Energies

Well a premium collector in oil has been making a fine living for the past couple of months and I sure hope he or she takes his money and runs, because this market has a habit of making option sellers go out of business in a bad way. For six weeks the market has shrugged off rising inventories in crude oil, as producers are taking advantage of a true normal market with back months offering storage worthy prices. If the market can handle that what happens when the weather turns cold like it has been, and the Middle East sparks up a bit because of new President in the U.S. or maybe even the supply trend shifts south because of rising inventories? I would say buy energies across the board but it might take a few weeks to get the action we are looking for. Buy now with trade designs that are not too sensitive to short term time decay. Focus on long crude oil and natural gas plays.

Financials      

Stocks are acting as anticipated and should continue their run to 900 on the S&P this week. Let me be clear about this. I believe the bottom is in. Call me crazy but the S&P could easily hit 1050 or 1100, and with volatility the way it is I wouldn't be surprised if it did it in a matter of 3 or 4 months. I hate to be super contrarian. Actually who am I kidding? I love to be super contrarian and this market has plenty of bears. The shock is over, the good times are in front of us, and it doesn't matter if it is 3 months away or 3 years away - all that matters is that the worst is already priced in. Bonds reflect that view as prices have collapsed a bit following the epic price run of 2008. However the idea of a freefall here just doesn't sit well with me, even though little will stop it from heading to 110 if my stock market outlook is even close to correct. Regardless the gut says there is premium collection to be had here with a deep out of the money leg in short strangle strategy. The dollar is at a critical point. I am a dollar bull and I expect a run to 98 by year's end. However the chart pattern on the euro might just offer a breakdown in the dollar in the next two weeks. It might just be the healthiest thing for long term dollar strength. I would hate to miss a big dollar move this month but sometimes you just gotta go with the gut and bail on the long positions in the near term. I will take my chances and just stick with a short Japanese Yen forecast and avoid the rest of the currencies for the next couple weeks.

On a side note, keep a close eye on the Mexican Peso. This market, albeit relatively untradeable due to light volume, is about to break down through a level that could ultimately set this currency into hyperinflation. There are certainly enough fundamental factors to do it too - drug war, plunging tourism, fears of a NAFTA breakdown, border issues, etc. all have the peso in the worst shape it has been at in decades. The banking system appears to be the only thing holding this market up as they have not fallen into some of the traps that their northern neighbors have when it comes to loans. Nevertheless the market is susceptible to strong selling if current supports fail.

Grains

This sector has always been fascinating to me from a psychology of the trader perspective. You have this whole cult like part of the sector that trades on the weather and the fundamentals. Then you have your chartists and then the hedgers. These types of traders exist in almost all markets, but it is so pronounced in this sector of the industry that when funds became the major players in 2007 and 2008, all control and logic went out the window. Now the funds are out, and the old game is back in town. Choppy trade is here again and I hope we don't get suckered in. If commodities are bouncing in February that means grains might go for the ride, but there is something about that market that screams February breakdown and I expect to see grains plunge in coming weeks. So be contrarian here and short these puppies with stops above the recent chart highs that occurred back in early January.

Wheat gave up on the China drought panic but I would not forget about it completely. When grains turn north, sometime in March or April, wheat is likely to see some special attention as the net outcome from China will be a shortage. That means the biggest demand for wheat in the world might just need to be a major importer in 2009 and that could spell rally in the grains this year. In the end you will wish you hadn't gotten so caught up in the first quarter of the year and had the patience to wait this thing out.

Meats            

I continue to see evidence that the cattle industry is disappearing in the states, despite lower grain prices. This may have a long term bull run to it, but in the short term I am not sure there is much to do here. Hogs remain a buy but when it comes down to it this sector as a whole is avoidable for now.

Metals        

The trading in metals is starting to heat up again, making long option premium the way to go despite overpriced options. They are likely to get even more overpriced. Silver has made a heck of a technical bottom and gold is fast approaching topside resistance. This week may just tell the tale of a topped metals market, but either way this is one important week for this sector. Gold is on topside resistance with little room for more upside if the resistance is going to hold. Silver is in a no man's land price point and will likely just follow the path of gold this week. I hate to be wishy washy here, but I always try to call it like I see it and this sector is acting bullish but is at the point of bull or bust. If we break this week it could be very ugly - $100 down for gold, $2 for silver. If it pushes through the same could be argued for the upside. This a long strangle option week if I have ever seen one, with a nice little bias to the downside.

