Energies

A violent near-term bottom was set in oil and rbob on Tuesday, following an FOMC statement that had the markets whipsawing into a rally. The bad news is out? Hardly, but the reality is the market needed a dead cat bounce after crude oil’s 25% freefall in just over two weeks, and that’s exactly what happened during a four-day 15% rally. Those chasing this rally will likely experience a hard reality this week as the oil market turns south to retest the Tuesday lows. The volatility presents a unique opportunity to play short condors.

Financials

The stock market had what some might view as a capitulation event (mass exodus, thereby removing all the sellers) on Tuesday, rebounding dramatically following a horrendous Fed statement. This was not capitulation in my book as there are plenty of potential sellers left here. This is wave number 1 of possibly 3 waves down. The current technicals are indicating a Mound Ladle Formation developing which means a move to 1260 is possible before a violent retest of the lows. A close above 1199 on the S&P indicates a likely move to 1260, otherwise I remain bearish and expect continued pressure and volatility in this sector. The Fed’s announcement that rates will remain unchanged through to 2013 should not be a surprise and I suspect it is the tip of the iceberg of what is to come in the way of monetary policy shocks that illustrate just how bad things are getting. One interesting side effect of the announcement is the possibility that loans will be more accessible as investors seek out opportunities to acquire debt since they know the intermediate term prospects are not there for rising rates. This could create spending and help out the situation near term, but it will be difficult to see this impact the market for several months. Bonds, on the other hand, have limited upside and I would consider there to be equal-weighted risk on the buy and sell side. Volatility and choppy trade should remain, but for those with high risk tolerance a short strangle is worth a look.

The dollar is choppy but remains bullish and I suspect this week will offer a strong rally as the euro currency experiences some pressure while Asian currencies chop. The Canadian and Australian dollars remain strong sells. The Aussie crumbled nearly 10% off the highs in a matter of days, showing the potential collapse that awaits this market. The Swiss Franc had one of the most impressive currency moves I have ever seen, as an FOMC play sparked an 8% rally in a day but was met with even more impressive selling as a clear top was put in. This market could see some impressive liquidation in the coming days. The Japanese yen performed as anticipated, erasing the intervention selloff in a matter of days. Following recent history the likelihood is for a chop around this 130 price range before heading higher. Expect a range between roughly 127-132 but don’t let the choppy trade scare you out of the long.

Grains

This past week’s WASDE and crop production reports led to an extremely volatile and whipsaw Tuesday, but a reality is likely to soon set in for this sector. Oil prices have topped, already breaking 35% from the highs in just over 3 months. This affects ethanol demand which thrives when price extremes exist in oil but crumbles when oil prices retrace. Overall the commodity markets are susceptible to declining global demand, with grains seemingly lagging this outlook and sustaining prices amid a shift in demand outlook. Sell corn and beans while using long wheat as a spread against either (1 to 1). Rice is worthy of a put play here.

Meats

Cattle is fast approaching topside resistance on the December contract, and I anticipate strong selling to come in early this week. Put plays are recommended. Delivery hogs for August have continued to scorch higher, but back months are not seeing the same support. December hogs broke key trendline support but rebounded dramatically late in the week, and I recommend waiting for a fresh low on the December to reestablish a short. In case you missed the final oinks from the pit, pork bellies can now rest in peace as the CME put that futures market to bed permanently, begging the question as to what market is next to walk the plank?

Metals

During the panic of the past couple of weeks the flight to quality in gold has been strong, but the increased volatility prompted the CME to raise margins once again. The margin increase and a rush of profit taking coincided with a bounce in the stock market to bring a bit of selling to end the week. Volatility premium is through the roof, but naked option selling is too risky a proposition in these markets at the moment, so look to sell an ITM call spread to pay for two OTM bear put spreads on an even money skewed option play to position for a volatile downside move. Copper remains a strong cyclical sell with straight puts.

Softs

Orange juice is in a freefall, collapsing on strong supplies and weakening demand with no crop-destroying hurricane in sight. More downside is expected. Coffee is chopping around while quietly establishing fresh lows every few weeks. I recommend puts here with increased downside momentum expected shortly. Cocoa broke key support at 2868 but recovered quickly late last week. I believe there is a high likelihood of a crash in this market in the next few weeks, but on a purely technical level the market is a near-term buy with a double stop reversal below last week’s low. Cotton remains a sell on bounces, along with sugar.

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.