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.

Foreign Central Bank Buying of Treasuries Rising

Much has been made at the usual sites about Foreign Central Banks supposedly not buying US Treasuries. One has to always take these claims with a good dose of skepticism.

Here is an updated chart of the Custodial Holdings of US Treasuries by Foreign Central Banks. As you can see, after plunging lower in March of this year  ( remember this was the result - so we were confidently told  of Russia selling its Treasuries which supposedly heralded the end of the Dollar), Treasury buying has picked back up considerably.

Treasury holdings at the beginning of this year were near $2.997 TRILLION. As of today, they are currently at 2.981 TRILLION. That is down $16 billion on the year thus far. Not much when all things are considered.

It is going to be most revealing when we finally get the updated Treasury International Capital flows data for the month of June ( we will get that in August, next month) so that we can get a look into how the  Treasury Department moves the allocation of Treasury holdings to the source nation instead of the intermediary nation.

Cattle Break Lower; Demand Fears

Regular readers of the site will recall that I have been commenting on the rise in the price of beef this spring and summer. The reason goes back to the back to back drought years of 2011 and 2012 during which times pastures burned up and died while corn prices shot to all time highs near $8.00/bushel.

Ranchers unable to locate reasonably priced feed, had no choice but to liquidate herds. We saw the impact from that herd culling in 2013 and it has continued into 2014 as heifers are retained for breeding purposes.

The shortage of cattle has pushed wholesale prices ( and by consequence retail prices ) to all time highs. Anyone who has picked up some beef lately at the grocery store knows all too well what I am speaking of.

The old adage however that the "best cure for high prices is high prices" seems to be kicking in when it comes to beef and then to cattle. Consumers are reacting to record high prices by cutting back on expensive cuts of beef, instead opting for cheaper cuts when possible. Substitutes such as pork and chicken remain very expensive as well.

Eventually the high prices begin to choke off demand. We are approaching points at the wholesale levels where many traders fear that we are now meaningfully impacting the demand side of the ledger.

Cattle prices have sold off sharply the last two days. The October contract has lost nearly 550 points during that time span.

In looking at the chart, the trend high has been interrupted as a result of the sharp selloff. The turn lower on the ADX tells us that. Also, the -DMI line has crossed over the +DMI line for the first time since late April of this year. Momentum is also pointed lower.

As you can see by looking at the sloping trendline on the price chart, cattle could fall another 500 points or so and technically remain in an uptrend so it is too early to count them out just yet. That being said, the bears have finally seized some short term control of the market. The onus is now firmly on the bulls to perform here to prove otherwise.

There is some good news in this for the consumer however. I have made a point of stating that I believe we will see some relief from record high beef and pork prices later this year and certainly by early next year. The market is looking ahead and is pricing in some of that discounting. Our next July 4th bar-b-q shin-dig will cost us a bit less for the meat, that is for sure.

Cattle producers, at least those who have cattle to sell, have had an incredible run this spring and summer. Record high prices, prices which quite frankly I never expected to ever see in cattle country, were paid for their finished animals. After suffering immensely in 2011 and 2012, cattle ranchers have gotten some long overdue and well deserved profits. Good for them!

Depending on what kind of numbers we get from the USDA, and what kind of weather we get for the rest of the growing season here in the corn belt, their feed costs will stay low for some time. Pastures remain in excellent condition. Good news for them and ultimately for the consumer.

Selling Hits Gold Late in Session; Miners hit hard

It did not take long for the longs in the gold mining sector to start a wave of profit taking. That came in when the mining indices could not extend their early-in-the-session gains. As a matter of fact, the opening print on many issues was the high for the day, or very near the high of the day. From that point forward, the shares drifted lower most of the session until they began to accelerate lower during the last hour of trading.

The result is a SHORT-TERM sell signal on the price chart although no major damage has been done to the uptrend at this point.

As long as this particular index holds near the 43 level, the retreat in price will be seen as a correction in an ongoing move higher. Just like this index did late last month, it could be merely pausing to gather its breath while it undergoes some consolidation of its recent gains. One would not want to see the index fall below 40 however if they are inclined to be bullish. That would shift the momentum back in favor of the bears.

The HUI on the other hand, just missed putting in what is termed a "Bearish Engulfing Pattern". It was only the appearance of some buying right near the closing bell that prevented the full formation from occurring. That being said, the near term price action is bearish.

I did not note it on the chart but there is a price gap coming in near and just below the 240 level. that might be a place to look for some buying support in the various shares that make up this index. Failing there, the index will look to try to hold above 232. If that fails, then we go to the gap region noted. Bulls will now need to extend prices past today's high to regain their advantage.

