HardAssetsInvestor

Written by Brad Zigler  |

August 24, 2010

Commodities Sometimes Require A Soft Touch

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Real-time Monetary Inflation (last 12 months): -2.2%

It seems an oxymoron to include soft commodities in the hard assets category, but this year, they've proven to be some of the most exciting markets for futures traders and securities investors alike.

Four softs—sugar, coffee, cocoa and cotton—are tracked by exchange-traded notes. Year- to-date, these four have produced an average gain of 1.9 percent. Their markets sector heated up in the spring and summer. Over the past month, the mean return for the four was 6.9 percent. Those numbers don't beat gold's gains, but they certainly outdo crude oil, which lost 11.8 percent for the year and 8.5 percent over the past month.

Soft Commodity Performance

Cotton, coffee and sugar could suffer corrections as they digest their most recent gains. Cotton already backpedaled last week on light volume, so its advance on Monday seemed fairly predictable. Sugar rallied with cotton Monday and still seems poised to move higher. Coffee, however, is approaching an overbought condition, while cocoa looks like it's headed lower.

Here's a quick take on the immediate prospects for these commodities.

• Cotton - Though spot cotton moved higher on Monday to close at 84 cents a pound, prices are still backing off from overbought levels. Buyers are likely waiting for a test of support at spot's 10-day moving average of 83.26 cents. Near-term resistance is above 86.39 cents. The equivalent levels for the iPath Dow Jones-UBS Cotton Subindex Total Return ETN (NYSE Arca: BAL), which closed Monday at $41.04, include support at $40.63 and resistance at $42.20.

• Coffee - Coffee's volatile run-up has gotten producers somewhat nervous as delivery time approaches. Spot settled at $1.8335 a pound on Monday and is overbought, so a pullback is likely. Buyers may be shopping around spot's 10-day moving average of $1.7325. A pullback to the $47.44 level for the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (NYSE Arca: JO), which closed at $49.55 on Monday, would be analogous.

• Sugar - Spot poked above a key retracement level of its early-year decline when it settled at 20.06 cents a pound on Monday. Bulls most likely have their eyes set on the 21.70 cent level, but resistance above 20.32 cents—spot's 200-day moving average—will first have to be overcome. Near-term support rests below spot's 10-day moving average at 19.25 cents. Equivalent levels for the iPath Dow Jones-UBS Sugar Subindex Total Return ETN (NYSE Arca: SGG) are $57.29 and $53.66, respectively. On Monday, the notes closed at $56.00.

• Cocoa - Spot cocoa is easing toward a support level at $2,775 a tonne and faces stiff resistance at $2,968. Cocoa still doesn't seem ready to rally yet. Support for the iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NYSE Arca: NIB) is below Monday's $40.77 close at $39.91 while resistance looms at $43.12.