Energies

The energy markets failed to follow through on a convincing rally staged earlier in the week. This retreat looks more to me like a shake out of the longs than a true return to the Bear phase we've experienced over the past couple of months. To see this downward momentum continue in the next week would be surprising to me especially if the next Department of Energy report shows the kind of draws I expect to see in both the Distillates and Natural Gas.

The overall supply picture at this time for Heating Oil is near 15 year highs which has been the catalyst for the recent downturn. But when demand continues to spike upward over the next couple of weeks I expect the market to return to its march upward. The current refinery capacity, while good considering the circumstances, is still roughly 20% shy of its average production this time of the year. This will come into play if we see inventories start to drop at a rate much quicker than what has been reported thus far due to the freezing temps we are seeing across the Eastern region of the U.S.

Natural Gas also gave up on its rally as the market broke through to all time highs on Tuesday only to plummet for the rest of the week back down to a low of 13.28 by Friday. The inventories don't look that great and the pipelines are still considerably hobbled by about 25%. The latest weather predictions by the government seem to have been enough to cool things down for the moment. Essentially the report said that weather expectations for the months of January and February were for warmer than normal temperatures throughout the U.S. This is amazing to me that traders are really paying attention to forecasters that have a hard time predicting the next 3 days let alone the next 3 months. That being said there are more than enough opinions on the matter to go around. Several other models (Serbian Snow Cover and Greenland Block theories to name a couple) are in fact predicting colder than normal temperatures for that same period. Only time will tell with regards to January and February but in the short term I predict this market will regain its footing and begin trending back towards the 15.00 mark over the next couple of weeks.

Remember that Crude Oil at this point is not trading independent of its products and wherever the Distillate, Unleaded and Nat Gas markets go, Crude will follow. I think the entire complex is a buy here with Unleaded being the least likely mover of the bunch through the month of December. I think a key point of support to watch out for is the 1.710 mark for Heating Oil. If we break below that mark it is time to re-assess.

Financials

Stocks
Stocks continue to defy gravity. I have been waiting for a pull back now for some time and it continues drift sideways. While the market has not gone down it has not gone up much either. Lack of conviction from both camps seems to be the theme lately. Overall I have seen nothing to sway me from the bear camp so I must continue to advocate the buying or spreading of puts on the indexes. Yes I know this is what I wrote last week but nothing has changed for me.

Bonds
Bonds did start to rally as I expected but we have yet to break out. Todays high at 133-10 was two ticks shy of the old high at 113-12. So I will be looking for a move above that point early this coming week to confirm the breakout is underway. I do expect this market to make it to at least 114 this week.

Metals 

What a difference a week makes! After peaking last Friday Metals spent this week pulling back. This should not have come to a surprise to any of our regular readers as I warned this was coming last week. This is not the end of the rally but rather a pause before the next leg up. Look for Gold to stabilize above $500 and silver to stabilize above 8.50. I am expecting silver to lead the charge back up and do not expect to find much resistance until we get above 950. I recommend a bull silver trade this week. If you would like to see it send me an email and I will be happy to send you a copy. Copper continues to be propped up buy strike fears but I continue to expect a sharp fall in this market in the near term. Bid ask spreads on the put side in copper have been very wide which means nobody wants to take the other side of a put right now...this tells me that the floor traders are worried about a drop as well.

Grains

Grains struggled a little this week but did manage to finish the week rather strongly. I continue to be bullish and am now long Corn, Wheat , and Bean Oil. Of the three I think wheat will see the most movement over the longer haul. Oats had a breakdown and as I have been saying they tend to lead the pack so do not be surprised by a breakdown next week. If we do go down I do expect previous support levels to hold, and I would buy the dip if we get one. Overall though grains are back in play and should no longer be ignored.
 
Meats

The Live Cattle market responded without much fanfare to the resumption of imports to Japan that began this week. This market is still suffering from an overbought environment and is struggling to keep the Bull going even with the reopening of a serious demand corner for the industry. While Live Cattle for the most part traded within the upper portion of its recent range it failed to follow through after taking a peek at new highs on two occasions. I'm looking for this market to retreat to the lower end of the trading range before making another stab at this breakout to the upside.

The piggies headed south this week as seasonal demand begins to soften and both the Hogs and Bellies finally broke out of their long established consolidation periods. Getting short at these prices should still be a smart play.

Softs 

Oj is drifting and having trouble maintaining the lofty levels it has recently rallied to. I am expecting a full scale breakdown in this market very soon. OJ could fall back below 100 by the end of the 1st Quarter in 2006. Those who don't believe that I encourage to look at a monthly chart of OJ. Notice that back in 1998 we briefly saw a high just above 130 which failed to follow through. I am betting that this will prove to be resistance in the near term and push OJ back below 100. Cocoa continues to bore me. It is trying to slowly and quietly move higher but i have seen this market fail to follow through too many times this year to get suckered in again. Stand aside this market for now. Coffee managed to stay above 95 but is not showing any real conviction about a further rally. For now I am mildly bullish but would not get aggressive here yet. Sugar continues higher despite being clearly overbought. Longs need to keep stops tight cause a pull back is inevitable. Cotton, much like coffee, did move slightly higher but really lacks conviction. Will need stronger Demand numbers to get excited about this market.

Currencies 

EUR/USD
Well my 1-2-3 bottom was confirmed and we did see a sharp move above 120. Next target is 122, this point could prove to be formidable resistance in the near term so do not be surprised to stall as we approach that point.

USD/CHF
We did get the move below 130 that I have been waiting for but I am still not convinced that this market is really wanting to break down. For now i am bearish with tight stops but not very enthusiastic about this market. Stand aside if not already in

GBP/USD
The Pound touched 178 this week and continues to look strong. There is minor resistance at 179 but I expect the market to push right through it this coming week.

USD/JPY
Well we tested 118 and fell right through it. This market was clearly overbought as i mentioned last week. We could fall all the way to 112 before finding any real support. But near term my first target is 114. Minor support there too but not expected to hold.

AUD/USD
The Ausi made a stab at 76 but then fell back quite a bit. This market also lacks conviction at this time and I will be spending my trading in other markets this week.

USD/CAD
This market spent the first half of the week moving lower only to get a late rally. Don't be fooled by this dead cat bounce. Look for a move back below 115 this coming week.

USD/MXN
The short squeeze continues and I will continue to watch from the sidelines.

Matt Odom is the Managing Partner and Energy Analyst and Derek Frey is Head Trader at Odom & Frey Futures & Options.