Economic Jitters out of Europe, Geopolitical events supporting gold

Iraq turmoil; Portugal turmoil; Israel turmoil; Ukraine turmoil - add them all together and you get a higher gold price. The flip side is lower equities. Translation - safe havens plays are in vogue. How do we know this? If you guessed the Japanese Yen is trading higher, go to the head of the class.

I will have to keep these comments brief as I have my hands full with the livestock markets today. For now, something that stands out to me is continued weakness across the commodity indices such as the Goldman Sachs Commodity Index.

Look at the plunge across the sector. The index is now at a three month low. Oddly enough, copper prices are firm today. I have no explanation for that one. This is spite of the fact that the dollar is benefitting from fears arising around the Portugal situation which has undercut the Euro.

My grain index hit a 31 month low today. By the way, both the October cattle and the October hog contract hit limit down today during the session although neither remained there.

I bring this up because based on the general fall in commodity prices that we are seeing, I remain somewhat cautious about the lasting ability of the current gold rally. The charts are very much improved on gold however and for now, that is all that matters.

Gold has managed to clear overhead resistance noted on the chart, a level which had successfully stymied it for almost three weeks now. The next level that it should have to contend with begins up near $1355 and extends just past the $1360 level. There is some light resistance showing up near $1340.

One of the indicators that I use reflects some negative or bearish divergence, suggesting upward momentum is waning but that is not unusual to see when a market has been trading sideways around a resistance zone as gold has been doing. I am monitoring it however as I would prefer to see it confirm the move higher by pushing to a fresh peak, or at the very least, reaching the previous peak reading.

The ADX continues to rise but remains below 30, a level that I generally look for when attempting to see whether markets have entered a trending phase. I get the distinct impression when watching the price action that this move is one being driven by shorts who are reluctantly exiting their positions ( buying them back). As of yet, based on the volume readings and general price action, there still looks like there remains a great number of skeptics about the current rally. The push through $1334 this morning nailed the overhead buy stops and fired them off generating a great deal of activity but since the time that those stops were taken out, volume has been lackluster.

Bulls have a good shot here at generating some further excitement if they can reach $1360 and surmount it. They might be able to pull this off if the notion that the shaky conditions existing in that bank in Portugal (Banco Espirito Santo) are going to spread further among other European-based banks and possibly precipitate some sort of bond buying program by the ECB.

Euro gold in particular seems very strong as a result of this thinking ( call it contagion fears). It is right into the resistance level noted on the chart near 985 and looks strong. Depending on how things go over in the Eurozone, it looks well-positioned for a try at 1000 Euro. That is a big psychological number.

I should also note here that the big gold ETF, GLD, reported holdings at 800 tons yesterday. That is very promising as one wants to see this key sentiment indicator moving upside along rising gold prices.

The junior miners as evidenced by the GDXJ look strong on the charts as they gapped above resistance this morning which is bullish but have encountered nothing but selling pressure since. If this index can close through 46, it would portend a push towards the next level of resistance near 48.

There is a type of flag formation on the chart ( It is not a classic one but similar) which suggests as a potential target a move all the way to the 52 level. Obviously bulls would need to clear 48 for a shot at that. The recent consolidation that occurred the last two weeks of June looks healthy in hindsight as the run higher was too far, too fast prior to that. Traders wanted to take a breather and survey the scene before getting too aggressive. Once again they are now into an area on the charts where it looks as if they want to pause once more. We'll see what we get to end the session today but especially to end the week tomorrow.


We have a big USDA report due out at 11:00AM CDT tomorrow which could send some further excitement into the grain markets. I will get some info on that report up sometime tomorrow. Grains have been anticipating a bearish report heading into the release. One thing I can tell you with certainty, livestock producers are very happy right now with these lower input costs. So too are the poultry guys, although rooster fertility issues are being noted through that industry.

Crude Oil, which succumbed to that long liquidation that some of us were concerned about, looks like it might be trying to find its footing down here. The jury is still out on that however but it is holding together pretty well after the recent beating it has taken.

Soybean Chart Analysis

Ever since that last USDA report, wherein the agency surprised the market with a big jump in planted acreage, the beans have been on the defensive. That report, plus the continuation of very good growing conditions changed the dynamic completely in the beans. Prior to the report, the focus of many traders was the continued tightness in old crop carryover. Simply put, the market was of a mind to ration demand so as not to run out of available bean supply prior to this year's harvest.

