On Friday, June 28, the USDA will release its acreage and stocks report.
August WTI crude oil lost $1.45 on volume of 687,802 contracts. Total open interest declined by 16,991 contracts, which relative to volume is average. During the past 3 trading sessions beginning on June 19, WTI has declined by $4.98, while total open interest has declined only 44,015 contracts, which relative to 3 day volume is 20% below average. As we stated in the June 23 Weekend Wrap, we see much more liquidation ahead in WTI, and clients should avoid the long side of the market despite the fact that it is on a short and intermediate term buy signal.
From the June 23 Weekend Wrap:
"From June 3 when the crude oil rally began through June 18, August crude oil advanced $6.75 or 7.34%. During this time, open interest increased by 126,214 contracts. On June 4, August WTI closed at $93.55 and the long to short ratio on that date was 6.13:1. From June 4 through June 18, August WTI advanced $4.93 and on June 18 closed at $98.67, which was the highest close for the move. From June 4 through June 18, open interest increased by 129,301 contracts. In other words, the massive increase in open interest occurred during 11 days of trading when the market was moving higher."
"From the decline that began on June 19 through June 20, open interest has declined by a total of 27,024 contracts. The final stats for trading on June 21 will be released by the exchange Monday morning, but preliminary stats indicate that open interest declined only 13,560. Relative to volume this is approximately 20% below average. In short, the open interest increase during the period that WTI was rising along with the massive increase in the long to short ratio from the COT report of June 4 to June 18 tells us there is a significant amount of liquidation ahead."
"Based upon our analysis of the open interest increase, we know there are large numbers of speculative longs who put on long positions after June 4 (close $93.55), which means on June 21 when August crude made a low of $93.12 and closed at 93.69, most longs that were initiated after June 4 have losses, or at best breaking even. In addition, Brent, heating oil and gasoline could generate short-term sell signals this week. If this occurs, the downtrend in WTI will accelerate, and this will be fed by large numbers of speculative longs who will be forced to liquidate."
Brent crude oil:
It is likely that Brent crude oil will generate a short-term sell signal on June 24.
August Brent crude oil lost $1.24 on volume of 632,839 contracts. Open interest declined by 16,872 contracts, which relative to volume is average. If Brent generates a short-term sell signal on June 24, this would reverse the short-term buy signal generated on June 14. As a result, the petroleum complex has lost another candidate that could support higher prices.
August heating oil lost 2.96 cents on heavy volume of 162,646 contracts. Volume was the highest since June 13 when 180,484 contracts were traded and heating oil advanced 4.43 cents while open interest declined 4,315 contracts. On June 21, open interest increased by 1,191 contracts, which relative to volume is approximately 55% below average, but this increase is made more impressive (bearish) by the fact that the July contract lost 7,121 of open interest.
August natural gas lost 10.6 cents on light volume of 284,437 contracts. Total open interest declined by 9,887 contracts, which relative to volume is approximately 40% above average, meaning that liquidation was fairly heavy on the decline. However, this is not bearish open interest action relative to the price decline. One aspect of trading that has been notable in the natural gas market is that open interest increases on declines are quite rare. This means that participants are reluctant to become overly bearish on the market. We are friendly to natural gas, and look for it to hold at the 150 day moving average of $3.73 on the continuation chart. Natural gas remains on a short-term sell signal, which means that long positions should not be initiated.
The September euro lost 55 points on volume of 274,453 contracts. Open interest declined by 2,971 contracts, which relative to volume is approximately 50% below average. The market action on June 19 and 20 showed that open interest had increased by 3,188 contracts on a decline of 2.10 cents. This is bearish. With leveraged funds holding long positions by a ratio of 1.45:1, the euro is vulnerable to further setbacks. As this report is being compiled on June 24, the euro is trading 15 points lower has made a new low for the move at 1.3065 on relatively light volume. The euro remains on a short and intermediate term buy signal.
S&P 500 E mini:
On June 21, the September S&P 500 E mini generated a short-term sell signal, which is the first sell signal of 2013. The E mini remains on an intermediate term buy signal.
The September S&P 500 E mini closed unchanged on heavy volume of 3,088,824 contracts. The E mini made a new low of 1570.50, which is its lowest price since May 1. Open interest declined by 20,513 contracts, which relative to volume is approximately 60% less than average, meaning that liquidation was light. The market has had a couple of days of downside action and we expect a rally, which would enable clients to initiate new bearish positions, or add to existing positions. Prior to the selloff, we encouraged clients to initiate bearish positions. A rally is overdue and after a short-term sell signal is generated, a countertrend rally lasting 1-2 and possibly 3 days usually occurs. This would be a prime opportunity to initiate new bearish positions for a sustained move lower. We think the treasury note market can rally at any time due to its massively oversold condition, which could spark the rally in the E mini.