Copper has an important week ahead as well. The chart begs you to buy here. There is $2 plus upside to test the highs, little downside exposure by comparison and a breakout to fresh near term highs on Friday. Folks, this is copper we are talking about here. The best way to put it is there are about 6 guys at a poker table and the game is copper. You sit down and everyone else goes ear to ear smiles. You may not know it but you are about to find out that you are the sucker at the table. This market may in fact breakout to the upside, but give it a minute. Let it close above 1.80 on the front month, then wait for a dip and buy straight calls on a down day. The best way to win if you are the sucker at the table is if no one else really knows you are there.

Softs               

Cocoa product is hitting the ports, but a recent panic over a caterpillar infestation in neighboring Liberia had many thinking that a destruction of Ivory Coast cocoa and a major price rally was in the cards. It's funny, because they can't control any of a myriad of diseases that destroy crops every year. They haven't had peace since the dawn of time. Ivory Coast uprisings from cocoa farmers are about as common as full moons. Yet when word of this million caterpillar march towards their cocoa crops came about the Ivory Coast government stacked up pesticides straight along the Liberian border to protect their precious crop. After all cocoa prices are flying high and the government, or whatever you want to call the controlling force de jour, is not about to let profits like this slip through their fingertips. In the end this caterpillar crisis will be much like the Mothman Prophecy as it will be feared but not seen in the precious Ivory Coast cocoa fields. Straight put buying is recommended.

Coffee, despite my long term bullishness, is right on the cusp of a nasty chart breakdown. I know it's a shock - I haven't had a bad word to say about coffee in years. However, a chart is a chart is a chart. Long term and short term a classic Mound Ladle formation is in the works, something I expected a premature breakout to the upside to thwart. Unfortunately this market is still congesting. Now a great lesson I learned throughout my career is that markets truly test a speculator's patience. Time is a relative thing, especially if you are a technical analyst. Right now it just feels like it is taking too long to breakout - a good trader should never feel this way. My chart read says avoid futures, play some longer term calls and bull call spreads and see if the market can actually breakout of this congestion. Fundamentally this market is a screaming buy for 2009 and this chart pattern is definitely screwing with my confidence on this bull run outlook. When that happens I lighten the load and wait a minute or two to see if the pattern changes to compliment my fundamental outlook.

Cotton's chart is one ugly cycle-shifting market. This market is begging for a long play with shrinking production ahead of a forecasted and possibly priced in demand plunge. The reality is that this is what causes cycle shifts in markets and it is likely this market will have a supply crunch in the next 12-24 months. However, this daily chart is just nasty. I have seen this pattern before and it generally ends with fresh lows. A daily chart in this market is a not a great reason to get your cotton panties in a bunch but it is worth noting, and it is worth a short term put play to the downside with a longer term call strategy still in play.

I have been touting lumber to the upside for a bit as I am a big believer in this market's long term cycle trends, which tend to offer a buy between 150-220. This time we went a bit below ground zero, but that shouldn't be a shocker given the current housing and economic climate. I have felt for some time that a lumber bottom was an economic bottom leading indicator and the recent shutdown of lumber production and better than expected GDP has this market flying high. It is a tough market to trade and futures are a big no-no, but straight calls are still at a discount in my humble opinion. This market should run 190 this week and ultimately trend to 220 by the end of March, if not sooner. It is critical that 163 holds on the front month.

Sugar broke out through a topside resistance band between 1300 and 1320. I honestly didn't think it could do it but it did and now this market is bullish, except you need to watch out for Monday. I have seen this market fake many a veteran trader out with short term technicals. Momentum is key in markets like this and a fresh high on Monday (Tuesday at the latest) is absolutely pivotal to the trend sticking. If we are up above the Friday highs come the close on Monday I would get heavy into the long side of this market.

What can I say about my good old buddy OJ. Even a frost can't slow this selloff down! I am not sure what to say other than it is not that far from a perfect V-shaped pattern completion, coming all the way down from 210. I am a buyer with futures with put protection and straight calls.



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.