From: futuresmag.com
Schwager Sees Commodity Prices Bottoming
By Kira McCaffrey Brecht
FWN U.S. Markets Editor
Chicago-FWN--After months of falling commodity prices nearly across the board, Jack Schwager, CEO of Wizard Trading, a money-management firm based in Phoenix, Ariz., believes most commodity markets have already hit bottom or are near a bottom.
Looking at commodity markets across the spectrum, Schwager said, "Basically, we are putting in a bottom in commodity prices." Meanwhile, Schwager believes some financial-based assets, including S&P 500 Index and Treasury bond futures, have already put in or are near major tops.
Gold prices have been in a bear tailspin for several years now. The yellow metal scored its last significant high back in February of 1996 at $417.50, basis nearby prices. Since then, gold futures have posted an overall downtrend, hitting a 19-year low at $271.60 in August.
"Just as I think S&Ps have made a major top, I think gold has put in a significant bottom," Schwager said, pointing to the August low in gold. Schwager called gold's action off that low a "classic bear trap reversal bottom," which he believes will be a long-term, multi-year low for the yellow metal. He looks for prices to continue moving higher off that low over the long term.
In the short term, "if we close above $300, basis December, that will be enough to shrug off last week's price activity and will target the $315 area," Schwager said. December gold futures posted a strong intraday rally on Friday, Sept. 25, with a spike high to $302.20, only to erase the nearly $6 rally by the close, ending lower on the day.
The energy markets also have been in a bear tailspin for much of 1998. Crude oil futures tumbled to 12-year lows in June, with nearby futures falling beneath the $12.00 mark. "The market dipped to a low and snapped right back. That was a very extreme level in terms of historical ranges," Schwager said of the crude selloff in June.
After spiraling as low as $11.42 in June on the monthly chart, nearby futures ended that month at $14.18. Just last week, November crude prices touched as high as $16.20. On the daily chart, November futures "bottomed" at the end of August, at $13.28.
Looking at the daily crude chart, Schwager said, "I'm long and remain long. I'm assuming the August lows are major bottoms." On the upside, Schwager pointed to $17.50 as his next major target for nearby crude prices.
"A lot of these markets--energies, metals and some of the grains--hit such extreme low levels and were just overdone and are ready for some corrective (up)moves. Some commodity markets have already made a bottom and others are near a bottom," Schwager believes.
Within the grain complex, Schwager pointed to soybean futures as one market that may still have some more downside momentum before a major bottom is formed.
Shifting over to the financial markets, Schwager admitted the action in the U.S. bond market is bullish. However, he warned, "We are getting into a very dangerous area." Treasury bond futures have posted a remarkable bull market for much of 1998, with the December contract shooting from a 117 27/32 low in late April to last week's high at 130 11/32.
Schwager pointed to measured-move targets at the 131 and 132 area for nearby bond futures and said the "market is reaching some major long-term objectives. I'm avoiding the long side now because I think the risk/reward ratio is no longer favorable."
Looking at the bull market of all bull markets, Schwager said of the December S&P 500 daily chart: "My bottom-line assumption is that the July high was the top. It could be an intermediate top or it could be the absolute top. Either would be believable to me."
December S&P 500 futures rallied out of a two-and-one-half-month sideways trading range, exploding to an all-time high at 1,211.80 on July 20 of this year. Schwager called the pattern on the daily chart "very, very important."
He pointed to the formation of the "long trading range and the dramatic upside breakout and then the collapse below the trading range" and called it a "classic bull trap" for S&P futures traders.
Following the all-time high, December S&P 500 futures plummeted 65.00 points to the Sept. 1 low at 946.50.
Gains have been seen over the last four weeks and Schwager called the short-term action bullish for the S&P market. He pointed to the "spike lows" in early September and last week as bullish for the short term. Schwager sees a flag forming on the daily chart which is likely to result in an "upswing toward the 1,110.00-1,120.00" area before the market turns back down.
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