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Open Interest Analyst

Open Interest Analyst

Garry SternGarry is the founder of openinterestanalyst.com (OIA), a website dedicated to analysing the interaction between price, volume, and open interest (P-V-OI). After consistently applying…

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Commodities Update: Open Interest Analysis for April 15, 2013

Crude oil:

May WTI lost $2.58 on heavy volume of 858,007 contracts. Volume was approximately 3,700 contracts less than April 12 when 861,748 contracts were traded and May crude oil declined $2.22 while open interest increased 8,105 contracts. The May contract accounted for loss of 14,619 of open interest. On April 15, open interest declined by 2,152 contracts, which relative to volume is minuscule and dramatically below average. The market made a new low for the move at $87.86, which is the lowest price for WTI since December 2012. May WTI closed at $88.71, which is above $87.55, its 200 week moving average on the crude oil continuation chart. On April 16, May crude has made a low of $86.06, which is its lowest price since the weeks of June 18 & 25 2012 when crude oil made a low at $77.23 on the continuation chart.

We were skeptical about the bull move in crude oil in late March and voiced our opinion about it in the March 27 report. On March 27, May WTI closed at $96.58. However, as wary as we were about the continuation of the bull move, we did not envision crude oil sliding nearly $10.00 in a little more than 2 weeks.

WTI is massively oversold, and we would expect to see a short-term rally to the $90.27-91.00 level, possibly to $92.00. Wait for a rally before considering the implementation of bearish positions. WTI remains on a short and intermediate term sell signal. Stand aside.

From the March 27 report:

"Our lack of bullish enthusiasm for WTI is due to the non-confirmation by other members of the complex to generate buy signals For example, Brent crude oil remains on a short and intermediate term sell signal.

Gasoline remains on a short-term sell signal and heating oil remains on a short and intermediate term sell signal.The generation of a short-term buy signal two days after the intermediate term buy signal occurred, increases the likelihood of a pullback, perhaps a sharp one.

Do not chase the rally in WTI."

Brent crude:

June Brent crude lost $2.41 on light volume of 763,600 contracts.

Volume was the lightest since April 10 when 591,748 contracts were traded. Open interest declined by 6,763, which relative to volume is approximately 55% less than average. As we are compiling the report on April 16, Brent crude is trading 1.27 lower and WTI, 47 cents lower.

The spread between WTI and Brent continues to narrow and on April 16, Brent is trading at an $11.00 premium to WTI. Brent is massively oversold, and we would expect to see a rally in the short-term to approximately $104.81. Stand aside.

Heating oil:

June heating oil lost 4.41 cents on light volume of 130,987 contracts.

Volume declined by approximately 41,000 contracts from April 12 when heating oil lost 3.23 cents and open interest declined 5,805 contracts. The May contract accounted for loss of 2,615 of open interest. On April 15, open interest increased by 2,837 contracts, which relative to volume is approximately 10% below average. June heating oil made a low of $2.7966, which is the lowest price since July 2012. Additionally, heating oil closed slightly below its 150 week moving average of $2.84. Heating oil is massively oversold, and we would expect a rebound to occur possibly to the $2.94-2.97 area.

Heating oil remains on a short and intermediate term sell signal.

Stand aside.

Gasoline:

June gasoline lost 4.94 cents on light volume of 137,595 contracts.

Volume increased by approximately 6,000 contracts from April 12 (131,458) when gasoline lost 3.01 cents and open interest declined 265 contracts. On April 15, open interest declined by 1,365 contracts, which relative to volume is approximately 50% less than average. The May contract accounted for loss of 1,843 of open interest.

Interestingly, volume traded on April 12 and 15 was significantly below year to date average daily volume of 151,017 contracts and March average daily volume of 153,991 contracts. Declining volume on 2 days after seeing a 7.95 cent slide in prices may signify a major bottom.

