After a year of some of the most volatile moves in recent commodity history, we enter 2005 with many questions and few answers.  The Year End Review looks at the year gone by and analyses and forecasts the year ahead.  So buckle and hold on - this is a bumpy one!

Overview
In 2004 we were witness to an historic Presidential election, expansive violence in Iraq, and overall growing political concerns on a global level.  This certainly didn't do much to help calm jitters among traders and created a very choppy and sometimes overwhelmingly volatile commodity and stock market environment.  Fundamentally we were exposed to numerous and devastating hurricanes in Florida and the Gulf, adding to supply issues in energies and utterly destroying the world's largest OJ producer.  Soybeans offered us one of the biggest price reversals in history and did it in record time.  China remains an ever-growing part of the global commodity picture.  Cocoa spiked on news of a French invasion in the Ivory Coast - the world's largest cocoa producer.  Coffee rallied as news of crop issues and rising demand help that market begin what could quite possibly be an epic rally from historically depressed prices.  Cattle remains near all time high prices.  The US dollar ends the year testing historic lows and flirting with disaster, helping gold and silver make ferocious strides.  We top it all off with perhaps the worst natural disaster in the history of the human race.  What a year this has been - and it is just the beginning...
 
Energies
Political premium dominated the pre-election trading in 2004 for the energy complex.  Despite events unfolding in Iraq that would be perceived as worse than anticipated, the market ultimately gave into the bear pressure and collapsed.  With a 25% plus retracement to end the year, crude oil seems poised for expansive volatility to start 2005.  This means Watch Out!  The market will not remain in the current range much longer, and with the Iraqi election and winter weather being quite unpredictable events, the market is very much on its heels.  While I believe that oil will be sub $30 in the not so distant future, the next 6 to 12 months could offer us a much broader picture with volatility expanding to never before seen levels and duration.  I would look at 2005 as a year to avoid energies for those faint of heart.  While I suspect volatility will dominate, option pricing would suggest much of the volatility premium is already factored in, making good option plays hard to come by.  Without the availability of good option strategies I would be hard pressed to play oil futures over the long haul.  My focus in energies will be playing the relationship between heating oil and unleaded, as heating oil remains incredibly and appropriately over priced by comparison.  Look for the spread to reverse, but I would wait for the next major cold front to pass before acting on it.  Weather dominates this spread, and if the winter demand concerns ease heating oil will tumble.  I am also looking for opportunities to sell call premium in crude and heating oil on rallies of 5-10% or more.  Sell intervals of 3 month time horizons (3, 6 and 9 months out) and stay 20% or more away from market price.  Natural gas is in a free fall, has momentum and lacks fundamental support.  It would not surprise me if we hit 3.50 in natural gas in '05, but the steal of a deal here is selling short term distant call premium on 30 point plus up days.

Financials
Resiliency is the best word to describe the stock market this year, as a late in the year post-election rally has bulls at the highest bull confidence rating in 18 years heading into '05.  I have been a bear for some time, and I must admit that the economic data in '04 truly denies any short term bear outlook of legitimacy.  Nevertheless the market remains overbought, and has p/e ratios that have a lot of room to tighten.  Scandals, terrorism, and election jitters all played a back seat to improving economic data, an infusion of foreign investment and a bull commodity market pushing stocks higher.  January is seasonally a bullish time of year as funds and individual investors reposition into the market.  Moreover, IRA funding give mutual fund managers a flood of cash to be placed in their respective stocks.  My gut says the market will be ass-backwards in '05 and January will be no exception.  Look for the major players to develop a larger cash position to start out the new year.  This means selling pressure without the cash influx everyone is expecting.  A quick dip to start the year is just what the market needs to get rid of the overbought environment we are currently in.  Let's not forget we are heading into the Iraq elections, a social security war in Congress and are spreading ourselves out with US support of the Tsunami tragedy. 

Bonds spent '04 reversing its trend as Greenspan and the Fed shifted to raising rates in a very methodic ¼ point fashion throughout the year.  My gut says the Fed will continue the ¼ point hikes for a few more meetings, but ultimately will halt the rate hikes either in the May or June meetings.  While I am a long term bond bear I see '05 as a choppy year, with a wider range of trading developing.  Look for support around 106 and resistance to hold around 116, with breaks above or below either of those marks meaning a major trend shift. 

The dollar ends the year near historic lows after three years of selling destroys a 7 year rally.  Critical price supports at 8060 and 8020 place the dollar in a major danger zone heading into '05.  With a Bush reelection and Snow remaining ‘in charge' one must wonder if they want the dollar to go to zero before making a shift in the opposite direction.  I would be shocked if a significantly strong European Union didn't step in, as their export issues are becoming overwhelming problems.  The Japanese would love to jump on the bandwagon and a foreign almost global currency intervention is right around the corner.  Develop long term shorts in the euro and yen, and buy the dollar - but have patience.  Interventions tend to come as price shocks to the markets.  If you are not ‘in' the market when it happens you miss the majority of the move, and yet timing the intervention is nearly impossible.  Maintain long term positions with a dollar average mentality.  The Canadian dollar is long overdue to a retracement to the 78 area and I suspect that will happen sooner rather than later.

Grains
This year witnessed one of the biggest rallies and failures in soybean history, with China demand being the focal point of all the action.  We head into next year with price support developing above the band of prior support (1999-2002), and China demand and supply questions all relative unknowns.  Corn and wheat experienced similar moves, albeit less dramatic and both hover above price support looking for direction as we head into the planting season.  I am and will remain a value buyer of grains, with a focus on beans.  I suspect beans could quickly make a move to $7 as a rust scare or a China demand surge could spike the market in a blink of an eye.  We are holding on to a very tenuous price support and a thorough break and hold below the recent lows would make me step aside, but otherwise I recommend establishing May positions with options and buying futures with tight stops below $5 on beans and $1.95 on corn.  Using puts in place of stops is also highly recommended here.

