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Futures Breaking news – BrokersEDGE 2-2-18

CORN (March)

Yesterday’s Close: March corn futures finished yesterdays session unchanged, trading in a range of 3 ½ cents on the day. Funds were estimated buyers of 8,000 contracts on the day.

Fundamentals: Yesterdays export sales came in at 1,850,000 metric tons, this compares to the expected range from 1,000,000-1,700,000 metric tons. Corn bulls want to see a continued trend of better than expected exports to encourage additional short covering and new buying interest. The USD has been trading near multiyear lows which has helped revive some global demand. Weather in South America continues to be monitored as some are concerned of potential yield loss in areas of Argentina. Private estimates for the Brazilian crop have been increased from 23.44 mmt to 23.87 mmt.

Technicals: The market has been firming up over the past few weeks and it looks as though that may continue. The bulls must maintain price action above 357 ¼-358 ½ to remain in control. This pocket contains the 100-day moving average, along with a key retracement level. The next level of resistance comes in from 366 ½-369. If the bulls cannot defend support, we expect to see the market trickle back towards 350-352. The RSI (relative strength index) is currently at 69.32; a level we have not seen since we peaked last July.

Bias: Neutral

Resistance: 366 ½-369****, 373-376***

Support: 357 ¼ -358 ½**, 350-352***, 345-346 ½***

 

SOYBEANS (March)

Yesterday’s Close: March soybeans finished yesterdays session down 12 cents, trading in a range of 18 cents. Funds were estimated sellers of 8,000 contracts on the day.

Fundamentals: Soybean futures took a turn south yesterday on the back of very disappointing export sales. Weekly export sales came in at 358,900 metric tons, this compares to the estimated range from 600,000-1,200,000 metric tons. On top of the poor exports sales, chances of rain have worked back into the forecast for areas of Argentina that have been relatively dry. There are some seasonals in play that should be encouraging for the bulls. We have recently referenced a May buy, the November buy starts today. If you had bought on February first and sold on the 17th, you would have been profitable for 13 of the last 15 years, with the average gain being about 12 cents.

Technicals: Soybean futures tested and held the first test of 980 on a closing basis yesterday, but the market is under pressure and testing 980 again this morning. This puts the bulls back on their heels as we head towards the open. 971 ¼ is going to be the key line in the sand we are watching for as we round out the week; we like the value at this level on the first test. This represents a key Fibonacci retracement from the June lows to the July highs. The bears want to defend 986 ½-988 ¼ on a closing basis.

Bias: Neutral/Bullish

Resistance: 986 ½-988 ¼***, 999-1006***, 1020 ¼-1027****

Pivot: 980

Support: 971 ¾***, 961 ¼-963 ¼****

 

 

WHEAT (March)

Yesterday’s Close: March wheat futures closed ¼ cent lower yesterday, trading in a range of 8 ¼ cents on the day. Funds were estimate buyers of 500 contracts.

Fundamentals: Wheat futures were under pressure to start yesterday morning as weekly export sales came in at 289,100 metric tons, this compares to the expected range from 300,000-600,000 metric tons. Weather premium has been the catalyst for encouraging higher prices on the back of fund short covering. The bulls need to see more bad news to continue the rally, neutral or no news will likely invite sellers back into the market. The USD is trading near multiyear lows which has also offered some support to the market.

Technicals: Wheat futures tested and held first support at 442 ¼ yesterday, finishing the day near unchanged. That support level remains a key focus today, another test and close below will likely mark a near term top as we would expect sellers to come back in and press us back towards 429 ¾. On the resistance side of things, the bears must defend 456 ¼-458 ¾. The RSI (relative strength index) has come off of overbought levels and is reading 60.78 this mornings.

Bias: Bearish

Resistance: 456 ¼-458 ¾***, 472 ¾***

Support: 442 ¼ **, 429 ½***, 410 ½-413 ¼****

 

E-mini S&P (March)

Yesterday’s close: Settled a 2822.50

Fundamentals: Equity markets are again under pressure this morning and investors await the release of January’s Nonfarm Payroll Report at 7:30 am CT. The S&P hit our main target at 2798 with an overnight low of 2797. Stocks in Europe are also sliding sharply, the DAX is down more than 1% again today and has lost more than 5% since its peak January 23rd. The Nikkei is down nearly 1%. Amazon is in a planet of its own, trading up about 5% after earnings last night. Apple was up more than 2% but has now gone red in the pre-market. Google is down nearly 4% this morning. The key catalyst in all of this is the rise in Treasury yields, a story we have been discussing for some time now. If you are simply watching the Dollar, you might be missing the story of global growth. The Dollar is unwinding its rally that began in 2014 when the Fed was the only central bank tightening. But just because the Dollar is weakening doesn’t mean the growth story isn’t there. Just yesterday, the Atlanta Fed said it projects first quarter GDP at a whopping 5.4%. Inflation has shown signs of rising and the Fed expects it to reach their 2% target and stabilize there later this year. All of this allowed the Fed to pave the way for four rate hikes this year at their meeting Wednesday. Treasury markets are seeing strong selling, which pushes yields higher as this global tightening gets priced in. Higher yields begin to attract investment out of the equity market and furthermore, costs more money to service. Today’s Nonfarm Payroll will be critical in this story, strong growth in jobs and wages will likely add further pressure to equities in the near term. Expectations come in at 184,000 jobs created and Average Hourly Earnings growth of .3% on the heels of .3% last month while the Unemployment Rate is expected to be stable at 4.1%. As we discussed in the Tradable Events this Week on Sunday, the U6 Unemployment Rate has risen for the last two months to 8.1% and this is a data point to watch.

Technicals: Though are Bias has been Neutral all week, we have been adamant about a few things. The sellers are in control until a move out above first resistance while the immediate downside is exposed with a continued close below 2825.50-2828; yesterday’s settlement was 2822. Our first target to the downside is 2807-2808.50 while our main target is 2798. Lastly, you don’t want to be short and just close your eyes. First resistance yesterday was 2838-2839.75 and this is now second resistance but still the line in the sand as a move out above here will completely neutralize the tape. First resistance now is 2825.50-2828.25 and we maintain that continued close below here is needed to keep the bears in complete control. The 2847.75 level is second resistance and a spot that if taken out could cause a strong move higher. With 2798 being achieved with a low of 2797, the next support level comes in at 2773-2777 while our next major three-star level is 2748.25-2752 and this aligns multiple levels as well as a rising trend line from November. If we see a close below 2798, this level is then in play and should present a spot to go long.

Bias: Neutral

Resistance – 2825.50-2828.25**, 2837.75-2839.75**, 2847.75**, 2858*, 2878.50**, 2887***, 2920***

Pivot – 2807-2808.50

Support – 2798***, 2773-2777**, 2748.25-2752***

 

Crude Oil (March)

Session close: Settled at 65.80

Fundamentals: Crude extended gains from Wednesday’s early low by more than $2.50 to 66.30 overnight. Today is Friday, and Friday’s have been very friendly to the energy complex. Today is also Nonfarm Payroll, a report that should influence the Dollar. Right now, the Dollar is slightly higher on the session and this likely has a small hand in Crude retreating from session highs. Do not underestimate the influence that the weaker Dollar has had in Crude Oil above $60 and in the month of January. If the Dollar recovers firmly from oversold territory, we expect this to become a key catalyst coupled with rising North American production in sparking a correction in Crude.

Technicals: Trading to 66.30, price action has extended near the top end of its recent range. If the tape stays contained today, this could build a lower high than Monday’s peak of 66.46 and the swing high on January 25th of 66.66. Remember, the only major three-star level we have had above $60 is 66.87 and this level has held well so far. Our Bias is now slightly more Bearish than Neutral. Traders do not need to pick a top but if today stays contained with a lower high, we believe the door is wide open for the sellers Sunday night. First key support comes in at 65.29 while a move back below 64.98 should encourage further selling.

Bias: Bearish/Neutral

Resistance – 66.30-66.46*, 66.87***, 68.43**

Pivot – 65.80-65.95

Support – 65.29**, 64.98**, 64.67**, 63.67-63.70**, 62.78-63.00***

 

Gold (April)

Yesterday’s close: Settled at 1347.9

Fundamentals: We continue to believe that the long-term picture for Gold is positive. However, we also maintain near-term caution. Since achieving above $1360 our Bias in Gold has been Neutral and we have exuded caution to longs that are pressing their largely profitable position from mid-December. Today’s Nonfarm Payroll report is crucial, and 184,000 jobs are expected to be created. Average Hourly Earnings is expected to grow .3% on the heels of .3% growth last month. Despite the rise in Treasury yields, historically a strong headwind for Gold, the metal has held ground tremendously. What Gold will not be able to ignore is a strengthening Dollar and that is why this report will be key to the near-term trade.

Technicals: A swing high of 1354.3 was achieved yesterday, but the metal struggled to hold above first resistance at 1349.7-1351.4. The near-term technicals look weak due to falling back from the session high. A close above this level today, with Nonfarm in the rear-view mirror, we could imagine becoming bullish again. However, we continue to believe the value is limited until the overcrowded long-position gets cleansed. The market would need to go to major three-star support at 1321.7 in order to begin doing that. Though we can make an argument to begin buying against first key support.

Bias: Neutral

Resistance: 1349.7-1351.4**, 1365-1370***, 1377.8**, 1392.6***, 1432.9**

Support: 1329.1-1331.9**, 1321.7***, 1307.6-1312***

 

Natural Gas (March)

Session close: Settled at 2.856

Fundamentals: Yesterday’s storage report came in at -99 bcf, the lowest drawdown reported since December 14th. Prices have been under pressure since the expiration of the February contract, retreating from a level in which they probably should not have tested to. Now the question is, have prices retreated too much ahead of a weekend and while headlines still warn of chilling temperatures over the next two weeks. Because of this, we would not be surprised to see a consolidation higher ahead of the today’s close.

Technicals: Price action traded sharply below major three-star support at 2.896-2.902 and traded to a low of 2.837. Our next key support level comes in at 2.786-2.81 and this has kept price action in check. We are neutralizing our Bias slightly ahead of the weekend, but the bears will continue to have a clear edge if price action stays below 2.896-2.902.

