Energies

What does it mean when a Turkish pipeline gets shut down, gasoline inventories fall 3 million barrels more than estimates, we are in the heart of hurricane and the summer driving season and yet oil plummets? It means the psychology of the market has changed. Supplies are there, the dollar is breaking out and the funds are running for the exits. Support at $105, $100 and $92 respectively on crude are less likely to be price supports than they are targets. Short the energies across the board on bounces, with puts of course.

Financials

A wacky week in the stock market to say the least. The Fed does nothing, and for the most part says nothing. Stocks chopped in large volatile swings all week and this is unlikely to continue at this rate for very long. Bonds are choppy as well with a hover in the 116 area, the mid-range of recent price action. Sell strangles are still recommended with a bias towards selling calls as a down move in the market is likely to go test 112. The dollar broke out of its range for one simple reason, a reason I have been talking about for months. It is not about the U.S. economy - let's face facts - we all know we are in some pretty bad shape. It is about the rest of the world when it comes to currency. When Trichet laid the bomb of inflation on us this week it sent the European currencies reeling. The dollar is rallying because everyone is finally realizing that the rest of the world is in just as bad, if not worse, shape as we are. The Canadian broke through key support and the flood gates opened. Expect a move to 88 before any real support is seen. Sell a bounce to 9550. The dollar is about to make an historic move and the euro is likely going to see its first real correction since inception.

Grains

Grains collapsed amid estimates for better than anticipated crops, a fund fallout and a rising dollar. This v-shaped market reversal is very typical of the grain sector when it comes off historic highs. This market sector is clearly approaching exhaustion to the downside, but that might only mean a congestion pattern before further downside is seen. $4 corn is a very real possibility by harvest, but that leaves little more to gain given the exposure to a market snapback. Take your put profits and run and sit on the sidelines until the dust clears.

Meats

Ranchers cheered the grain plunge this week, but traders must be weary of this dollar rally. Cattle exports will suffer from a rising dollar and partially offset the reduced feed prices that this grain breakdown will bring. It is an important 3-way correlation. A fourth correlation could be found in falling oil prices. The same dollar strength that will hurt foreign buying will be offset partially by lower oil prices as transportation expenses fall. Overall cattle is ready to tumble. Hogs are due for a 10% fall.



Metals

The metals plunge this week came as expected, falling on a dollar breakout. No sense adding comments here - last week's thoughts repeated below are probably worth a second look.

1) Inverse U.S. dollar correlation - gold is priced in U.S. dollars on a global scale. The cheaper the dollar the stronger foreign currency is to buy gold at what they perceive are discounted levels. However, if the dollar rallies this has the opposite effect and foreign buyers are stuck paying inflated prices. The single biggest reason that gold will fail from these levels is the dollar's strength over the next 6-12 months.

2) Oil inflation - inflated oil prices, or commodity prices in general, create a much higher annual inflation rate (9% sound about right?) than what the Federal government wants us to think. Gold is the world's inflation gauge so it would seem that as goes inflation, gold will follow. However, when prices in gold far exceed the annual inflation rate (by anyone's calculation) over the past 5 years or so, then it would seem that there is less of a true correlation and more of an exposure to the downside for the potential of a declining inflation rate in the months and years ahead.

3) Flight to quality - the reeling stock market is getting beat up on what many would argue is a complete economic meltdown - the perfect storm of inflation, bank failures and collapsing real estate market. When the normal source for investment disappears and investors become concerned over how to make a return on their money they turn to bonds and gold. However, this resilient market is not a screaming sell anymore. It is clear the Fed will take excessive and unlimited measures to support the financial markets, despite its long term negative affect.

So a strong dollar means declining commodity inflation and will likely be supported by strong economic numbers (at least compared to our friends overseas) which means there will be little, if any, flight to quality. This equates to a strong price retracement in metals over the next 6-12 months. Jump on board with straight put plays in silver and gold - even copper if you can find a bargain.

Softs

Softs took a bit of beating during this commodity plunge, the second time this year that correlation really took its toll on this sector. Surprisingly sugar dodged the bullet despite falling corn and oil prices. This market must break 1300 otherwise it remains bullish. Coffee is all over the map and is still a long term buy. Cocoa is ready to fall as inventories at Ivory Coast storage facilities are strong and the market is due to head toward 2200. Cotton is taking a beating along with the grain sector but remains a stand out buy at these levels. Look at Dec. 2009 call spreads. OJ is ugly on a chart, I know, but this is a great value buy here and worth some calls or straight futures.

James Mound is the head analyst for www.MoundReport.com, and author of the commodity book 7 Secrets. For a free email subscription to James Mound's Weekend Commodities Review and Trade of the Month, click here.