Financials
Stocks: The stock market continues to hold itself up, and I continue to ask for how much longer? Most analysts are calling for the consumer to rush in and save the day. But how can they? With a negative savings rate and the Credit card collectors calling every other day, it is only a matter of time before the piper comes to collect. This house of cards is impressive, but it is still a house of cards. The question is not will the market correct but when. We may drift through the Holiday season without a huge stock market plunge, but as the New Year approaches and the hangover subsides, the numbers will speak for themselves. Buy or spread puts on the Dow now in either the Jan., Feb., or the March contract, depending on your personal outlook. The bottom line is: after the champagne goes down so to will the market.

Bonds: Bonds could not even follow through this week. We are now seeing a bit of reality settle into the bond traders. Tuesday is the last FOMC meeting for 2006. While we are not expecting any change in rates, we are expecting the Fed to have a hawkish tone to their comments. I am targeting a move to about 112 this week. The only thing that can keep bonds from falling in the near term is a falling stock market. As I mentioned last week, the first line of defense in a falling stock market is bonds. So if the market corrects, as I expect it will, bonds could regain their strong bid. Longer term, I remain a bond bear and I am holding January 112 puts that look great at this time.

Energy
The energy markets continue with two steps forward and one step back. As I mentioned in past issues, volatility in energy has increased and will likely increase further in the near term. We continue to be bullish on energy and feel that $65 in crude oil is a realistic objective. Natural gas has also pulled back after a brief rally but here too, we advocate buying the dip as higher prices are almost a foregone conclusion in the near term. We are still targeting a fast move to $10.00 once the market turns back up. Overall energy prices are not likely to pull back much more than we have already seen, and if somehow they do, look for OPEC to intervene with more production cuts.

Metals
Metals continue to more or less drift sideways. These consolidations within a longer- term bull market, are healthy and needed to sustain the bull. The longer the consolidation, the greater the move when it comes. We continue to buy long on substantial dips. Caution is still advised as we could have a more substantial pullback in medium term, the best way to be cautious is with tight stops on any new longs. If you have the staying power to hold on long-term, then you will almost certainly be rewarded. This week we see increased volatility in metals. Look for range expansion on both sides of the current price in both gold and silver, but to follow through in either direction seems unlikely.

Grains
Grains really took it on the chin this past week. Grains, as a whole, have already rallied substantially for the year. As I mentioned in metals, a consolidation and or correction is healthy if not needed for these longer term bulls to be able to sustain themselves. This week I see continued volatility in the grain markets. Wheat has broken its support level and could now fall to the mid $4.00 range before finding longer-term support. I continue to favor long wheat over short corn, but I must admit to being stopped out of 50% of that position on Friday. In the soy complex, bean oil looks like the most likely candidate for a stronger correction in the near term. For now, we will cautiously buy these dips, but we are cutting our position size in half, or even thirds, for the near term.

Softs
OJ broke out to new highs triggered by colder than usual weather here in Florida. I will stand aside this market for now, as I cannot bring myself to go long OJ at the current prices. However, the short side is simply not working out either. Cocoa did in fact follow through as we had expected and we continue to see this market moving higher in the near- term. We are targeting a test of the highs seen earlier this year at about 1725 in the coming days or weeks. Keep trailing your stops, as this market is quite thin and can stage violent shakeouts at any time. Coffee continues to be strong and I really like the long- term prospects of this market. We see a very classic bull flag being formed that should point the way to a test of resistance above 135 in the near term. Much like Cocoa, this market is also fairly thin and can also stage violent corrections at any time, so continue to be vigilant with your risk management. Sugar has stabilized, and is likely to stage a real break out of the sideways consolidation in the weeks ahead. Longer term, much like coffee, I really like the prospects for this market. Long-term position trades are the only way I have ever been successful in the sugar market, so look to buy this dip and hold for the next few months at least. Long-term I like what I see in cotton, but near-term I remain cautious. This market can move big when it wants to but so far it has only moved in fits and starts. This week if we see a move above 54, I would cautiously go long and target a test of resistance at 56. If we do manage to break through resistance at 56, then I would finally be converted to a full bull.

Meats
Dec Live Cattle have started showing some signs of strength, forming a double bottom at the 85 level. However, significant resistance remains above the current price between 88 & 89. Long term I favor the long side of this market, though I expect a somewhat range- bound trade until we can push through resistance. Jan Feeder Cattle have also started to catch a bid; this can be attributed to the underlying supply & demand factors, coupled with the recent weakness in the grain complex. Open interest and volume are both climbing as the market approaches the gap near 100. If buyers can remain in control and push through the resistance at 102, then look for 105 in the short term. Feb Lean Hogs sold off quite heavily on Monday and spent the rest of the week rebounding. However, this recent bounce seems to be losing momentum and if buyers cannot regain 65-66 look for weakness, targeting 61 in the near term.

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.