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Commodities Battle the Hydra! (DBC,UDN,JBHT,SPXC)

Posted on February 27, 2020

This week’s barn-burner is coming at you with the speed of a crash-bound Tesla.

But before we get there, we have two trades that require your attention.

The first was opened just eleven days ago in Pull That Empty Rig Over, Trucker!  In that missive, we urged you to sell the JBHT May 15th 110 CALL for $5.50 and buy JBHT May 15th 120 CALL for $1.95 (credit $3.55).  Then, we recommended you buy the JBHT May 15th 110 PUT for $5.50 and sell the JBHT May 15th 100 PUT for $1.80 (debit $3.70).  Total debit on the affair was $0.15.

And today, after a sharp move in our favor, we’re closing out the PUT spread.  Sell the 110 for $11.00 and buy back the 100 for $5.50 and you pull in $5.50.

Hold off for now on any action with the short CALL spread.  We’ll keep you apprised of any need to act.

Next up is our trade from Stock Needs Some Air, Mate! that arrived in your inbox on February 9th.  There, we recommended you sell the SPXC June 19th 50 CALL for $4.00 and buy the SPXC June 19th 55 CALL for $2.05 (credit $1.95).  We then urged the purchase of the SPXC May 15th 50 PUT for $2.95 and sale of the SPXC May 15th 40 PUT for $0.55 (debit $2.40).  Total debit was $0.45.

Here, too, because of a strong move in the right direction, we’re closing the long PUT spread.

Sell the 50 FOR $4.60 and buy back the 40 for $1.55, and you add $3.05 to the account.

Hold off acting on the short CALL spread.

Jambalaya!  A trade for the week, Matty.  Lay it on us.

We’re examining the commodity sector as a whole today, partly because current volatility allows us a tremendous trade opportunity, but also because commodities are less prone to lie than equities.

Yes, they can be manipulated (and it does happen), and yes they can trade to extremes – as all securities can.

But they’re also truer to the fundamentals of real world supply and demand – and farther from the scourge of central banks and other rogue players from the sordid underbelly of officialdom.

The Dollar as Bête Noire

As you’ve been told repeatedly, the U.S. Dollar generally moves counter to the commodity class of assets, as most goods & stuff are priced in our fair American fiat.  That means any move higher or lower in the buck will directly affect the commodities.

And so it is.

Lately, amid fears of pandemics and trade wars and a global economic freeze-up, the dollar has soared.  It’s happened partly as a safe haven bet, but also because America has yet to submit to the economic choke-hold to which the rest of the world is now succumbing.

How long it lasts, of course, we don’t know.  But unless we see the COVID-19 virus taking down whole American cities, or the entire state of California trading its cioppino and Napa Valley Cabernet for face masks and alco-gel, it’s likely to continue.

Who’s gonna stop it?

Now take a look at the dollar for the last year –

The buck just jumped to a nearly three year high last week after a strong coronavirus buying spree.

And though it also triggered an RSI overbought signal (in green), the trend remains intact.  So long as price remains above all her moving averages, all should be well.

The Dollar Strikes

That said, the commodities have been whacked by the latest dollar strength and the near complete paralysis of Chinese industrial production.

The energy and metal sub-sectors have been hit especially hard, and as a result, the overall commodity complex, as represented by the Invesco DB Commodity Index Tracking Fund (NYSE:DBC), has been crippled.

Take a look at that stock’s WEEKLY chart here –

Technically, the following is key –

  • Price is now trending below all her moving averages (in blue) – all of which themselves are declining,
  • A roof is therefore forming over price in the $15.50 vicinity, and
  • A long term trendline that dates back to the summer of 2017 (in red) has recently broken down.

All of which leads us to recommend the following action…

We’re proposing the sale of a CALL on DBC to purchase a PUT on the Invesco DB US Dollar Index Bearish Fund (NYSE:UDN).

And it goes like this –

A Jew and His Gold recommends you consider selling the DBC October 16th 15 CALL for $0.35 and buying the UDN September 18th 20 PUT for $0.45.  Total debit on the trade is $0.10.

Mind those expiries!

Many happy returns,

Matt McAbby

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