This week we are presenting some spread ideas in natural gas, coffee and soybean oil, 3 markets which we think have solid upside, and 2 perhaps significantly so. Taking positions in spreads is a conservative way to participate in markets that have yet to make their move, but can generate profits without exposing portfolios to excessive risk.

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The time frame for this week’s Commitments of Traders report is from Wednesday, September 24 through Tuesday, September 30.

On October 3, 2014, the Greenhaven Continuous Commodity index made a new low for the move of 24.60, which is the lowest print since July 6, 2010 (24.61).

On October 10, the USDA will release its World Agriculture Supply Demand report (WASDE).

Soybeans:

For the week, November soybeans lost 2.00 cents, January 2015 +1.75, March 2015 +1.50. The COT report revealed that managed money added 9,333 contracts to their long positions and liquidated 2,915 of their short positions. Commercial interests liquidated 1,719 contracts of their long positions and also liquidated 3,429 of their short positions.As of the latest report, managed money remains long soybeans by ratio 1.45:1, which is up from the previous week of 1.30:1 and the ratio of 2 weeks ago of 1.24:1.The net long position of commercial interests increased this week and they remain long by ratio of 1.31:1, which is up from the previous week of 1.30:1 and the ratio of 2 weeks ago of 1.25:1.

Interestingly, the net long position of managed money has increased during the past 3 COT reporting periods even though soybeans have fallen precipitously during this time. This dovetails with our thesis that soybeans will not begin to bottom until managed money assumes a net short position.

This past week, November 2014, January 2015 and March 2015 soybean contracts made new contract lows of 9.04, 9.12 1/4, and 9.20 3/4 respectively.

Soybean meal:

For the week, December soybean meal lost $2.30, January 2015 -1.50, March 2015 -2.60. The COT report revealed that managed money added 2,406 contracts to their long positions and also added 3,619 to their short positions. Commercial interests liquidated 177 contracts of their long positions and also liquidated 43 of their short positions. As of the latest report, managed money remains long soybean meal by ratio of 2.03:1, which is down substantially from the previous week of 2.20:1 and the ratio of 2 weeks ago of 2.17:1.

The current ratio of 2.03:1 is the lowest of the current bear market.

This past week, December, January 2015 and March 2015 soybean meal contracts made new contract lows of 295.10, 293.80, and 292.10 respectively.

Soybean oil:

For the week, December soybean oil gained 43 points, January 2015 +41, March 2015 +39. The COT report revealed that managed money liquidated 1,942 contracts of their long positions and also liquidated 1,023 of their short positions. Commercial interests liquidated 7,702 contracts of their long positions and also liquidated 5,274 of their short positions. As of the latest report, managed money is short soybean oil by ratio of 1.10:1, which is about the same as the previous week of 1.09:1, but down from the ratio of 2 weeks ago of 1.20:1.

The spread action in soybean oil has been very positive, and on October 3, the May 2015-December 2015 spread closed at a 3 point premium to December 2015. This is up significantly from the most recent low of 70 points premium to December 2015 made on September 10 and the previous low of 71 points premium to December 2015 on August 15. Most interesting, has been the action in the May 2015 contract, which has been gaining strength on December 2015 even though prices have barely moved.

For example, on September 10 when the spread closed at a 70 point premium to December 2015, May 2015 soybean oil closed at 32.66 and by October 3, closed at 33.12, but the spread had narrowed from 70 points to 3 point premium to December.This is bullish spread action, and as we have said before, the one factor holding back soybean oil is the abysmal performance of soybeans. However, a bull spread is one way to be in the market at a lower risk while waiting for soybeans to stabilize.On July 1, 2014 the May 2015-December 2015 spread made a high of 80 points premium to May 2015. On that day, May 2015 soybean oil closed at 39.67.

On September 2, November palm oil made its 52-week low and through October 3 has advanced 14.05%. In our view, this is an indication of firming of demand for vegetable oils, and we think it is only a matter of time before soybean oil demand begins to increase.

