Trade with a workable plan.

- Sterling Smith

Get Quotes, Charts & Margins - RJOFutures

Get Your COMPLIMENTARY 30-day Trial to Probability Trader.

July 3, 2007

Sign up for you complimentary CD-ROM "Trading Commodity Futures". Brought to you by FuturesOne

Sign up and get your complimentary educational seminar. This interactive CD-ROM introduces you to the fundamentals of futures trading. It lays out easy to follow trading examples along with additional resources to help today's commodity trader. This comprehensive educational CD-ROM was developed by the Chicago Mercantile Exchange and brought to you by FuturesOne. To get your complimentary personal CD and learn more about this great offer go here.

From 2004 into 2007 the orange juice put on a show that few other markets could match. After setting deep lows under 60.00 in June of 2004, prices soared by late 2006 to over 200.00. 2007 has not been friendly to the Orange Juice as prices have dropped from 205 down all the way to the 120’s since March.

The run up in the Orange Juice was driven by a number of factors. Several hurricanes struck key orange producing areas; destroying crops and damaging groves. Citrus Canker did its share of the damage, along with an eradication program which resulted in still more lost trees. Citrus greening, which could be the most devastating of any of these, has yet to be brought under control.

These factors combined led to much smaller 2005 and 2006 crops and prices soared. Imagine that! Supply is cut and prices surge…maybe there is something to that supply and demand idea.

Looking at market internals throughout the climb has some value here as we can look inside two major moves during this time. Here is the Commitment of Traders (COT) report from Jan 25, 2005, when prices stood around 82.25.

If you cannot view the January 2005 OJ Report, go here.

As we can see here, the funds were net long about 5500 contracts, the small speculators were long a little over 3700 contracts and the commercials short about 9200. You can think it of this way; the commercials sold the OJ to the funds and the small speculators. Under most understandings of the COT report this market configuration would be considered bearish, and generally speaking I would agree with that. But remember each market is different and requires more analysis than just the COT reports.

Now let’s look at June 2006 when prices had nearly doubled and when are headed heavily into hurricane season

If you cannot view the June 2006 OJ Report, go here.

Notice how the fund position has grown to more to than 14,000 net longs and the small spec position had grown to more than 5000 net longs and the commercial short position had grown to almost 19,000 net short. Compared to the position above, this position could be viewed has very bearish, but yet prices climbed higher from here. Why? Orange Juice is a comparatively small market and the futures market represents only a very small slice of the orange juice market. There is this other thing that has been known to influence markets…reality.

Next let’s look at the OJ market as it reached its top, at around 200, it should be noted that topping action went on for four months before the market caved in, so for our purposes here I am going use the last week in March 2007, as this was the last month in which the market traded in its topping range.

If you cannot view the March 2007 OJ Report, go here.

Note that the long fund position has increased, while the net long position actually decreased. This can be viewed has bearish divergence. This is why, when following COT reports, you need to look for small changes, and should always employ some type of chart analysis.

What can we glean from this? One, the funds clearly led the rally up in the futures market, and two, that prices were most likely supported by a solid underlying cash market.

Now let’s take a look at where the market is right now and maybe some ideas I have about where it could go in the future.Orange Juice futures have sunk down to the 130.00 area.

If you cannot view the Current OJ Report, go here.

Now this is the most interesting COT report I have seen in the Orange Juice in a long time and really one of the most interesting in any market. Look at that fund position…they are net short more than 2500 contracts, and the commercials are now net long and the small specs are long, but the position is not that alarming large.

The interesting thing here is that on the way up, folks who actually have the orange juice were selling to the speculators on the way up. This behavior is neither abnormal nor should really raise to me many red flags. The current configuration of the market is actually rather bullish in my COT view. The combination of the funds being net short with a market making near term lows can be a formula for a rally.

Then there is that reality thing. First, while the prospects for the 2007 orange juice crop are better than 2006’s we are not exactly going to be awash in Orange Juice. Second, hurricane season is just at its beginning and these price levels likely will not be very tolerant of anything that interferes with supply or production.

Orange Juice…it’s not just for breakfast anymore.

May of all you have a safe and enjoyable 4^th of July.

REPRODUCTION OR REBROADCAST OF ANY PORTION OF THIS INFORMATION IS STRICTLY PROHIBITED WITHOUT THE WRITTEN PERMISSION OF FUTURESONE AND STERLING J SMITH. THE INFORMATION REFLECTED HEREIN IS DERIVED FROM SOURCES BELIEVED TO BE RELIABLE; HOWEVER, THIS INFORMATION IS NOT ASSURED AS TO ITS ACCURACY OR COMPLETENESS. OPINIONS EXPRESSED ARE SUBJECT TO CHANGE WITHOUT NOTICE. THIS MATERIAL AND ANY VIEW EXPRESSED HEREIN ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED IN ANY WAY AS AN INDUCEMENT TO BUY OR SELL COMMODITY FUTURES OR OPTIONS CONTRACTS. FUTURESONE AND ITS OFFICERS, DIRECTORS, EMPLOYEES AND AFFILIATES MAY TAKE POSITIONS FOR THEIR OWN ACCOUNTS IN CONTRACTS REFERRED TO HEREIN. TRADING FUTURES INVOLVES RISK OF LOSS. DO NOT DUPLICATE.

This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way assured. No assurance of any kind is implied or possible where projections of future conditions are attempted.

Futures and options trading involve risk. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. In no event should the content of this market letter be construed as an express or an implied promise, assurance or implication by or from FuturesOne or Sterling J Smith that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

This week's author is Sterling Smith. FuturesOne Vice President and CTA, Sterling Smith, creator and publisher of the FuturesOne Power Index, is a veteran broker and widely quoted market analyst. Beginning in the futures industry as a risk manager for a large FCM, he moved to a major clearing firm and learned from some legendary traders. He incorporates the benefits of these insights to help every client construct better trading plans and to enhance their understanding of the marketplace.

Sterling is the creator and publisher of the FuturesOne Power Index, a unique method to approaching the Commitment of Traders reports. Sterling is quoted by Dow Jones News and Bloomberg.

Sign up for you complimentary CD-ROM "Trading Commodity Futures". Brought to you by FuturesOne

Sign up and get your complimentary educational seminar. This interactive CD-ROM introduces you to the fundamentals of futures trading. It lays out easy to follow trading examples along with additional resources to help today's commodity trader. This comprehensive educational CD-ROM was developed by the Chicago Mercantile Exchange and brought to you by FuturesOne. To get your complimentary personal CD and learn more about this great offer go here.