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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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Commodity Update: Open Interest Analysis for April 17, 2013

Crude oil:

May WTI crude oil lost $2.35 on heavy volume of 758,985 contracts.

Open interest declined by 7,901 contracts, which relative to volume is approximately 50% less than average. We have discussed in previous reports the high long to short ratio of managed money, and during the past 3 trading sessions, it is apparent that a liquidation mindset has engulfed WTI. In the April 14 Weekend Wrap, we wrote that more selling was ahead in WTI due to the high long to short ratio of managed money.

This has come to pass from April 15 through April 17 when crude oil has declined $4.93, while open interest has declined 25,131 contracts.

Brent crude oil lost $2.78 on volume of 747,254. Open interest declined by 1,791 contracts, which is minuscule and dramatically below average. Brent made a low of $97.26, which is the lowest price since July 2012. Stand aside in Brent and WTI.

Heating oil:

July heating oil lost 7.30 cents on volume of 164,407 contracts. Open interest increased by 2,162 contracts, which relative to volume is approximately 45% less than average. Heating oil made a new low for the move at $2.7242, which is the lowest price since early July 2012.

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

Stand aside.

Gasoline:

June gasoline lost 5.36 cents on volume of 180,114 contracts. Open interest declined by a hefty 7,186 contracts, which relative to volume is approximately 50% above average meaning that liquidation was unusually heavy. For the past 4 trading sessions beginning on April 12, gasoline has lost 11.97 cents while open interest has declined 10,028 contracts. In the April 14 Weekend Wrap, we wrote about the current low long to short ratio in gasoline, and compared it to previous periods when gasoline sold at approximately the same level.

As we said in the Weekend Wrap, gasoline is entering its prime period of consumption, and the low long to short indicates an unusual amount of bearishness by managed money for this time of year. We suspect that the long to short ratio in the upcoming COT report, which will be released on April 19, will show an even lower ratio. We are not suggesting that clients try to pick a bottom in this market, rather we believe it is likely a rally is on the horizon. However, gasoline remains on a short and intermediate term sell signal, and we advise clients to stand aside.

Natural gas:

May natural gas gained 5.4 cents on very low volume of 311,438 contracts. Volume was the lowest since March 13 when 299,879 contracts were traded and May natural gas closed at $3.718. On April 17, open interest increased by 4,786 contracts, which relative to volume is 40% less than average. As this report is being compiled on April 18, natural gas is trading 19 cents higher and has made a new high for the move at $4.418, which is the highest price for natural gas in approximately 21 months. The catalyst for the move higher is the 31 Bcf injection into storage which was less than expected. For those with long positions in futures and options, we have recommended writing out of the money calls in order to mitigate any potential downside risk. We continue to recommend staying with these positions based upon cold-weather dissipating and that injections into storage will begin to increase. We suspect that the long to short ratio in the upcoming COT report will be significantly larger than the current week. We think it is risky to enter new positions at current levels.

On March 1, 2013, Open Interest Analyst announced that natural gas had generated a short-term buy signal and on March 8 generated an intermediate term buy signal.

Copper:

May copper lost 11.80 cents on heavy volume of 147,508 contracts.

Remarkably, open interest declined only 368 contracts, which is minuscule and dramatically below average. On April 18, copper has made another new low at $3.0600. In our view, the dramatic decline in copper prices is indicative of global economies that are weakening and this is bolstered by the fact that petroleum prices have declined precipitously as well. Copper remains on a short and intermediate term sell signal. We would like to see a major rally that chases out the ever-increasing number of shorts before advising new bearish positions. A rally to the $3.32 level is to be expected, and preferably to the 3.40 level. Stand aside.

Gold:

June gold lost $4.70 on heavier than normal volume of 271,410 contracts. Open interest declined by 733 contracts, which relative to volume is minuscule and dramatically below average. Ever since plunging to a new low of $1321.50 on April 16, gold has attempted to rally, but has not been able to gain much ground. As we have pointed out in previous reports, gold is now considered to be a bear market, and any market action should be viewed through this lens. Although the market will have periodic rallies, these will be met by new short sellers and old longs that are trying to decrease their losses by selling on rallies. Gold has support at the $1309 level and remains on a short and intermediate term sell signal. Stand aside.

Silver:

May silver lost 32.1 cents on heavy volume of 115,590 contracts. Open interest declined by 2,662 contracts, which relative to volume is approximately 5% below average. Our comments about gold are applicable to silver, and because silver is used in industrial applications, its potential for further downside action could be more dramatic than gold. We see no support for silver until the $19.00 level.

Soybeans:

July soybeans advanced 4.75 cents on volume of 206,364 contracts. Open interest increased by 5,112 contracts, which relative to volume is average. The May contract accounted for loss of 6,460 of open interest, which makes the total open interest increase that much more impressive. For the past 4 trading sessions beginning on April 12, price and open interest has been acting in a bullish congruent manner.