Meats 
2004 sustained the biggest meat rally in history, but as we head into 2005 cattle faces tremendous challenges in order to remain at inflated prices.  Many argue we are in a new era of meat prices, as Atkins and general philosophic changes in diet and health have helped to change the demand picture for the meat market.  Rarely do we see major trend shifts of this nature, and we almost never are aware of it when it is happening.  I see some truth to the idea of sustained demand, but one must look at the current retail costs and you will see prices cannot be sustained forever because price will eventually break the demand bubble.  Moreover, as US meat opens up to Canada and supply becomes more readily available on a global level, price will need to be adjusted.  Cattle will be a major focus for me in 2005, as I believe a major retracement will take place, and take hogs and bellies along for the ride.  I see a price target of 75 or lower on live cattle easily attainable.  Hogs and bellies also experienced extremes in 2004 and are fundamentally overbought and due for a retracement.  Historically you could have sold bellies between 100-110 and made substantial profits with limited losses.  All in all the meat complex heads into next year with a consolidated formation suggesting a breakout will come sooner rather than later so get on the bandwagon before it gasses up.

Metals 
A wild and tumultuous year in metals was helped by a complimenting US dollar breakdown and overall precious metals demand throughout the year.  Gold remains holding onto its long term saucer formation and silver remains in a price arena that is well above historical resistance.  With my feelings on the dollar I am clearly an intermediate term bear in metals.  This means mega retracements in gold and silver in '05.  We are in a major bull market in the long term, which would be difficult to deny on a fundamental or technical level, but we are way ahead of ourselves in these markets and a shakeout is long overdue.  Look for sub-$400 gold prices and a possible breakdown in silver to $5.50.  Copper remains strong with a weak dollar and strong foreign demand, but should see a major break on a currency intervention and could see 110 by mid-year.  Play the dollar or play gold and silver, either way an intervention will shake these markets up in 2005.

Softs
OJ experienced a ridiculous year of crop destruction, and yet ended the year in a price range suggesting a neutral market outlook, or fair historic pricing.  There are a bunch of conflicting problems here.  We have numerous hurricanes wiping out huge chunks of Florida's crop and suggesting the next 5 or 6 years will provide poor harvests in Florida, the largest OJ producer.  Canker fungus will be a big story in '05 as major tree destruction will take place in Florida, adding salt to the wound.  The problem is we have almost a year's supply in backup before this happened, and increasing supply from South America.  Nevertheless the market is showing strong signs of price support and a large short covering effort over a several months.  OJ is a buy at these prices and 2005 should over a major run for OJ bulls.  Coffee also experienced a long awaited bull run and ends the year with a strong heart beat.  Brazilian supplies are cut in half and while this market also has a lot of carryover from successful crop years past, we enter 2005 with large specs and hedges playing the bull run.  This market has had a couple of year history of bouncing and failing, bouncing and failing, etc.  The shakeouts are a way for the market to rid itself of long small specs and establish a true base.  Now we have less small spec participation and a strong layer of large spec and hedger support giving significant life to the current rally.  Historically, coffee has been at sub-50 cent pricing 3 times, the first two of which we saw a run to $2 plus pricing (two of the highest price surges in coffee's history) and the third of which we are currently experiencing.  Coffee may retrace to 90 cents or so but ultimately 2005 should see coffee priced break $1.50.  Get long with bull call spreads.  Cotton ends the year in the doldrums, with pricing near historic lows.  However, as history as a guide cotton has never support out at or near its current pricing and should test the mid-30s before bottoming out.  For that reason alone, I would wait on going long cotton, and focus on long strangles as a way of hedging my bet because I would surprised if we stay around these prices much longer.  Cocoa had a politically driven 2004 with stable prices becoming quite volatile after France invaded the Ivory Coast late in the year.  This is no minor event for this commodity, as the Ivory Coast supplies about 2/3rds of the world's supply of cocoa.  Keep a close eye on whether France takes over the export operations of the Ivory Coast, as this will lead to significantly lower prices in the future.  However, if violence and defiance continues (which would be consistent with the last decade plus) then prices will remain volatile and choppy.  My trading strategy is to play short term bounces with value buying between 1350-1550 and longer term selling on bounces to 1700.  I remain a contrarian in sugar with a bearish outlook for the first half of 2005.  The market is up 70% in just over a year and should retrace to about 7.50 to become a value in my mind.  Lumber got a bit ahead of itself on its breakdown, and technically has retraced so much to the upside that one must wonder if the bear reversal has spent itself.  The gut says there is one more plunge left, and my original target of 250 as a long term projection should still materialize.  Selling around 360 should be a great entry price with support at 325 and 290 being significant technical points to break through on its way to 250.

Disclaimer
There is risk of loss in all commodities trading.  Commissions and fees vary per individual and therefore are not included in profit, cost and risk scenarios.  Please consult a licensed broker before you trade for the first time.  Losses can exceed your account size and/or margin requirements.  Commodities trading can be extremely risky and is not for everyone.  Some option strategies have unlimited risk.  Educate yourself on the risks and rewards of such investing prior to trading.  James Mound Trading Group, or anyone associated with JMTG or moundreport.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (clients or otherwise).  Past results are by no means indicative of potential future returns.

James Mound, owner of JMTG Brokerage LLC, MoundReport.com and author of the book 7 Secrets, writes the Weekend Commodities Review Newsletter. Receive your free weekly subscription to the Weekend Review by e-mail. Click here.