Energies

The energy markets consolidated for the most part this past week as predictions of warmer weather ahead battled it out with larger than expected inventory drawdowns in the Distillates and Unleaded. While the drawdowns for the products were cause for concern, the overwhelming consensus among traders seems to be that we are going to make it through this winter with tight but adequate supplies of Heating Oil. This is primarily due to the recent forecast from the government predicting milder than normal temperatures for the U.S. in the first three months of '06. The current price range for Heating Oil is already thirty percent higher than this time last year and barring a prolonged and severe cold front across the U.S. it is unlikely we would retest the highs of a week ago, let alone those that were put in during the hurricane season.

As we look to the week ahead I think it is important to note that the coming inventory data will probably reflect yet another drawdown in the Distillates and quite possibly the Unleaded inventories as well. Do not buy into this info unless it is coupled with some drastic change in the weather predictions or some serious refinery issues. The reason is, the report is reflective not predictive and the markets on going to trade on what's ahead not what has passed. The cold weather from this past week and the increased fuel consumption that accompanies Christmas and the New Year may seem to be Bullish but if anything are a chance for traders get positioned short during a quick reactionary bounce in the market.

We are trading Bear Put spreads for February Crude in anticipation of a retest of support in the low 50's in early January. Naked short options are a bad idea despite the increased premium you can receive at this time. And as always, if you must trade futures remember that your stops aren't in effect during overnight trading, so be wary.

Financials 
 
Stocks
Well for those that did not read my Dow recommendation, I have now officially switched from a bear to a bull. For some of you this may be a sign of a top. But for me I have grown tired of waiting for the bears to wake up from there slumber. Stocks tend to have what is sometimes called the January effect. That is an inflow of year end bonus money as well as other sources. The first 2-3 weeks of any new year tend to be rather strong for stocks. This year looks to be no exception. The Dow has made a very nice bull flag and is close to breaking back out to the upside. I expect this Holiday week to be good for the market so don't be afraid to go long.

Bonds
Bonds finally made it to 114 late today (Friday). With constant talk of the Fed taking a break the bulls are getting restless. Small trades are still very much net short so they will be the ones to pay for this rally. I do not expect a huge amount of upside follow through. We are likely to see bonds chop higher for the rest of 2005.
 
Metals 
 
Metals spent the week stabilizing as we expected. I am not 100% convinced that we have seen the end of the pullback but am getting cautiously long here with stops below recent lows. I expect silver to lead the way back up. I have been calling for a fall in copper for a few weeks now and nothing has happened...until today. Copper broke out to the upside so it looks like this bull is not as dead as I thought. I was stopped out of my shorts today and for now will stand aside as I cannot get myself to want to go long here even after this breakout. I still feel that a rather big and violent fall is coming in copper but of course when is the magic question. Platinum and Palladium also recovered some ground this week and aggressive traders should consider longs in Palladium as this market will be back above 300 before most traders even notice.
 
Grains 
 
Grains continued to push higher this week. Fear of bad weather in South America has been one of the drivers. If this bad weather does not come to pass then expect some pullback in grains this coming holiday week. But like I said last week I expect prior lows to hold so buy any dips with both hands. Wheat is still my favorite grain with oats a close second.
 
Meats 
 
The Hogs failed to follow through on their break to the downside but nevertheless seem poised to charge lower as demand continues to wane at this time of year. I'm recommending selling into bounces for both the Hogs and Bellies for the next week.

Live Cattle can't seem to capitalize on the recent, limited re-opening of the Japanese markets to U.S. imports. Just I predicted last week, the market failed to follow through on its recent peek at new highs and retreated beck to the lower end of its trading range. I think we are still overbought here and with recent fundamentals still pointing to plentiful supply I'm looking for further moves to the downside over the next couple of weeks. I'm selling bounces to 9650 with protective buy stops at 9750 over the next week.
 
Softs 
 
Oj spent the week drifting sideways. I still expect a full scale breakdown in this market after the holidays are over. Cocoa is trying to rally again but as i said last week I will stand aside for now. Last week I mentioned that coffee was only mildly bullish. Well after the strength we saw this week I am now quite bullish. I expect to see 105 hit this week. Sugar looks toppy and I continue to expect a correct here that pulls us back to about 12 cents. Cotton, continues to struggle to go nowhere. I am still a bull but this bull is about to doze off if we don't get some kind of movement soon.
 
Currencies 
 
EUR/USD
The Euro pulled back to 118 and there found solid support. My resolve has not been shaken at all by this pullback. In fact I have bought this dip all week and feel good holding it for the rest of the year.

USD/CHF
The counter move that I mentioned last week did come and I was stopped out. Since being stopped I have not reentered and see nothing yet that makes me want to take any new positions in this market near term. A move above 133 we make me a buyer.

GBP/USD
Well the Pound spent the week pulling back with the rest of the currencies. Here like the Euro I am not at all bearish. This pullback is another great buy opportunity and opportunity rarely knocks twice.

USD/JPY
The Yen manged to find support around 116. I think this is just a pause and further downside is expected. Next target is 114.

AUD/USD
The Ausi really broke down this past week. I was not in it on either side so I did miss that move but really don't feel bad about it. Support need to hold above todays lows or this market could be in for a move back below 70. For now I will by here around 73 with stop and reverse orders below 72.50.

USD/CAD
The Canadian continued its bounce. I am still a bear here but was stopped out early in the week. I will look to sell above 117 this coming week.

USD/MXN
The short squeeze looks to have ended, so aggressive traders could put some shorts on above 1070 this coming week.

Risk Disclaimer 
Past performance is not indicative of future results. Trading futures and options is not suitable for everyone. There is a substantial risk of loss in trading futures and options. 

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