Energies
Energies broke this week after Ernesto heads east instead of west and the weatherman shows why he is no better an educated guesser than the average trader.  There are a few interesting developments this week to take a hard look at.  First, the marketââ,¬â"¢s perception of hurricane season says with August over so is the worst of it.  No hurricanes means no rally.  I would tend to agree that Gulf hurricanes are most probable in the early part of the hurricane season, mainly due to water temperatures and normal cyclonic activity.  However, this is no normal hurricane season and I suspect the market will be caught off guard by a series of late storms that threaten the Gulf.  Nevertheless a heck of a lot of the hurricane premium just got sucked out of the market.  Second, the technical structure of the market suggests we could see some serious downside, plus you are talking to a long term bear ââ,¬â€œ after all what goes up must eventually come down.  Third, the fundamental structure of the market just seems too exposed to the ââ,¬Ëœelementsââ,¬â"¢ to fail hard and fast.  Overall, I buy this market on dips and look for a move to about $75 (maybe a last hoorah).  Natural gas broke down through key support but I suppose the same logic would hold true here and buying calls that had the volatility premium punched out of them is not such a bad idea.

Financials
Stocks broke key 1305 resistance on the S&P and have little standing in there way to 1330.  But the market has this multi-year track record of breaking to fresh highs and failing, so it is tough to jump on the bandwagon, especially when the Fed is screaming that more rate hikes are to come.  I think the market just doesnââ,¬â"¢t believe them and the market might just be on to something.  If you really look at the psychology of the Fedââ,¬â"¢s actions, they are trying to appease the market but not be controlled by the market.  I think this could setup a shocker of a Ã,¼ point hike just to force the market to retreat from its contrarian position.  Stock index put options are about as cheap as I have seen in quite a while, suggesting the sentiment is shifting and the timing for a contrarian play is upon us.  Bonds broke through key support and, despite the Fedââ,¬â"¢s scare tactics, have pushed to some impressively low interest rates ââ,¬â€œ maybe the housing market is due for a bounce?  The dollar choppiness is not a shock, but the bullish momentum remains and I suspect the failure in the yen is foreshadowing the run the dollar is about to go on.  Buy euro puts over various time frames.

Grains
The grains caught fire this week, possibly a premature and early bounce on a seasonal correction.  I like the move and think it sticks, mainly because it just didnââ,¬â"¢t seem like too many traders had a shot at catching the bottom and grain bottoms rarely give traders a second look.  Wheatââ,¬â"¢s 10% move in two weeks might be a bit overbought, but donââ,¬â"¢t shy away from that or the underplayed beans.  Just because everyone says there are too many beans out there doesnââ,¬â"¢t mean that it isnââ,¬â"¢t already priced into the market.

Meats
Cattleââ,¬â"¢s low volume support over the past two weeks is not very convincing.  This market shrugged off a 15% retracement like it never happened and I just donââ,¬â"¢t buy that the long side has much more steam left.  A bear put spread is the way to go here and gives us

Trade Description
Buy one October Live Cattle 93 put and buy one October Live Cattle 90 put for a spread cost of $400.  Margin and max risk is the cost of the trade.  Options expire on October 6th, 2006.

Explanation
A technically overbought market on light volume sets up a likely retracement.  A bear put spread gives you a low cost, low risk and low margin approach to play a reversal.  A near the money spread with a 1 to 2 risk to reward ratio and 5 weeks of time is a solid deal.

Profit Scenarios
Max profit is $800 and occurs at expiration with the market below 90.00.  Profit is reduced by $40 per .10 up to 92.00 (breakeven at expiration).

Risk Scenarios
Max risk is the cost of the trade ($400) and occurs at expiration with the market above 93.00.  Profit is reduced by $40 per .10 down to 92.00, which is breakeven at expiration.  It is recommended that you scale out of half of the bear put spreads at $800.

Metals
Metals broke the congestion this week, despite a weakening oil sector and a flat to strong dollar, by surging higher.  I continue to recommend the more predictable play here which is buying long strangles to play volatility.  Copper puts are still worth the long shot play ââ,¬â€œ July 150 puts for $400 are a bit of a leap of the imagination but will catch a nice volatility spike on a 50 point drop over the next several months.

Softs
Sugar gapped lower again and remains in a bear breakdown.  I am buying calls here (March 16 strike at the current price) if for no other reason then to play an eventual retracement off of this drastically oversold condition.  Coffee prices remain off the highs, but the market is a great buy here.  Cotton is heading south as I remain bearish.  Cocoa is a buy heading into the elections ââ,¬â€œ turmoil is right around the corner and the market is at a  value.  OJ is deflated after Ernesto felt more like a rain shower in Florida than a hurricane.  I buy calls on dips here.  Lumber is still a buy but I would rather miss it than chase it so wait for a move down to the 240-250 area.

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.