Energies
Energies rallied this week after finding price support at the bottom of a technical downtrending channel. An opposing view is that it is filling out a longer term pennant formation via this channel price action and is setting up a bullish breakout of that pennant. This view is further supported by the anticipated union strike in Nigeria, general violence and exposure to militant oil strikes in that country (Chevron has pulled workers throughout the country due to the violence), disruptions in gasoline refineries and the general exposure to weather issues given the current low levels of gasoline supplies heading into the high demand summer driving season. To top it all off, the President got the green light to move forward with an attack on Iran without the backing of Congress; a possible tell to what the future may hold.

Despite the looming issues, the fact is the market can tolerate supply problems from Nigeria if we don’t go to war with Iran and the early part of the hurricane season is uneventful (much like it was last year). If it is all just fear premium and not real impediments to supply then the market will deflate. The technicals should be the guiding determinant in this sector. While gasoline futures are running to fresh highs, crude oil is testing the top of its downtrending channel and heating oil is bouncing off of a potential double top. Natural gas broke through 810 resistance but lacked follow through and is ultimately back below that resistance to start the upcoming week. The sector is at a critical juncture and a net negative week will be a significant indicator of a topping market.

I recommend a dynamic three market spread to best play the current technical and fundamental structure of this sector: Sell one unleaded gas, sell one heating oil and buy 2 natural gas futures. Natural gas offers more congestive support to reduce loss on a sector wide selloff, while unleaded gas could have a significant failure and bring heating oil along for the ride with that market’s double top setup. Keep a close eye on the crude chart, however, because if June crude breaks out above $68 then this market has completely turned momentum bullish and will likely have the backing of a real fundamental issue.

Financials
A choppy stock market ended the week in stellar bull fashion, setting fresh contact highs across the board and coming within ticks of a fresh all time high in the S&P. Nevertheless the view is still the same – a bull market with an impending failure that only the stubborn few will receive the benefit. Increasing premiums in normally discounted S&P call options make this an excellent option seller’s market with a short covered call spread strategy.

Bonds topped with a strong technical turn, giving momentum to a long time dead market. Can volatility sustain itself to the downside to bring substantial price moves? I doubt it. The market did break through key 110 support, but faces critical support at 109-16 and 109-06 respectively. While it is unlikely the market will penetrate those supports without some buying coming in, there is little to technically hold this market up below those marks. It would be a significant tell by the market that it expects rate hikes as opposed to cuts. Perhaps what we are really seeing is a slow pullout by foreign buyers that held this market up for so long. That could be 5-10 basis points of premium leaving the market in a mass exodus if this price action is actually an indicator of that occurring. I don’t mean to be wishy-washy here. This market is bearish - there are no two ways about it. It is, however, approaching key support and is likely not to collapse anytime soon. Therefore I suggest playing the more likely occurrence – a continued range bound market. This means buying futures with stops below 109 with a profit target above 111.

The dollar is continuing to show signs of price support, but is desperately in need of a breakout day to establish true momentum. I suspect we will see that move shortly, with a break above 83 eminent in this market that is likely to establish a key trend change before August. This means buying cheap puts in the euro and pound (discounted premiums based on a lack of downside volatility in recent months). The yen is at a critical juncture. The February rally off of the 82 area seems more and more like it was a dead cat bounce giving way to a more momentous market collapse. Is the carry trade a non-issue? Not too sure about that, but I do see this market melting away to nothing on a close below 82. It does provide a near term swing trader’s buy with stops below 8170. More importantly this market is showing the likelihood of price expansion on a longer term basis (see chart) and is a long strangle play if I have ever seen one. The Canadian dollar is on fire and due for a pullback on a short term basis. I recommend a sell on Monday with a short term target of 9020. Longer term the market is likely to set a fresher high and test the 9350 area before establishing a trend shifting bearish topping formation. Establish long term put plays here if the market runs to 9350.



Grains
If the grain sector were a roller coaster ride at a theme park then everyone getting off the ride would be sick to their stomachs. This is one choppy market with ugly technicals and a weather issue that can’t seem to hold a trend for more than a few days. This is more of an indication of the corn market’s historic price and extreme exposure to supply problems in a crop year where demand is expected to be through the roof. The ethanol industry is expected to eat up as much as 27% of the 12.46 billion bushel corn crop. Corn prices have dipped, offering a significant test of the post-plantings report lows and developing a several month channel after topping in late February. Technically we are in a band with a $3.50 break signaling a short and a $4.00 breakout screaming a buy signal. Personally, I like the idea of playing the middle chop and buying around 3.60 and reversing around 3.90 until the breakout occurs. The gut says that break will occur shortly one way or the other, with the sector bullishness and weather exposure indicating a breakout to the upside is more likely.

