Energies

The energy sector as a whole seems underwhelmed by the global currency shift currently taking place. There should not be congestion here but as the S&P goes, so goes oil and I believe it is just a matter of time before oil must break free of the correlation and trade on this euro move. Oil prices throughout the EU are high relative to many parts of the world including the U.S., and the drop in the euro emphasizes this differential. If the euro cracks 130, oil prices should see a considerable drop in demand. The dollar index has resistance below 80, but a break above that could panic euro traders and escalate volatility to the downside in the euro and pressure oil prices into a volatile downward spiral.

Financials

Throw out the jobs plan, ignore GDP, get rid of your election analysis, and definitely forget about U.S. debt. This is all about the fall of the euro and the impact it will have on the global economy as the story plays out over the course of years rather than weeks or months. I know it's always about the center of your world, but unless you are in the euro zone then I’m sorry to deflate your ego. The ECB jumped the gun raising rates and now they are going to pay the price. As the euro falls from grace two things will continue to plague the markets – buying demand evaporation and a currency shift. The U.S. dollar strengthening will pressure the U.S. economy and in turn the stock market. The yen barely moved during a week the U.S. dollar gained dramatically on the euro, a good indication that yen strength is forthcoming on any near-term dollar dip, possibly escalating in volatility in the near term.

Grains

Two weeks ago I wrote about the grain rally: “Use this move to establish bear put spreads on the way up, perhaps as early as this week if November beans hit $14.54 or December corn hits $7.78.” Corn hit a high of 7.79 and beans hit an intraday high of 14.65 before pulling back. Now grains become very exposed to a v-shaped market reversal which means extreme downside volatility potential. Straight put and ratio put front spreads are recommended and one specific trade rec will be detailed in this week’s premium trade recommendation report Mound Trade Signals.

Meats

Cattle and hogs both bounced last week, offering what I feel are good entries into additional short positions – puts are recommended on this bounce across the board.

Metals

Gold and silver are congesting near the highs, supported by a flight to quality out of stocks with bonds offering little alternative for the conservatives. At what point does the dollar rally impact gold and silver demand and at what point does the market sell an overbought situation? Now. Copper is a strong sell with a 30%+ drop anticipated in the next 6-8 months.

Softs

OJ is setting up a price collapse, but for the time being a short strangle or a bear call spread is recommended. Large put buying helped to spark heavy futures selling in coffee as locals slapped on offsetting positions. The idea behind option action triggering futures movement is twofold. First, the option volume must be relatively large compared to the underlying futures volume. Second, the locals would need to put hedges on to sell those options to the put buyers – a hedge would be a short futures to balance a short put position. So a speculative put buying position creates a short futures demand and therefore becomes a self-fulfilling prophecy, not unlike heavy one-sided trade volume in futures. Now the market could see long liquidation and a technical top or a possible immediate Monday recovery. I say this is the beginning of the end of this rally and join the put buyers. Cocoa is crashing, possibly turning into a hyperbolic liquidation situation as early as this week as the market gives up on the recent rally effort amid a dollar bull run. If December cocoa breaks 2846 then watch out for a serious collapse. Cotton remains avoidable. Sugar is a strong sell with straight puts recommended.

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.