Corn:

For the week, December corn advanced 0.25 cents, March 2015 +0.50, May 2015+0.75. The COT report revealed that managed money liquidated 2,839 contracts of their long positions and added 9,789 to their short positions. Commercial interests liquidated 7,744 contracts of their long positions and added 2,267 to their short positions. As of the latest report, managed money is long corn by ratio of 1.28:1, which is down from the previous week of 1.34:1 and the ratio of 2 weeks ago of 1.36:1.

The current ratio of 1.28:1, is the lowest reading of the current bear market.

This past week, December 2014, March 2015 and May 2015 corn contracts made new contract lows of 3.18 1/4, 3.30 1/2 and 3.39 1/4 respectively

Chicago wheat:

For the week, December Chicago wheat advanced 11.50 cents, March 2015 + 9.50, May 2015+8.25. The COT report revealed that managed money added 5,858 contracts to their long positions and liquidated 802 contracts of their short positions. Commercial interests liquidated 6,543 contracts of their long positions and also liquidated 1,506 contracts of their short positions. As of the latest report, managed money remain short Chicago wheat by ratio of 1.77:1, which is down from the previous week of 1.91:1 and the ratio of 2 weeks ago of 1.80:1.

The current COT reporting period is the 1st time that managed money has increased their net long position in Chicago wheat since the report of August 26 when managed money added 1,422 contracts to their long positions and liquidated 2,119 of their short positions. During the week of August 25 through August 29, December Chicago wheat advanced 1.25 cents.

Kansas City wheat:

For the week, December Chicago wheat advanced 4.25 cents, March 2015 +1.75, May 2015+0.75. The COT report revealed that managed money added 2,296 contracts to their long positions and also added 1,420 to their short positions. Commercial interests liquidated 1,571 contracts of their long positions and also liquidated 1,108 contracts of their short positions. As of the latest report, managed money remains long Kansas City wheat by ratio of 1.24:1, which is approximately the same as the previous week of 1.23:1, but slightly lower than the ratio of 2 weeks ago of 1.26:1.

This past week, December 2014, March 2015 and May 2015 Kansas City wheat contracts made new contract lows of 5.50, 5.54, and 5.57 3/4 respectively.

During the 3rd quarter, December soybean oil was the out performer with a loss of 17.32%, December soybean meal -18.64, December Chicago wheat -20.14, December Kansas City wheat -21.02%, November soybeans -21.08%, December corn -24.57%.

Year to date, December soybean meal is the out performer with a loss of 14.58%, December Kansas City wheat -15.13%, December soybean oil -19.09%, November soybeans -19.63%, December Chicago wheat -24.16%, December corn -28.21%.

Cotton:

For the week, December cotton advanced 58 points, March 2015 -36, May 2015-61. The COT revealed that managed money liquidated 3,621 contracts of their long positions and added 5,577 to their short positions. Commercial interests added 571 contracts to their long positions and liquidated 7,725 their short positions. As of the latest report, managed money is short cotton by ratio of 1.12:1, which is a complete reversal from the previous week when they were long by ratio of 1.15:1. 2 weeks ago, managed money was long cotton by ratio of 1.33:1.

This past week, December 2014, March 2015 and May 2015 cotton contracts made new contract lows of 61.01, 59.65, and 60.50 respectively.

Sugar #11:

For the week, March 2015 sugar lost 12 points, May 2015-9 July 2015 -10. The COT report revealed that managed money liquidated 4,567 contracts of their long positions and added 14,447 to their short positions. Commercial interests liquidated 41,104 contracts of their long positions and also liquidated 45,840 of their short positions. As of the latest report, managed money is short sugar by ratio of 1.30:1, which is up substantially from the previous week of 1.19:1 and the ratio of 2 weeks ago of 1.16:1.

The current short ratio of 1.30:1 is the highest during the current bear market in sugar.

Coffee: On October 1, December coffee generated a short and intermediate term buy signal.

