Energies
Energies continued to test for a bottom in this recent pullback and ended the week in a strong technical position. Wednesday's inventory report is setting up a potential short term supply problem as both crude and heating oil inventories are piling up while gasoline inventories are plunging at the worst possible time. As hurricane and general weather issues plague the U.S., the market becomes very susceptible to a run to the pumps and a major gasoline price spike. The next 3-4 weeks are critical weeks before the market starts looking forward to a roll from gasoline to heating oil ahead of the winter.

If we run a shortage on gasoline the refiners will go into full gasoline production, thus leaving us with a heating oil shortage heading into the fall and winter. The refiners always seem to be a step behind and could set the stage for a three week run in gasoline and then a quick rollout to heating oil before the end of September. Monday is a pivotal day for the bulls as a positive close reverses momentum back to the upside in both crude and heating oil.

Natural gas is all over the map, with fallout from a non-event hurricane Dean leaving the market at recent lows. This is a market that has fallen from significant highs and the memory of this market in the 2.50 area is beginning to come back for some long time traders. I suspect this market will shock many participants over the coming months by beginning a volatile and sharp rally supported by a spike in demand and weather issues. The bad news is already factored in here - we all know supply is solid, but what happens when the trend shifts? This sleeping giant of a market could wake up and unleash a roar that could pay some dividends on long option plays. To me it is worth the price of admission.

Financials
Stock market volatility died substantially this week as anticipated. A drop in the yen carry trade's volatility, the lack of major economic data and no Fed speak all helped to calm the market. Throw in some bank bailouts and talks of cutting rates and the stock market spent the week in what could only be described as a 'back to normal' uptrend. Do not be fooled.

The entire financial sector is exposed to at least a month of expanded volatility, and weeks like the one just passed give traders an intermittent false sense of security. This past week is an excellent case in point, as the market developed confidence with the Fed's move to cut the discount window rate and looks towards the FOMC meeting in September to see a cut in interest rates. As the 18th of September approaches the market will become increasingly concerned with the Fed's next move. We have been stuck in no man's land for months on end with a lack of knowledge about whether the Fed will cut or hike or sit still. Now we finally can sink our teeth into a cut, and yet the market will be on pins and needles waiting to see if and when it will come to fruition. Mr. Bernanke is not as predictable as many once thought and there is no telling whether this cut will happen or not. Look to play long bond strangles on quiet days and sell stock premium on volatile trading days.

The dollar has fallen back into weak momentum and could be exposed to extreme price volatility over the next 3 weeks. Long strangles in the euro and yen are highly recommended as the market figures out its trend ahead of the Fed meeting. Long term the dollar remains a buy. The Canadian dollar is resilient but is still an excellent short with stops above 9590. The Australian dollar filled out an interesting long term trend line support and could be a value buy after a very strong decline. The Aussie economy remains on solid footing in my opinion and could easily resume its rally mode to test the contract highs.

Grains
Too hot - drought. Too wet - flooded crops. Any weather extreme in grains is bullish and this week showed a hint of just how exposed this sector is to a major price rally should the realization of major crop problems come to pass. Expect a dip on Monday and buy it up early.

Corn is by far the most exposed market within this sector for three reasons:

1) Record supply and acreage forecast - anytime you see a market forecasted to produce record crops the market sucks way too much premium out of the price, thus leaving it exposed to a price reversal if the supply situation changes. Downgrades to crop condition and yield will have a greater impact on a market that is expected to produce a record crop.

2) Late plantings - during the summer months grain traders lose their long term memory because they get engrossed in short term weather and crop progress reports. This season brought us one of the latest corn plantings in recorded history. Late plantings means lower yield. In previous late planting years yield dropped by as much as 12%, which is even more significant when you have a potential record crop year like this one.

3) Unknown demand factor - unlike any previous year in which significant supply was forecasted, this year brings a new source of demand that will cause a complimentary record demand season. This demand, spiked by the government's ethanol subsidization program and general growing interest in ethanol production from corn, sets the stage for a volatile demand side of the supply/demand equation.