Bias: Bearish/Neutral

Resistance – 2.981-2.998**, 3.035-3.051**, 3.181-3.197***, 3.27*, 3.32**

Pivot – 2.896-2.902***

Support – 2.786-2.81**, 2.693**, 2.53****

 

10-year (March)

Yesterday’s close: Settled at 121’07

Fundamentals: The global growth story is real and along with the Fed being upbeat on inflation and paving the way for four rate hikes this year, the Atlanta Fed now projects first quarter GDP at 5.4%. The 10-year yield is pushing 2.8% and on the other side of the coin, this is now weighing on equity markets and if the selling in equities picks up any more than this, we believe the 10-year will see strong waves of buying. Today’s Nonfarm Payroll is key for the trade and we have a strong focus on Average Hourly Earnings growth and the U6 Unemployment Rate that has dropped for two consecutive months.

Technicals: We continue to have a contrarian perspective in this market and it has not paid off in a very tough week. Price action has stayed suppressed below 121’17-121’18 which keeps the sellers in clear control. However, watch for a close below 2798 in the E-mini S&P to bring support ahead of the weekend. The session low comes in at 121’02 and we really don’t want to see this taken out.,

Bias: Bullish/Neutral

Resistance – 121’25**, 121’31-122’015***, 122’15-122’175**, 122’26-122’29***, 123’10**

Pivot – 121’17-121’18

Support – 121’02**, 119’20-120****

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

 

Cattle Commentary: Cattle futures finished the session mostly higher, though well off of the highs for fats and feeders. April live cattle finished the session up .275 at 124.90, trading in a range of 1.325. March feeder cattle finished the session up .225 at 146.95, trading in a range of 3.325. Friday afternoon we got some new news across the wires in the form of cash trade and the Cattle on Feed report. The bulk of cash trade was reported at 127 and 200 dressed, this was up 4 and 5 respectively. Majority of market participants we spoke with were expecting to see 126. Fridays Cattle on Feed report showed the following:

 

Cattle on Feed: 108

Range of Estimates: 107.2-108.1

Average Estimate:107.7

 

Placements: 101

Range of Estimates: 93.3-100.3

Average Estimates: 96.9

 

Marketing’s: 99

Range of Estimate: 97.9-100.3

Average Estimate: 98.6

 

This afternoons boxed beef prices were up slightly.

PM Boxed Beef / Choice / Select

Current Cutout Values: / 206.83 / 201.83

Change from prior day: / .06 / .51

Choice/Select spread: / 5.00

 

Cattle Technicals

Live Cattle (April)

April live cattle futures finished gaped higher to start the week, marking the high print in the opening minutes as price action fizzled out for the remainder of the day. The overall price action for the session was neutral but we continue to believe there is opportunity at the top end of the range to consider selling, whether that be reducing long exposure or legging in on shorts. If the market fails to break out above resistance in the coming sessions, it is likely that we see long liquidation take prices back towards first support which comes in from 122.475-122.75. If the bulls do achieve a breakout, the next resistance pocket comes in from 127.20-127.35.

Resistance: 125.20-125.35***, 127.20-127.35***, 130.10****

Support:122.475-122.75***, 120.20-120.625****, 117.90-118.70****

 

Feeder Cattle (March)

March feeder cattle saw some volatility on the open, as we saw a “surprise” gap higher with prices testing our “last line of defense” from 149.40-150.00. The market was not able to hold water at those levels and that led to some pressure for the remainder of the day. If that market fails to gain traction here in the first half of the week, we could see selling pressure come back into the market and press us towards first significant support which we have marked as 143.25-143.50. As with the fat cattle, we continue to feel that this is an opportunity to consider the sell side regardless if you are bullish or bearish (reduce longs/initiate shorts).

Resistance: 147.75-148.00***, 149.40-150.00***, 153.95*****

Support:145.80-146.45***, 143.25-143.50****, 142.10-142.60**, 139.85-140.125***

 

Lean Hog Commentary & Technicals (April)

April lean hogs finished today’s session down .50 at 73.30, trading in a range of .90. Supply side fundamentals continue to lend hand to keeping a lid on a significant rally. Technical resistance from 76.225-76.40 held last week and will continue to be the significant pocket to keep an eye on. On the support side, the market is making a run towards the 100-day moving average which comes in at 72.80. A break and conviction close below opens the door to accelerated selling pressure which could press prices towards the bottom end of the range which we see coming in from 70.625-71.15. This pocket represents The November lows and the 200-day moving average.

Resistance: 74.00-74.375**, 76.225-76.40**, 77.25****

Support: 72.80**, 70.625-71.15***, 67.75-68.00****

 

Euro (March)

Session close: Settled at 1.24265, down 33.5 ticks

Fundamentals: The Euro began working lower late Friday afternoon and continued on that path through today’s session. This slow and steady drip eludes to traders taking positions off the table at the beginning of a pivotal week that has the State of the Union Tuesday night, Fed decision Wednesday and Nonfarm Payroll Friday. U.S PCE Index data was in line with expectations today. Tomorrow morning brings Eurozone GDP at 4:00 am CT along German CPI. U.S Case Shiller is due at 8:00 am CT and Consumer Confidence at 9:00. Both fundamentally and technically, the Euro has more upside in the long-term.; we believe pullbacks are buying opportunities However, traders do want to manage risk properly through what is expected to be a volatile week. Do not forget to read out Tradable Events this Week.

Technicals: Price action is attempting to relieve itself from overbought conditions. The 14-day RSI reached 75 last week. The CoT showed traders expanded the already record long position in the Euro by 25% in the week ending January 23rd. The Dollar Index is bouncing from the most oversold on the weekly since November 2007. To the downside we have first key support at 1.2349-1.23685 and today’s session low of 1.2374 was kept in check by this level. Though we remain long-term bullish, we would rather be buyers closer to major three-star support at 1.2209-1.22135.

Bias: Neutral/Bullish

Resistance – 1.2514**, 1.2608***

Pivot – 1.2434-1.2436***

Support – 1.2349-1.23685**, 1.2307*, .2209-1.22135***

 

Yen (March)

Session close: Settled at .92035, down 23 ticks

Fundamentals: The Yen retreated slightly today, but given recent volatility and today’s Dollar strength, this was a solid session for the currency. Still, we are concerned that Wednesday’s Fed meeting can bring a hawkish surprise and near-term pressure for the Yen. Furthermore, the Yen is attempting diverge from falling Treasury prices but if the Treasuries are lower because of the Fed, the Yen is likely to take similar heat. In a week that will center around U.S political and monetary policy, there are some key data points out of Japan to watch. Household Income and jobs data is due tonight at 5:30 pm CT. BoJ Core CPI is due out at 11:00 pm CT. Tomorrow night is going to be a volatile one for reasons more than just the State of the Union with Japanese Industrial Production data along with Chinese Manufacturing.

Technicals: The Yen has finally picked itself up out of the gutter but faces a tremendous hurdle this week in maintaining its recent gains. Price action is showing signs of fatigue just below major three-star resistance. This level will be extremely critical and a close out above here on the week should spark the next bull leg higher. While we see first key support at .9164, we would rather be buyers against major three-star at .9089-.91035.

Bias: Neutral/Bullish

Resistance – .9237-.9255***, .93215**, .9480***

Support – .9164**, .9089-.91035***, .9043*, .8998-.9006**, .8946-.8957**

 

Aussie (March)

Session close: Settled at .8101, down 18 ticks

Fundamentals: The Aussie has gained more than 8% since its December bottom and as the year unfolds there is room for further gains. For now, we believe it should be most vulnerable to a strengthening Dollar and domestic data this week. First, last week’s CPI read out of its neighboring New Zealand missed widely and we will be watching tomorrow nights Aussie CPI read that will be accompanied by Chinese Manufacturing data (China is Australia’s top trade partner). Tonight, there is Business Confidence data at 6:30 pm CT.

Technicals: Price action traded to a high of .8135 on Friday, the highest level since May 2015 before paring gains. Pullbacks in the Aussie over the last two months of been extremely shallow and the trade is overdue for a sharp move. The weekly RSI is testing the level in which it hit last September, when it traded at this price, this is the highest since 2011. We believe that if the Aussie can chew through major three-star support at the .8033-.8037, the door will open for it to trade down to .7874-.7881.

Bias: Bearish/Neutral

Resistance – .8100-.8125***, .8151*

Support – .8033-.8037***, .7998**, .7962**, .7874-7881***

 

Canadian (March)

Session close: Settled at .81195, down 2 ticks.

Fundamentals: The Canadian stayed in a very tight range through the session as NAFTA talks wrapped up with a positive vibe. We look to a busy week of U.S political and monetary policy to be the key catalyst in price action but at the same time traders need to keep an eye on Chinese Manufacturing tomorrow night and major Canadian data points Wednesday; monthly GDP data and Raw Materials Price Index. We are very bullish the Canadian in the long-term and hope to see it about 1% lower this week on the U.S Dollar consolidating higher from oversold territory to present a strong buy opportunity, rather than down on negative news out of Canada.

Technicals: Price action is holding strong against major three-star resistance at .81005-.81195. One concern technically, is trend line resistance from July 2014. However, like the Aussie did against a similar trend line, we believe the Canadian can get out above here in due time and this can ultimately spark a move to .8524. We would like to see price action dip to .7931-.7949 in order to present the aforementioned buying opportunity.

Bias: Neutral

Resistance – .81005-.81195***, .8163**, .8290***, .8524****

Support – .80505-.8057**, .7996**, .7931-.7949***, .7903**, .7752-.7787***

 

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

 

E-mini S&P

Yesterday’s close: Settled at 2853.50

Fundamentals: The 10-year Treasury yield notched above 2.7% yesterday, a level in which many have called for to spark volatility in equity markets. Our biggest concern with rising yields is the velocity in which they move; a slow grind may not be as troublesome to equity markets while fast spikes higher are more likely to cause pressures. This move in yields is coming from all around the globe. The German 10-year bund yield traded to the highest since November 2015 at just about .7%. While the Chinese 10-year has been around 4% since November, it spiked firmly though that benchmark over the last week and a half. Treasury prices are the inverse of yields and last night the 10-year Treasury extended losses early in the session, this was enough to push the S&P through a key support level and encourage further selling ahead of the busiest of weeks. With more than 100 S&P companies reporting earnings this week, the State of the Union tonight, a Fed policy decision tomorrow and Nonfarm Payroll Friday, it only makes sense for investors to take something off the table at these levels. Eurozone GDP data was in line with expectations this morning while minor components that accompanied the read missed the mark. German CPI data is due at 7:00 am CT. U.S Case Shiller is due at 8:00 am CT and Consumer Confidence follows at 9:00. Lets also not forget Chinese Manufacturing this evening during the State of the Union.

