Energies

The Crude Oil market is lulling in the shorts at the moment with continual focus on the current domestic supply picture dominating the scene. The market is so caught up in the now that we even closed to the downside on Friday as we head into the weekend. As you look at the daily charts there is really nothing to cling onto aside from the percentage of retracement. But if you look further to the monthly continuous charts then you will notice that we havenââ,¬â"¢t even broken trend here. Now Iââ,¬â"¢m not suggesting that the upside is a lock by any stretch of the imagination but this market has definitely fallen too far too fast and is ripe for a bounce next week.

The current inventory picture isnââ,¬â"¢t nearly as rosie as itââ,¬â"¢s been depicted when you take into consideration that the only way we got here was by having one of the warmest summers on record. If you added the typical demand for Heating Oil into the picture this year then I think we would have seen $80 oil in the fourth quarter of ââ,¬â"¢05. But we didnââ,¬â"¢t see that happen and quietly in the background the demand for other Distillates (jet fuel, diesel, etc.) has grown at a very healthy pace but went unnoticed as excess Heating Oil has blurred the picture.

Of course we canââ,¬â"¢t forget Iran, Venezuela, Nigeria and company as they continue to flex the only muscle they have in the international arena especially with the west. Things seemed to take a little softer tone by weeks end with the rebel situation in Nigeria fading out and the agreement between Russia and Iran to sit down and discuss alternative methods for the Iranians to develop their Uranium needs (that sounds a little like the fox watching the hens to me). Nevertheless these talks have quieted some of the hysterical speculation (some of it founded) surrounding the fourth largest producer and their recent referral to the UN Security Council. No matter how you slice it, there are only a few major players in the supply game when it comes to Crude Oil and right now there are a few rogues that could cause some serious supply problems in a hurry.

When you take into account the technical picture, increasing demand for the other distillates, the unlikely occurrence of a cool summer or flat driving season then you have to believe that inventories are going to shrink again and thereby cause prices to rise. I donââ,¬â"¢t claim to have the answers and Iââ,¬â"¢m not always right (thatââ,¬â"¢s what stops are for) but to count this market out for upside potential is premature by my guesstimation. If anything this sharp sell off is possibly giving us a rare chance to get in on a meteoric type rise over the next few months. For now we are recommending April bull call spreads in the mid 60ââ,¬â"¢s.with about 5:1 reward to risk ratio.

Financials

Stocks
Stocks continued to struggle this week and I expect more of the same next week. My models show about a 69% chance for a breakdown in the stock indexes late next week and into the following week. I am holding Feb. Dow 108 puts. My target is a move in the Dow down to 10,500 or so but it may take more than just this next week to see it get that far.

Bonds
Bonds ended the week with a rather wild back and forth day. We tested both sides of the range and still failed to get through either one. I look back on these attempted rallies as a last cry for help from the market. Looks to me like the current cry for help will go unanswered. Look for bonds to breakdown below 112 this coming week. First target is 111-08 and then 110-03.

Metals 

Metals began the correction that I have been warning you was coming. So far initial support has held but based on the action I saw in the pits this past week I am not sure we will see those support levels hold up this coming week. We may very well see silver push below 9.00 and gold could test 525 or possibly even 500. So if you did not head last weeks warning please take this one to heart. This is a period of already high and still increasing volatility in metals and is no longer a place for small under funded traders,(not that it really ever was the right place for them but now even more so) unless you are using options. I do remain a long term bull and will be buying once we turn higher again but I will be waiting patiently for that day to come as I doubt it is here yet. For now I continue to hold a bullish silver spread and bearish gold spread in options.

Grains 

Well I guess last weeks calls in grains were a bit too optimistic. I remain bullish especially on wheat and do expect some movement higher this coming week. I am getting into a 620 -680 call spread in May beans this week for a 4:1 risk reward ratio. Overall we are seeing what I think is a short term top in the CRB index but I expect one of the few bright spots within that index to be grains.

Meats 

The entire meat complex rebounded this week as many traders saw the markets move a little too quickly to the downside. This bounce however has created some very decent entry points across the board.

Softs 

OJ continued to maintain trend and move up. So far we have broken through all resistance points and I see no reason to call a top here at this time. The March 1996 high in OJ was 138.75 so we may find some resistance there but again based on what we have seen so far that resistance holding does not seem very likely. If we do make through that point the next point of real resistance is all the way up at 174.25 which was the high back in November of 1991. Cocoa managed to push through 1500 but just barely. This market has failed to follow through more than Liz Taylor! Cocoa is the first market I ever traded and therefore very dear to me, not to mention the fact that I alone contribute 1% per year to Hersheyââ,¬â"¢s bottom line (and Iââ,¬â"¢m not even a share holder!). But none of these things have been enough for me to trade Cocoa lately and I continue to stand aside until this market does something, anything worth paying attention too. Coffee did stabilize and has started to resume the uptrend. I would be cautious if you are trading coffee futures and keep stops below this weekââ,¬â"¢s lows. Sugar looks as if it has topped and should continue to correct this week. First downside target is 16.00. Cotton continues to disappoint. While I am somewhat bullish this market, the pace of its moves are so slow that I need two cups off coffee per 30 minutes I watch this market just to stay awake. For now I will stand aside.

Currencies 

EUR/USD
The Euro fell hard late in the week. All support levels failed so far and for now the short term trend remains lower. Next support is 117.70. I would expect the Euro to consolidate and start to support out this coming week so short traders should real in there stops.

USD/CHF
I did not trade this pair this week as my bias was too the short side and I did not get any solid short signals. I am slowly becoming a bull here but would prefer to wait for the market to confirm this idea by pushing to and through 132.86. My plan here is to put a short trade on around 132.50 with a stop and reverse order working at 133.00.

GBP/USD
We got stopped out at 175 and are still standing aside. I would like to buy long soon but for now I will wait for the market to stabilize.

USD/JPY
The dip I have been waiting for in this pair looks like it is here but here too I am waiting for the market to confirm the turn rather than me anticipating it.

AUD/USD
Still standing aside, I donââ,¬â"¢t have much else to say here, other than a lack of inspiration can lead to desperation.

USD/CAD
Long from 115 with stops working at 114.88.

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.