Energies

Plunging inventories in crude oil should be digested with a grain of salt as rising distillate production converts a relative oversupply of oil. Energy prices remain strongly connected to the stock market moves, but the potential US dollar breakout will pressure the euro currency and shift oil’s correlation to a currency connection. I continued to anticipate more downside in crude oil, RBOB and heating oil. Natural gas remains an alternative play to the upside with straight calls recommended.

Financials

Stocks continue to have a wide chop, constantly recovering from sharp price corrections. Stay short on these bounces until this market clears 1265 on the S&P, at which point the trend would be reversed. Bonds remain avoidable except for possibly a short strangle. The dollar is a buy on dips as it is on its way to test 80 and beyond on the index. The euro is failing and the world recession’s epicenter is located in the heart of the EU. The Canadian and Australian dollars are sells as their bull runs have likely come to an end. The Japanese yen remains a buy, as it holds support during dollar rallies and then surges on dollar pullbacks.

Grains

Highlights (courtesy of www.CommodiNews.com):

U.S. rice production in 2011/12 is forecast at 190.9 million cwt, up 2.8 million from last month due entirely to an increase in yield.
Global wheat supplies for 2011/12 are projected 7.6 million tons higher mostly on larger beginning stocks in Canada and increased production for Canada, EU-27, and Ukraine.
Corn production for 2011/12 is forecast 417 million bushels lower with expected yields down from last month across most of the Corn Belt.
Soybean production for 2011/12 is projected at 3.085 billion bushels, up 29 million due to higher yields. Soybean ending stocks are projected at 165 million bushels, up 10 million as higher supplies are only partly offset by increased exports.

I continue to see weakness across the grain sector through harvest and anticipate expanding volatility to the downside in coming weeks.

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

There is still a congestion fight in metals as the stock market remains directionless. It will be difficult for the stock market to determine the future of gold and silver prices if the dollar breaks out to the upside, which in turn pressures foreign demand for metals. Bear put spreads are recommended in both markets. Copper is a long-term short with China growth stunted and a global recession greatly diminishing demand.

Softs

Coffee is in a full-on nose-dive, offering a nearly perfect v-shaped market reversal. It is key for the market to break Friday’s low, after which there is little supporting the market above 240. Cocoa broke major support and should experience a wave of liquidation in coming weeks. Cotton is showing support but is not worthy of a buy here, rather the puts are finally losing some of their overpriced premiums and should be accumulated on rally days. Sugar is a sell having technically reversed the bull trend. OJ has plenty of downside potential here and puts are 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.