Technicals: Price action tested into our key support at 2851.75-2852.50 early yesterday with a low of 2854.50 and bounced firmly to 2868.25; between the 50% and .618 but also a level in which the sell-volume had come in at earlier on the open. After finishing the session back to this support level, it broke below here last night, and we believe this opens the door for selling down to 2807-2808.50 and the major three-star level we now have below there at 2798. Last night’s low of 2831 held the crucial level at 2825.50-2828, one in which we had as three-star support last week. However, now that the trend line is taken out, we view this level as less strong. This is now a trading environment and can be played from both sides, the bears have an edge this morning though sellers are better off positioning closer 2847.75-2849.25; a move above here will neutralize this immediate-term weakness while a close above 2854.50-2854.75 will help the bulls regain an upper-hand. Only a close back above 2858-2860.50 will turn this immediate-term bullish once again.

Bias: Neutral

Resistance – 2847.75-2849.25**, 2854.50-2854.75**, 2858-2860**, 2878.50**, 2887***, 2920***

Support – 2825.50-2828**, 2807-2808.50**, 2798***

 

Crude Oil (March)

Yesterday’s close: Settled at 65.56

Fundamentals: Crude Oil saw pressure early in the overnight with a strengthening Dollar and ahead of inventories coming into the picture. The Dollar move is so far short-lived as it has turned south this morning, bringing support. Early estimates on the EIA inventory read are for a build of 100,000 barrels. However, API is after the bell today and last week’s API came in at +4.755 mb while the EIA read was a draw and more in line with expectations. It would not be surprising to see API give a bullish read this week relative to expectations. This could ultimately set up for a sell opportunity upon the EIA release. The Dollar will remain in play all session and through this evening on the State of the Union, a strengthening Dollar puts pressure on commodities while continued weakness brings support. Chinese Manufacturing is due at 7:00 pm CT.

Technicals: Price action settled at first support yesterday, this will be a key level that the bears must keep the tape suppressed below. We have maintained a slight Bearish Bias and a lower high below 66.66 and our major three-star level at 66.87 has opened the door for the sellers. Ultimately, as we said yesterday, we need to see a close back below previous highs and support at 64.72-64.89 in order to neutralize this recent push higher. Furthermore, to turn truly Bearish we need to see a close below the $63 area; the market is extremely overbought, and we believe the crowded long position will begin to bail at this level.

Bias: Neutral/Bearish

Resistance – 66.87***, 68.43**

Pivot – 65.45-65.61

Support – 64.72-64.89**, 64.26**, 63.70*, 62.78-63.00***

 

Gold (April)

Yesterday’s close: Settled at 1345.1

Fundamentals: This consolidation lower in Gold is less about long-term fundamentals and more about near-term positioning due to data, the Fed and the pendulum effect. First with the data, Case Shiller is due at 8:00 am CT while Consumer Confidence is due at 9:00; this is just the beginning for the week as we have ISM and Nonfarm Payroll. Second, the Fed and the pendulum effect are more intertwined. Gold bottomed after a dovish Fed hike in December that had two dissenters. Since, inflation has been stable but not much higher and they are not expected to hike tomorrow. However, as we have discussed at length in many of our articles, there is a great unwind going in the Dollar and Euro trade as well as the Dollar against many of its other pairs; the Fed is not the only central bank tightening. Additionally, it is firmly believed that the White House does not want a strong Dollar. This pendulum has swung too far, at least in the very near term. Ultimately, the likelihood of a hawkish Fed statement is increased and for that reason we are cautious Gold in the near-term. Lower price action should bring a tremendous buy opportunity.

Technicals: Yesterday we said we could not make the case to buy Gold until support at 1329.1-1331.9 is tested. Last night’s low was 1337.5 before the Dollar began weakening once again. With key data points today and the State of the Union tonight which are both expected to swing markets, we remain cautious and await a more attractive area to reposition.

Bias: Neutral

Resistance: 1349.7-1351.4**, 1365-1370***, 1377.8**, 1392.6***, 1432.9**

Support: 1329.1-1331.9**, 1321.7***, 1307.6-1312***

 

Natural Gas (March)

Yesterday’s close: Settled at 3.167, 13 cents from its session low

Fundamentals: Natural Gas is surely making it difficult on both the bears and the bulls. The bears are having it a little tougher though. After gapping lower Sunday night, price action worked higher through the second half of yesterday to nearly finish in the green. Storage drawdown expectations from last week, reported this Thursday have increased slightly but are not enough to justify such a reversal. The February contract expired and fell off the board yesterday, for now we chalk this up to repositioning and will be watching today’s settlement closely on a technical basis.

Technical: Price action is above major three-star resistance at 3.181-3.197 and this begins to Neutralize our Bias slightly. Today’s settlement will be key, and we must see it fall back below here. There is minor resistance at the 3.27 level but 3.32 will be in play on a close out above major three-star resistance. Price action could not get below first key support yesterday, but a failure to do so should not have sparked such a strong reversal.

Bias: Bearish/Neutral

Resistance: 3.27*, 3.32**

Pivot: 3.181-3.197***

Support: 3.035-3.054**, 2.943***, 2.865**, 2.786**

 

10-year (March)

Yesterday’s close: Settled at 121’26

Fundamentals: Treasuries around the world have been under pressure. The 10-year achieved 2.7% yesterday and essentially again last night on the Asian open as it traded to a new low before reversing. However, as we discussed in the S&P section, many are calling for this level to put pressure on equity markets; debt will cost more to service and older and more cautious investors will begin to find bonds attractive as yields rise with equity valuations at these levels. The week is just beginning, and volatility will be here to stay through Nonfarm Payroll Friday. Case Shiller is due at 8:00 am CT and Consumer Confidence is at 9:00. German CPI just fell short of expectations and this could work to support Treasuries if we don’t get hot reads from the U.S, especially if equity markets remain weak.

Technicals: Support is thin in this area but building at the 121’17-121’18 area. Price action managed to claw back a close above our 121’25 first support level yesterday. We have maintained a Bullish Bias for now but as a reminder this is a contrarian play as we believe prices and sentiment are exacerbated at this level in the near term. Since early last week, we have said that we like positioning long through last week’s central bank meetings and this week’s Fed.

Bias: Bullish/Neutral

Resistance – 122’15-122’175**, 122’26-122’29***, 123’10**

Pivot – 121’31-122’015

Support –121’25**, 121’17-121’18**, 119’20-120****

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

 

CORN (March)

 

Last Weeks Close: March corn futures finished last week up 3 ¾ cents, trading in a range of 8 ½ cents. This is the second consecutive week of gains; we have not seen three consecutive weeks since May. Friday’s Commitment of Traders report showed funds bought back 8,006 contracts, putting their net short at 217,057. Keep in mind that this data is through Tuesday and does not include the back half of the week.

 

Fundamentals: Grains opened the Sunday night session on firm footing which has carried over into strength in the early morning trade. Grain markets seem to be working together here as funds are looking to reduce some of their short positions as we round out the first month of 2018. South American weather continues to be the headliner as concerns continue to linger with regards to hot and dry temperatures, this could lead to eventual yield loss.

 

Technicals: The market has managed to crawl back towards the December 4th highs, the bulls will want to see consecutive closes above this resistance pocket to encourage additional short covering. The next level of resistance comes in at 366 ½. We will be waiting to see how the floor open goes as volume confirms price. First technical support this week comes in from 352-354 ½. The RSI is currently at 65.5, the most overbought since peaking in July.

 

Bias: Neutral/Bearish

 

Resistance: 358-360 ½ **, 366 ½-369****

 

Support: 352-354 ½***, 345-346 ½***, 334-335 ¼****

 

 

 

SOYBEANS (March)

 

Last Weeks Close: March soybean futures finished last week up 11 cents, trading in a range of 22 ½ cents. According to Friday afternoons Commitment of Traders report, funds were buyers of 24,487 contracts putting their current net short futures position at 81,218.

 

Fundamentals: The market started the Sunday night session with a gap higher as concerns n South America persist. If we continue to see hot and dry weather patterns in Argentina, it is possible we see yield and production loss discussions gain traction. If we see rains work back into the forecast, we will see this weather premium evaporate from the market rather quickly. Seasonally speaking, we are in a bullish time. If you had bought May soybeans on January 28th and sold February 26th for the last 15 years, you would have been profitable for 13 of them with the average gain being roughly 28 cents. We will continue to keep our eyes on the soybean meal market has it continues to offer support.

 

Technicals: Soybean futures traded well technical last week. Technical resistance was tested and defended by the bears, that came in from 999-1006. On the support side, we saw the market retreat back towards our pocket from 983-988. This represents the 50 and 100 day moving average, along with the 50% retracement (middle of the range) from the June lows to July highs. The bulls still remain in control of this market until we see a conviction close below technical support.

 

Bias: Neutral/Bullish

 

Resistance: 999-1006***, 1020 ¼-1027****

 

Support: 983-988***, 971 ¾**, 961 ¼-963 ¼****

 

 

 

WHEAT (March)

 

Last Weeks Close: March wheat futures finished last week up 19 cents, trading in a range of 22 ¾ cents. This was the biggest weekly gain we have seen since June. Friday’s Commitment of Traders report showed funds sold 808 futures, putting their net short futures position at 149,777. Keep in mind that this data is compiled through Tuesdays trade.

 

Fundamentals: Concerns over winter wheat stress has led to some short covering from the funds, this will continue to be monitored closely over the coming weeks. Last week we saw a lot of volatility into the currencies which spilled over into a lot of the commodity markets. If we see the USD rebound and recover losses, we could see that stall out the rally. Also, on our radar will be the weekly export numbers. The bulls need to see a trend of better exports to help this short covering rally turn into a bullish market.

 

Technicals: The market made a nice run higher last week on the back of technical short covering. Our resistance pocket continues to come in from 443-448 ¼, this is being tested in the early morning session which will make today’s closing price more significant. The bulls want to see price confirmed by increased volume on the floor open. A break and close above resistance opens the door to 456 ¼. A failure and close back below 443 lends hand to a run back at 428 ¾.

 

Bias: Neutral

 

Resistance: 443-448 ¼****, 456 ¼***, 472 ¾***

 

Support: 428 ¾***, 410 ½-413 ¼****

 

 

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

 

 

 

 

 

Disclaimer:

 

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

 

 

E-mini S&P (March)

Last week’s close: Settled at 2874.50 and gained more than 1%

Fundamentals: Equity markets finished last week extremely strong but major U.S indices have struggled to hold these gains into this morning. One headwind is the overnight move in treasuries which are under pressure with the 10-year prices trading to the lowest level since May 2011. The inverse, treasury yields for the 10-year, have jumped to 2.7%, the highest since April 2014. Rising yields can and will be a headwind for equity markets as this makes debt more expensive to service. Though a rise in yields is not a dagger for the S&P, a high velocity move like the one overnight can cause immediate pressures. There is a huge week ahead and this ahead of today’s PCE data. We discussed this inflation read due at 7:30 am CT along with other major events in our Tradable Events this Week; posted each Sunday. This will set the tone for Wednesday’s Fed decision and a better than expected print will likely add to selling in the treasury complex and strengthen the Dollar while paving the way for a hawkish tone from the Fed.