For the week, December coffee advanced 20.45 cents, March 2015 + 20.05, May 2015+19.35. The COT report revealed that managed money added 1,483 contracts to their long positions and liquidated 2,106 contracts of their short positions. Commercial interests added 197 contracts to their long positions and also added 3,642 to their short positions. As of the latest report, managed money is long coffee by ratio of 6.66:1, which is up substantially from the previous week of 4.91:1 and the ratio of 2 weeks ago of 5.01:1.

Last week’s ratio of 4.91:1 was the lowest since the COT reporting date of July 22 when managed money was long coffee by ratio of 4.64:1.

We think the fundamentals in coffee are strong enough to see coffee trading above $3.00.However, this may take a significant amount of time, and the goal is to stay in the trade without losing too much profit, or worse see the trade slip into deficit. As all of you know, coffee is extremely volatile, which makes it hazardous to trade large. As a result, position sizing should be conservative.We have been examining coffee spreads and think they may offer a much safer way to trade the market longer term. On a seasonal basis, coffee tends to top out in May through July. Therefore, we recommend a bull spread: buying July 2015 coffee and selling December 2015, or March 2016.

On Friday, the July 2015-March 2016 spread closed at 85 points premium to March. The significant low for the spread occurred on September 10 when March 2016 coffee sold at a 1.85 cent premium to July 2015. This was a test of the low made on August 25 when the spread closed at 1.85 premium to March 2016. In short, based upon the October 3 close, the risk in the trade is approximately 2.70 cents.However, we think the spread could widen considerably, especially if the Ebola virus spreads throughout Africa, which would impact coffee distribution there. On May 29, the July 2015 contract sold at a 3.35 cent premium to March 2016.

Cocoa: On October 2, December Cocoa generated a short and intermediate term sell signal.

For the week, December 2014 cocoa lost $255.00, March 2015 – 228.00, May 2015 -220.00. The COT report revealed that managed money added 5,597 contracts to their long positions and also added 1,972 to their short positions. Commercial interests liquidated 336 contracts of their long positions and added 1,875 to their short positions. As of the latest report, managed money remains long cocoa by ratio of 4.64:1, which is down slightly from the previous week of 4.83:1, but above the ratio of 2 weeks ago of 4.15:1.

During the 3rd quarter, December coffee was the out performer with a gain of 8.20%, December cocoa +5.60%, March 2015 sugar -14.41%,December 2014 cotton -16.51%.

Year to date, December coffee is the out performer with a gain of 71.94%, December cocoa +12.68%, March 2015 sugar -7.38%, December cotton -20.35%.

Live cattle:

For the week, December live cattle advanced 3.77 cents, February 2015 +3.55, April 2015 +2.05. The COT report revealed that managed money liquidated 1,603 contracts of their long positions and added 1,143 to their short positions. Commercial interests added 3,437 contracts to their long positions and liquidated 1,293 contracts of their short positions.As of the latest report, managed money remains long live cattle by ratio of 8.49:1, which is down from the previous week out 9.35:1 and the ratio of 2 weeks ago of 10.85:1.

This past week, December 2014, February 2015 and April 2015 live cattle contracts made new contract highs of 1.6767, 1.6760 and 1.6522 respectively

Lean hogs:

For the week, December lean hogs lost 1.45 cents, February 2015 + 1.15, April 2015 +1.30. The COT report revealed that managed money added 2,491 contracts to their long positions and liquidated 292 of their short positions. Commercial interests added 1,056 contracts to their long positions and also added 2,708 to their short positions. As of the latest report, managed money remains long lean hogs by a ratio of 7.21:1, which is up from the previous week of 6.74:1 and the ratio of 2 weeks ago of 6.31:1.

During the 3rd quarter, February 2015 live cattle was the out performer with a gain of 6.41%, December live cattle +6.00%, February 2015 lean hogs – 0.77%, December lean hogs -3.96%.

Year to date, December live cattle is the out performer with a gain of 25.83%, February 2015 live cattle +25.32%, December lean hogs +17.01%, February 2015 lean hogs +12.54%.

