Commodities primed for an upturn

In the last edition of "Commodities Corner" on January 26, we noted the following about the oil market:

"On the technical side, we have the descending 50-day moving average which is pegged right now at roughly $49.50/barrel, which should put a lid on this most recent upswing in prices. If it falls from there, we could go quickly back to $40/barrel. But if it blasts through the 50-day moving average, we could see a quick run up to at least $60/barrel."

Talk about hitting a brick wall! Once the price hit that 50-day moving average mark, it quickly retreated back down to a low of $38.60 last Friday.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

At the moment, we continue to see the oil market hover near the low end of its recent trading range. But the trading ranges are getting tighter. Simply put, when this happens, it means the eventual breakout should be quite large.

In my column two weeks ago, I noted how oil had bounced from a low of $39 per barrel to a recent high of $48 a barrel. And now that the market has failed to break above that key 50-day moving average, we're sticking with our projection that the next move will be lower - particularly given the large oil supplies reported by the Energy Information Administration.

As oil goes, so goes natural gas

Let's just come right out and say it: We like the bullish side of natural gas for the foreseeable future.

Over the past two weeks, the chart has carved out a bottom, which should keep the bullish momentum going.

We maintain the theory that with solid support seen at the $4.500 per MMBtu level, this is a very good place to start executing a bullish position in natural gas.

You can do this directly through futures options on the natural gas market (which trades on the NYMEX) - but be sure to use limited risk strategies like credit spreads - or by playing a natural gas sector ETF such as the United States Natural Gas Fund (NYSE:UNG).

Given that I expect natural gas prices to double over the next two to three years, the risk-reward ratio in taking a long-term play is favourable here. Don't forget that weather conditions have a big say in driving prices higher - both during summer (when there's a risk of supply disruption from hurricanes) and winter (when cold weather sends demand higher).

Prepare for profit-taking in gold and silver but you can buy at these levels on dips.

Watch out for some profit-taking in the metals markets

While both gold and silver have enjoyed nice upward runs over the past month, as they feed off a weak economy, we may see short-term bullish traders take some of their profits off the table.

With gold recently topping out at $950 per ounce and silver creeping its way above $13.15 an ounce, we continue to like the bullish prospects for both metals over the long-term.

Look for opportunities to buy gold and silver on dips. With gold, that level comes in between $850 and $870 an ounce, based on the April 2009 futures contract. And you can buy silver on a pullback to the $11.50 per ounce level, based on the May 2009 futures contract.

These 'household items' are ready to run higher

Natural gas gold silver - all markets in which our analysis points to a solid, long-term bout of bullishness.

But the coffee and cotton markets look primed for an upward run, too. In fact, both look ready to blast off at any moment. For coffee, we're projecting a run to $1.3300 per pound, while cotton could shoot to $.6600 per pound.

The best way to play these markets is with bullish option strategies such as naked call options or bull call spreads. Both coffee and cotton trade on the ICE exchange (formerly the NYBOT).

This article was written by Lee Lowell, Futures Options & Commodities Specialist, for the Smart Profits Report, on Monday, 9 February, 2009.