Technicals: Price action accelerated higher on Friday and blew through our 2869.75 level before trading to a new all-time high overnight but has begun paring some of those gains. We will continue to watch this level through today’s close and a settlement above here would keep the bulls in the driver’s seat while encourage a drift higher into Wednesday’s Fed meeting. The first crucial support level we are watching comes in at 2851.75-2852.50 and this aligns multiple levels but most key is a trend line from the last trading day of 2017 that price action has ridden for the last month; a close below here would open the door for another 1%. Ultimately, we would like to use a test into here as a buy opportunity.

Bias: Bullish

Resistance – 2878.50**, 2887***, 2920***

Pivot – 2869.75

Support – 2851.75-2852.50**, 2847.75**, 2825.50-2828**, 2805.25-2807***, 2797.75***

 

Crude Oil (March)

Last week’s close: Settled at 66.14

Fundamentals: Crude is lower this morning as the U.S Dollar is strengthening ahead of a busy week. We saw how closely tied this relationship can be midweek last week on volatility due to comments on the Dollar from Treasury Secretary Mnuchin and President Trump. Adding to pressure this morning is Baker Hughes data from Friday that showed an increase in twelve rigs, bringing the total to 759; the largest weekly jump in nearly a year. Iraqi Oil exports set a record in December at 3.535 mbpd and as of now it could be topped this month. This is to a drop in local consumption and not higher production. However, this was accompanied by the Iraqi Oil Minister stating they have the capacity to export 5 mbpd.

Technicals: Price action is attempting to retreat this morning but first key support at 65.45-65.61 has stood strong. While our first major three-star level since the breakout above $60 has been tested and has held, price action must close back below previous highs and support at 64.72-64.89 in order to neutralize this recent jump. Furthermore, the market will remain in an uptrend until a close below 62.78-63.00. The net-long position decreased by nearly 6,000 contracts for the week ending January 23rd due to a small jump in speculation from shorts. Still, this is above previous record highs and signals extremely overbought conditions.

Bias: Neutral/Bearish

Resistance – 66.87***, 68.43**

Support – 65.45-65.61**, 64.72-64.89**, 64.26**, 63.70*, 62.78-63.00***

 

Gold (April)

Last week’s close: Settled at 1357.2

Fundamentals: Traders should now be using the April contract. We brought our Bias in Gold to Neutral last week after price action tested above 1360. We also did this for the Euro and Yen as we believe the Dollar is oversold and the risk of a more hawkish than expected Fed is not priced in. PCE Index data is due at 7:30 am CT today and we discussed on yesterday’s Tradable Events this Week the type of impact it can have on Wednesday’s policy statement from the Fed. Also, due this morning is Personal Spending and Income data. We remain bullish Gold in the long-run but believe there will be a better place to reposition.

Technicals: Gold is down about $10 this morning as overbought conditions attempt to relieve themselves. The CoT report showed that the net-long position expanded in the week ending January 23rd though it is likely some relief already began late last week. For us, it is tough to make the case to buy Gold until first key support at 1329.1-1331.9 is achieved.

Bias: Neutral

Resistance: 1349.7-1351.4**, 1365-1370***, 1377.8**, 1392.6***, 1432.9**

Support: 1329.1-1331.9**, 1321.7***

 

Natural Gas (March)

Last week’s close: Settled at 3.175

Fundamentals: Prices stayed elevated ahead of the weekend as headlines had called for an impending Polar Vortex. With a potential cold front being delayed for another week, price action gapped lower on the open last night by more than 10 cents. We said on Friday “The main catalyst for this recent volatility is the roll out of February which is essentially near a cash contract and according to headlines, the fear of a Polar Vortex in February. We have been fairly adamant this week that the rally is overdone due to these headlines. In fact, again today storage draw expectations over the next four weeks have dissipated.”

Technicals: After gapping to a low of 3.042 last night, price action worked to a session high of 3.128 in an attempt to cover some of the gap. Major three-star resistance at 3.182-3.197 held strong last week. The sellers are in control right now and we must see a close below 3.11 in order for it to stay that way. In December, we discussed how Managed Money went net-short Natural Gas and this should pave the way for a rally. That rally has come. According to the Commitment of Traders, Natural Gas is now at a net-long ratio of 2:1. This is a drastic shift in less than a month and a move like this from Friday’s close should encourage further selling as longs jump ship.

Bias: Bearish

Resistance: 3.182-3.197***, 3.32**

Pivot: 3.11

Support: 3.035-3.042**, 2.943***, 2.865**, 2.786**

 

10-year (March)

Last week’s close: Settled at 122’02

Fundamentals: Treasuries are under tremendous pressure this morning after the 10-year reversed Thursday’s gains to finish poorly on Friday. A critical week is underway and it kicks off with PCE Index data due at 7:30 am CT, we discussed the impact of this read in our Tradable Events this Week. Accompanying this is Personal Spending and Income data. The Fed begins their two-day meeting tomorrow and concludes with a policy decision Wednesday at 1:00 pm CT. The move in the 10-year overnight is pricing in the likeliness of a hawkish surprise from the Fed. However, as we discussed last week, we believe that the selling is being incurred ahead of and through the central bank meetings last week and this week and this should present an opportunity to position long for a rally through the middle and late part of February. Today’s move though has made this a difficult task.

Technicals: It is undeniable that this type of move overnight has worked to Neutralize some of our Bullish Bias. Price action stalled against first resistance late Thursday and the sellers have been in the driver’s seat since. We must see a close at or above 121’25 to stop the bleeding. However, only a close back above 121’31-122’015 will neutralize this weakness.

Bias: Bullish/Neutral

Resistance – 122’15-122’175**, 122’26-122’29***, 123’10**

Pivot – 121’31-122’015

Support –121’25**, 119’20-120****

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

The following is our levels for each of the most highly traded commodities. This includes Agriculture, Currencies, Energies, Indices, Livestock, Metals, Treasuries and Softs.

 

E-mini S&P (March)

Resistance: 2887***, 2920***

Pivot: 2869.75

Support: 2847.75-2850**, 2825.50-2828**, 2805.25-2807***

Bias: Bullish

 

NQ (March)

Resistance: 7062**, 7076**, 7120***, 7192***

Support: 6965-6987**, 6845.75-6888.25**, 6545-6560****

Bias: Bullish

 

Russell 2000 (March)

Resistance: 1623.7***, 1646.4**, 1660.3**, 1683***

Support: 1580***, 1562.2-1564.4***

Bias: Bullish/Neutral

 

Crude Oil (March)

Resistance: 66.87***, 68.43**, 70.00***

Support: 64.72-64.89**, 64.26**, 63.70*, 62.78-63.00***

Bias: Neutral/Bearish

 

RBOB Gasoline (March)

Resistance: 1.9554***, 2.00-2.0072**

Pivot: 1.9263-1.9393

Support: 1.8950-1.90***, 1.8779**, 1.8199-1.8291***

Bias: Bearish/Neutral

 

Heating Oil (March)

Resistance: 2.1674***, 2.1928**, 2.2086** 2.23-2.24****

Support: 2.07-2.08***, 2.0342***, 1.945***

Bias: Neutral

 

Natural Gas (March)

Resistance: 3.182-3.197*** 3.32**

Pivot: 3.11

Support: 3.035**, 2.943***, 2.865**, 2.786**

Bias: Bearish

 

Gold (April)

Resistance: 1365-1370***, 1377.8**, 1392.6***, 1432.9**

Support: 1349.7**, 1329.1-1331.9**, 1321.7***

Bias: Neutral

 

Silver (March)

Resistance: 17.70***, 18.12-18.18***, 18.825**, 21.095***

Support: 17.00-17.05**, 16.90***, 16.65-16.73**

Bias: Neutral

 

Copper (March)

Resistance: 3.293-3.32****, 3.46**, 3.613***

Support: 3.108-3.1325**, 3.03**, 2.97***

Bias: Neutral

 

10-year (March)

Resistance: 122’15-122’175**, 122’26-122’29***, 123’10**

Support: 121’31-122’015**, 121’25**, 119’20-120****

Bias: Bullish/Neutral

 

30-year (March)

Resistance: 149’22**, 150’19**, 151’10***, 153***

Support: 148’07***, 147’03***, 146***

Bias: Bullish/Neutral

 

Euro (March)

Resistance: 1.2514-1.2531**, 1.2608***. 1.2780***

Pivot: 1.2434-1.2435***

Support: 1.2349-1.23685**, 1.2209-1.22135***, 1.20435***

Bias: Neutral/Bullish

 

Yen (March)

Resistance: 9255-.9279***, .9480***

Support: .9164**, .9089-.91035***, .9043*, .8998-.9006**, .8946-.8957**

Bias: Neutral/Bullish

 

British Pound (March)

Resistance: 1.4370**, 1.4592***

Support: 1.3972-1.40***, 1.3719***

Bias: Neutral

 

Aussie (March)

Resistance: .8100-.8125***, .8151*

Support: .8033-.8037***, .7998**, .7962**, .7874-7881***

Bias: Neutral/Bearish

 

 

Canadian (March)

Resistance: .81005-.81195***, .8163**, .8290***, .8524****

Support: .80505-.8057**, .7996**, .7931-.7949***, .7903**, .7752-.7787***

Bias: Neutral

 

Corn: (March)

Resistance: 358-360 ½ **, 366 ½-369****

Support: 345-346 ½***, 334-335 ¼****

Bias: Neutral/Bearish

 

Soybeans (March)

Resistance: 999-1006***, 1020 ¼-1027****

Support: 979 ¼**, 971 ¾**, 961 ¼-963 ¼****

Bias: Neutral/Bullish

 

Wheat (March)

Resistance: 443-448 ¼****, 456***, 472 ¾***

Support: 428 ½***, 410 ½-413 ¼****

Bias: Neutral

 

Live Cattle (April)

Resistance: 125.175-125.45***, 127.20-127.35***, 130.10****

Support:122.025-122.55***, 120.20-120.625****, 117.90-118.55****

Bias: Neutral/Bearish

 

