wmeubank@ocp.kcmo.com
SIEGEL
TECHNICAL MARKET UPDATE
DECEMBER U.S. TREASURY BONDS: In contrast to the recent volatility, credit traders saw a relatively quiet week, punctuated only by the Treasury's quarterly refunding of 3-year notes and 30-year bonds, which was deemed favorable. In the wake of the turmoil on Wall Street, good demand for U.S. Government securities, especially from foreign buyers, continues to keep prices close to their recent highs. As many believe that the Federal Reserve will not be inclined to raise interest rates at the next FOMC committee meeting on November 12, the approach of another report on unemployment is not having its usual nervous effect on the market. However, should a much higher-than-expected non farm payroll number (above 225,000) be released, or other employment data enhance the odds of wage-push inflation, this complacent attitude towards the Fed and U.S. interest rates could quickly change. Technically, prices are again facing the 118-00 level, with resistance expected all the way back to the contract high at 119- 02. Unless another financial shock wave hits this market, we expect the bulls will have an increasingly difficult time maintaining these lofty levels. The slow stochastic that has already turned downward, also enhances the outlook for a further correction. While we remain long-term bullish, for the time being, new short positions appear in order.
Recommendation–(Aggressive)–Look to sell near 118-10. Buy Stop–119-00, close only. Objective–116- 00.
JANUARY FEEDER CATTLE: Short covering and spread buying on ideas of firming cash and continued uncertainty over recent weather related animal losses out west, has helped spark some renewed life into the beleaguered bulls. However, with the outlook for ample cattle supplies further down the road, and considering the increasing competition from both pork and poultry, many expect rallies to be short lived. Nevertheless, should any additional weather problems further limit the availability of near-term supplies, the bulls could enjoy more of a respite from the steep sell off that began last July. Technically, the rally off the double bottom posted at 77.30¢/lb. is a promising sign that could encourage additional bargain buying. A close above the October high at 79.55¢/lb. would set a new swing pattern back to the trend line resistance now near 81.00¢/lb. However, should the bulls fail to capitalize on their recent good fortune, the bubble could easily burst, sending prices back under 78.00¢/lb. All things considered, we feel that this market is destined for a stronger correction and now see a buying opportunity at hand.
Recommendation–Look to buy near 78.50¢/lb. Sell Stop–77.70¢/lb., close only. Objective–80.00¢/lb.
JANUARY CRUDE OIL: A sharp increase in crude oil stocks and indications that tension between the U.N. and Iraq could be easing, has forced the energy bulls to mount a hasty retreat. Reports that OPEC production will remain on the high side and that, in all probability, Iraq will be allowed to continue its humanitarian exports of crude oil, suggests ample global supplies throughout the winter months. Here at home, stocks of petroleum distillates are still running 18 million barrels over last year's level. More important, primary supplies remain about 5.0 million barrels ahead of the five-year average, with refineries running at 94.1% of capacity. As a result, energy experts continue to predict that heating oil supplies will remain more than adequate to meet the winter demand. Pending further surprises emanating from the Middle East, which is always a possibility, we feel that crude oil prices will gradually trend back to lower ground. However, our outlook would quickly change should Saddam Hussein begin taking pot shots at U.N. aircraft enforcing the no-fly zone over Iraq. An early onset of frigid temperatures throughout the U.S. and/or Europe could also send prices skyward, as traders foresee greater consumption of crude and distillates. On the charts, we see that January crude has dropped back to its trend line support near $20.50/bbl. where some bottom picking is now being encountered. Should the bulls begin to falter, we'd project a negative swing objective back to the October low near $19.59/bbl.
Recommendation–Look to sell near $21/bbl. Buy Stop–$21.50/bbl, close only. Objective–$19.50/bbl.
JANUARY SOYBEANS: Reacting to the record pace of demand for U.S. soybeans and soymeal, bullish traders have launched futures prices back above $7.00/bu. With export data reflecting demand running 50% greater than last year, the prospect of a record new-crop harvest continues to be losing much of its negative impact. The bulls also continue to capitalize on reports of El Nino-induced rain in Brazil that is causing planting delays. While soybean Brazilian planting is possible through December, some analysts foresee additional weather problems that could cause their new-crop production to suffer. However, it's still far too early to tell. This week, soy traders also reacted favorably to the sharp rebound in the world's stock markets, which has forced many doomsdayers to reassess their forecasts of slackening Asian meal demand. However, considering the shaky state of the Asian financial markets, few are willing to predict the economic impact of their currency devaluations.
