Financials 
Stocks: The stock market ended the year with a bang. We hit an all time new high on the second lowest volume day of 2006. New highs on low volume are rarely a sign of a healthy market so we continue to advocate caution with long trades. The climate for stocks in 2007 could continue to be positive so we are not telling anyone to get out of the long side but rather we are encouraging you to keep tight stops on all trades (long or short), and or continue to hold protective put option positions to hedge you long side exposure.

Bonds: Bonds continue to correct and now look poised to test support at the 50% Fibonacci retracement level which lies at about 110 on the weekly charts. Bonds should continue to sell off in the near term as more and more economic data comes out and confirms that the Fed. will continue to be on hold into and through the second quarter of 2007. If the Fed. does step in, it will most likely be to raise rates again, and then bonds would really sell off. Overall pressure in bonds remains to the downside in the first half of 2007. We are holding 112 puts on the March contract for now. Buying puts on strength is the best looking trade for the early part of January.

Energy 
The energy market continues to churn as we end the year. We are well off of the 2006 highs and the forces that caused those highs were somewhat of a â�,��"perfect stormâ�,� and not likely to be repeated in the near term. Geopolitical events being what they are there is still more room for crude to rally than fall but we see a more likely scenario of a market that continues to drift with little directional movement in the early part of 2007. Demand for energy continues to grow but at the same time alternatives like ethanol and bio-diesel are also growing which should keep the energy market from testing the 2006 highs anytime soon. These markets are now more than ever a â�,��"traders marketâ�,� which means wild short term moves in both directions. Approach the energy sector with caution and again manage your risk up front on any energy trades.

Metals
Metals continue to recover from the mid December breakdown. Gold needs to push to and through 660 to get the bull back on its feet. Near term gold could falter a bit but longer term this market is poised to continue to rally as we go forward into 2007. Silver had a very violent Correction a few weeks ago. This type of correction makes us even more bullish. These type of one or two day washouts tend to happen prior to a market breakout to the upside. Many people refer to this as â�,��"shaking out the weak hands.â�,� We feel that Silver is likely to test the $15.00 range in the first quarter of 2007. Copper has broken down out of the consolidation wedge it had been in for some time. We had liked the long side of this market while support was holding, but now that we have broken down we are likely to see a retracement back to strong support around the 225 level. Remember that copper tends to forecast the economy as a whole and a falling copper market could be a leading indicator for things to come in 2007.

Grains
The grain complex had had quite a year. Grains were lagging the rest of the commodities at the beginning of the year and are now poised to assume a leadership role in 2007. We could see continued higher prices across the entire complex as more and more demand for these products comes in. Increased weather phenomena also contributed to the run up in 2006 and are likely to continue to plague these markets in 2007 and beyond. Soybeans on a technical level seem to have some of the greatest upside potential in the medium term. Look for corn and oats to lead the way higher with wheat not far behind.

Softs
OJ continues to hang around the 200 level but this market is likely to have a directional move early in the New Year. We continue to see greater potential for a quick downside correction than a rally, but longer term this market could continue higher for some time. Cocoa is consolidating the recent rally and that should allow us to continue to push higher once we break out from the bull flag we are building. These types or consolidations are needed to sustain a longer term rally and we are happy to see this one taking shape. Look for Cocoa to trade above 1700 sometime in January and then a rally to 1850. Coffee continues to consolidate and struggle with resistance at 130. We now have flat topped resistance at 130 and these flat topped patterns very often signal a market that is setting up to move much higher. Longer term Coffee could move back above 2.00 so look at any big dips as buying opportunities. Sugar to is struggling with resistance at 1200. This market is now the laggard of the soft complex after being the leader in the early part of 2006. Will it again become a leader? We think so and are positioning long as we get into 2007. Cotton has finally started to rally and is getting more and more attention from both traders and funds as time goes on. Cotton could stage a significant rally if it can break out above resistance at 57.50. For now call spreads are the safest way to position long this market.

Meats
Feb Live cattle finally showed signs of life last week. The market bounced off strong support and stalled just below 93. A follow through above that level could signal a more pronounced move targeting 97, the high from last year. I would recommend spreading ITM calls with OTM to reduce your risk while maximizing your risk to reward ratio. Jan Feeder Cattle also rebounded last week and closed just below long term resistance @ 100. If buyers can finally force a break above 100 look for a quick move higher targeting 105 in the short term. Feb Lean Hogs continued their 2 month decline last week and the contract is now approaching long term support near 61. I would be cautious buying a sharp move lower unless it closed near the highs, forming a hammer on the candlestick chart. On the long term charts the uptrend is still intact, so be vigilant and watch for an increase in buying volume.

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.