Friday’s Futures Outlook: Precious Metals Supported, Treasuries In Downtrend

Yesterday’s failure by the Federal Reserve to complete its anticipated purchase of government assets weakened the June Bond and June Notes. Traders had been supporting these markets for 9 days as the Fed was expected to take supply out of the market ahead of next week’s Treasury auction.

This action by the Fed drove yields higher and Treasury futures lower as traders now expect auction participants to drive up yields next week.

More bearishness is also developing in the market as traders are now starting to price in the possibility of a downgrade of U.S. debt by one of the rating services. Yesterday it was announced that the S&P Corp. had cut the rating of the U.K. because of the huge increase in government debt.

Since both the U.K. and the U.S. have been increasing debt during this financial crisis, some analysts feel it is just a matter of time before the U.S. government debt is downgraded.

June Treasury Bonds are in a downtrend but holding the last swing bottom at 119′15. The trend is likely to accelerate to the downside if this price is violated. A trade through 123′23 will negate the downtrend and turn the main trend up. Until this happens, look for sideways to lower trading.

The main trend is decisively lower for the June Treasury Notes. Support for this market is coming from a pair of old bottoms from February at119′06 and 119′08.

The first hint of a change in trend to up will occur if 121′11 is violated. The actual change in trend takes place following a violation of 122′02.

Thursday’s sell-off in the June E-mini NASDAQ indicates a secondary lower top may be forming at 1423.00. This price is paired with the main top at 1437.75. A trade through 1336.50 will not only confirm the double-top formation, but also change the Main Trend to down on the daily chart for the first time since April 9th.

A retracement zone at 1352.25 to 1332.00 inside of the range of 1266.75 to 1437.75 is providing temporary support at this time. The current developing downtrend could accelerate to the downside if this area is violated and set up an even further decline to a 50% correction of the entire multi-month rally to 1238.75.

The daily swing chart suggests a break to 1321.75 by May 28th is possible.

On the upside, look for resistance today at 1387.50 to 1396.00. If this market is to continue lower, then any rally into this zone should be met by sellers.

This week’s break has been triggered by comments from the FOMC minutes that the Fed expects the economic recovery to be long and slow. Additional weakness is coming from talk that the U.S. debt rating may be lowered to below AAA. Expectations of higher yields at next week’s Treasury auction is leading some traders to believe that higher interest rates will hurt future earnings and slow down expected economic growth.

Speculators ignored the weak supply and demand fundamentals and pushed July Crude Oil through the last swing top at 60.86. This kept the uptrend intact and helped form a new main bottom at 56.74.

The weaker U.S. Dollar is probably the strongest driving force behind this rally as traders are demanding crude oil as a hedge against a possible inflationary scenario.

Traders are not talking much about an OPEC production cut later this month. This is probably because they feel OPEC will refrain from reducing output until they are certain the global economy is on the mend. Saudi Arabia is already on record saying they don’t want to be responsible for stalling an economic recovery.

Iran, Russia and Venezuela have said they’d like to see crude oil at $70, and this is where this market seems to be headed.

June Gold held a key 50% price at 937.40. Since the market did not back down from this level, there was enough upside momentum to take this market to the next .618 level at 954.50.

Lingering banking issues and inflationary concerns are providing support for precious metals at this time. This is taking place despite comments from the Fed that inflation is not expected to be an issue at this time.

The inability to break the July Silver from current levels along with the close near the high suggests that the buying is greater than the selling. The strong close puts the market in a position to challenge the high for the year at 14.64. Bullish traders are likely to continue to push this market higher in an effort to run stops over 14.64 and accelerate this market to the upside.

Buying interest has helped July Platinum recover nicely from the recent bottom at 1071.10 but the main trend will remain down until 1193.90 is violated. Uncertainty regarding the global auto industry is still keeping pressure on demand for autos and thus catalytic converters. This is helping to limit gains.

July Copper has been trying to mount a rally but the buying interest is in the precious metals at this time. A pair of bottoms at 1.90 and 1.97 is providing support at this time but the uptrend is not going to resume until the pair of tops at 2.22 and 2.24 is taken out. The lack of demand from industrial traders is still keeping a lid on any substantial advancement.

July Soybeans are expected to continue its march toward its major upside target at 12.23

The bullish fundamentals remain intact. Traders are looking for more upside as inventories remain low and demand high. Furthermore, speculators may start to add to their long positions if any weather problems begin to develop.

July Corn traders seem to be convinced that despite the dry weather across the Midwest, farmers have been unable to complete the necessary fieldwork to plant enough seeds to match pre-season crop estimates.

This news helped July Corn establish a new higher main bottom at 406 1/4 and set up the market to breakout over the last swing top at 434. This action will set up the market for an acceleration to the next resistance level at 449 1/4.

News of the possibility of reduced yields and greater demand is helping to support July Wheat. Planting delays caused by wet weather has put a lid on the expected size of this crop this growing season.

The current support base being built on the weekly chart suggests the strong possibility of a breakout rally with 6.70 the minimum upside target.

Despite the bullish supply and demand fundamentals, July Sugar traders seem hesitant to add to their long positions at current levels. The recent break through 14.90 and the failure to make a new high on the subsequent rally suggests that the trend is turning down.

This developing correction seems necessary to attract fresh buying which should launch this market to a new high later in the year. Wait for a break back to at least 14.55 before considering the long side.

News that demand is expected to outstrip supply this year is driving July Coffee higher. Recently the Brazilian government paid above market prices to take supply off the market. This is helping to support the current rally. The weekly chart suggests that this market should not run into any serious resistance until 144.00.

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