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Volatility in the commodity market reached an extreme last week. Right up through Friday, we have seen record volumes in some contracts as investors thrash their portfolios to adapt to the disconnect between prices and the underlying fundamentals.

While base-metals have done well on speculation for even more easing in China and Japan, we are starting to detect some serious weakness in the trend as shorts have been covering. Our recommendation is designed to profit from a decline in metals, like copper, that looks likely to drop with a large technical divergence. A put trade in SSCO is the best way to trade it.

‘Buy to open’ the SCCO June 29 Puts (SCCO160617P00029000) for a maximum price of $1.45.

However, there will be some key earnings reports this week within the metals sector that make this put in SCCO a relatively risky trade. We think the potential ROI is worth the risk, but we want to set expectations appropriately.

In general, we expect this quarter’s earnings season to be the catalyst for a broader market decline, but the timing will be tricky. We recommend waiting until the S&P breaks short-term support at 2,000-2,035 before getting aggressive about a decline.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.

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