Nevertheless, as the U.S. harvest draws to a close, it's apparent that buyers will continue being forced to our shores to satisfy their growing oilseed needs. And until the South American new crop is planted and safely underway, we expect that the strong pace of world usage will keep traders wary of being overly committed to the short side of the oilseed market, and for good reason. History has shown us that markets driven by demand potential are much more volatile than those predicated on supply. Recent price action tends to confirm this. In a bullish demand scenario, renewed emphasis on weekly export numbers will keep the market highly sensitive to foreign commitments. Reports of export tenders will begin commanding much greater attention from anxious traders, especially if a scramble by foreign importers to book forward supplies should ensue. Farmer holding of newly harvested crops for higher prices could aggravate this situation and ultimately create a squeeze on pipeline supplies, which would have a dramatic impact on prices. Finally, reports of weather problems in Brazil or Argentina would suggest that ambitious plans at increasing their soybean output could fall short. Should any of the above circumstances be presented, the outlook for higher soybean prices would vastly improve, giving merit to talk of $9.00/bu. beans. In the meantime, we'll contend with the prospect of seeing a rise to $8.00/bu., which is quite possible following this week's sharp advance.
On the bar chart, we now find the market facing the October high, once again. The chart pattern appears quite bullish and supports a further rise to $7.50/bu., where bullish ambition will be put to the test. Accordingly, a short-term correction back to the trend line support near $7.00/bu. would be considered an excellent buying opportunity. Readers should be aware that the approaching Crop report could generate enhanced volatility. Though few expect any great surprises, the considerable demand now being seen could force the Uncle Sam to increase the export and crush numbers at the expense of the carryover.
Recommendation–Look to buy near $7.05/bu. Buy Stop–$6.88/bu, close only. Objective–Initially, $7.50/bu.
DECEMBER COTTON: Improved crop prospects continue to cast a shadow on bullish cotton traders. However, while prices remain mostly on the defensive, strong world demand has kept the market from breeching 70¢/lb., a factor which continues to encourage the bottom pickers. Indeed, many feel that a further rebound could be in the cards once the seasonal harvest pressure abates. Nevertheless, with another USDA Crop Production report to be released on Monday, traders should remain focused on increasing supply prospects, and a crop which could total nearly 18.7 million bales or more. There is also concern that the USDA will revise the Chinese production estimate higher and give merit to fears of decreasing import demand. In any case, China remains a virtual wild card in the global supply/demand equation. Though China continues to import U.S. cotton, it's reported that domestic users are now being offered incentives to utilize their large internal cotton stocks. However, the fact that China is still buying cotton suggests that serious quality problems may exist that keeps users looking for other sources of supply. If so, Chinese demand could remain surprisingly strong and help bolster U.S. prices in the months ahead. Moreover, while U.S. ending stocks should get a boost from the abundant new crop, world ending stocks appear to be on the decline. Strong demand from Mexico and Brazil would be expected to keep emphasis on foreign demand and encourage further bargain buying of quality U.S. supplies.
Turning to the daily chart, we see prices now in retreat following their 50% retracement of the September/October sell off. With the stochastic turning downward, the odds now favor a drop back to the nearby trend line near 71.50¢/lb. Good support developing here could foster another rebound and perhaps a serious challenge of the resistance slope near 73¢/lb. The high open interest suggests extreme volatility, should a breakout occur in either direction.
Recommendation–Look to buy near $7.05/bu. Buy Stop–$6.88/bu, close only. Objective–Initially, $7.50/bu.
DECEMBER S&P 500: The resiliency of the 10-year-old bull market was amply demonstrated over the past two weeks, as the S&P 500 was able to recover all but 25% of the October 1997 massacre. Driven by the a rebound in the Asian markets and the impression that the sharp sell off had returned value to the marketplace, investors and fund managers appeared to flock to take advantage of the lower prices. A sharp rally in bonds also contributed to the strength. However, upon further analysis, the bond rally suggested that the strong demand for government securities remained more a function of safety than return on investment.
In the wake of the sharp rebound, we find the S&P back at the 950 level, which reflects a greater rebound than we had estimated. Nevertheless, we continue to have doubts that the Asian crisis is now behind us. Few are willing to predict the longer-term impact of Asia's economic problems on the rest of the world. We continue to expect greater volatility ahead and suggest that traders remain flexible in their approach to these now sensitive markets.
Recommendation–Look to sell near 950. Buy Stop–955, close. Objective–900.
November 6, 1997 Siegel Trading Company, Inc.
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