Crude oil:
June WTI crude oil gained 84 cents on light volume of 574,864 contracts. Volume was the lowest since April 29 when 466,236 contracts were traded and June gasoline closed at $94.50. On May 17, open interest declined by 4,153 contracts, which relative to volume is approximately 45% less than average. Since the June contract is about to go off the board, open interest in this month declined by 26,537 contracts. As this report is being compiled, crude oil is trading 89 cents higher and has made a new high for the move at $97.35.
With WTI crude, heating oil and now gasoline on short-term buy signals, and Brent crude about to generate one,, we want to offer a word of caution on the long side. With very burdensome crude oil stocks according to the latest Energy Information Administration report, and the lackluster demand for gasoline, we cannot help but think that much of this is due to the uncontrollable boom in the stock market. Massive quantitative easing and money printing around the world is flooding markets with liquidity. The rally in copper along with strong petroleum markets is indicating that we are about to enter a major economic boom, or that the flood of liquidity throughout the world is seeping into the commodity space. From a global fundamental point of view, demand for petroleum products certainly is not robust. Speculators should take this into account when contemplating long positions. If stock markets swoon, so will the petroleum complex. We advise a stand aside position in the petroleum complex.
Brent crude:
July Brent crude gained 86 cents on low volume of 540,779 contracts volume was the lowest since May 6 when 388,255 contracts were traded. On May 17, open interest declined by 11,970 contracts, which relative to volume is approximately 10% less than average. Despite the higher move in Brent on May 20, it will not generate a short-term buy signal.
Heating oil:
June heating oil gained 2.83 cents on volume of 122,905 contracts. Total open interest declined by 4,220, which relative to volume is approximately 40% above average, meaning that liquidation was fairly heavy. However, the June contract, which is close to expiration lost 4,709 of open interest. Heating oil is bouncing up against resistance at the $2.95 level, and although its relative strength is superior to gasoline, we recommend that clients stand aside.
Gasoline:
On May 17, June gasoline generated a short-term buy signal, but remains on an intermediate term sell signal.
June gasoline gained 2.47 cents on volume of 128,956 contracts. Total open interest increased by 3,542, which relative to volume is average. Making the total open interest increase much more impressive is that the June contract lost 7,024 of open interest. For the past several days, price and open interest has been acting in a bullish congruent fashion, but the big surprise is that gasoline has been underperforming heating oil and WTI. To put this in perspective, consider that June heating oil generated a short-term buy signal on May, 7 and June gasoline generated a short-term buy signal several sessions later. We recommend that clients stand aside.
Natural gas:
June natural gas advanced 12.3 cents on volume of 347,414 contracts. Volume on May 17 was approximately 49,000 contracts fewer than May 16 when natural gas declined by 13.8 cents and open interest declined by 16,229 contracts. In other words, volume on the downside was greater than volume on the upside even though the magnitude of the advance and decline was nearly equal. Combine this with an open interest decline of 8,103 contracts on May 17, which relative to volume is 10% below average, and it is clear that upside is limited at this juncture. As this report is being compiled on May 20, June natural gas is trading 5.6 cents higher on very low volume. Natural gas remains on a short-term sell signal, but an intermediate term buy signal. Stand aside.
Soybeans:
July soybeans gained 21 cents on heavier than normal volume of 175,197 contracts. Volume was the highest since April 29 when 210,651 contracts were traded and July soybeans closed at $14.08 3/4. On May 17, total open interest increased by 2,540 contracts, which relative to volume is approximately 40% below average. Interestingly, the old crop July contract lost 1,674 of open interest and the new crop gained 2,251 of open interest. The November contract gained 10.75 cents versus the July contract gaining 21 cents. Although volume on the advance was impressive, the schizophrenic open interest action among key delivery months is unusual. As this report is being compiled on May 20, July soybeans are trading 2.25 cents lower after making a new high for the move at $14.60. This is the highest price for July soybeans since March 8 when beans reached 14.63 1/2. The market is overstretched at current prices, and is trading at the high-end of 2013 prices. As stated in previous reports, we believe soybeans would be moving higher after generating a short-term buy signal on May 9. However, bulls should not allow themselves to be over enthusiastic at current levels.