The corn market is truly in uncharted waters. The recent 29% retracement from the highs offers us a good value entry. The nearly perfect double bottom low and bullish weather offers us a reason to go long well beyond it just being a good value.

Wheat is in a league of its own with crop problems and a global demand crisis. The lack of wheat acreage in both the U.S. and Canada along with previous frost damage make this market fundamentally bullish. Fresh contract highs and a major short covering rally make it technically bullish. Last, but not least, the market is seeing one news story after another about crop problems, surprise exports and weather issues making it psychologically bullish with a bit of market hysteria to boot. There is little stopping this market from an historical run other than traders being too scared to get in this late in the game.

Soybeans are the sleeper in the group. Despite a known lack of planted acreage, weather issues and rising demand, this market is still struggling to get back to its recent highs. Call premiums remain relatively cheap based on the potential for massive volatility ahead. Bean oil retraced after an historic rally, but this soybean derivative continues to have both supply and demand issues that will likely lead to a mega rally if soybeans ultimately set a fresh contract high.

Meats
Major news this week out of the pork world as China imports a massive amount of pork and surprises the market. There had been rumors flying around but nothing substantiated, and with this news comes the first chance this market has of truly breaking out of its congestion pattern. A close above 71.50 on the Oct. contract sets the stage for a retest of the highs and a possible bull run in this market. Cattle's spike on Friday has potential top written all over it as Monday will be the key day for this market. Sell Oct. on a stop below 97.15 with a protective stop (once in the trade) at 98.70. South Korea's meat ban is getting loosened, but I suspect the supply side of this market is about to get flooded.



Metals
A choppy week in metals ended on a strong note despite weak technicals. The situation in the option pits (in what is left of the trading floor) is a bit on the scary side. Silver's out of whack trading the past two weeks has opened the bid/ask spreads on options to a laughable level. The underlying issue is that everyone is scared to sell options as premiums have skyrocketed and left a path of destruction in its wake. Wide spreads mean thin, low volume trading and a lot of traders getting ripped off. This should get cleaned up a bit after Tuesday's option expiration but it is a sign of things to come as the floor disappears. Moreover, it is a warning sign to avoid short options in these markets (despite the premiums) in less you can handle the massive potential swings.

Silver's out of whack trading is not a foreshadowing of direction but rather of the volatility to come. Gold remains a good long strangle market as it gets ready to breakout of its channel, and the metals are still strong sells (palladium being the exception). Copper remains temporarily supportive due to recent demand but is capable of collapsing from these extraordinarily high prices.

Softs
OJ experienced choppy, low volume trade this week but is still trying to develop a bottom after a couple of hurricane threats failed to materialize and recent crop estimates showed strong supply. This market, however, is still worthy of long call buying. Coffee remains in a congestion pattern near recent highs, a bullish pattern that could offer a bull breakout this week if the market shrugs off the Brazilian Ag Ministry's crop estimate. The estimate, which came in a bit higher than the whisper numbers, is often discarded because of Brazil's history of providing inaccurate data.



Cocoa spiked on Friday after developing a base of support in the 1750 area. This market remains bullish heading into harvest and Ivory Coast elections. The Ivory Coast has been recovering after a French intervention of their three party civil war. Peace treaty after peace treaty is ruined by out lashes of violence and the elections have been put off so many times I have lost count. There is little history to suggest peace in the Ivory Coast is upon us or ahead of us anytime in the near future, which supports higher prices in cocoa moving forward. Call premiums have evaporated out of this market quite a bit and scooping up some straight calls is recommended.

Cotton has had sustained volatility after several weather issues spiked this market. Overall the market is worthy of some long strangles, but taking a directional view at this point would be tantamount to flipping a coin. Lumber is offering traders a second chance at buying value around the 260 area. Sugar is choppy following ugly supply forecasts, but may get a lift from an ISO forecast of a 10.8 million ton surplus that comes in under recent estimates. This is a market with option premium that is so cheap it will feel like they are paying you to take them.

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.