Strategies for Nasdaq, Cotton and Energy Futures

by Blake Robben

I’m going to take a look at a few markets I feel offer good trading opportunities right now—the Nasdaq 100, cotton, crude oil, natural gas and unleaded gasoline futures.

Nasdaq 100

The stock market has been gloomy in 2008, but I view this first-half weakness as a good opportunity for longer-term investors. Going back from 2004 through the first month of 2008, you can see in the chart of the Nasdaq 100 that there has been a strong channel line, with support at the lower end of the channel right around 1,700. I'm bullish down at these levels, ans as long as this market doesn't violate 1,700, I'd recommend bullish strategies, and put your stop under 1,700 on a closing basis. The front-month March contract is currently trading just above 1,800, and I'm looking for a bounce up to 2,000 in the next six months. If 1,700 is violated on a closing basis, I'm going to reassess my outlook.

 

Cotton

Cotton has fallen to a six-week low on worries that a possible recession will slow global demand, and amid general profit-taking after sky-high grains rallies in the past few days. But from a fundamental standpoint, I like cotton at current levels and would use the pullback as a buying opportunity. Cotton is competing for acreage with crops like corn, wheat and soybeans, which have doubled in price in the past year, while cotton remains under-priced in relation. This spring’s planting intentions will be important, and the better prices other grains are offering are likely to induce farmers to cut back further on cotton planting. Eventually, this will lead to a major shift and cotton supply won’t be enough to meet demand. I’m recommending a call options spread. Buy the 80-cent July call, and sell the 90-cent call. If I’m wrong, and this market starts to see a meltdown, I see a breach of 74.50 as suggesting a move down to 70.

This trade will cost you about $500, not including commissions, and if by July, cotton isn’t above 90 cents, that’s your defined risk. As these options expire in June, there is some time for this trade to gel, and I see a dramatic increase in cotton prices coming if demand sparks. Your maximum potential on the trade, if it works in your favor, is $4,500, not including commissions. This equals the difference between the strikes, or 10 cents, and since every penny move in cotton is worth $500, that’s $5,000 – the $500 you paid. I see this trade as offering an attractive risk-reward ratio on a cotton rally between now and second week in June, but watch for the U.S. Department of Agriculture’s crop reports in March and April to get a better sense of farmers’ intentions.

 

Crude Oil

Looking at the chart of April futures, we can see a possible head and shoulders pattern in crude oil, and the market is currently in the midst of the right shoulder of the pattern. I see $85 a barrel as the downside of the trading range, and a close below there would bring a lower trading range into view, from $70 to $85. On the upside, resistance is at the high back in January 2,2008, just shy of $100 for this contract, at $98.87. I think it would take a major disruption or panic to take out that high. In the meantime, I’m looking for a range of $85 and $100 for the foreseeable future. The market spiked above $94 this week on news that OPEC may cut production to keep a floor on prices around $80 - $85, and amid threats from Venezuela’s Hugo Chavez.

 

Natural Gas

Looking at the February contract, you can see this market is in a long-term downtrend, although it saw a spike Monday to a three-month high amid frigid weather patterns. I was bullish around $7 mmBtu, but this market had its pop and I’m not so sure whether this recent rally will have legs. From a technical point of view, there is a dark cloud cover on the candlestick chart, a bearish sign. As long as this market trades below $8.15, I would view selling rallies within the overall downtrend as a solid type of strategy. However if this market closes above $8.25, I’d be out and the pattern would start to shift to a more bullish stance. But as long as it stays below $8.25 on a closing basis, it should be a good short-term short.

 

Unleaded Gasoline

Of course we can’t predict what will happen in the future, but seasonally, this market has tended to bottom in February or March, and rally in the spring and early summer as driving season gets underway. If crude oil can hold above $85, unleaded gasoline has a chance to spike again this spring. So, I’d look for a bullish position on a break and would recommend considering a call spread. This market can be very volatile and experience big swings in one day, so this one for mainly larger accounts. Call me for details if you are interested in setting up a long-term position.

Blake Robben is a Senior Market Strategist at Lind Plus, Lind-Waldock’s broker-assisted division. He can be reached at 800-266-0551 or via email at brobben@lind-waldock.com.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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