WTI crude oil:

For the week, November WTI crude oil lost $3.80, December -3.95, January 2015 -4.15. The COT report revealed that managed money added 7,690 contracts to their long positions and liquidated 6,195 contracts of their short positions. Commercial interests liquidated 1,353 contracts of their long positions and also liquidated 1,326 of their short positions. As of the latest report, managed money is long WTI crude oil by ratio of 4.23:1, which is a big jump from the previous week of 3.75:1 and the ratio of 2 weeks ago of 4.05:1.

Remarkably, the current COT ratio of 4.23:1, is the highest since the report of August 12 when managed money was long WTI crude oil by ratio of 5.44:1.

Heating oil:

For the week, November heating oil lost 8.61 cents, December -8.81, January 2015 -9.14. The COT report revealed that managed money added 1,086 contracts to their long positions and also added 4,588 to their short positions. Commercial interests liquidated 2,989 contracts of their long positions and also liquidated 4,600 of their short positions. As of the latest report, managed money is short heating oil by ratio of 1.99:1, which is above the previous week’s ratio of 1.90:1 and significantly above the ratio of 2 weeks ago of 1.71:1.

The current short ratio of 1.99:1 is the highest of the current bear market.

Gasoline:

For the week, November gasoline lost 10.96 cents, December -10.83, January 2015 -10.82. The COT report revealed that managed money added 2,296 contracts to their long positions and also added 4,032 to their short positions. Commercial interests liquidated 1,143 contracts of their long positions and also liquidated 3,750 of their short positions. As of the latest report, managed money remains long gasoline by ratio of 1.24:1, which is down from the previous week of 1.32:1, but slightly above the ratio of 2 weeks ago of 1.21:1.

The ratio of 1.21:1 recorded 2 weeks ago has been the lowest of the current bear market.

Ethanol: This past week, November ethanol made a new contract low of 1.432.

Natural gas:

For the week, November natural gas advanced 1.00 cent, December + 3 ticks, January 2015 + 2 ticks. The COT report revealed that managed money added 10,094 contracts to their long positions and liquidated 8,424 contracts of their short positions. Commercial interests liquidated 576 contracts of their long positions and also liquidated 29 of their short positions. As of the latest report, managed money is long natural gas by a ratio of 1.13:1, which is up substantially from the previous week of 1.04:1 and the ratio of 2 weeks ago of 1.02:1.

The current ratio of 1.13:1, is the highest since the July 15 COT report when managed money was long natural gas by ratio of 1.15:1.

The trading range the trading range encompassed by the July 15 report was from 4.127-4.259, which is above the trading range of the current COT report of 3.845-4.178. In other words, managed money is more bullish even though prices are below that of the range traded during the July 15 report.

From September 1 through October 3, November natural gas is lost 2.54%, December -2.54%, January 2015 -2.59% and February 2015 -2.32%. In short, the winter months have not begun to show strength against the November 2014 contract. This is good, because we are proposing that clients examine a natural gas bull spread wherein they buy February 2015 and sell April 2015, or May 2015.

The February 2015-May 2015 spread currently is trading at the low end of its range and on October 3 closed at 38.7 cents premium to February. This is below the recent high close of 39.9 cents premium to February 2015 made on September 29. The low for the February 2015-May 2015 spread, 26.9 cents premium to February 2015, was first made on July 22 and a subsequent test of this low occurred on September 23, but the market was unable to break it.

The reason why the spread is so compelling is that on February 21, 2014, the February 2015-May 2015 spread made a high of 96.4 cents premium to February 2015. Keep in mind February 2014-May 2014 would have been last year’s equivalent, yet the February 2015 – May 2015  spread expanded dramatically on the cold snap during the winter of 2013-2014. Additionally, when the cold snap began, inventories were considerably higher than they are today.

Generally speaking, the best time to initiate the spread is via a pullback, however as winter approaches, the May 2015 contract could lose to the February 2015 contract on a pullback, which would be further confirmation of the strength of the spread.

