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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 May 23rd, 2013

The Memorial Day holiday will be celebrated on Monday May 27, and therefore the report on Friday's market activity will not be available until Tuesday May 28. We will publish the Weekend Wrap as usual.

Crude oil:

July WTI crude oil lost 3 cents on volume of 623,334 contracts. Open interest declined by 6,198 contracts, which relative to volume is approximately 50% less than average. Although, crude oil remains on a short and intermediate term buy signal, we continue to dislike the way it trades.  With the fundamentals being what they are and a bearish zeitgeist hanging over the entire commodity complex, we think it makes sense to write out of the money calls in WTI on a rally of a $1.00-2.00. If concerned with geopolitical risk, this can be coupled with buying calls that are farther out of the money to mitigate any upside risk.

Brent crude:

July Brent crude lost 16 cents on volume of 536,225 contracts. Open interest declined by 8,612 contracts, which relative to volume is approximately 35% less than average. Brent remains on a short and intermediate term sell signal, which is in our view the canary in the coal mine for the entire petroleum complex. Stand aside.

Heating oil:

July heating oil lost 1.22 cents on heavy volume of 170,535 contracts. Interestingly, volume increased approximately 14,000 contracts from May 22 when heating oil declined by a much larger number (5.06 cents) and open interest increased by 2,315 contracts. On May 23, open interest declined by a hefty 6,093 contracts, which relative to volume is approximately 40% above average, meaning that liquidation was unusually heavy on the decline. Perhaps much of this can be attributed to the fact that July heating oil made a low of 2.8159, which is its lowest price since May 15. It appears that heating oil may be getting close to generating a short-term sell signal, which would reverse the short-term buy signal generated on May 7. Stand aside.

Gasoline:

July gasoline gained .0059 on volume of 144,131 contracts. Open interest declined by 3,363 contracts, which relative to volume is approximately 10% below average. For the past 2 sessions, gasoline has been the relative strength outperformer, and remains on a short-term buy signal, but an intermediate term sell signal. Although we think gasoline can move higher due to the seasonal factors, we think that advances will be muted. We advise a stand aside posture.

Natural gas:

On May 23, July natural gas generated a short-term buy signal, which reverses the short-term sell signal generated on May 3.

July natural gas gained 7.4 cents on relatively heavy volume of 415,429 contracts. Volume was the highest since May 2 when 550,296 contracts are traded and July natural gas closed at $4.077. On May 23, open interest increased by 11,413 contracts, which relative to volume is average. We are bullish natural gas and think the market will continue to rally, especially if temperatures in the Midwest and south begin to rise at a higher than normal rate. During the next month or two, we think natural gas can trade between $4.40-4.80. Bullish positions can be initiated on any setback, and usually after the generation of a buy signal, the market does tend to pullback for 1-2 and possibly 3 days. In this case however, the pullback may not be much considering that the 50 day moving average on the July chart is $4.15. Options on futures are a terrific way to trade this market and we recommend them. Also, for those who do not trade futures, the ETF UNG is a terrific way to trade natural gas because it accurately tracks the movement of the futures contract.

Soybeans:

July soybeans gained 5.25 cents on heavy volume of 307,139 contracts. Volume was the highest since March 28 when 310,890 contracts were traded and July soybeans closed at $13.85 1/2. On May 23, open interest increased by 3,772 contracts, which relative to volume is approximately 50% less than average. The July contract accounted for loss of 2,919. The market rocketed to a new high of $15.46 3/4, which is the highest price for July soybeans since September 2012. After reaching this, the market promptly sold off and managed to close higher on the day. Market action on May 23 has all the looks of a blow off top, and adding to this scenario is that soybeans are currently trading 24.50 lower. We have been cautioning clients they should not initiate new long positions, and the action on May 23 and 24 is the reason why. Trading before a long holiday weekend often is distorted due to low volume.

Soybean meal:

July soybean meal lost $3.60 on volume of 122,274 contracts. Volume was the highest since February 22 when 125,673 contracts were traded and July soybean meal closed at $420.30. On May 23, open interest increased by 4,920 contracts, which relative to volume is approximately 55% above average. The July contract accounted for loss of 593 of open interest. July soybean meal made a new high for the move at 451.40, which is the highest level since mid-September 2012. Like soybeans, it looks like soybean meal had a blow off top, and we continue to advise a stand aside position with respect to initiating new long positions.

Corn:

July corn gained 3.50 cents on volume of 226,705 contracts. Open interest increased by 4,513 contracts, which relative to volume is approximately 25% less than average. The July contract showed an increase of 1,951. The market made a high of $6.69 3/4, which is a shade above the high of 6.69 made on April 30. On May 23, July corn closed at $6.62, which is a one half cent above the May 3 close of 6.61 1/2. Although continued upside in corn is possible, there are going to be reluctant buyers at the upper end of the trading range. We continue to think that writing out of the money calls in the July option make sense.

Wheat:

July wheat gained 14.75 cents on fairly heavy volume of 115,144 contracts. Volume was the highest since April 30 when 147,140 contracts are traded and July wheat closed at $7.31. On May 23, open interest increased by 853 contracts, which relative to volume is approximately 65% less than average. Like corn, we continue to advise writing out of the money calls in the July option.

Cotton:

On May 23, July cotton generated an intermediate term sell signal, and remains on a short-term sell signal as well.

July cotton lost 1.64 cents on very heavy volume of 34,568 contracts. Volume was the highest since April 16 when 36,897 contracts were traded. On May 23, open interest declined by 3,426 contracts, which relative to volume is approximately 300% above average, meaning that liquidation was extraordinarily heavy. We have been waiting to see a major open interest decline because we know based upon the most recent COT report released on May 17, that managed money was long at a stratospheric level. As this report is being compiled on May 24, July cotton is trading down 51 points and has made a new low for the move at 81.03. At this juncture, we think it is likely that cotton will move to the 80.00 level.  However, the market is oversold and due for a rally. Those who initiated bearish positions when we made the recommendation in the May 19 Weekend Wrap should continue to hold them.

Australian dollar:

The Australian dollar gained 52 points on extremely heavy volume of 210,054 contracts. Volume was the highest since April 15 when 212,824 contracts were traded and the Australian dollar closed at 1.0271. The Australian dollar made a new low for the move at 95.78, which is its lowest price since June of 2012. The market is massively oversold and is due for a rally, however the short call positions recommended on April 29 and 30 should continue to be held.

Euro:

The June euro gained 89 points on volume of 326,905 contracts. Open interest declined by 3,490 contracts, which relative to volume is approximately 50% less than average. We continue to recommend initiating bearish positions in the euro on a rally to at least 1.2950. Use 1.3000-1.3032 as exit points for bearish positions.

S&P 500 E mini:

The S&P 500 E mini lost 5.50 points on volume of 2,703,658 contracts. Open interest increased by 43,251 contracts, which relative to volume is approximately 35% less than average. Initiate or maintain long put protection, which is especially important for investors with long positions in equities.

By. Gary Stern




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