Energies
Despite a lack of damage from Cyclone Gonu, and a strong Friday plunge, crude oil continues to hold a bullish technical formation which includes a head and shoulders pattern and trend line support on a weekly chart. This market is in a tug-o-war with bullish technicals and fund buying support pitted against a yet to happen supply issue. The market is set to explode to the upside on any hurricane, Nigeria, Russia or Middle East issue or countless other supply threatening concerns that surround this sector. But the fact is nothing is immediately creating a supply problem, and as rising gasoline inventories relieve the seasonal supply threat this market is left with a premium that will evaporate if nothing detrimental happens in the near term. It is for that reason that I recommend ratio calendar call credit spreads and put buying.

A ratio calendar call credit spread allows you to play a short term price spike with leverage and zero up front cost factor, and plays against a price surge later on if the move doesn’t happen in the near term (there are unlimited risk aspects to this trade – see disclaimer below). Natural gas remains a solid hurricane play and is at the bottom end of a sideways trading pattern, suggesting now may be the time to make a call side volatility play heading into the heart of hurricane season.

Financials
A strong sell off in stocks occurred as the market panicked at rising bond yields and inflationary indicators. This market is long overdue for a massive correction but Friday’s rally may have stalled the effort as a key technical support was developed, suggesting the bulls are back in control. The indicator for me is a break and close back below 1500 on the Sept. contract to confirm that this is in fact the beginning of a strong sell off in stocks. Until then, I would sell rising option premium on both sides and avoid a futures play.

The bond market thoroughly broke through 109 and began a week of price volatility that has been absent from this market for years. The catalyst here may be a fundamental concern over inflation, but the volatility appears to be due to massive fallout of foreign players exiting long bond and note positions that had held this market up artificially for years. An important overnight low just below 105-11 support may hold for the time being as the market consolidates following this massive explosion of volatility. I recommend premium collection in the near term as this volatility is unlikely to continue as long as that support holds.

The dollar saw significant strength as anticipated this week and will likely push the euro and pound down in the coming weeks. The yen is capable of supporting here, but the recommended approach is July long yen strangles to play currency volatility rather than trying to forecast the bottom in a long term bearish market. The Canadian dollar will likely test 92 despite a powerful price reversal on Friday. Puts are recommended to play the decline.

Grains
Choppiness continued in a bullish grain sector this week as weather and planting assessments show not only the volatility due to the high price of grains but also the potential threat that a supply issue has on making this market skyrocket. I recommend bullish summer plays in grains across the sector, with a focus on soybeans and corn.

The wheat market has a premium built in that reflects the damage from frost issues earlier in the year but, despite the tremendous rally potential, the current premium for entry suggests that we focus on a better value play in the other markets within this sector. Soybean oil remains an incredible grain play due to both the susceptibility of the bean harvest as well as the spiking demand. However, the soybean to soybean oil spread has gotten very far out of whack and the play here would be to short bean oil against a long beans (2 to 1 ratio or a 3 to 2 ratio to maintain a bullish position).



Meats
The downtrend in cattle prices continue to quietly sneak by the average speculator, who will likely take notice of it after it plunges another 5% and will make most traders feel like they are jumping on the bandwagon too late in the move. That means jump now and get into short futures and put plays. Hogs and bellies appear to be in a bit of a consolidation mode with a slight possibility of a bear break. The gut says focus on cattle and let the pigs roll around in the mud for a bit before taking another look.

Metals
A strong selloff in metals came as expected and is likely to continue. Any close below 647 on August gold would be solid confirmation of continued downward momentum in this sector. The expected rise in the dollar could destroy this sector in the near term.

Softs
The wet weather that helped drought conditions in Florida brought OJ to its knees this week, feeding fuel to the fire that has many analysts calling for the complete meltdown of this market. The lack of hurricane premium makes OJ a buy with call options or a good long strangle play. Why pay hurricane premium in oil when you can get it at a discount in OJ?

Coffee prices tumbled a bit on Friday, but after the close the USDA estimates for this year’s coffee crop should send prices significantly higher in the weeks to come. I have said it before and will say it again – this is the market to watch for 2007. Cocoa prices broke prior price support and could test the recent lows at 1786 (Sept.) this week. I remain a bull in this market and expect a surge through 2000. This is a call buying opportunity. Cotton may offer a good summertime long play with potential weather issues, but overall I would look to sell Oct. OTM calls on a price spike as the likelihood of a major rally compared to the payout for selling premium a decent bit away from the market makes it a worthwhile play. Sugar is developing some questionable support but is a dirt cheap market for call plays and is also a good market for a long strangle since calling a bottom in a freefalling market is by no means an easy task. Lumber may pull back a bit before surging through 300 but is still a good long term play to the upside for a 340 target.

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.