Financials
Stocks: The recent strength in the stock markets has been a bit of a surprise. At the same time we continue to see signs that the rally is happening on very low volume. While this time of year is traditionally a low volume period, the fact that we have made it to new highs on thin volume is not, I repeat, not a sign of strength. In fact it is a sign of another â�,��"sucker rallyâ�,�. True breakouts need strong corresponding volume to keep them going. A lack of volume can be equated to trying to drive up a mountain in your car on an almost empty tank of gas. Sooner or later the car runs out of gas and slides back down the hill. Volume is like energy and a lack of it is rarely a good sign. Our analysis of the stock market this week uncovered an interesting fact. We ran some put/call premium ratio analysis and found that currently the put premium on the S&P 500 is almost three times the call premium. That means that if we assume the S&P is trading at 1300, then a 1350 call would be trading at 10 while a 1250 put would be trading at 30. What this really means is that floor traders, (who tend to be the largest writer of options) are charging three times more for puts then calls. Which leads to the question why? The why, is relatively simple to explain. Traders are asking for 3 times more premium for puts because they do not really want to write them at all. This is because they too believe that this rally is less than â�,��"realâ�,� and likely to take a turn lower in the very near future. Another sign that points to stocks breaking down soon is the VIX indicator. The VIX indicator is a measure of overall market Volatility. Currently the VIX is extremely low. This is a sign that the average investor is not at all concerned with downside risks in the stock market. This stands in sharp contrast to the above mentioned put/call premium. If the little guy is not thinking about the risk in stocks and at the same time the pros are very concerned about the down side, who do you think is better informed? We continue to be biased to the downside and therefore continue to accumulate puts on strength.

Bonds: Bonds continued to rally this past week, but here too there is a sign that we are running out of gas. Here the sign is not volume but rather the fact that the average true range (ATR) continues to narrow. What that means is the daily range (the difference between the intraday high and low) continues to get smaller. This is a sign for any market that the current trend is losing steam. Here we are not calling an all out reversal in bonds but rather a consolidation. Bonds should start to consolidate this coming week. We are likely to establish a new range between 109 and 112 in the near term. As we get close to the next FOMC meeting (September 20th) we should see this market stall. We are recommending a short condor spread on the 30 year bond contract at this time to take advantage of this consolidation. Contact us if you would like to see the details of this trade.

Energies
Crude Oil did pullback this week and ended the week below $70 for the first time since the beginning of the summer. Longer term support lies just above $68 So it is critical that this support level holds for us bulls. We continue to buy this dip with stops starting at $67.89 Natural gas is also testing support levels that we put in earlier this summer. Here too we are buying long with stops below support. Overall the slow down that we have seen in the energy markets could be looked at as the market simply trying to catch its breath. Once it does, the path of least resistance remains to the upside. There are so many things that would have to go right for Crude Oil to find its way back below $60 and at the same time so few things that have to go wrong for Crude to be above $80 that we must continue to be biased to the upside.

Metals
Metals really came back to life this past week. Silver lead the way higher and fell just a few pennies short of my target at $13.00 This market is breaking out to the upside and we see little in the near term that will stand in the way of this rally. Gold continues to lag and we continue to position long waiting for it to catch up. The gold contract that we trade is based on the US dollar. This is however not the only way to look at the price of gold. Gold when priced in the British pound is at an all time high. This could be a sign of things to come on this side of the pond. We continue to target 650 in the near term and 700 before this calendar year is out. Copper continues to drift and not even the ending of the strike was enough to move this market out of its range. While I remain a bull I must wonder what this market is waiting for to move.

Grains
Grains tried to begin a rally this week but fell short of following through. Over all we do think we have put in the summer lows and we are feeling very good about our current longs. We are long Corn and Beans at this time and will be looking at getting long wheat this coming week. We continue to believe that we are entering â�,��"phase 2â�,� of the commodities boom, where the laggards from phase 1 (grains and Softs), begin to catch up to the leaders (metals and energy). So look for big moves to come in grains as we get closer to harvest.