Export sales announced by the USDA came in at 339,400 tons for the 2012-2013 season and 227,400 tons for the 2013-2014 season. Export sales for soybean meal totalled 266,000 for the 2012-2013 season and 49,200 for the 2013-2014 season. Export sales for both soybeans and soybean meal were outstanding, especially when taking into account that the pipeline for old crop soybeans is getting extremely tight.

Export sales of soybean oil came in at a dismal 8,200 tons for the 2012-2013 season. On the 17th, May soybeans finally broke above $14.19, which was acting as resistance, and made a new high for the move at $14.29 3/4. Soybeans remain on a short and intermediate term sell signal. Stand aside.

Corn:

July corn gained 0.50 cents on volume of 271,886 contracts. Volume increased approximately 14,000 contracts from April 16 when corn advanced 16.50 cents on volume of 257,012 contracts while open interest declined 14,054 contracts. On April 17, open interest declined by 12,149 contracts, which relative to volume is approximately 75% above average, meaning that liquidation was extraordinarily heavy. The May contract accounted for loss of 25,088 of open interest. This is the second day in a row that corn prices have advanced and that open interest has declined by an amount significantly above average. The USDA reported that 400,300 tons were sold for the 2012-2013 season and 16,900 tons for the 2013-2014 season. Corn remains on a short and intermediate term sell signal.

Stand aside.

Wheat:

July wheat lost 0.50 cents on volume of 123,835 contracts. Open interest declined by 3,582 contracts, which relative to volume is approximately 15% above average. The May contract accounted for a loss of 12,187 of open interest. Export sales announced by the USDA for the most recent week were outstanding with 552,000 tons sold for the 2012-2013 season and 1.1 million sold for the 2013-2014 season. This has been the largest export total for the entire crop year, which ends on May 31. Despite this, wheat remains on a short and intermediate term sell signal. Stand aside.

Australian dollar:

The Australian dollar lost 88 points on heavy volume of 143,203 contracts. Open interest declined by 624 contracts, which relative to volume is approximately 75% below average. After recommending that bullish positions be exited upon the penetration of the April 15 low, we advise clients to remain on the sidelines. Although the Australian dollar has not generated a short or intermediate term sell signal, at this juncture, we remain wary of its ability to rally significantly from here. The Australian dollar/British pound cross rate shows that the Aussie dollar is weak and is weak against the euro as well. Stand aside.

Euro:

The June euro lost 1.76 cents on volume of 354,523 contracts. Open interest increased by 359 contracts, which is minuscule and dramatically below average. The euro remains on a short and intermediate term sell signal, and the dollar index remains on a short-term sell signal and an intermediate term buy signal. On April 17, the June dollar index advanced 96.8 points, which is a huge move in one day on volume of 52,420 contracts. This was the highest volume since March 15 when 62,758 contracts were traded. Open interest declined by 4,805 contracts, which relative to volume is approximately 250% above average. The massive decline in open interest on heavy volume confirms the short-term bearish situation in the dollar index.

We expect a retest of the high of 1.3208 made on April 16. Stand aside.

S&P 500 E mini:

The S&P 500 E mini declined 22.75 points on heavy volume of 2,990,981 contracts. Volume was the highest since March 8 when 3,053,473 contracts were traded. Open interest declined 20,947 contracts, which relative to volume is approximately 70% below average. We have been skeptical of the market's ability to move higher based upon a number of factors, one of which is the number of stocks trading above their 50 day moving average, which began declining in earnest after February 19. This was the last day that the number of stocks trading above their 50 day moving average traded above the 50 day moving average of 1,854 stocks. On April 17, the number of stocks trading above their 50 day moving average fell to 1,056 from 1,269 on April 16. When the market was rallying, we advised clients to write calls that were significantly out of the money, coupled with buying calls that were further out of the money. Alternatively, we advised writing calls that were significantly out of the money, but this was a riskier strategy.

This trade is working well, and we expect the market to move lower in the weeks ahead, which will make it even more profitable.

From the April 14 Weekend Wrap:

"However, there is another reason to be concerned about the short-term direction of the market. This is interest rates. On April 12, the yield on the 10 year treasury note closed at 1.72%. On March 8, the 10 year treasury note yield topped out at 2.08%, and by April 5 had made a low at 1.67%. From March 8 through April 12, the 10 year treasury note yield has fallen 16.29% while the S&P 500 has gained 2.43% and the DJIA has gained 3.25%. If the economy is truly recovering, interest rates should be on a slow grinding path higher. This is especially the case when the S&P 500 is not only advancing, but is making new all time highs in the process. The 1.67% low in the 10 year treasury yield on April 5, was the lowest since mid December 2012. In short, the S&P 500 has rallied close to 180 points since mid December, yet the yield on the 10 year treasury note remains at the same level as it was when the S&P 500 was trading at 1410.00. We consider the action in the treasury note to be bearish on the economy, and this is supported by the bearish action in the petroleum complex and in base metals, copper in particular."

By. Garry Stern




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