During the 3rd quarter, November natural gas was the out performer with a loss of 7.65%, November WTI crude oil -11.19%, November heating oil -11.49%, November gasoline -12.33%, November Brent crude oil -14.75%, November ethanol -25.09%.

Year to date, November WTI crude oil is the out performer with a loss of 3.87%, November natural gas -4.19%, November gasoline -8.96%, November heating oil -12.54%, November Brent crude oil -13.69%, November ethanol -21.51%.

Copper:

For the week, December copper lost 3.70 cents. The COT report revealed that managed money added 280 contracts to their long positions and also added 9,324 to their short positions. Commercial interests added 4,373 contracts to their long positions and liquidated 2,214 of their short positions. As of the latest report, managed money is short copper by ratio of 1.67:1, which is up substantially from the previous week of 1.39:1, and a complete reversal from the ratio of 2 weeks ago when managed money was long copper by ratio of 1.02:1.

Palladium:

For the week, December palladium lost $29.25. The COT report revealed that managed money liquidated 805 contracts of their long positions and added 360 to their short positions. Commercial interests added 18 contracts to their long positions and liquidated 494 of their short positions. As of the latest report, managed money remains long palladium by ratio of 6.45:1, which is down substantially from the previous week of 7.55:1 and down dramatically from the ratio of 2 weeks ago of 16.35:1.

Platinum:

For the week, January 2015 platinum lost $74.20. The COT report revealed that managed money liquidated 2,175 contracts of their long positions and added 1,325 to their short positions. Commercial interests added 1,024 contracts to their long positions and liquidated 2,490 of their short positions. As of the latest report, managed money is long platinum by ratio of 1.96:1, which is down substantially from the previous week of 2.34:1 and the ratio of 2 weeks ago of 3.26:1.

The current ratio of 1.96:1 is the lowest of the current bear market.

This past week, January 2015 platinum made a new contract low of 1225.10.

Additionally, January platinum made its lowest print since September 2009 when October 2009 platinum made a low of 1205.30.

Gold:

For the week, December gold lost $22.50. The COT report revealed that managed money added 837 contracts to their long positions and also added 44 to their short positions. Commercial interests liquidated 1,684 contracts of their long positions and also liquidated 720 of their short positions. As of the latest report, managed money is long gold by ratio of 1.38:1, which is identical to the previous week’s ratio of 1.38:1, but down from the ratio of 2 weeks ago of 1.55:1.

Silver:

For the week, December silver lost 71.1 cents. The COT report revealed that managed money added 2,458 contracts of their long positions and also added 3,924 to their short positions. Commercial interests liquidated 998 contracts of their long positions and also liquidated 881 of their short positions. As of the latest report, managed money remains short silver by ratio of 1.06:1, which is up from the previous week of 1.03:1 and the ratio of 2 weeks ago of 1.04:1.

This past week, December silver made a new contract low of 16.64.

Additionally, December silver made the lowest print since March of 2010 when March silver printed 16.32.

During the 3rd quarter, December copper was the out performer with a loss of 5.94%, December palladium -8.21%, December gold -9.05%,January 2015 platinum -12.27%, December silver -19.49%.

Year to date, December palladium is the out performer with a gain of 4.85%, December gold -1.18%, December copper -10.65%, January 2015 platinum -11.07%, December silver -13.75%.

Canadian dollar:

For the week, the December Canadian dollar lost 80 pips. The COT report revealed that leveraged funds added 5,087 contracts to their long positions and also added 10,704 to their short positions. As of the latest report, leveraged funds are short the Canadian dollar by ratio of 1.76:1, which is up from the previous week of 1.65:1 and up dramatically from the ratio of 2 weeks ago of 1.14:1.

Australian dollar:

For the week, the December Australian dollar lost 82 pips. The COT report revealed that leveraged funds liquidated 6,819 contracts of their long positions and added 5,880 to their short positions. As of the latest report, leveraged funds are long the Australian dollar by ratio of 1.65:1, which is down substantially from the previous week of 2.36:1 and down dramatically from the ratio of 2 weeks ago of 2.65:1.