Feeder Cattle (March)

Resistance: 147.75-147.875****, 149.40-150.00***, 158.925****

Support: 143.15-143.80**, 142.10-142.60**, 139.85-140.125***, 138.30-138.75****

Bias: Neutral/Bearish

 

 

Lean Hogs (April)

Resistance: 76.225-76.40**, 77.25****, 78.50***

Support: 73.275-73.60****, 72.45-72.75**, 70.625-71.10****

Bias: Neutral/Bearish

 

Cotton (March)

Resistance: 84.65-85.10****, 87.18-87.50***, 93.85-94.90****

Support: 79.45-80.35**, 77.30-77.74***, 74.93-75.60****

Bias: Bullish

 

Sugar (March)

Resistance: 15.10-15.80***, 16.70-17.15****, 18.25**

Support: 12.45-12.94***, 10.12-10.51****

Bias: Neutral/Bearish

 

Cocoa (March)

Resistance: 2,000-2,032**, 2,226-2,263***, 2,367**

Support: 1,908-1,932**, 1,804-1,836***, 1,732**, 1299****

Bias: Neutral

 

Coffee (March)

Resistance: 128.50-131.35**, 134-134.55****, 143.75***

Support: 118.30-119.60**, 111.05-113.00***, 100.95****

Bias: Bearish

 

Orange Juice (March)

Resistance: 152.85-153.00**, 158.58**, 165.70****

Support: 144.95-145.35**, 140.05-141.30***, 132.05-132.20****

Bias: Neutral/Bearish

 

Lumber (March)

Resistance: 501.40-505.10***, 547.00-551.30****

Support: 465.20-469.80***, 440.35-44540****, 421.65**

Bias: Bullish

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

BrokersEDGE Futures trading News 1-8-18

E-mini S&P (March)

Last week’s close: Settled at 2742.50, its third record high close in a row.

Fundamentals: Equity markets have picked up this week right where they left off last. Most major European indices are up more than .33% while the Nikkei is up nearly 1% (futures which saw some of these gains on Friday are up nearly .5%). Friday’s read on Nonfarm Payroll showed steady job growth and though much less than expected, last month’s revision higher helped the overall read. Average Hourly Earnings came in at a respectable +.3% MoM and overall this is not a report that is going to encourage the Fed to tighten policy faster than already priced in. Data out of Europe this morning that included Business Confidence and Retail Sales was superb. Fed speak and reads on inflation will be the highlight. Fed president Bostic speaks at 11:40 am CT, Williams at 12:35 pm CT, and Rosengren at 3:00 pm CT. The Russell 2000 took out its all-time high last night before retreating, this will continue to be a concern of ours and we will watch this closely.

Technicals: The S&P gained 2.5% in the first week of the year and we remain Bullish though introducing some slight Neutrality as price action is due to take a breather for a session or two. Yes, we refrained from an outright trade recommendation in the second half of last week once our target of 2728.75 was hit, but our levels and Bias continue to work. From Friday’s levels price action achieved and settled near R1 and extended to hit R2 Sunday night. Our next major upside target is 2759.25, we have made this major three-star resistance. However, as for an outright recommendation, we would like to be buyers closer to what is now major three-star support at 2728.75. The NQ is also in a breakout trade, we put out a target of 6707 last week. The small caps Russell 2000 continues to concern us, and is a factor in waiting for a pull back in the S&P before recommending stepping in. Last night it traded to a new all-time high of 1565.9, but has since failed to hold ground, key support levels to watch here are 1557, 1551-1552 and then major three-star support at 1543.

Bias: Bullish/Neutral

Resistance – 2747.75**, 2759.25***

Pivot – 2740.50

Support – 2728.75***, 2718.25*, 2708.50-2711**, 2698.25-2700***

 

Crude Oil (February)

Last week’s close: Settled at 61.44, the highest weekly close since December 2014

Fundamentals: Prices are edging up into this morning after Baker Hughes reported a drop in U.S Oil Rigs Friday afternoon from 747 to 742. Unrest in Iran continues to take center stage as it has led to speculation that the U.S could use this as another reason to withdraw from the nuclear deal signed in 2015. Doing so will further tighten supply with the interesting factor being OPEC’s reaction regarding the current production cap. Though an official decision might not come until July, every three months the president must waive sanctions. The last deadline was October 15th, and the next is right around the corner.

Technicals: Friday’s weekly settlement was the highest since Oil plummeted in Q4 2014. Last week’s swing high of 62.21 fell shy of our resistance mark and the May 2015 highs at 62.58. From here, we introduced a Bearish Bias in order to begin positioning for a consolidation lower this week at minimum. Price action traded to a low of 61.09 on Friday, testing into S2 before moving back north. We are watching the 61.79 level today which was edged this morning. However, it will be more critical on a closing basis and the bulls look to settle prices out above here in order to regain the immediate-term upper hand.

Bias: Bearish/Neutral

Resistance – 61.79**, 62.21**, 62.58**, 63.39**, 66.87***, 68.43**

Support – 61.37**, 61.11**, 60.85**, 59.87-59.96***, 58.97-58.99***

 

Gold (February)

Last week’s close: Settled at 1322.3, the highest since September 15th

Fundamentals: In a choppy Nonfarm Payroll session, Gold came out a winner on the day gaining 60 cents. Headline job growth fell largely short of expectations at 148k vs 190k, however, a revision higher from the previous month of 24k helped chip into some of it. Average Hourly Earnings were a respectable +.3% MoM and met expectations, however, last month was revised a tenth lower to +.1%. In a seasonally bullish time of year for the metal, bulls should walk away satisfied. Today, Fed president Bostic speaks at 11:40 am CT, Williams at 12:35 pm CT, and Rosengren at 3:00 pm CT.

Technicals: Gold remains about as constructive as you can get and by maintaining a close above 1317 it has left the bulls with the clear upper hand. We remain immediate term Bullish until a close back below major three-star support at 1302-1303.4. However, we are beginning to be concerned that much of the bull camp has already positioned, with the net-long position at the highest since the 21:1 on the week ending November 28th. Still, it is only at young but mature 8.5:1. While some longs may have added late last week, we believe this read still eludes to upside potential on a technical basis.

Bias: Bullish

Resistance – 1323*, 1335.8**, 1358-1365***

Support – 1317-1317.2**, 1314.6-1314.8**, 1302-1303.4***, 1292.9**, 1279.5***

 

Natural Gas (February)

Last week’s close: Settled at 2.795

Fundamentals: With a storm being dubbed the “Bomb Cyclone” bitter cold temperatures reinvigorated Natural Gas prices to start the year. Not so fast, prices in the front month February contract finished the week 10% from the high on the first trading day of the year. As we discussed last week, the cold temperatures that not only spread across the northeast but as south as Texas and Florida can also have a two-sided effect. When schools and factories are shut down, demand also drops. Cash Natural Gas, saw a meteoric rise, one that was only felt in a minor fashion in the futures before disappearing altogether by Friday. Prices have edged higher into this morning but if a storm like this cannot keep futures above $3, then what will?

Technicals: Our Bias began to turn Neutral last week when prices failed to hold $3. Friday’s low of 2.746 and settlement did hold first key support at 2.734-2.7664 which has helped encourage a bounce this morning. The key level to watch today is 2.88-2.887, this is first resistance, a key retracement, Friday’s high and Thursday’s settlement. We are now introducing a slight Bearish Bias and believe if prices stay below this first key level, the bears will take it lower once again. Remember, we are expecting a record storage draw this week between -325 and -340, but this is already priced in.

Bias: Neutral/Bearish

Resistance – 2.88-2.887**, 2.9215**, 2.9415**, 2.963**, 3.00-3.01***, 3.108-3.145**

Pivot – 2.795

Support – 2.734-2.7664**, 2.562***, 2.486-2.522****

 

10-year (March)

Last week’s settlement: Settled at 123’15

Fundamentals: Strength in the global equity market has brought cash off the sidelines to further support momentum and this has kept a heavy tape in the treasury complex. Friday’s Nonfarm Payroll report as we discussed above was not something that would force the Fed to tighten policy at a faster pace. We believe Friday’s weakness is a direct correlation to global equity markets extending record gains. This can be seen even closer this morning as the S&P peeling back just a slight bit has brought in some support for treasuries. This week will be all about Fed speak and reads on inflation Thursday and Friday.

Technicals: We were Neutral last week as prices were depressed. However, we are introducing a slight Bullish Bias as we believe there is value in the lower half of 123. Key support at 123’10-123’13 has remained sticky and has kept price action in check. First resistance comes in at 123’215. Friday’s Nonfarm spike stayed in complete check against the 123’27-123’28 level and this will be key to watch on the week.

Bias: Neutral/Bullish

Resistance – 123’215**, 123’27-123’28**, 124’01*, 124’06-124’07

Support – 123’10-123’135**, 122’29**** 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

E-mini S&P (March)

Yesterday’s close: Settled at 2723.75

Fundamentals: Global equity markets continue their surge as the DAX joins the party gaining more than 1% this morning for two reasons; a blowout German Retail Sales number coupled with a Eurozone CPI read that fell just shy of expectations. Domestic indices capitalize off weaker currencies, i.e. the U.S Dollar and S&P. This was a great domestic read for Germany, however, the Eurozone CPI coupled with the anticipation ahead of U.S Nonfarm Payroll has encouraged a lower Euro. Asian markets continued their push after Japan finally took out the 1992 highs. The S&P and NQ are also higher ahead of today’s Nonfarm Payroll due at 7:30 am CT. Expectations are for job growth at 190k, we expect a number in the ballpark of 220k. However, for us, as always, the Average Hourly Earnings Growth is most important. Expectations come in at +.3% and we expect a number at .2%; ultimately this is great for equities to some earnings growth but ultimately this lagging indicator along with inflation will keep the Fed from moving any faster than markets have priced in. As discussed for the last three weeks, we will continue to watch the Russell 2000 small caps which have still failed to take out their December 4th all-time high. Lastly, let’s not forget that ISM Non-Manufacturing data, a read we watch very closely, is at 9:00 am CT.

Technicals: Our S&P target of 2728.75 was hit yesterday, congrats to those who jumped on board and especially to those who chased our recommendation above 2700. Both the S&P and NQ are in melt-up mode and we remain Bullish. If you exited as we suggested yesterday and have been following us, there is no reason to force the next trade ahead of data today, especially if you caught the move lower last week. Resistance comes in at 2740.50 and then again at 2747.75, look for a test into this. However, the Russell 2000 continues to concern us and must close out above 1564 today to keep the market as a whole wildly bullish, also coinciding with a continued close above 2728.75 in the S&P.

