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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 June 14th, 2013

For the first time in several months, WTI, Brent, heating oil and gasoline are on short-term buy signals. Collectively, they should provide underlying support for further advances in WTI and Brent. However, if global equity markets take a major dive, all bets are off. Also, the geopolitical ramifications of the recent election in Iran, which appointed a moderate as president, and the escalating confrontation between the West and Syria will make trading especially difficult.

WTI Crude oil:

July WTI crude oil advanced $1.16 on heavy volume of 752,559 contracts. Volume was the highest since June 7 when 871,598 contracts were traded and July crude advanced $1.27 while open interest increased by 24,058 contracts. On June 14, open interest increased by a massive 28,731 contracts, which relative to volume is approximately 50% above average. The July contract lost 13,685 of open interest, which makes the total open interest increase much more impressive. Additionally, it is significant that crude broke out to a new high of 98.25, which is 3 ticks above the April 1 high of $98.22. In short, crude oil advanced on heavy volume along with a major increase of open interest as the market made a new high for the move. This is bullish. As this report is being compiled on June 17, WTI is trading unchanged on the day, but has made a new high for the move at $98.74.

Brent crude oil:

On June 14, August Brent crude oil generated a short-term buy signal, but remains on an intermediate term sell signal.

August Brent crude oil advanced 98 cents on very light volume of 495,633 contracts. Volume was the lightest since May 28 when 454,526 contracts were traded. On June 14, open interest declined by a massive 14,108 contracts, which relative to volume is average. Brent reached its highest price since early April and made a new high for the move at $106.64. The difference in the price, volume and open interest action between WTI and Brent crude could not be more different. The tepid volume accompanied by a decline in open interest as the market moved into new high ground shows that market participants lack enthusiasm for the long side of Brent and we agree with them.

Heating oil:

On June 14, July heating oil generated a short-term buy signal, but remains on an intermediate term sell signal.

July heating oil gained 2.27 cents on volume of 134,004 contracts. Open interest declined by a massive 6,129 contracts, which relative to volume is approximately 75% above average, meaning that liquidation was unusually heavy on the advance. The July contract lost 6,216 of open interest, and there were not sufficient new entrants in heating oil to overcome the open interest decline in the July contract.

It is fascinating that heating oil generated its first short-term buy signal in the week the COT short to long ratio in heating oil reached its highest level of 2013 (1.78:1). We examined our records for the year and found the second highest short to long ratio occurred on the tabulation date of April 23, 2013 at 1.62:1. The trading range of heating oil during the reporting period (April 17-April 23) was from $2.7277-2.8186. The trading range for the current COT report has been from $2.8378-2.9157. In other words, the trading range for the current COT report is approximately 10 cents higher than the trading range during the tabulation period of the April 23 report.  However, the short to long ratio is higher than it was during the COT reporting period in April.

On June 12, open interest increased by 2,295 contracts as heating oil advanced 3.77 cents. However, on June 13, heating oil advanced another 4.43 cents and open interest declined by 4,315 contracts. The open interest decline on June 14 is additional corroboration that market participants are massively liquidating as the market moves higher. As is usually the case after a buy signal is generated, a pullback occurs lasting 1-2 and possibly 3 days. As a consequence, we think heating oil can setback to the $2.88 2.89 level, before it would be safe to consider bullish positions. Unfortunately, the heating oil ETF, UHN does not track heating oil very well and we discourage its use.

Gasoline:

July gasoline gained 3.54 cents on volume of 125,876 contracts. Open interest increased by 2,687 contracts, which relative to volume is approximately 20% less than average. The July contract lost 3,702 of open interest, which makes the total open interest increase more impressive. As this report is being compiled on June 17, July gasoline is trading 3.12 cents lower.

Natural gas:

July natural gas lost 8.1 cents on very light volume of 246,150 contracts. Open interest increased by 6542 contracts, which relative to volume is average. The July contract accounted for loss of 14,736 of open interest, which makes the total open interest increase more impressive. As this report is being compiled on June 17, July natural gas is trading 14.2 cents higher and has made a new high for the move at $3.891.

From the June 11 report:

"We remain friendly to natural gas, and as stated in the report on June 10, the $3.71 area should provide support, which is the 150 day moving average on the natural gas continuation chart. We will feel much more confident about support at the 3.71 level, once the market has tested this low and bounced back. On May 31, July natural gas generated a short-term sell signal, but remains on an intermediate term buy signal."