Swiss franc:

For the week, the December Swiss franc lost 1.81 cents. The COT report revealed that leveraged funds added 3,716 contracts to their long positions and also added 3,497 to their short positions. As of the latest report, leveraged funds are short the Swiss franc by ratio of 1.84:1, which is down from the previous week of 2.18:1, but up from the ratio of 2 weeks ago of 1.72:1.

During the past week, the December Swiss franc made a new contract low of 1.0333.

Additionally, the December Swiss franc traded at its lowest level since July 2013 when the September contract printed 1.0259

British pound:

For the week, the December British pound lost 2.88 cents. The COT report revealed that leveraged funds added 1,938 contracts to their long positions and liquidated 5,198 of their short positions. As of the latest report, leveraged funds remain long the British pound by ratio of 2.39:1, which is up from the previous week of 2.00:1 and up substantially from the ratio of 2 weeks ago of 1.72:1.

Euro:

For the week, the December euro lost 1.74 cents. The COT report revealed that leveraged funds added 3,999 contracts to their long positions and liquidated 5,567 of their short positions. As of the latest report, leveraged funds are short the euro by ratio of 2.50:1, which is down from the previous week of 2.76:1, but up from the ratio of 2 weeks ago of 2.27:1.

This past week, the December euro made a new contract low of 1.2506.

Additionally, the December euro made the lowest print since September 2012 when the September contract traded at a low of 1.2503.

Yen:

For the week, the December yen lost 42 pips. The COT report revealed that leveraged funds added 5,176 contracts to their long positions and also added 5,902 to their short positions. As of the latest report, leveraged funds are short the yen by ratio of 3.66:1, which is down from the previous week of 4.09:1 but up from the ratio of 2 weeks ago of 3.07:1.

This past week, the December yen made a new contract low of .9088.

Additionally, the December yen made the lowest print since August 2008 when the September 2008 contract traded at a low of .9013

Dollar index:

For the week, the December dollar index advanced 1.06 points. The COT report revealed that leveraged funds liquidated 2,091 contracts of their long positions and added 2,962 to their short positions. As of the latest report, leveraged funds are short the dollar index by ratio 1.002:1, which is a complete reversal from the previous week when they were long by a ratio of 1.16:1. 2 weeks ago, leveraged funds were long the dollar index by ratio of 1.16:1.

This past week, the December dollar index made a new contract high of 86.870.

Additionally, the December dollar index traded at its highest level since June 2010 when the June contract made its contract high at 88.800.

During the 3rd quarter, the December dollar index was the out performer with a gain of 7.65%, December Canadian dollar -4.61%, December British pound -5.19%, December Australian dollar -6.66%, December Swiss franc -7.23%, December yen -7.67%, December euro -7.79%.

Year to date, the December dollar index is the out performer with a gain of 7.58%, December Australian dollar -1.10%, December British pound -3.40%, December yen -4.31%, December Canadian dollar -4.98%, December Swiss franc -8.44%, December euro -9.29%.

S&P 500 (250x): On October 2, the December S&P 500 E mini generated a short and intermediate term sell signal.

For the week, the December S&P 500 futures contract lost 15.60 points. The COT report revealed that leveraged funds liquidated 964 contracts of their long positions and added 1,483 to their short positions. As of the latest report, leveraged funds are short the S&P 500 futures contract by ratio of 1.53:1, which is up substantially from the previous week of 1.02:1 and the ratio of 2 weeks ago of 1.37:1.

During the 3rd quarter, the NASDAQ 100 cash index was the out performer with a gain of 5.19%, Dow Jones Industrial Average cash index +1.29%, S&P 500 cash index +0.62%, New York Composite cash index – 2.52%, S&P 400 cash index – 4.32%, Russell 2000 cash index -7.65%.

Year to date, the NASDAQ 100 cash index is the out performer with a gain of 12.12%, S&P 500 cash index + 6.47%, Dow Jones Industrial Average cash index +2.61%, New York Composite cash index +2.26%, S&P 400 cash index + 1.63%, Russell 2000 cash index -5.06%.