FROSTY FUTURES

NOVEMBER 5, 2005

INDICES

The bullish thesis states that stock markets will rally because energy markets are in decline and interest rates will not increase to any great degree, therefore consumers will remain strong into the Christmas season, employment levels will recover and top-line Corporate growth will remain positive. Secondarily, bottom-line earnings will be dragged along as fear of recession wanes, is proven inconsequential and will improve, thus a positive slant will be allowed the price to earnings ratio’s in advance. Voila’ the market is a bull. IF this is a perfect world all the above would be just fine. However, there are several things that can, and likely will, go wrong. The Bush administration could fall. Cheny could be forced to resign. Elections in the grass roots this Tuesday could shift more power back to Dems. Consumers, fearing a huge shock this winter could pull back from spending. After all, Americans are renowned for being “once burned, twice shy.” The Oriental, particularly Chinese, mentality is truly a herd mentality. Proof of that is in the rapid growth of market economies as speculation in development has increased demand curves for many commodities and stocks. If this, and it looks like it, begins to slow, earnings of consumers worldwide will decline. If that growth bubble bursts it will only be a reflection of the rapid shift in psychology of the indigenous investors. The charts are showing consolidation as these various streams run through the minds of investors. Follow the money after verifying the validity of the pattern presented. To paraphrase Larry Williams, don’t trade the news, trade the money.

INTEREST RATES

There is less than 30-basis points spread between yields on the 5-year and the 30-year instruments. That’s narrowed 16-basis points since Sep 1. Money handlers can borrow longterm, loan out short-term, flipping and adding fees, points and other charges on each flip and make the hell out of money. They hedge their short-term risk and have a money machine. As demand has increased for long-term money price has fallen and yield has risen. Increased activity has carried the yield on short-term instruments higher as well, but to a lesser extent, perhaps with some inflation fear thrown in. A shallow recession will change the level of rates but not the configuration of the yield curve. So it will be the shape of the yield curve, as well as the dynamic of the yield curve that will define our economy and perhaps that of the world.

METALS

Gold appears to be in a bearish trading pattern, with a head and shoulders top on daily charts. What I can’t tell, and won’t commit to, is the potential depth of this particular pattern. It’s one thing to recognize a bearish pattern, it’s totally another thing to over commit. Paper currencies are suspect whether from weak governments, overtaxed consumers, fraud or whatever. The trend in gold has been bullish. It’s going to take a lot more than a shallow head and shoulders formation to change all that. The correction forthcoming, in my opinion, is a buying opportunity. Silver on the daily charts, and weekly, are presenting a double top formation. This is a bearish signal. The technical target, if support is taken out, on this particular chart is 7.10. Moving averages as far back as the 20-day have turned down. RSI near 50 is neutral but the trend is down. Demand for copper remains strong as reflected by price but here is divergence between price and RSI, once again. Shows us how meaningless some of these indicators can be, sometimes.

DOLLAR INDEX

The Dollar’s recent rally has reflected a 25% retracement from the high in July 2001 to the low in Dec 2004. Support for the balance of this month lies near 8800. Resistance is below the technical target of the current formation which is 9530. That resistance level is around 9250.

CATTLE

Live cattle are making a second attempt at the 9150-9250 area. The 20-day MA is acting as a buying platform for bulls. Penetration of that level will force funds to liquidate and force a waterfall going into first notice day. Expect a decline. What was it I said last year about feeders not going back to test 115-120? Well they did, I was wrong and now you have a second chance to sell feeders at record highs. I put out some info about hogs this fall so I will, reluctantly, add some comments here. There is a good chance the Dec and Feb lean hog contract will rally into the middle and end of November, possibly extending that time frame into December. The chart looks bullish as a good base is being built. Aggressive traders may want to try the long side on a retest of 6125-6025 with stops at 5875, or just beyond a limit move from the retest in case the locals or funds want to go after weak stops.

ENERGY

Bearish patterns dominate the energy complex. Tech target on crude is 5700, on Heating Oil it’s 1.42 and on unleaded it’s 1.35. Natural gas price activity is warning us to expect a much less deep correction because of the forthcoming weather. That tech target is 10.55, still “too damn high.” Resistance is just wide open to news, weather, terrorism, you name it. I won’t publish it.

SOFTS

Cocoa is near strong support, at least near enough for strong speculators to begin to establish long positions. My initial idea, that I am staying with, is to sell 3 each of the at the money puts and calls, not in the money, but bracket the current price and then use the proceeds from those sales to buy out of the money calls. As many as you can afford and that makes sense to you. Your risk is a drop in price below the cash flow amount, plus commissions and fees. The coffee chart looks good; good momentum, good volume, good tech’s. Take a look at it yourself and see what you think. A clear breakout occurs with a close above 10580. Some readers made an excellent trade on the sugar idea I presented month before last. Now bearish traders have a chance to do the same kind of thing, but not with as good a ratio as the initial trade allowed, because premiums are richer now than before. The idea is to sell three each of the at the money puts (1100 @ 34) and calls (1200 @ 42) and take the proceeds and buy 28 of the 1000 puts at 8. You could use either the cash flow as a stop measure or maybe the 20-day MA. Remember, commissions are negotiable but fees are standard, SPAN margins should apply but you must check with your broker and selling options can be dangerous to your account. Other than that, you should know what you are doing or let an experienced, trusted broker handle it for you. Cotton is expressing harvest pressure. The head and shoulders top formation is being fulfilled, but price, basis Dec is in a narrow range bound approximately by the 100-day and 50-day MA’s. Friday’s close was just below the 100-day. OJ price continues to climb, discounting hurricane damage, potential disease and the beginning of the winter frost premium. This trend may remain in place for some time so don’t get eager to sell into it. Wait until a pattern develops that shows all three threats are fully discounted. Use every tool in your box, then when the signs are there, be easy. Don’t get ahead of yourself. Sell futures and buy calls is one way of protecting yourself. Or trade small, don’t get greedy. There are large stockpiles of SPF lumber sitting on yards across the country as traders in the business or in the know anticipated big demand. This may detract from the potential in futures contracts. There is a cash basis in lumber just as there is in grain and that can fluctuate madly.

GRAINS

Bean harvest is drawing to a close and hedging pressure is declining. A post harvest rally should be expected and that should be defined by a breakout of the recent trading range in the Jan contract, 575-615 or so. Corn remains under constant hedge pressure with no sign of relief any time soon. However, there has been some change in the March-May spread. Take a look at that. Good weather for winter wheat put a crimp in bullish expectations for a few days. But it looks like that has been discounted and the bullish trend, particularly for KC Hard winter is back underway.

CONTACT ME: williamfrost@comcast.net or call 615 331 8567.

TO SUBSCRIBE: www.frostyfutures.com.

Trading futures is for individuals willing to assume greater risk for the opportunity of greater rewards. Only speculative capital should be used. Past performance is no assurance of future profits. Information contained herein is believed reliable but original sources of data have not been independently verified therefore is not guaranteed. Ideas and suggestions are just that. Nothing herein should be construed to be a solicitation to trade futures or options. Hedgers should have a defined plan.