Soybean meal:
July soybean meal gained $10.20 on volume of 78,886 contracts. Open interest increased by a massive 4,106 contracts, which relative to volume is approximately 100% above average meaning that new longs were entering the market at an aggressive pace and moving prices significantly higher. In contrast to July soybeans, the July contract of soybean meal added open interest of 1,504 contracts. As this report is being compiled on May 20, July soybeans are trading $2.40 higher. On May 9, July soybean meal generated a short-term buy signal, and at current levels the market is overstretched and due for correction. Although soybean meal has been the laggard in the recent past, it has gained considerable momentum compared to soybeans.
Corn:
July corn gained 11.25 cents on volume of 231,931 contracts. Volume was the highest since May 13 when 307,826 contracts are traded and open interest increased by 5,433 contracts while July corn advanced 19.25 cents. On May 17, open interest increased by 4,399 contracts, which relative to volume is approximately 25% less than average. We continue to advocate writing out of the money call options in the July contract, which expires on June 21. A more conservative way to trade corn options is to initiate a bear call spread. The crop progress report will be released after the close on Monday and is likely to move the market sharply if there is a surprise in the report.
Wheat:
On May 17, July wheat generated a short-term sell signal, which reverses the short-term buy signal generated on May 2. Wheat remains on an intermediate term sell signal.
July wheat lost 4.50 cents on volume of 66,520 contracts. Open interest declined by 473 contracts, which relative to volume is approximately 45% less than average. Like corn, we advise clients to short out of the money calls on any rally.
Coffee:
July coffee lost 2.95 cents on volume of 16,931 contracts. Open interest increased on the decline by 663 contracts, which relative to volume is approximately 55% above average. On May 16, we reversed our bullish recommendation and advised clients to liquidate bullish positions and move to the sidelines. Furthermore, we stated that coffee would generate a short-term sell signal if the high of the day was below $1.3885. As this report is being compiled, the high of the day has been 1.3690, which is Friday's closing price. Stand aside.
From the May 16 report:
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"We do not like the way coffee is trading and are reversing our buy recommendation, and now advise clients to move to the sidelines. For those who are long call options, we recommend these be liquidated. For coffee to generate a short-term sell signal, the high of the day must be below $1.3885."
Australian dollar:
The Australian dollar lost 97 points on heavy volume of 149,998 contracts. Open interest increased by 3,648 contracts, which relative to volume is average. The Australian dollar generated a short and intermediate term sell signal on April 23. On April 29 and 30, we recommended that clients write out of the money calls. This trade continues to work well and positions should be held.
Euro:
The June euro lost 78 points on volume of 266,897 contracts. Open interest increased massively by 15,955 contracts, which relative to volume is approximately 140% above average meaning that new shorts were heavily entering the market and driving prices lower. On May 15, the June euro generated a short-term sell signal and remains on an intermediate term sell signal. Wait for a rally to at least 1.2950-1.300 before initiating bearish positions.
S&P 500 E mini:
The S&P 500 E mini gained 15.00 points on volume of 1,941,406 contracts. Open interest declined by 49,526 contracts, which relative to volume is approximately average, but a large number nonetheless. Our view of the stock market is that it clearly is in a bubble, and the risk remains on the downside. Additionally, we are seeing bubble like characteristics in the real estate market and global art markets. The Federal Reserve has done an excellent job of raising asset prices, but this is not filtered down to the general economy and has not boosted employment significantly. We think this disconnect will snap with either the general economy improving rapidly, or the stock market declining significantly. We think the latter, rather than the former will be the end result. Initiate, or maintain long put protection.
By. Gary Stern
