SOFT COMMODITIES - Analyzed 3rd February 2010

Over the past two or three years we have been subject to a barrage of advice from the fundamentalist community suggesting that the world is running into a period where food stocks would come under severe pressure. Their conclusion was that the Soft commodity market would be the next boom area. This seems a reasonable assumption on the surface but like most obvious conclusions it is unaccompanied by the timing issue. Our analysis concentrates upon the market itself with emphasis upon timing being the most important element of all,

The CRB index shows clearly that investors chasing this dream have been sorely disappointed with commodity prices peaking in June 2008 followed by a drop of 57% in no time at all…so much for the guessing game of the intelligentsia. It is far less risky and far more profitable to let the market disclose its secrets through its natural laws rather than assume human guessing games can effect the markets. Over my 56 years in the business I have been staggered how investors fall for the predictions perpetually trotted out by people who prove to be eternally wrong. It seems to me that the higher the image the lower the awareness. But there again being bottom of the pile north of Watford I would think that wouldn't I?

So where does reality stand today?

If we follow the logic of increasing population relating to increasing soft commodity prices then our analysis would be expected to produce a predominance of buying opportunities. The reality is we have nine ‘shorts’ and eleven buys. This is about normal suggesting that we should treat each contract individually and trade accordingly. This process should be followed without any influence from predetermined views. Treat them for what they are, usually uninformed guesses geared heavily to the advancement of self interest. Sorry about this cynicism but 56 years of the observation of human self delusion is difficult to overcome at times.

Now lets see what the market is telling us.

CRB daily

1 - Soft's now on support (CURRENT BUYING OPPORTUNITY)

There are a number of interesting contracts which are now at buying support levels. A good example is Oats US where we find it at the support level, a Fibonacci retracement and the angle from the Sept ‘09 low.

Other contracts in similar positions are Coffee Robusta, Rough Rice, Soybeans, Soybean Meal & Soybean Oil where we are just waiting for trend confirmation.   

2 - Softs falling to support (FUTURE BUYING OPPORTUNITY)

We are watching for falls for both the Sugar contracts (UK White & US World) to their supports which are still some distance away. This will necessitate constant observation and reanalysis when more information is to hand.

3 - Softs having risen to upside resistance and could now show weakness (FUTURE ‘SHORTING’ OPPORTUNITIES)

Cattle Feeder, Cattle Live, Cocoa US & Lean Hogs have recently had strong runs. All have recently reached our resistance calculations followed by the strong runs being halted in their tracks. A look at the Cattle Feeder chart clearly shows the type of contract we place into this category. 

3 - Softs having risen to upside resistance but supported by a rising timing angle (NEUTRAL OR AGGRESSIVE SHORT)

Cocoa US & Lumber are contracts similar to the previous category but here there are close rising angles which might supply support and push the commodity into higher ground above the resistance level on the chart for a buy. ‘Shorting’ at the resistance level without breaking the angle has to be a trade for aggressive traders only. The chart for Lumber illustrates the risk in ‘shorting’ without a trend change and now asks the question whether a buy should be considered on a trend confirmation over 260. This is a reminder that our levels are not buy and sell signals but decision levels with possibilities either way. Guessing one way or the other gives less than a 50/50 chance, a risk ratio which should be unacceptable. Leave the guessing game to your competitors.

4 - Softs having risen to upside resistance with the supportive angle broken on the downside (CURRENT OR FUTURE ‘SHORTING’ OPPORTUNITIES)

A more conservative trade would be when the angle is broken on the downside and then only if the contract has not fallen too far from the resistance level.

Falling into this category are Coffee US, Cotton US and Pork Bellies. The chart for Cotton shows such a break.

5 - Softs meandering within a trading range (NEUTRAL)

None

The PROSPECTS for Softs seem bright for both ‘Shorts’ and Longs.  

THE UK FTSE 100

Throughout 2009 I have made many references to the comparability of the FTSE 100 and the Dow Jones of the ‘1920’s and early 1930s. I think it deserves a further airing due to the affinity of the two indices which may possibly contain a warning for 2010 as the FTSE approaches the break point at 4895 of its recent up trend.

