Commodities had a difficult week, but most commodities were able to rally strongly on Friday. Commodities are still tied closely with the equity markets and the Dollar tends to drop when the equity markets stabilize. Those patterns held true this week and I would expect next week to be a good week for commodities as stocks look stronger and the Dollar should have another swing low.

Crude oil futures dropped sharply and tested the lows around $35. Talk about a quick move up and then a quick move back down! Crude oil can’t escape the fact that demand has dropped faster than expected and OPEC can’t cut production quick enough to alleviate the relative abundance of supply right now. It will be interesting to see if oil establishes a trading range between $35 and $50.

Cocoa futures are trying to rally again after a downside breakout of its consolidation early in the week. I’m not too anxious to get long until this market can challenge the previous highs. Coffee is still consolidating and I would expect an eventually breakout higher. Sugar futures sure look like they want to make a strong move higher.

The grains were destroyed early in the week on the crop reports, but they came back late in the week. Upside may be limited in the near term unless the South American crops are destroyed from weather.

Gold and silver had a nice rally late in the week. Silver looks like it is building a nice base for a strong breakout higher. The long-term picture for gold is also building for another strong leg higher. I like positioning for the long-term in gold and not trying to trade in and out.

While many commodities have moved lower this week, coffee futures appear to be in a very bullish setup and they could have some nice upside potential this year. The fundamental backdrop to the coffee market is the expected lower coffee production this year – mainly from Brazil. The International Coffee Organization stated last week that they expect a world production deficit of at least 5 million bags of coffee.

Coffee futures were trading as high as $1.65 a pound last year and sunk close to $1.00 in December. March coffee futures closed Wednesday at $1.15. The market looks very good technically as it is holding up strong this week, while many other commodities are weak. Coffee futures will likely be shooting for the $1.35 to $1.40 range. The upside appears to be much greater than the downside risk this year for coffee.

Most commodities ended the day sharply lower on Monday. The grains probably took the biggest beating as the USDA crop reports showed larger supplies than the market expected. Soybeans, corn and wheat traded limit down today. Crude oil continued to move lower and the precious metals were also hit hard.

Several commodities were in a strong position to move higher, but the charts now show a much more negative picture. Soybean futures were in a steady uptrend with a nice breakout on Friday. Now, the chart looks very negative with an island top. Follow through on the downside tomorrow would reinforce a negative setup for soybeans.

Cocoa futures broke to the downside out of its consolidation pattern. It wasn’t a clear break, but a move below 2,450 might get the ball rolling on the downside. If this market can get back on its feet and move above 2,700, we will probably see another strong leg higher.

When trading commodities, you have to be agile. The technical and fundamental pictures can change very quickly and you have to move with the new developments. Being stubborn is a recipe for disaster. For example, I liked soybeans coming into today, but I have to say I would not want to have a long position right now.

December and January have been good months for many commodities, as many markets have had significant rallies from their lows. Stabilization may be the key word here as the torrent of hedge fund selling seems like it has subsided, which opened the door for commodities to mount some good rallies. The main question here is whether commodities have made a long-term low or is there more room to go on the downside.