Energies

Energies first attempt at bottoming after its monumental collapse from $147 has been met with choppy trade and a bit of congestion. This is a very bullish short term pattern as fund managers are given an opportunity to clear out positions in a tight range (as opposed to the free fall environment of the past few months). This organized liquidation sets up a strong breakout rally that still has time to be a v-shaped market reversal. There are two great arguments out there - one is how much more downside is there? - $30 crude, $25 crude - how low do we go before it's a screaming buy? Thus there is limited profit potential for a short play here and a short covering rally would ensue.

The other argument is that this global economic crisis is no environment for spiking demand and that upside is limited. This sets up a congestion pattern, but it is likely short lived. The upside in oil can be sparked any of a multitude of fundamental influences - Middle East, China growth resurgence, cold weather, etc. Now is the time to buy futures with put protection. Natural gas is breaking well below support but the long term chart suggests that current levels could be the last major area of support before a move to 2.50, so scooping up heavily discounted calls (relative to the last couple of years) for an upside volatility spike is recommended.

Financials

Stock market weakness has persisted since the beginning of 2009 as fears of a banking collapse remain ever-present and concerns over the government intervention with the new administration are heightened as Obama took office. The chart is ugly, the fundamentals are nasty, but this is a true second chance buying opportunity in stocks. Expect a 30% rally by April or May and a great play for the first half of 2009. Why you ask? Simply the fear is measured against the panic that took place only a few months ago. The situation may not have hit bottom but the panic did, and that means the lows are in.

Bonds are rocketing south after setting one of the more peculiar looking highs I have ever seen on a chart (the OJ chart when it was at 210 was one of the only other times I have seen a bridge top like that). This market can conceivably fall to 110 but realistically this market is acting volatile as it tries to find the bottom side of what should be a year long range and volatility decline. Sell put premium and then sell call premium on the bounce, thereby legging into a solid intermediate term strangle. Expect the range to be 118 to 137 for much of 2009, which offers real premium collection given current volatility levels.

The dollar is making its second major rally in less than a year. Expect an attempt at 98 on the index, setting in motion a major euro and pound price collapse. The yen is hanging in there but the current chart formation sets up an unbelievable trading opportunity with puts, as 115 is a near perfect double top. This allows for a near term play with sensitive put options and a bailout exit if the market closes above 115. Otherwise downside volatility can be vicious. Play the move to 106 then 100. The Canadian dollar is congesting and premium collection may be worthwhile, however the gut says just wait for the break.

Grains

Grains all developed strong bull pennants as they recovered from limit down reactions to the WASDE and crop production numbers. Bottom line is I would love to buy grains but they are too early to the party. Expect strong upside come March/April, but until then there is a bear play here. Puts across the board.

Meats

Hogs are choppy but remain a buy in and around these levels. Cattle has another 10% more downside before it tests a 6 year lower band of support, but I am not jumping at trading the downside here over the long term. If grains fall short term like I expect, cattle should make that leg down by mid-February, making short term puts not such a bad play.

Metals

Amid a dollar rally gold makes a momentous move, taking silver for a bull run into the weekend. Can gold really push higher in a strong dollar environment? The answer is yes if two elements collide. First gold must be a flight to quality buy, which is a big part of this past week's move as prices surged on fears of a banking collapse. Second, the dollar must not breakout in a clear uptrend, which there is little to suggest this will be the case. That means that next week, as early as Monday, the gold panic buying will reverse. This is a great volatility play to the downside and gift by the bulls to the bears in my humble opinion. Now I have no intent of staying with a sinking ship, and the great thing about the current price is there are clear levels of price resistance not too far away. 926, 986 and 1015 respectively sets up three clear paths of resistance. This means a short play with straight puts (or better yet bear put spreads) can offer a great risk to reward ratio with a clear exit on a break to fresh highs. Look at June options for the best premium retention while still offering good near term profit potential, but look at March options for the real volatility play. Silver is offering similar action and opportunities. Copper is likely bottoming here.

Softs

Coffee made some strong bullish technical moves as it set fresh highs coming off a stop-triggering intraday selloff on Wednesday. The 2009 crop is setting up to be low and global demand remains strong. This market is on its way to 130 in short order. Cocoa remains resilient but is unlikely to see any more upside. A break above 2800 makes this market breakout bullish, but until then this is a great entry into some puts. OJ caught a bid this week, for about 20 minutes, on frost fears from a cold spell in Florida. This season appears to offer some late cold weather for Florida, setting up continued frost scares. Unfortunately this market is paying it little mind. Nevertheless, OJ remains a value buy. Cotton is making a breakout move to the upside, something long overdue in this cycle shifting market. Global cotton supply is far outweighing demand, but if you look at the cyclical change in plantings it is unlikely to remain oversupplied for very long. Calls will get a boost on a breakout to 60 and this should happen very quickly. Sugar is on the cusp of breaking out to the upside, but is right on topside resistance between 13.00 and 13.14. If it breaks that mark it should run to 15 in short order. Lumber has broken through some historical support but is a screaming buy at 150. This is a great buy and hold market as it should be the first to turn on an economic turnaround.



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.