Bias: Bullish

Resistance – 2740.50**, 2747.75**

Pivot – 2728.75***

Support – 2718.25*, 2708.50-2711**, 2698.25-2700***

 

Crude Oil (February)

Yesterday’s close: Settled at 62.01

Fundamentals: Yesterday’s EIA report was actually bearish despite a Crude draw of more than 2 mb than expected at -7.42 mb. This is because Distillate inventories gained 8.9 mb and Gasoline 4.8 mb. This explains the higher than seasonally usual run rate in the read last week; Crude was drawn significantly to create products. Furthermore, production did bounce back from the drop in last week’s report to finish the year at 9.782 mbpd. As we have discussed all week, the situation in Iran has kept a bid under the market and not because of domestic supply disruptions but more so what will happen with the U.S and the nuclear deal/sanctions in a market that is seeing supply currently tighten. Yemen militants took credit for a missile launched at Saudi that was intercepted.

Technicals: Price actin traded to a high of 62.21 yesterday and failed against that May 2015 high and resistance at 62.58 we discussed yesterday. We are now introducing a Bearish Bias to Crude at these levels and traders can look to risk a stop above yesterday’s high. We are not afraid to add on a bounce, however, if it makes new highs traders must not be stubborn. The tape is now hugging where we had support at 61.50 yesterday, this level is now 61.37 today. We have three layers of support above what is now a major three-star level at 58.87-59.96. This is our target to the downside, however, a close below here should get the ball rolling on further selling. We expect to see a record net-long position in today’s CoT, if everyone has bought, who is left to buy. If the selling does not come in today, we will be readily positioned for early next week.

Bias: Bearish/Neutral

Resistance – 62.58**, 63.39**, 66.87***, 68.43**

Support – 61.37**, 61.11**, 60.85**, 59.87-59.96***, 58.97-58.99***

 

Gold (February)

Yesterday’s close: Settled at 1321.6

Fundamentals: Gold has stayed elevated extremely well despite strong data this week and ahead of Nonfarm Payroll. Today’s close will boil down to this Nonfarm read. Regardless, we will remain Bullish in the long run, but this could encourage profit taking and a short-term breather; two to five sessions. Expectations come in at 190k jobs created, however, we believe the number will be more like 220k. For us, the bigger component is Average Hourly Earnings growth which is expected to come in at +.3%. We expect to see a lower number at +.2%. Overall, we think the read can be good but not good enough to encourage the Fed to move at a faster pace than already anticipated. Ultimately, the Dollar might hop up a little for two or three sessions, but a good report does not change our anticipation that the Dollar Index can and should test near 87 before the end of Q1. Also, today is ISM Non-Manufacturing, a read that we like to watch very closely, this is due at 9:00 am CT.

Technicals: This is as constructive tape as one could ask for. Today is also the start of the Silver seasonal buy that lasts into February. We have been eyeing major three-star support at 1302-1303.4 as a strong buy opportunity on a pull back this week but to our surprise we have not gotten it. As discussed, we have been Bullish and remain Bullish.

Bias: Bullish

Resistance – 1323*, 1335.8**, 1358-1365***

Pivot – 1317-1318.5

Support – 1307.1-1309.8*, 1302-1303.4***, 1292.9**, 1279.5***

 

Natural Gas (February)

Yesterday’s close: Settled at 2.88

Fundamentals: Yesterday’s storage read was came in below the range of expectations at -206 bcf and price action sold off hard in a delayed reaction. Though we like to believe this was bulls taking profits, the bear camp has not truly relinquished control of this market. Instead, this was likely the bear camp repositioning ahead of a long weekend on the east coast, one that has already seen a lot of school and factory closings. Remember cold weather is bullish Natural Gas, but extreme storms actually lowers demand due to the closings of high consumption buildings.

Technicals: Price action settled below the support level we were eyeing most closely this week at 2.8926. This has completely Neutralized any bias we have in the market and we are now in a wait and see mode. The bears are in the driver’s seat, but we see no edge to either side. Traders can look to resell the first test back to key resistance at 2.8926-2.9048 and risk a close back above here. However, those who are still bullish can find support at 2.734-2.7664, but a close below here is very bearish.

Bias: Neutral

Resistance – 2.8926-2.9048*, 2.9415**, 3.00-3.01***, 3.108-3.145**, 3.21**, 3.28-3.32***

Support – 2.734-2.7664**, 2.562***, 2.486-2.522****

 

10-year (March)

Yesterday’s close: Settled at 123’215

Fundamentals: Treasury markets remain under pressure due to strong global growth data and breakout record highs in stocks across the globe. The 10-year has not taken out the mid-December low but the 2’s and 5’s have though they also consolidated back off those lows ahead of today’s Nonfarm Payroll data. We believe there to be a buy opportunity around the corner in the 10-year, but it will need some help from the data today to hold this level. Nonfarm Payroll is due at 7:30 am CT, we expect to see strong job growth but ultimately expect lagging earnings growth to keep prices in the longer end of the curve afloat. ISM Non-Manufacturing is due at 9:00 am CT and must not be overlooked.

Technicals: Price action neared the December 21st low of 123’125 with a low of 123’135 against our key support level. However, first support at 123’20-123’225 has kept the market in check on a closing basis, this will be critical to watch after today’s data read. We believe long term support at the lower half of 123 will present that buy opportunity once again very soon. Today is building to be the fourth session in a row with a lower high and a close back above 123’27 is need to neutralize weakness.

Bias: Neutral

Resistance – 123’27**, 124’01*, 124’06-124’07**, 124’125-124’135**, 124’295-125’00***

Support – 123’20-123’225**, 123’10-123’135**, 122’29****

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

E-mini S&P (March)

Yesterday’s close: Settled at 2656, down about .5% and off the session high of 2673.50

Fundamentals: Equity markets ran out of steam early in yesterday’s session, but the real selling pressure didn’t come in until the last couple hours. The market has priced in a healthy dose of tax-reform and as congressional talks hit headline snags, which have been nothing more than negotiating tactics, we begin to see waves of selling. Ultimately, we view these pullbacks as buy opportunities through the next week and a half when support is achieved. Yesterday, J.P Morgan unveiled bold predictions for 2018, calling for S&P 3000 and siting Trump initiatives that garner strong economic growth. Equity markets around the world are mixed this morning as an exciting week sets to finish out; Europe is seeing slight pressure though the FTSE is unchanged while China is down about 1%. We look to NY Empire State Manufacturing at 7:30 am CT and Industrial Production at 8:15 am. Let’s also not forget that today is quadruple witching.

Technicals: Price action has recovered well from yesterday’s closing pressures as it held first key support beautifully at 2650.25-2654 with a low of 2651.75; this level is now tightened up a bit. Our major upside target of 2666-2667.75 is still in play to close out the week and we want to see a weekly close above here to truly confirm a breakout and bullish leg higher to our next target of 2715.25.

Bias: Bullish

Resistance – 2673-2675.50*, 2681.50**, 2688**, 2694.50**, 2715.25***

Pivot – 2666-2667.75***

Support – 2651.75-2652.50**, 2649*, 2640.75**, 2632.75**, 2622.50**, 2506.25**, 2596-2598****

 

Crude Oil (January)

We will reference January today and begin February on Monday.

Yesterday’s close: Settled at 57.04

Fundamentals: Some say that Forties pipeline shutdown in the North Sea that could last weeks was the cause for yesterday’s rally, and others site the lingering effects of OPEC cuts. We are not saying that is wrong, and rightfully so, those bullet points have surely had some hand in price action gravitating back up ahead of the weekend. How could one argue that a declared force majeure at one of Britain’s most important pipelines hasn’t supported prices on fear of further tightening after OPEC announced the lowest output in six months. Considering that the pop in Brent Crude has remained somewhat contained, we believe yesterday’s move to be more about the technicals, both simple support and trend line applications but also supply demand technicals.

Technicals: Yesterday was January option expiration and we sited how calls outweighed puts by more than 2:1 and we believed this would be a key driver in pushing Crude Oil through support early in the session. Support at the 55.82-55.95, now 55.82-56.09, did not give. This was last week’s low as well as trend line support. After trading higher than last week’s high, a move below here would have created a significant failure on a potential outside bearish week; one that would have likely set up a bear leg lower to take out major three-star support at 55.00-55.25. Another factor that we did not consider ahead of options expiration but instead in making sense of the lack of pressure seen early yesterday was the timing of many of the calls and puts purchased that expired yesterday. Many of those January 55 to 56 calls were likely purchased more than a month ago and costed a hefty premium ahead of the November 30th OPEC meeting, while a clear majority of the put position were likely purchased much cheaper. All in all, we remain bearish and believe that patience will pay off. Friday’s have not been favorable for Crude, but staying contained below resistance at 57.32-57.61 through today’s session should set next week up nicely. Ideally, we will get a close below 56.93-57.04.

Bias: Bearish

Resistance – 57.32-57.61**, 57.98*, 58.35-58.56**, 58.97***, 59.96***, 62.58**

Pivot – 56.93-57.04

Support – 55.82-56.09**, 55.00-55.25***

 

Gold (February)

Yesterday’s close: Settled at 1257.1

Fundamentals: What if I told you a story about the Federal Reserve hiking interest rates and in the same week PPI and Retail Sales crushed expectations while CPI only missed by a tenth. Where would Gold be? How many of you would be surprised to hear that it is set to finish the week up more than 1%? Not us of course. This is exactly what we have been calling for, a bottoming to begin after the December Fed meeting. The setup was as true as they could come after last week’s sell off cleansed the overextended speculative long position by more than 33%. If you aren’t in though, don’t worry. As with any trade there is risk. However, Gold has finished the month of January positive 9 out of the last 12 years. To be more precise, if you purchased Gold on December 23rd and held through January 11th it is positive 13 out of the last 15 years with an average gain of $27. NY Empire State Manufacturing is due at 7:30 am CT and Industrial Production due at 8:15 am. Traders should also keep an ear to the ground on tax-reform and any hiccups will put pressure on Gold and present a buying opportunity.

Technicals: Yesterday gave aggressive buyers an opportunity to buy ahead of support. Price action is running into first key resistance at 1262.8-1263.2 and buyers should be cautious chasing the market into here. Today’s price action coming off yesterday’s settlement is creating somewhat of a mini bull flag but again, if you have not bought yet, it is ill-advised to buy against resistance and we believe patience should pay off.