Additionally, we saw open interest decline on both of days, which shows that participants were liquidating. It is difficult to know at this juncture whether the bottom is temporary or is a major low. However, the decreasing volume 2 days in a row indicates that sellers may have become exhausted. Gasoline is massively oversold, and a rally to the $2.88-2.92 level should be expected. Gasoline has declined over 40 cents during the past 11 trading sessions, and  it is entering the period of high consumption. As we pointed out in the April 14 Weekend Wrap, the long to short ratio in gasoline is at major lows when comparing it to previous periods when gasoline prices were at the current levels. Gasoline remains on a short and intermediate term sell signal. Stand aside.

Natural gas:

May natural gas lost 8.5 cents on light volume of 404,297 contracts.

Volume was the lowest since April 9 when 402,625 contracts were traded and natural gas declined 6.5 cents while open interest declined 4,669 contracts. On April 15, open interest increased by 8,282 contracts, which relative to volume is approximately 20% below average.

Considering the elevated price level of natural gas, its performance on April 15 was outstanding. Almost all markets were down sharply, which could have been a catalyst for sellers to aggressively begin to take profits. The low volume on April 15 and April 9 is testament to the underlying strength in the market. Although the long to short ratio is significantly lower than crude oil or gasoline, natural gas has become somewhat of a crowded trade. A setback to $3.93-3.99 would be healthy for the market, especially if open interest had a hefty decline. Natural gas remains on a short and intermediate term buy signal. Previously, we have advised those holding long positions in futures and options to write out of the money calls, and this strategy continues to work. We would not enter new positions at current levels.

Soybeans:

May soybeans lost 18 cents on volume of 221,099 contracts. Open interest declined by 6,701 contracts, which relative to volume is approximately 20% above average. The May contract accounted for loss of 16,444 of open interest. Soybeans traded to a high of $14.19 3/4, which is the second day in a row that the market traded to this level.

As we said in yesterday's report, we think that May soybeans will trade sporadically higher due to the near term tightness of old crop soybeans. The May-July spread closed at a new high of 39  cents, which is the highest for the spread going back to mid-2012. This is bullish market action despite the uneven performance of open interest for the past several days. First notice day is April 30. The market remains on a short and intermediate term sell signal. Stand aside.

Corn:

May corn lost 11.75 cents on volume of 242,225 contracts. Open interest declined by 8,375 contracts, which relative to volume is approximately 40% above average. The May contract accounted for a loss of 17,345 of open interest. Corn remains on a short and intermediate term sell signal. Stand aside.

Wheat:

May wheat lost 21 cents on volume of 133,726 contracts. Open interest declined by 3,656 contracts, which relative to volume is average.

Wheat remains on a short and intermediate term sell signal. Stand aside.

Copper:

May copper lost 7.70 cents on huge volume of 172,794 contracts. Volume was the highest in over one year. Although the market made a low of $3.1935, it closed at 3.2730 or approximately 8 cents above the low.

May copper hit its lowest level since October 2011. The extremely heavy volume accompanied by a major new low indicates that copper may have found a temporary bottom. Copper remains on a short and intermediate term sell signal. Stand aside.

Gold:

June gold lost $140.30 on unbelievably heavy volume of 751,058 contracts. We have not verified it, but this may be a record. Open interest declined only 3,307 contracts, which relative to volume is approximately 80% less than average. The minor decline of open interest was a huge surprise, and there are a number of questions regarding the trade on April 15 that remain unanswered. We rarely discuss narratives surrounding a particular market move, and the fact is, the reason (s) why gold moved the way it did on April 15 is less important than people think.

The question remains: how does one trade gold at this juncture. First, gold closed below its 200 week moving average of 1435.70, and closed at its lowest level since early February 2011. However, the 50 week moving average is significantly above the 200 week moving average, which is positive from a longer-term standpoint. There is support at the 1309.00 level made on January 28, 2011 which holds through September 2010. However, much damage has been done to the chart and it is going to take time to repair it. Clients who trade futures and options on futures should refrain from jumping in on the long side.