Soybeans:

July soybeans gained 6.25 cents on light volume of 142,108 contracts. Total open interest declined by 1,049 contracts, which relative to volume is approximately 60% less than average. The July contract lost 12,039 of open interest. As this report is being compiled on June 17, July soybeans are trading unchanged on the day. We expect July soybeans to continue its rally. July soybeans remain on a short and intermediate term buy signal

Soybean meal:

July soybean meal lost $1.90 on light volume of 66,987 contracts. Total open interest declined by 1,189 contracts, which relative to volume is approximately 25% less than average. The July contract lost 7,255 of open interest. As this report is being compiled on June 14, July soybean meal is trading $1.80 higher. Like soybeans, we expect soybean meal to continue its rally, and much prefer the July meal contract to July soybeans. July soybean meal remains on a short and intermediate term buy signal

Corn:

July corn advanced 11.50 cents on volume of 243,879 contracts. Volume declined by approximately 57,000 contracts from June 13 when corn lost 7.50 cents and open interest increased massively by 24,478 contracts. On June 14, total open interest declined by 1,597 contracts, which relative to volume is approximately 65% less than average. The July contract accounted for loss of 18,430 of open interest. As this report is being compiled on June 14, July corn is trading 11.25 cents higher and has made a new high for the move at $6.67 3/4, which is July corn's highest price since June 7 when it reached $6.74. Corn remains on a short-term buy signal, but an intermediate term sell signal.

Wheat:

July wheat declined by 4.75 cents on volume of 127,459 contracts. Total open interest declined by 3,925 contracts, which relative to volume is approximately 20% above average. The July contract lost 12,314 of open interest. As this report is being compiled on June 17, July wheat is trading 3.75 cents higher. Wheat remains on a short and intermediate term sell signal.

Cotton:

December cotton gained 29 points on heavy volume of 58,001 contract. Despite the higher than usual volume, it was the lowest since June 10 when 40,788 contracts are traded. On June 14, open interest declined by 5,245 contracts, which relative to volume is approximately 250% above average. The heavy decline of open interest can be attributed to the imminent expiration of the July contract. We are concerned that open interest action has been unimpressive. For example, on June 6 total open interest was 179,399 contracts and by June 14, open interest had expanded to only 180,557 contracts or an increase of 1,163 during the 7 day advance of 4.54 cents, or 5.35%. This is dismal open interest action relative to the price advance.

As of the latest COT report, the long to short ratio is at its lowest level since before March 12, 2013. From June 11 through June 14, open interest declined by 2,767 contracts while December cotton advanced 4.27 cents. In short, it is unlikely that the long to short ratio has expanded much beyond the ratio reflected in the recent tabulation date of June 11. If the market pulls back as we expect, it is highly likely that some recent speculative longs will be shaken out on the correction. This places cotton in a sweet spot with respect to an entry point on the long side because shorts have been blown out and longs will be taken out once cotton corrects its over bought status. Cotton has been on an intermediate term buy signal and generated a short-term buy signal on June 13. We think a correction lasting 1-2 and possibly 3 days should take cotton down to 86.50 and possibly to its 50 day moving average of 85.30 on the December chart.

 Platinum:

July platinum gained 30 cents on volume of 13,864 contracts. Open interest declined by 231 contracts, which relative to volume is approximately 35% below average. Platinum will generate a short-term sell signal on June 17, which reverses the short-term buy signal generated on June 5. As it turned out, the buy signal on June 5 was false. However, our protocol dictates that a pullback of 1-3 days was in the offing and therefore positions were not recommended. By the third day, it was apparent the buy signal was suspect and we informed readers about this.
 On June 7, the June Swiss franc generated a short-term buy signal and the September Swiss franc generated an intermediate term buy signal on June 11. As of June 14, the euro, British pound and Swiss franc are on short and intermediate term buy signals. The yen is on a short-term buy signal and is close to generating an intermediate term buy signal. The Canadian dollar is on a short-term buy signal, but remains on an intermediate term sell signal. All of these are massively overbought and due for a good-sized correction. Do not chase the markets. Wait for a correction.

Euro:

The September euro lost 5 points on volume of 298,524 contracts. Open interest declined by 1,472 contracts, which relative to volume is approximately 50% less than average.

S&P 500 E mini:

The September S&P 500 E mini lost 12.50 points on heavy volume of 2,881,062 contracts. Open interest increased by 69,454 contracts, which relative to volume is average, but a hefty number nonetheless. As this report is being compiled on June 17, the E mini rallied to 1641.00, but has pulled back to the midpoint of the trading range. We continue to advise long put protection, because we do not believe the correction is over.

By. Garry Stern




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