Bias: Bullish/Neutral

Resistance – 1262.8-1263.2**, 1273.9-1276.8***, 1289**, 1303.4-1304.7****

Support – 1247-1250**, 1237-1241.7**, 1214.5-1225***

 

Natural Gas (January)

Yesterday’s close: Settled at 2.684

Fundamentals: Yesterday’s storage draw was slightly more than expected and this has helped hold price action from extending losses. This was also more or less in line with projections earlier in the week. With winter here, so is the demand, at this point we just need momentum to change hands which will force the shorts to begin to cover. There is still a question mark about consistency of the cold about two-three weeks out and this has kept price action subdued to lower.

Technicals: The key for today’s session is to achieve a close above 2.745-2.747 and neutralize the immediate term weakness; this is the previous low and 50% retracement on the week. A close above the .618 and last week’s close at 2.77-2.772 might just be enough to spark further buying back to 2.85-2.88.

Bias: Neutral/Bullish

Resistance – 2.77-2.772**, 2.85-2.88**, 2.946**, 2.9825-3.01***

Pivot – 2.745-2.747

Support – 2.643-2.656*, 2.486-2.522****

 

10-year (March)

Yesterday’s close: Settled at 124’18

Fundamentals: Pressure on equity markets through the second half of the session as questions again swirled around tax-reform helped prop up the 10-year. Ultimately, we believe tax-reform is going to get done which will then put pressure on Treasuries in the near term. However, for now, what might seem like hurdles are just negotiating tactics. In summary, we are range bound until January and we will become outright bullish closer to the end of the year.

Technicals: Resistance at 124’21 held well through yesterday and price action is back to hugging the 124’15 level. The market is range bound and we believe that one more test to the bottom side is in store before a hold and sharp reversal north in January. The 10-year has not broken last year’s low while the 5’s traded to the lowest since 2011 and the 2’s to the lowest since 2008 this week; the curve is flattening and could potentially invert. However, we believe this is a hard low in the 10-year and a hold on the next test should present a tremendous buy opportunity.

Bias: Neutral/Bullish

Resistance – 124’21**, 124’295-125’00***

Pivot – 124’15

Support – 124’09**, 124’015**, 123’27***, 123’10**, 122’29****

 

For more information please contact DAW Trading at brokersedge@dawtradingdiv.com or at 877-329-0006 and visit us at http://dawtradingdiv.com/brokers-edge/

 

 

Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

The Evolving Economics of Bitcoin, Gold and Fiat Currencies

  • By CME Group

An inherent tension exists between the two major purposes of money.  Currencies that are perceived as great stores of value, such as gold and bitcoin, make for poor mediums of exchange.  By contrast, currencies that are effective mediums of exchange, such as fiat currencies used the world over, can make for dubious stores of value. Where a currency falls on the store of value versus medium of exchange spectrum influences its usefulness as a unit of account and a standard of deferred payment.

Supply Scarcity and Stores of Value

As stores of value, many investors perceive gold and, more recently, bitcoin as second to none.  Since 1971, gold has appreciated from $35 per ounce to around $1,300 at the time of this writing, a gain of over 3,500%.  Bitcoins have done even better.  On July 19, 2010, a bitcoin was worth $0.08.  At the time of this writing, it’s priced close to $5,300 per bitcoin, a gain of over 6,000,000% in seven years.  Not bad!

Figure 1: Gold and Bitcoin Have Been Great Stores of Value.

Figure 1: Gold and Bitcoin Have Been Great Stores of Value.

Whether gold and bitcoin really are stores of value is not universally accepted. Viewed from a fiat currency perspective, such as that of the U.S. dollar, bitcoin and gold are, to say the least, not without risk.  Over the past 12 months, the annualized standard deviation of gold has been 12%. Gold had a 70% drawdown between 1980 and 1998. Compared to bitcoin, the gold market looks sleepy.  Bitcoin owners experienced a 60% annualized standard deviation over the past 12 months and in the past, it has achieved a mind boggling 175% annualized risk (Figure 2).  Moreover, in its short life, it has already had drawdowns of 93% and 84% (Figure 3).

Drawdowns of such magnitude do sound crazy yet investors still allocate funds to other markets which have experienced large drawdowns. The U.S. equity market, which experienced an 89% drawdown between 1929 and 1933, from which it took until 1954 to recover. Since then, it has experienced a 47% drawdown in 1973-74, a 50% drawdown in 2000-2002 and a 60% drawdown from October 2007 to March 2009.  Crude oil prices are currently 67% off their 2008 highs.  The difference being, of course, that few investors would argue that stocks and crude oil are stores of value.  Rather, investors perceive them as being risky investments.

Figure 2: Stores of Value are Not Without Risk When Viewed from a USD Perspective.

Figure 2: Stores of Value are Not Without Risk When Viewed from a USD Perspective.

Figure 3: What’s a 93% Drawdown Among Friends?

Figure 3: What’s a 93% Drawdown Among Friends?

However volatile they may be, the reason why gold and bitcoin are perceived as stores of value is simple: their money supply doesn’t grow quickly and, in the case of bitcoin not at all, some day.  Both gold and bitcoin money supply growth is determined by mining output. Over the past half century, new gold mining supply has added anywhere from 1.1% to 2.4% to the existing stock of previously mined gold (Figure 4) and gold prices tend to vary inversely with the degree of mining supply coming on line.  This is much slower growth than the money supply of the U.S. dollar and credit. Even during the 14 years prior to the 2008 financial crisis, the Federal Reserve’s balance sheet, one of many proxies for the amount of money in the system, grew by 5.6% per annum.  Since the fall of 2008, it has expanded by nearly 20% per year.

Cryptocurrencies such as bitcoin have very specific processes for expanding their money supply – mining by technology with strict limits.  For bitcoin, most of the “mining” activity happens in China.  The strict money supply rules mean that if demand grows, as it has, the price can soar, which it has.  Some observers, such as economist and Nobel laureate Robert Shiller, have suggested that the rapid rise in bitcoin prices resembled a financial bubble.  Nevertheless, Shiller also notes that from his perspective, gold has been in 5,000-year bubble.

Bitcoin’s mining supply grew at an infinite pace in 2009 when the currency burst into existence.  This year it will likely slow to around 4.2% and then drop to below 2% per year after 2020.  Sometime around 2140, the last new bitcoin ever will be mined, bringing the total to 21 million (Figure 5). The bitcoin market anticipates this, hence the extraordinary bull market in the digital currency. This contrasts with gold, whose price has been depressed by 94 million new ounces coming onto the market each year.

Figure 4: Gold Prices Vary Inversely with Mining Supply.

Figure 4: Gold Prices Vary Inversely with Mining Supply.

Figure 5: The Bitcoin Algorithm Reaches a Theoretical Limit of 21 Million.

Figure 5: The Bitcoin Algorithm Reaches a Theoretical Limit of 21 Million.

While bitcoin has delivered its holders spectacular, if highly volatile returns, what’s most amazing is how little it’s worth, even at $5,800 per coin.  If one assumes that there will be 21 million coins in existence by 2140, that means that their aggregate present value comes to $120 billion.  While it is nothing to sneeze at, it pales in comparison to the outstanding value of the nearly 5 billion ounces of previously mined gold whose total worth is over $6 trillion at current prices.  Moreover, the 94 million ounces that will come out of the world’s mines in 2017 have a value of nearly $120 billion at current market prices, about the same theoretical value of all the bitcoins that will ever come into existence.  While there is no logical reason to suppose that bitcoin should have the same value as gold, if it did, each bitcoin should be worth approximately $285,000, 45 times the current market price.  As such, one might wonder: is bitcoin still vastly undervalued even after a 6,000,000% rally?

Bitcoin, Gold and Fiat Currencies Demand and Regulation

While gold and bitcoin supply comes from miners, what drives demand is another story.  Gold’s demand side is mainly as jewelry and as an alternative currency that get stored in vaults, albeit one that pays no interest. As such, when interest rate expectations increase, gold prices tend to fall and vice versa.

By contrast, demand for bitcoin has a reputation of being used for money laundering, tax evasion and avoidance of regulated cross-border money flows.  The motivation is that the transactions are extremely hard to trace, yet they offer considerable security. Proponents of bitcoin and cryptocurrencies would argue that the reputation of cryptocurrencies being used for criminal purposes may not be entirely fair.  After all, fiat currency cash is used by criminal organizations and tax evaders the world over.

A little historical background may be informative.  When the euro was introduced at the end of the 1990s, illegal drug and money laundering transactions in Europe, including Eastern Europe, were often conducted in large denomination Deutsche Mark (DM) paper currency.  The advent of the euro meant that the DM cash notes had to be turned in and exchanged for euros, and the unintended consequence was that large denomination U.S. dollar paper currency filled the void left by the DM.  This switch from DM to U.S. dollars actually helped push the euro lower against the U.S. dollar around the time of the transition.

It is also worth noting that of the $1 trillion or so of U.S. paper currency outstanding, about 50% resides outside the United States.  Unfortunately for drug dealers and money launderers, the digital revolution is rapidly eliminating the need for paper currency and even the ability to use it secretly and discreetly.  Bars, restaurants, and dry cleaners are no long bastions of cash transactions.  This has created a market opportunity, so to speak, for cryptocurrencies that can facilitate secure, yet difficult to trace transactions.

Regulators, tax collectors, central banks, etc., around the world can be expected to act aggressively to combat illegal uses of digital currencies, especially as they gain traction in the global economy.  U.S. regulators are beginning to act.  The Securities and Exchange Commission (SEC) has launched fraud cases.  China has started to rein in the use of cryptocurrencies for moving money out of the country.

Regulators are also moving to bring cryptocurrency platforms into the mainstream.  For example, in July 2017, the Commodities Futures Trading Commission (CFTC) approved a new Derivatives Clearing Organization (DCO) which was also granted an order of registration as a Swap Execution Facility (SEF).  Under the order, the new DCO will be authorized to provide clearing services for fully-collateralized digital currency swaps (i.e., Bitcoins, etc.).    Several other countries are also onboard with encouraging cryptocurrencies for legal commerce, including Japan and South Korea.

Some of the cryptocurrency platforms are starting to perform active user due diligence in terms of Know Your Client (KYC) and Anti-Money Laundering (AML), putting them in a position to successfully meet a variety of regulatory tests and become more mainstream with their business models.

And, one should recognize that regulation does not mean the demise of cryptocurrencies – only that the motivating uses will eventually have to be dominated by legal activities. For now, the regulatory landscape for cryptocurrencies is very much a moving target around the world.