The Dow fell heavily in 1921 and seven years later suffered the 1929 Wall street crash with a 50% fall. There was then a correction to just over 50% followed by a fall of 83%.

The FTSE fell heavily in 2001 and seven years later suffered the Credit crash of 2008 with a 50% fall. There was then the recent politically controlled correction of just over 50% followed by a fall of ?????

The hideous printing of money into the economy hidden by a concocted new word QE # is the sole reason for the recent rise on the world’s stock markets. As in 1930 it is likely that there is a grim period ahead. The only question is how far will it go and how long will it take? A worrying aspect of the recent fall from 2008 is that due to the interference of establishment self interest with the theft of public money plus the accumulation of huge unimaginable sovereign debts the fall has so far been spread out time wise. This could suggest that the world will not emerge from the morass for decades rather than a shorter times should the gangsters who concocted this desperate situation had been eliminated from positions of power. The people who caused the disaster are still there with their crazy mixed up Keynesian ideas.

# Remember my warning in 2000 of disaster when new paradigm was spewed up from nowhere. Now we have Quantative Easing rather than the use of the proper description ‘fake money’.

In the aftermath of the 1929 Wall Street crash resulting in the crushing of faith in equity investment the financial community reverted to an almost total Bond allocation strategy with equities taking a back seat which lasted until the 1970's. As always the financial services industry got it totally wrong having ignored the remarkable equity opportunities in the 1930's. The 'Dow' rose by 382% from a low of 40.56 in 1932 to a high of 195.59 in 1937. This was one of the great investment opportunities of the century but of course as always the sophisticated big boys got it totally wrong…W.D. Gann didn't and we won't when history repeats in the next few years. The establishment went its merry way advising heavy Bond investment over the next few decades. This in the longer term proved to be disastrous resulting in inflation crushing invested capital

All is not lost…the first essential element in avoiding disaster is to steer clear of current wisdom. Look at the markets in a dispassionate way. Bear in mind that practically all are now bullish on the stock markets. The contrary view must therefore be to be extremely cautious. In the event of a downward trend change it should be taken seriously. Take recourse into a ‘maverick’ mentality and generate an independent and unorthodox mind set. The new world will be yours as the old order with its gangsters leanings fades into obscurity.

As always these personal views will not distort our daily, weekly and yearly actions which are totally guided by our Gann analysis.

Let’s firstly assess  the few general indicators we follow.

THE JANUARY EFFECT

For decades I have followed the ‘January Effect’. This is the observation of the movement of prices during January and then mapping the movements onto the year as a whole to achieve an advanced picture of the year. It is surprising how often it proves to have the capacity to look into the future with a surprising success rate of 80% Last years January pattern forecast an initial fall followed by a part retracement of that fall. This forecast was held up to the summer but was invalidated by political interference thereafter.

PROSPECTS - This GUIDE is now bearish with the support of an 80% track record.       

THE INFORMED BUYERS INDEX

A recent comparison of the FTSE and the Informed Buyers index reveals a definite discrepancy between the two indices with the Informed Buyers selling from October of last year against a rising FTSE until the fall on the 11th January. The informed index has just produced a sell signal. Such signals have enabled our subscribers to evade every bear market since the 1970’s. This is evidenced by our defensive pension management being positive each year since the late 1990’s when we commenced our service.

PROSPECTS - This index is now bearish with the support of a 100% track record.

And now

GANN ANALYSIS OF THE FTSE 100

As 2010 passes I am becoming more convinced by the day that the top analyzed last year as seen on the chart below could prove to be an historic high of historic proportions.

However the weekly chart under has not yet confirmed that the longer term trend has turned to the downside. This would be established by a fall under the last low at 4985.

This weeks analysis under exposes a clear break below the angle allowing the anticipation of a fall to the lower angle. This could be at any point on the angle but our calculations from recent highs suggest a fall to 4676 in early April where support may be anticipated following strength at that time.

PROSPECTS - The FTSE 100 is now bearish short term but waiting for a fall under 4985 confirming the longer term downtrends. The next support level is some distance away at 4676.

Regards,

Fred Stafford