Because the market has fallen to major lows, it doesn't make any sense to implement bearish positions either. As we stated in the Weekend Wrap of April 14, the precious metals now have the imprimatur of a bear market. With this as the primary zeitgeist, gold will be on the defensive. We envision a retest of the low, which on April 16 is $1321.50. It will be important to watch what gold does as it approaches this low, and whether another leg down is in the offing.

Stand aside.

Silver:

May silver lost $2.97 on huge volume of 236,815 contracts. This is the highest volume in at least one year, and is likely the highest since the great bull market in the spring of 2011. Open interest declined only 916 contracts, which relative to volume is approximately 80% less than average, which is remarkable considering the volume traded. May silver made a low of $22.515, which is its lowest price since October 2010. In the early evening session, silver made another new low at $22.00. Looking at the chart for 2010, there doesn't seem to be much support until silver reaches the $19.00 level. Like gold, silver is trading as a bear market, and as a result, more liquidation is ahead, although this will be punctuated by occasional technical rallies. With respect to gold and silver, traders of futures and options on futures should not try to pick a bottom. We will have much more information when silver retests its April 16 low.

Australian dollar:

The Australian dollar lost 1.82 cents on extremely heavy volume of 212,824 contracts. Volume was the highest since December 13, 2012 when 251,485 contracts were traded and the Australian dollar topped out at 1.0577. On April 11, the June Australian dollar topped out at 1.0531.

In yesterday's report, we stated that we wanted to see a hefty decline of open interest, and we certainly saw that according to the latest exchange report. On April 15, open interest declined by 23,162 contracts, which relative to volume is approximately 320% above average, which means that huge numbers of speculators were liquidating en masse. This is extremely positive, and despite the move sharply lower from a high made on April 11, the June Australian dollar remains on a short and intermediate term buy signal. We would use setbacks as an opportunity to get long and the April 15 low of 1.0240 should be used as an exit point for all long positions.

Euro:

The June euro lost 40 points on volume of 250,527 contracts open interest increased by 2689 contracts, which relative to volume is approximately 50% less than average. As this report is being compiled, the June euro is trading 1.56 cents higher and has made a new high for the move at 1.3208. It is likely the June euro will generate a short-term buy signal on April 17.

From the April 11 report:

"The June euro gained 54 points on light volume of 238,066 contracts.

Open interest declined by 6,623 contracts, which in relation to volume is average. From March 27 when the June euro made a low of 1.2758 through April 11, the euro advanced 3.36 cents, while open interest declined 5,510 contracts. This confirms overall bearish open interest action relative to the price advance. However, we think the dollar index is in a corrective phase, which means further euro strength is likely. Considering the magnitude of the recent move, and the very small decline of open interest, more shorts need to be chased out of the market. This is especially true in the euro because managed money is net short at the highest level in at least several months according to last week's COT report. A rally to the 1.3250 level is possible, if shorts begin to panic. The euro remains on a short and intermediate term sell signal. Stand aside."

Dollar index: The June dollar index generated a short-term sell signal.

S&P 500 E mini:

The S&P 500 E mini lost 38.50 points on heavy volume of 2,866,752 contracts. Volume was the highest since March 12 when 2,885,864 contracts were traded. On April 15, open interest declined by 12,262 contracts, which relative to volume is approximately's 75% less than average. In short, the minor decline in open interest shows that speculators were not panicking despite the sharp move lower. We continue to think that the E mini is in a corrective phase, and there is much more damage ahead before it is over. The number of stocks on the New York Stock Exchange trading above their 50 day moving average declined to 1,063 on April 15 from 1,550 on April 12. We had to go back to late November of 2012 to find the same number of stocks trading above their 50 day moving average as traded on April 15. We continue to recommend writing calls that are significantly out of the money, coupled with a purchase long calls that are further out of the money. A more risky approach is to short out of the money calls.

By. Gary Stern




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