July soybeans lost 4.25 cents on light volume of 158,649 contracts. Total open interest declined by 33,845 contracts, which relative to volume is a huge number and the result of the July contract losing 39,127 of open interest. For the past 4 days beginning on June 18, the daily highs have been lower and the daily lows have been lower. It now appears likely that the move to the high of $15.58 3/4 on June 12 may have been the last tradable high for the current crop year. First notice day is June 28 and though the July contract may move to new highs after this, speculators will have to switch to the September forward contracts. The the gravity of the emerging markets, especially China is driving all commodities lower along with skyrocketing interest rates, which is deflationary. The tightening of the money supply, which has been engineered by the Chinese government is creating a great deal of havoc in global markets. Soybeans remain on a short and intermediate term buy signal, but we would avoid the market for now.
July soybean meal gained $2.10 on volume of 85,645 contracts. Open interest declined by 3,768 contracts, which relative to volume is approximately 65% above than average. The July contract accounted for loss of 10,230 of open interest and first notice day for the July contract is June 28. Although July soybean meal had displayed solid support at $445.00 since June 10, the market dipped below this on June 21 to $443.30 and this has been the low for June 24. In the current environment it is going to be difficult for soybean meal to make a significant move higher and we think that a move above the June 12 high of $469.90 is off the table for now. As we have said before, it is likely we have seen the high in soybeans, however, soybean meal may make its final assault on the highs in the month of July. If soybean meal breaks below $443.00, the next area of support would be 440.00. With global equity markets in a downtrend, soybean meal could pullback to $440.00, but the demand for soybean meal is incredibly robust, which should support prices. Soybean meal remains on a short and intermediate term buy signal, but we recommend a stand aside posture for now.
July corn lost 11.50 cents on volume of 266,200 contracts. Total open interest declined by 21,772 contracts, which relative to volume is approximately 230% above average, meaning that liquidation was heavy. The July contract accounted for loss of 27,870 of open interest. First notice day for July corn is June 28. Corn is a victim of the fallout from the Chinese monetary tightening along with bearish markets in general. Based upon the downward trends in commodities and equities, corn is likely to have a difficult time moving significantly beyond the $6.83 1/2 high made on June 19. Corn remains on a short-term buy signal and an intermediate term sell signal.
July wheat lost 2.50 cents on volume of 108,057 contracts. Open interest declined by 14,304 contracts, which relative to volume is approximately 375% above average. The heavy liquidation was the result of the July contract losing 18,120 of open interest. As this report is being compiled, on June 24, wheat has pulled back 20 1/2 cents and has made a new low for the move at $6.76 3/4. From April 10 through June 24, trading in the wheat market on the continuation chart has been bounded by a high of $7.21 1/2 made on April 30 to lows of 6.76 on May 20, 6.75 on June 13 and $6.76 3/4 on June 24. Although, it has gotten close, wheat has not been able to generate a short-term buy signal and it remains on an intermediate term sell signal. Despite its very recent weakness, we would recommend against shorting wheat at current levels.
It is likely that cotton will generate a short-term sell signal on June 24.
December cotton lost 72 points on light volume of 22,042 contracts. Total open interest declined by 6,951 contracts, which relative to volume is approximately 960 percent above average. Accounting for the massive decline of open interest is the July contract which lost 4,916 of open interest and December, which lost 2308. As the extract from the June 23 Weekend Wrap shows, the December contract lost only a minor amount of open interest on the decline of June 19 and 20. Our conclusion was that speculators were digging in and refusing to liquidate, which did not bode well for cotton prices. Below, we are reprinting the salient paragraph from the June 23 report. As this report is being compiled on June 24, December cotton is trading 1.22 cents lower and has made a new low for the move at 83.11.
From the June 23 Weekend Wrap:
From June 11 through June 18 (COT tabulation dates) open interest increased 36,309 contracts in the December contract. As the table below indicates, cotton advanced 2.14 cents in this time frame and the long to short ratio increased by 135%. In short, the open interest increase and massive increase in the long to short ratio from June 11 to June 18 confirms that managed money has piled into the long side of December cotton. The trading that transpired after the recent COT report shows that during June 19 and 20, open interest in the December contract declined by only 59 contracts, but December cotton declined 1.96 cents. In other words, the 2.14 cent advance generated an open interest increase of 36,309 contracts while the 1.97 cent decline generated a 59 contract loss of open interest. This tells us that longs are digging in. Although cotton has not yet reversed its short-term buy signal, this could occur on Monday. In any event, we think the bull move is over for now, and that more liquidation is ahead for December cotton.
By. Garry Stern