some light profit taking in there today ahead of the release. Sharp weakness in silver is also weighing somewhat on copper today.

Crude oil continues exhibiting weakness as traders are concerned over increasing supplies from Libya. Brent is losing ground faster than WTI for now as global demand is expected to drop. Traders have noted that thus far Iraqi oil supplies do not seem to be impacted by that region's troubles.

WTI is holding above $100/barrel which is more of a psychological chart support level than anything. Technical support appears near $99 and extends to $98.75. If crude is unable to hold that region, losses could accelerate further. Maybe we consumers will see some further relief at the gas pump. I do not know about you, but I was enjoying the lower gasoline prices back at the beginning of this year.

Unleaded has rallied nearly $0.55/gallon since January but finally fell back below $3.00 at the wholesale level last week. Price has descended to the 38.2% Fibonacci retracement level of the entire rally off the November low. If it does not hold here, which it looks like it is trying to do, it should test the May low near $2.87.

I am noting that the XLE is showing some strength today ignoring the weakness in crude. That deserves some further attention.

I am not even going to bother commenting on the currencies today as they are going nowhere. No one really seems to know what to do with them at the moment as the Central Banks are all involved with speeches and the various economic data coming out from several countries seems to be conflicted. There is no clear trend.

After a sharp pop off the session lows last Friday, cattle are moving lower early in the session. Lower cash prices paid in cattle country last week have sparked concerns among traders that beef demand is going to weaken heading into the hotter months of the year.

Price found support at the 50% Fibonacci retracement level from the rally off the May low. Today's session low is just above the 38.2% retracement level from the rally using the April low. If Friday's low were to give way, cattle could lose another 200 points. This market has been in a spectacular bull for some time now and such attitudes do not subside that easily. Bulls do not yet seem ready to give up on the complex. The key will be whether or not beef demand is going to be impacted by these high prices. Restaurants and export buyers are still shell-shocked but they may fear being able to move the stuff at current prices. If they pull back from the market, it is likely that cash cattle prices will follow. The jury remains out and might continue to do so until much later in this week when cash trade finally commences.

This afternoon we will get the updated USDA conditions report for the crops. As of now traders are expecting to see continued good numbers. That report last Friday really shocked the market so any improvement in the numbers will add more bearish fuel to the fire. Right now there remains no damaging heat/dryness in any of the forecasts that I have seen. Some were buying beans today off the spike from the session lows Friday and there was some chatter about the weather turning hot and dry in August but that talk pops up every year whenever we get a move higher in the beans. It looks to me like this is just a consolidation coming off a  big move lower. End users of beans are certainly not going to be in a big hurry to book needs at the moment.

today we say goodbye to July grain futures for this year. There is never any way of knowing what might take place in those expiring contracts. I have seen them do all manner of things before they take their last breath. I was originally expecting some big commercial firms to orchestrate a squeeze but the recent USDA reports undercut any notion of that as the carryover stocks are no longer the concern they once were.

I will try to get some thing else up later on today especially after going through the conditions reports.

Hedge Funds Bet Big on Corn - and Lose Big

Here is something that one does not see too often in the futures markets - trend following hedge funds on the wrong side of a market. I am referring to the corn market which has been hit hard by selling ever since the acreage numbers first came out and the weather became nearly perfect. Throw on top of that USDA supply and demand numbers and the downtrend has been relentless.

Take a look at the following chart and you will see what I mean. The price of corn has gone from near $5.20/bushel to its current $3.78, a drop of 27% in two months time.

Now take a look at the chart noting the positioning of the various players in the corn market.

While it is not unusual to see long liquidation from the hedge funds accompanying a move lower on the price chart, what is unusual is the fact that even though corn has taken out both its November 2013 and its January 2014 low - the point at which these hedge funds began building their massive net long position which took the market up - these same hedge funds remain net longs. As a matter of fact, they even added slightly to that position in this latest COT report. They are massively underwater on these long positions; something rather uncommon to see in this day and age of computer-driven markets.

Even more interesting is the fact that the little specs, the small traders, the general public, usually the guys on the wrong side of the market, are all on the correct side and are making money at the expense of the gigantic hedgies. Chalk up one for the little folks!

One shudders to think what might happen to corn price should the hedge funds actually totally abandon the long side of this market and start moving over to play it from the short side.

Here is a quick shift over to the soybean market. Look at the price action over the last six weeks. They have imploded lower dropping from up near $15.40 all the way to today's 11.95 close.

The COT report for beans clearly shows why in terms of money flows. Since March of this year, hedge funds ( managed money ) have been liquidating longs as the price has continued to move lower. What is also remarkable is that even though prices have broken below the January lows - the point at which the already net long hedge funds really began to ramp up longs - this category of traders remain net long as of Tuesday this week. In other words, they have also been losing money in the beans as well as in the corn.

Based on the carnage that today's USDA report unleashed in the grain complex, my educated guess is that they have finally moved over to the net short side of the beans although I would not think the position is up over 25K net short at this point. Maybe by next week it will be.

The point in all this is that if the hedge funds decide to press the short side of the bean market - and in the face of what is now expected to be a massive crop this year - beans could see even more selling. USDA today shocked the market, as it did not that long ago, with an even larger than expected acreage number of 84.8 million acres. They left yields the same but that larger acreage number means a lot more beans are expected than what the market was trading prior to the report. Right now we are looking at a 3.8 billion bushel number. That was up from the June estimate of 3.64 billion.

What saved this market from even more selling was the fact that today is a Friday and the USDA report hit the wires after a week during which beans had already been moving lower. Some shorts decided to go ahead and book some profits before heading into next week. That short covering took the price well off the worst levels of the session. There was also a bit of sentiment that unlike corn, it is a bit too early in the growing season to completely remove all the weather premium.

Bean traders will be looking at the longer term forecasts, particularly for the month of August to try to get a handle on the weather during that all-important time for this market. If the forecasts continue to be benign, hedge funds will be at work selling.

We will see what we get next week.

I will leave you with an updated chart of my Trader Dan's Grain Index. It hit a 45 month low this week.

USDA Supply - Demand Report Obliterates the Grain Complex

I will have more on that huge USDA report later on, after I can find my stomach and my head, both of which are still spinning after seeing those numbers.

For the immediate time being, let me just put up a quick chart of the Goldman Sachs Commodity Index so that the reader can see for his/her self how much damage has been done to the complex. With crude oil collapsing lower today and with the grains imploding in reaction to an overwhelming bearish report, there was little to support the various commodity indices.

The GSCI not only confirmed a double top on the charts but has now lost all of its gains on the year and has gone negative.

Gold bulls has best rejoice in the woes in the Portuguese bank sector and the turmoil in Israel ( one has to feel sadness for those folks having to endure that sort of thing ) along with the Iraq mess, because that is what is keeping gold afloat right now as the prices for tangibles are sinking.

Rising commodity prices tend to support higher gold prices just as sinking commodity prices tend to undercut its price. Safe haven bids are still at work however due to the events mentioned above. Any change in those and gold bulls had best watch out!

Here is the chart... It is not pretty. The price has collapsed vertically over the last three weeks.