If you can't afford to lose it don't use it!

- Lee Gaus

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August 15, 2007

While many traders have been focused on the grains, energies, and indices Copper has been a market that has drawn the attention of the likes of Warren Buffet and Jimmy Rogers. Both of these fine gentlemen have commented in the past that they believe Copper is overdone. A little historical reference might help, in 2001 Copper made a low just slightly over sixty cents a pound, and as of this writing Cooper is trading over $3.30 cents a pound.

In my view the underlying strength in Copper rests with the increased Chinese demand. If my conclusions are correct it made sense to me to study the Shanghai Copper market compared to the New York Copper market. My models are suggesting that for the first time in months both markets are working in unison. The U.S. September Copper market near term model turned negative last week as did the Shanghai October market. On Fridays close it appeared that the New York market had a greater degree of weakness as compared to Shanghai. At the end of the last week my short-term model showed that New York Copper needed to close on this coming Thursday above $3.58 to reverse the near term model, which is a fair degree higher than where it is now. The Shanghai market needs a close above 65310 RMB or about $3.85 to reverse the trend. At the end of their trading week the Shanghai market was pretty close to that figure, but as of this writing the Shanghai October market closed down at 64170 RMB or about $3.78.

The long-term models appear to be confirming the short-term models. My term model turned negative for N.Y. September Copper, and will need a close this Friday above $3.866 to reverse the bearish signal. The long-term model for Shanghai Copper has shown a strong inclination to turn negative but as of the end of last week failed to confirm. This week, however, may do the trick. If October Shanghai Copper closes on Friday below 64660 RMB or about $3.81 the long-term model will turn negative, and if that should happen both New York and Shanghai will be in unison.

I have to admit I was not smart enough to buy Copper, but also not dumb enough to get short. Given the aforementioned factors I believe for those with brass ones it may be time to get short Copper. If you are so inclined you may want to look at selling September Copper at around $.3.38 or December Copper around $3.37. Use the previously mentioned model reversal points as stop levels to consider. If September Copper gives us a couple closes below $3.1775 we could be off to the races.

Coffee is another New York traded commodity that has caught my eye. My long-term model has been as flat as any commodity I have ever dealt with over the last ten weeks. The short-term model has been only a little more active than the long-term model, but I think that has changed. The short-term model has turned decidedly higher and requires a close on Thursday below 115.00 to reverse the trend. The long-term model finally showed some life at the end of last week and turned higher. It will take a close below 103.00 on Friday to reverse the signal from last week.

I think Coffee is worth considering from the long side. If you like the idea of being long Coffee you might consider buying December Coffee at around 120.50, using a Thursday close below 115.00 as a potential stop loss area.

Cocoa is the third New York market that caught my eye (egad, who would ever believe I would suggest one New York commodity let alone three). All my models suggest that New York December Cocoa has turned off the lights and the party is over. It will take significant rallies to reverse any of my models. The short-term model will need to close this Thursday above 2103 to reverse the trend, the mid-term model will need a close on Thursday above 2034 to reverse, and long-term model will need a close on Friday above 2354 to reverse the trend.

Given the trend reversals to negative and want is needed to reverse those trends I am compelled to suggest a possible short position in December Cocoa. If being short Cocoa strikes your interest think about selling December Cocoa between 1925 and 1940. We have already discussed the areas where the models reverse.

Point of information: As we see in the Cocoa example the reversal or suggested stop levels are a pretty fair distance from the suggested entry levels. The reversal points I look at not only tell me where the trends might turn, but the underlying strength of the present trend. The further away the reversal points are from the entry points the stronger the underlying trend. That does not mean that a market cannot or will not reverse, but it does suggest the probability of a reversal occurring within a given time span.

A Word to the Wise

Past performance is not indicative of future results. The information contained in this report is intended for informational purposes only and is the opinion of the writer and may change at any time. This information was compiled from sources believed to be reliable but accuracy cannot be and is not assured. There is no warranty, expressed or implied, in regards to this information for any particular purpose. There is SIGNIFICANT RISK involved in trading futures and or options on futures and may not be suitable for all investors. Investors should consider these RISKS and evaluate their suitability based on their financial conditions. No one should ever consider trading futures or options on futures with anything other than RISK CAPITAL. This information is provided freely and is NOT in the capacity of a trading advisor. NO LIABILITY on the part of the author exists for any trading loss you may incur in the use of this information. Information provided is not to be construed as an offer to sell or solicitation to buy any commodity or security named herein.

Lee Gaus is a 54 year old industry veteran of twenty-six years. Lee began his career in the livestock feed business before becoming a grain merchandising/commodity trader with a leading international company.

In 1992, Lee established EFG Group along with his two partners who are long-time friends. Since then, Lee has traveled the U.S. conducting seminars and trading meetings for retail traders and commodity offices.

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