Energies

Rising oil prices have been sparked by a pullback in the dollar and an amazingly strong rally in the stock market. The stock market surge of over 15% in 14 trading days coincided with crude oil’s run of nearly 20% in just 12 days. While it could be argued that the chaos in Libya held as much as 35% market premium, it is unlikely that the majority of that premium remained in recent weeks, and therefore Gaddafi’s death should not be overly impactful to market prices in the near term. By some estimates Libya is producing under a third of max daily production, but the idea of getting back to that upper range is a long-term goal and the market is not about to experience massive supply increases anytime soon. Oil is a sell at current levels. Natural gas remains a contrarian spread buy against oil.

Financials

The stock market broke through key resistance and had the biggest percentage gain in 14 trading days since the stock market bottomed in March 2009 (on a point basis the S&P actually rallied slightly more!). This massive 15+% move in the S&P broke through channel resistance; however, this breakout move shouldn’t get the shorts to fully cover just yet. Grab some straight puts to play a volatility spike down, with a top in the S&P likely to occur below 1265.

Bonds remain a good short strangle option play as they should be range-bound with the upcoming retracement expected in the stock market. The U.S. dollar has retraced a bit from the highs with the strong stock market rally; however, it held support much better than the S&P held resistance. Expect a quick retest of the highs in the dollar. Puts in the euro and pound are recommended. The Canadian and Aussie dollars have congested and I would be waiting for fresh lows before jumping short. The Japanese yen remains an impressive bull market, surging thru pre-second intervention levels.

Grains

Soybeans offered a nearly perfect reversal off a Mound Ladle Formation, suggesting significant volatility and downside should be expected in coming days. I suspect the entire grain sector will end October and begin November dramatically lower. Straight puts are recommended in beans and corn. Wheat is a spread buy against either of those shorts. Rice could see a supply shortage from the flooding in Thailand but puts are recommended on an anticipated sell-the-news effect.

Meats

Live cattle has shown some selling pressure below previous historic highs. I recommend puts here or short futures to play a double top. Lean hogs have momentum to the upside but should top shortly.

Metals

Congestion central is going on in metals after getting kicked around for a month, but this feels more like the calm before the storm to me. Long-term deep out of the money puts in copper are worth a look if you can get them in a pretty awful option pit (think Dec 2012 $2 puts).

Softs

Coffee spiked on heavy rain damage in Central American growing regions during harvest. I do not expect coffee to resume a bull trend and see any bounces as opportunities to establish bearish positions here. Cocoa remains a strong sell with straight deep out of the money puts or short futures recommended. Cotton is avoidable. OJ and sugar are both sells with 20% retracements expected before the year is out.

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.