Medium of Exchange and the Benefits of Inflation

While gold has proven to be a great, if volatile, store of value, essentially nobody still uses gold as a medium of exchange. When was the last time that you heard of somebody buying groceries, clothing, a new house or a new car with gold coins?  The problem for gold as a medium of exchange is simple: why would you part company with it now if you think that it might be worth more in the future? This problem applied doubly (or exponentially) for bitcoin and other cryptocurrencies. Wouldn’t you have regretted paying 20 bitcoins for a $40,000 car in June 2017 only to see the same 20 bitcoins valued at nearly $100,000 by October of the same year?

Basically, the overwhelming majority of transactions are in fiat currencies created by central banks.  These currencies tend to lose their value over time, not just against gold and bitcoin as we have seen, but also against the baskets of goods included in consumer price indices.  Some fiat currencies lose their value slowly, others do so quickly. That loss of value is precisely what makes them useful.  Without the fear of inflation, holders of currency tend to hoard rather than spend it.  Hoarding currency depresses economic growth and creates financial instability.  The Japanese yen, the one fiat currency that has experienced deflation over the past few decades, is a case in point.  Far from being a virtuous store of value, the Japanese deflation produced a depressed, underperforming economy.

Likewise, both gold and silver were extensively used as currencies in the past and both produced less than desirable economic outcomes.  Despite the rosy history of the gold standard written by gold bugs, economic reality under the gold standard was harsh.  While laboring under the gold standard, the United States experienced high economic volatility (Figure 6) and repeated economic depressions: 1873-79, 1884, 1893-98, 1907, 1920 and the Great Depression of the 1930s. Between 1877 and 1933, when then President Franklin Roosevelt confiscated the nation’s gold and devalued the U.S. dollar to $35 per ounce from $21, per capita GDP rose by just 1% per annum despite tremendous technological progress.

The New Deal was a success. Between 1933 and 1939, real per capita GDP grew by 6.8% per year and that growth accelerated to over 10% per year during the massive, fiat-currency financed, government spending program known as World War Two, which was basically the New Deal on steroids.  Post-war, under the Bretton Woods system of fixed exchange rates tied to gold, real per capita GDP expanded by 1.3% between 1945 and 1971 when President Nixon abandoned gold entirely and floated the U.S. dollar.  Floating currencies proved a difficult adjustment but despite the volatility of the 1970s and the Great Recession in 2008, U.S. real per capita GDP expanded by 1.7% per year, on average, since Nixon dropped gold and floated the dollar (Figure 7).

Figure 6: The Gold Standard Produced Massive Economic Volatility.

Figure 6: The Gold Standard Produced Massive Economic Volatility.

Figure 7: The Gold Standard Also Coincided with Sub-Par Progress in Real Per Capita Income.

Figure 7: The Gold Standard Also Coincided with Sub-Par Progress in Real Per Capita Income.

Unit of Account and Method of Deferred Payment

It’s difficult to use money as a unit of account if it is excessively volatile. While the U.S. dollar loses value versus consumer goods and services over time, it has the virtue of losing that value at a steady rate.  By contrast, consumer prices viewed from a gold or bitcoin perspective are excessively volatile making using either currency as a unit of account difficult (Figure 8).  Moreover, using either currency as a method of deferred payment would be extremely risky.

Figure 8: Consumer Prices from a USD, Gold and Bitcoin Perspective.

Figure 8: Consumer Prices from a USD, Gold and Bitcoin Perspective.

In addition to being volatile, consumer prices tend to be in a strong deflation from both a gold and bitcoin perspective.  Since December 1999, consumer prices have risen by 44% in U.S. dollar terms but have fallen 64% in gold terms.  From a bitcoin perspective, prices have fallen by 99.98% since the end of 2010.  Imagine the economic disaster that would have resulted had people borrowed money in gold or in bitcoins.  Paying back loans would be a near impossibility.  As such, given the inadequate growth in money supply, and the persistence of long-term deflation, there is little possibility that either bitcoin or gold could be used for deferred payments.

This is the beauty of fiat currencies.  Central banks can create as much money as they deem necessary.  Moreover, fiat currencies pay interest, and long-term interest rates allow investors to discount future cash flows into the present, creating liquidity, facilitating trade and greasing the wheels of commerce. Essentially, fiat money inflation is the lubricant of the economic engine. This isn’t to suggest that either fiat currencies or the central banks that create them are above reproach.  They can create too little credit growth (the U.S. during the early 1930s or Japan during the 1990s), too much inflation (the U.S. and Europe during the 1970s), or hyperinflation (Germany in 1923 or in Venezuela or Zimbabwe today).  Unlike the gold standard and bitcoin, which depend upon mining supply, central banks can at least attempt to create the right amount of money to keep the economy growing.

Moreover, holders of fiat currency don’t necessarily lose their value if they put their currency to work in the banking system and bond markets, which pay interest, or the in the equity market, which tends to increase over time. Although interest rates can be below the rate of inflation, as they were frequently during the 1970s and have been since 2008, for the most part, depositors hold their own against inflation. Over the long term, fiat currencies only lose value if they are kept under the mattress, in cash, in checking or in other non-interest-bearing accounts.

The ability to use a currency as a method deferred payment explains why even under precious metals standards there tends to be so much inflation. Yes, you read that correctly, inflation.  Far from preventing inflation, gold and silver standards require currency debasement in order for the economic system to function.  For example, under Julius and Augustus Caesar, the Roman denarius contained four ounces of silver.  250 years later, by the late third century, that same coin contained only 2% as much silver as before, implying that it was worth about 1/50th as much.  That sounds like a dramatic depreciation but it amounts to an average annual inflation rate of about 1.6%, not far from what central banks target today. Rome’s metal-based monetary system functioned only with debasement.

The Roman experience of precious metal currency debasement was just a precursor to future European currency debasement.  Essentially every single country in Europe did exactly what Franklin Roosevelt would do in 1933: they resolved financial crises by debasing their currencies (Figure 9).  Sometimes the only way to pay off debts, public or private, is to do so with money that is worth less than what it was worth at the time the loans were secured.  This is the Achilles heel of gold and bitcoins as currencies.  They are stores of value. Stores of value are deflationary and deflation is destabilizing.

Figure 9: Past as Prologue, a Brief History of Currency Debasement.

Figure 9: Past as Prologue, a Brief History of Currency Debasement.

The Future of Bitcoin

So, will bitcoin rally another 5,000% or more until the outstanding value of the digital currency equals the outstanding value of the world’s gold?  The short answer is that we don’t know.  Something is worth what somebody else is willing to pay for it, and how much people in the future will be willing to pay to hold bitcoins is difficult to know. That said, precious metals do hold a potential insight into one factor that might limit bitcoin’s future upside.

Just as gold isn’t the only precious metal, bitcoin isn’t the only digital currency.  As we discussed earlier, gold responds negatively to increases in gold mining production.  It also responds negatively to increases in silver mining production. Thus, a boom in silver production can contain price rises in gold and vice versa (Figure 10).

Figure 10: Gold and Silver Respond Negatively to Rises in Each Other’s Mining Supply.

Figure 10: Gold and Silver Respond Negatively to Rises in Each Other’s Mining Supply.

Likewise, the existence of other digital currencies could limit price upside for bitcoin.  Ethereum, Zcash, dash, ripple, monero etc. compete with bitcoin just as silver, and to a lesser extent platinum and palladium, compete with gold. This might keep bitcoin’s value in check before it rises another 10 or 100-fold in value.

Indeed, just in the past two years, over 1,000 additional digital currencies have been launched.  One could argue that they actually are limiting the rise in bitcoin, whose price appreciation actually has slowed, at least in percentage terms. Even bitcoin itself has split (“forked”) into bitcoin, bitcoin cash and bitcoin gold as disagreements within the user community create new iterations of the original currency.

That said, two things argue in favor of bitcoin’s continued success: network effects and government regulation. Just as Facebook, LinkedIn and a handful of other websites or apps dominate social networking, it is possible that the incumbent currencies like bitcoin and ethereum could continue to dominate cryptocurrencies as well for the simple reason that they have large networks of users who accept them.  Google’s attempt to invade the social networking space with its Facebook equivalent, Google+, didn’t turn out so well because the user community was already on Facebook’s platform (although Google, by all appearances continues to prosper in other domains). Analogous network effects could work to bitcoin’s advantage.  If a large community of users accept it, they will be loath to move elsewhere unless a new alternative is truly completing and not a mere copycat.

Isn’t the U.S. dollar a bit the same?  What makes USD the world’s reserve currency isn’t just the size of the United States (4% of the world’s population and about one fifth of the world economy) and its military might, it’s also a network effect: people the world over denominate their foreign transactions in USD. Once enough people agreed to use USD, it began to dominate the world’s liquidity and became the primary global reserve currency.

Recently, governments have begun to crackdown on digital currency exchanges in the case of China or at least regulate initial currency offerings (ICOs) in a manner similar to their regulation of initial public offerings (IPOs) of equities.  To the extent that ICO regulation limits the creation of new currencies, one unintended by-product could be to restrict competition and to enhance the market position of incumbent currencies like bitcoin and ethereum. Libertarians often rightly accuse government regulation of protecting incumbents by raising barriers to entry.  There is no reason to think that cryptocurrencies will be an exception to this rule.

On the other hand, regulation could also give rise to, and bestow legitimacy upon, new cryptocurrencies that lack bitcoin’s main attribute and flaw: an asymptotically fixed money supply. A digital currency that replaces fiat currencies as a medium exchange cannot have a fixed supply.  In fact, central banks, like the Federal Reserve, might even create their own cryptocurrencies but ones that are designed to optimize economic growth. It will probably need to have constant money supply growth and preferably money supply growth that matches economic needs and not some algorithm’s hard, mathematical constraint. In the meantime, bitcoin could continue its role as a sort of purely electronic crypto-gold: a perceived store of value given to great but, perhaps, slowly decreasing volatility.

Bottom Line:

  • A natural tension exists between stores of value and mediums of exchange.
  • Gold and bitcoin have been great, if erratic, stores of value.
  • Gold and bitcoin appreciate because of the slow growth of mining supply.
  • Fiat currencies are more practical as mediums of exchange because they lose value which encourages holders to exchange them for goods and services.
  • Strong stores of value encourage hoarding, deflation and financial instability.
  • They also make for poor units of account and methods of deferred payment.

 

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Disclaimer:

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. DAW Trading (“DAW”) uses various outside sources for research material regarding futures and options on futures trading therefore the views and opinions expressed in this letter may not necessarily reflect the view of DAW or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to DAW.

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