It was that old crop carryover tightness that had been the driving factor particularly in the July and to some extent, the August bean contracts. New crop November had been yanked, tugged, pulled and generally distorted by the buying in those former mentioned contracts.

Now that the Quarterly report is out of the way, traders are looking forward to a massive harvest based on USDA weekly conditions ratings, as well as field reports. The result has been a complete and rapid sentiment shift that has caught many of the hedge funds leaning on the long side of this market. They are getting out of Dodge very rapidly based on what we are seeing in the weekly Commitment of Traders reports. However, as of last Tuesday, they were still net long. I am sure that has changed by now as the market has lost some 82 points since then.

I expect to see this week's COT reports showing them to having moved over to the short side of the market. 

The market is now anticipating this coming Friday's Supply and Demand report. Based on what we get out of that, we could see even more weakness if end users feel that they can buy, "Hand to Mouth" to meet their needs as they wait for harvest to begin. While the beans are certainly not out of the woods, as they are essentially more dependent on August weather compared to corn, it is not inconceivable that we could see them near the $12.00 level without some sort of bullish surprise in this report ( or a shift to a hot, dry weather pattern across the corn belt).

Indicators on the weekly chart are pointing lower. A breach of the $12.00 support zone would suggest an initial move to $11.50 and then to $11.00- $10.80 should that fail.

On the upside, this week's gap lower is initial resistance starting near $12.86 and extends to $13.00.

A quick note on gold - it is firm due to geopolitical events - first it was Ukraine, then it was Iraq, and now it is Israel and Hamas. One wonders, with the various commodity indices all retreating lower once again, how long the geopolitical concerns can keep it supported. Gold needs support from rising commodity prices.

Russell 2000 continues to Flash Negative Divergences

Not that it has made the least bit of difference to the continuing price rise over the last year, but each new weekly high in this very risk sensitive index, has come with a lower reading in the RSI. Note that I have smoothed the indicator a bit to weed out a bit of the "roughness". That being said, the RSI reading has not once in the last year, surpassed its high reading made in March 2013 and again in August 2013. Upside momentum is waning but it does not yet seem to matter. The index has relentlessly powered higher.

I do not believe one can call a definitive top in this market until, at the very least, the support level near 1080 might give way on a weekly closing basis. One should however note these negative or bearish divergences and at least exercise some caution.

Traders who are long with large open profits might want to get a bit of downside protection in the form of puts or covered calls on a portion of their positions just in case this index were to finally confirm any of these divergences.

The problem for the bears has been the ultra low interest rate environment. It has essentially made stocks the only game in town as far as obtaining a decent rate of return on invested money. Until that changes, bulls will more than likely continue with their heretofore successful practice of buying dips. Eventually the music will stop but timing that over the last year has been a fool's errand. All a trader/investor can do is to go with the money flow until something changes technically to indicate that the party is over. For now, in spite of the divergence warnings, the good times continue to roll for the bulls.

Trader Dan's Grain Index Notches 42 month low

Benevolent weather and falling demand ( in anticipation of weaker prices ahead ) has led to heavy selling across the entirety of the grain floor this morning. The result is that my grain index has notched a 42 month low! This is very welcome news for the livestock and poultry industry as well as for consumers who can expect to see lower food prices ahead ( assuming of course that the trade will eventually pass through the savings).

I should also note here, that according to the most recent Commitment of Traders data through 7-1-2014, Managed Money or Hedge Funds still remain as net longs in the corn market in spite of the fact that corn futures scored a 4 year low today. Also this same category remain net long in soybeans as well even though they have been caught on the wrong side of the market and are now in the process of liquidating long positions at a very rapid clip ( not to mention starting to build shorts).

This informs us that if this category decides to get aggressively short, we have further downside to go across the corn and bean markets.


Crude oil prices are also continuing to weaken although they remain high but are at least headed in the direction that will benefit consumers and business for the moment.

The weakness in crude oil and its products today, especially gasoline, is weighing on the Goldman Sachs Commodity Index, which I wish to remind the reader is excessively weighted ( in my opinion ) in its energy component.

Notice the sharp retreat from the top resistance zone which has knocked the index back to a 3+week low. Also note that it has fallen back below the recent breakout point near 660.

I am also noticing that Cotton prices are trading near an 19 month low today. That will help keep the cost of clothing from rising too abruptly... more good news for the cash strapped consumer. Cotton fiber competes with the synthetics most, if not all of, which are tied to crude oil prices.

With the yield on the Ten Year Treasury dropping to 2.616% today, it would appear that inflation worries, at least in the area of commodity prices in general, have subsided for the immediate moment.