Softs
OJ began to break down after Ernesto proved to be a non-event for Florida. Hurricane season peaks on September 10th of each year so we continue to live with that threat in the near term which should keep the bid in OJ. We have now exited our longs and remain on the sidelines in OJ for now. I do see an opportunity to strangle this market near term so aggressive trades should look at that idea this week. Cocoa managed to stabilize this week and we in fact exited our puts and are now simply long futures. While this market has struggled a lot lately we could see a fast rally back to 1600 in the very near term. Coffee continued to drift sideways this past week but is looking more and more bullish as the days go on. We are looking at a long 110-120 Dec. call spread this week. Well the bounce that I mentioned last wee in sugar did turn out to be nothing more than a dead cat bounce. We remain long via our swing trade but will look to exit the puts in the near future as the bottom of this market is near. While cotton has done nothing for me this year but disappoint I see an opportunity to strangle this market in the near term. Look at the Dec. 55 â�,�“ 53 strangle for a great way to position cotton for the rest of the third quarter.

Meats
After briefly pulling back to support @ 65 lean hogs bounced back up to resistance @ 67. The longer term trend remains bullish although if we donâ�,��"�t see new highs soon i would expect us to pullback and consolidate a bit more. 64 and 67 are my key support and resistance levels. Feeder Cattle continue to consolidate and we are looking to straddle the market at the current levels. Oct Live cattle made some new highs but failed to close near the high of the day today which could be a short term overbought sign. Overall though, this trend up is likely to continue in the near term. We have significant resistance just below 97.50, so that is our near term target.
 
Forex Currencies
EUR/USD: The short term trade I suggested last week (long @ 1.275 target 1.285) gave us a quick profit, and got us out before volatility increased late in the week. Even though our trade worked out quite well, it is important not to become overconfident and careless simply because of one good trade. We continue to wait for a move out of the recent range between 1.27 and 1.29 to confirm our bullish outlook for the longer term. Until then I will continue to use 1.2750 and 1.285 as my support and resistance levels.

USD/CHF: For the past few weeks this pair has been trading in a range that continues to narrow on both the upper and lower bounds. From my perspective it seems as though the balance between the buyers and sellers is becoming more and more unstable, which should eventually lead to a powerful move. The support level between 1.22 & 1.225 has been tested several times as has the resistance @ 1.24 & 1.245, and I will continue to use them for my short term trades. However, due to the downtrend evident on my long term charts I remain bearish and would use a break below 1.2225 to go short, targeting 1.20 if that occurs.

GBP/USD: After weeks of consolidation we finally saw some positive action in this pair. In fact the cableâ�,��"�s recent behavior has been quite strong considering that we are approaching some new highs and volatility has been somewhat muted. Furthermore, on Friday we saw what I believe to be the final shakeout of the weak hands, as the intraday breakdown was followed by a positive close. In that respect I am a cautious bull, looking for a b/o above 1.91 to signal that the cableâ�,��"�s bull run will continue. Support @ 1.895 & 1.89 are key.

USD/JPY: From a long term perspective this pair is testing some significant resistance @ 117.50 from back in July. In the short to medium term this pair is also quite extended it has not yet had a significant pullback or consolidation since the current move up from 114.50 began. That leads me to believe we should see at least some type of sideways or bearish trade in the near term. I am looking to go short at the current levels, watching for a breakdown below 116.85 to signal a violation of the month long uptrend. Support @ 116.50 & 115.75 are my downside targets and I will tighten my stops trailing stops accordingly.

AUD/USD: I must admit that my bearish call from last week was wrong. In fact, with the benefit of hindsight it appears that the pullback 2 weeks ago merely retraced and filled the gap from the end of July. The support level @ .7575 held on Monday and was followed by a move back up to the resistance @ .7675. It is important to step back and analyze your mistakes in order to learn from them and this is a perfect example. This pair continues to be range bound, and I am really looking for strong move up or down before I will commit to a longer term position. Until then the agile trader may want to fade above .7790 or go long below .7580 with tight stops.

USD/CAD: It would appear that the buyers have yet to find this pairs valuation reasonable, as they remained on the sidelines all week. As stated last week, the 1.11 level seems to be drawing the most action, as the pair traded between 1.1075 and 1.1125 for most of the week. This type of consolidation after last weeks break down through support @ 1.12 leads me to believe this pair has further downside to go. Support @ 1.0975 and resistance @ 1.1125 are key level on this one.

Derek Frey is Head Trader at Odom & Frey Futures & Options.

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.