The soybean market has the potential for acreage planting dip with a swing towards corn supply in a year where soybean rust and a China shortage are significant overhanging issues. Soybean oil is spiking on increasing demand and setting the stage for an epic supply crunch. The soybean sector as a whole is showing strong technicals and a potential breakout above $8 resistance.

Wheat is pulling back hard after a strong rally from a serious frost issue that will have a long term affect on supply. While the market could easily see a break to $4.40 and still maintain a longer term bullish chart pattern, it is unlikely to have weakness in a grain sector that is about to ride the coattails of a major soybean rally. If beans pull back this week, which is certainly possible given the overbought short term condition and $8 resistance barrier, then look for wheat to test $4.40 (which would offer a heck of a value buy entry). Wheat supply is too devastated to see a collapse in this market long term, even if everyone forgets about it in the near term. This a case of buy the rumor and sell the fact, but the facts aren’t truly realized just yet.

Meats
The previous week’s spike failure on the news of another mad cow case in Canada was bought up by the market. But is does appear to indicate a longer term sentiment and momentum change in that market. Feeder cattle is setting a technical double top at 114, a ridiculous price that ranchers are foolish not to grab. Why is it the average farmer and rancher holds out for inifinitely higher prices but bails on the first dip below their breakeven? I suppose the psychology of the average rancher is what sustains rallies and brings unhealthy market collapses. Put positions in live cattle are recommended. Short feeder futures with stops above 11460.

The USDA reported 11.297 million head of cattle on feed in the U.S. as of May 1st, down 2.3% from a year ago and below expectations. Placements in April were down 2.8%; marketings were up 2.0%. After the close, the USDA estimated this week's beef production at 522.6 million pounds, down 2.3% from a year ago. Pork production estimates were 395.4 million pounds, unchanged year over year.

Hogs are rallying into a consolidation pennant that is about to breakout. Outside of a long strangle play there is not much here and, to be honest, I am not sure that this market will do much of anything despite the nearing of the tip of its pennant. Technically a neutral pennant in a bullish longer term pattern is bullish, but the gut says avoid the temptation until there is a technical confirmation.

Although I hate to acknowledge this market much, bellies are offering a swing trade short with stops at 10610 and a profit target of 9920. The trade should be exited by Thursday regardless of price.

Metals
Metals continue to offer corrective selling pressure amid a supporting dollar and weak sector technicals. Copper collapsed after a failed attempt at the $4 highs, gold topped below $700, and silver is holding up just above 12.62 lows and 12.86 closing price support from back in early March. If the metals are going to hold up at all it will be right now, otherwise gold will likely penetrate through 641 support as the dollar heads higher.

While the dollar/gold inverse correlation has not held up on short term intermarket comparisons, it does indicate a more ‘connected’ relationship on longer term trends. IF the dollar is in fact offering a true trend changing support above the critical 80.50 double bottom then it is likely gold will falter to substantially lower prices – perhaps penetrating $600 and possibly even lower! The yen’s possible collapse and recent weakness isn’t helping the case of the bulls any either. Puts remain cheap in gold and silver, especially if you go out 15% from the market with about 3 months to expiration. The market just doesn’t see the potential for downside volatility, but trust me, its there.



Softs
A strong price spike in coffee came as a poor crop in Vietnam and rising Robusta prices brought a strong bid and a short covering rally to the market. Throw in some news of researchers predicting that viable bio-diesel and ethanol production from coffee could happen in as quickly as one year and all of a sudden funds and new specs are starting to pay attention to this market.

OJ prices stumbled a bit as it consolidates after a huge plunge and recent run-up, but overall this market is a seasonal buy heading into an under-feared hurricane season for Florida. While OJ certainly has the technical structure of a market setup to collapse after a massive cyclical three-year run-up, it is more likely going to follow a similar chart pattern to cattle and gravitate back towards its highs as supply problems will plague this market for a few more years. Despite the risk exposure, a short strangle in OJ should payout over the next 6 weeks or so.

Cocoa prices are setup to test the highs it set back in mid-April. This market could run to all time highs in no time as a short squeeze is very possible given current market conditions. Cotton got a major price spike this week after failing miserably and setting up an ugly chart pattern. Is this the spike low the bulls have been waiting for? Unlikely. Sugar is worth taking a look at for some strangles and call plays out in October or even into ’08. The market has gotten carried away with its selloff and I do not expect long term consolidation, which means a strong rally is a real possibility. Lumber is starting to find some strength this week and remains a good long-term buy with calls in place of futures.

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.