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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 28th, 2013

Crude oil:

July WTI crude oil gained 86 cents on volume of 494,101 contracts. Open interest increased by a minuscule 3,110 contracts, which relative to volume is approximately 60% less than average. From May 20 through May 28, July crude oil has fallen $1.14 while open interest has declined 4,114. This is congruent price and open interest action. It appears that we have received clarification on the direction of Brent on May 29 since it has not been able to exhibit follow-through from its performance on May 28. As this report is being compiled, WTI is trading $1.79 lower and has made a low of $92.87. The contradiction between the lackluster performance of WTI versus the possibility of Brent crude generating a short-term buy signal was the reason we advised a stand aside position in WTI.

From the May 24 report:

"Although crude oil remains on a short and intermediate term buy signal, it looks top-heavy and unable to sustain much of a rally. On the other hand, it appears that Brent crude may generate a short-term buy signal on May 29 or 30. Conceivably, the spread between WTI and Brent may be reversing. In short, it may be wise to stand aside in WTI until we get more clarification on the movement of Brent."

Brent crude oil:

July Brent crude oil gained $1.61 on low volume of 454,526 contracts. Open interest declined by 486 contracts, which relative to volume is minuscule and dramatically below average. The volume and open interest action on May 28 really tell the story of the inherent weakness in Brent. In one of the largest advances in quite a while, open interest declined on low volume, which means that longs and shorts were liquidating on the large advance. Brent remains on a short and intermediate term sell signal. Stand aside.

Heating oil:

July heating oil gained 4.96 cents on volume of 117,469 contracts. Open interest declined by 3,657 contracts, which relative to volume is approximately 20% above average. The June contract, which is about to expire accounted for loss of 5,743 of open interest. Heating oil remains on a short-term buy signal, but an intermediate term sell signal, although it appears that the buy signal will be reversed soon. Stand aside.

Gasoline:

July gasoline gained 1.73 cents on volume of 147,863 contracts. Open interest declined by 2,447 contracts, which relative to volume is approximately 35% less than average. The June contract accounted for loss of 9,393 of open interest. The market continues to look terrible and we see no reason to be involved in gasoline.

Natural gas:

July natural gas lost 6 cents on volume of 345,645 contracts. Open interest declined by 8,858 contracts, which relative to volume is  average. The June contract accounted for loss of 15,509 of open interest. As this report is being compiled on May 29, natural gas has made a low of 4.118, but has recovered. As the extract from the May 24 report indicates, we saw the possibility of natural gas pulling back to the $4.12 level. Additionally May 29 is the 3rd day of the pullback, therefore the $4.11 area should remain as solid support. We think that natural gas is a terrific buy at current levels, and as an alternative, which we advised on May 24, speculators should consider writing out of the money puts in the May 2014 contract. Use $4.11 for sell stop placement.

From the May 24 report:

As is usually the case after the generation of a buy signal, the market tends to pullback for 1-2 and possibly 3 days. As this report is being compiled, natural gas has pulled back 6.1 cents and has made a low at $4.17, which is slightly above the 50 day moving average. In short, the market has had a 2 day pullback and although we think it is unlikely, natural gas could have a setback to the $4.12 level. We see this as a buying opportunity, and as an alternative suggest writing out of the money puts in the May 2014 contract. This contract is trading for approximately the same price as the current July contract and is likely to have less of the setback than nearby months and out of the money put premiums are attractive.

Soybeans:

July soybeans gained 33 cents on volume of 227,113 contracts. Volume increased approximately 30,000 contracts from May 24 when soybeans lost 23.25 cents and open interest declined by 517 contracts. On May 28, open interest declined by 7,398 contracts, which relative to volume is approximately 25% above average. The July contract accounted for loss of 10,044 of open interest. From a price and open interest point of view, the market action with negative. On a rally of this magnitude, if soybeans were in a healthy market environment open interest should have increased. Another concern is that ever since soybeans made its high of $15.46 3/4 on May 23, the daily highs have been successively lower. Although the uptrend appears to be intact, it is going to be a rocky road going forward. Soybeans remain on a short and intermediate term buy signal.

Soybean meal:

July soybean meal gained $14.10 on heavier than normal volume of 87,265 contracts. Volume increased approximately 12,000 contracts from May 24 when soybean meal lost $8.80 and open interest increased by 234 contracts. On May 28, open interest increased by 442 contracts, which relative to volume is approximately 75% below average. Note the difference in the open interest action between soybeans and soybean meal on yesterday's advance. The demand for soybean meal is robust and exports have been healthy.  In order for soybean meal to continue its advance, it must break above $458.60, which is the May 13 high on the soybean meal continuation chart. This would easily take out the high made on May 23 of $451.40. We much prefer the long side of soybean meal to soybeans. Soybean meal remains on a short and intermediate term buy signal.

Corn:

July corn gained 9.25 cents on volume of 253,252 contracts. Volume was the highest since May 21 when 262,379 contracts were traded and corn lost 9.50 cents while open interest increased 6,384 contracts. On May 28, open interest declined by 1,958 contracts, which relative to volume is approximately 65% less than average. The price and open interest action on May 28 was negative. As this report is being compiled on May 29, July corn is trading 3.25 cents lower. In yesterday's report, we advised speculators to liquidate short call positions in the July option. Our reasoning is that the market is packed with managed money shorts and corn has been bumping up against the $6.69 high, but has pulled back every time. Our concern is that due to short-term tightness, July corn could have a good-sized technical rally, which would blowout speculative shorts. Because we believe this is a likely scenario, we don't think the risk reward on the short call trade makes sense.

Wheat:

July wheat lost 3.75 cents on volume of 97,943 contracts. Open interest declined by 3,620 contracts, which relative to volume is approximately 45% above average, meaning that liquidation was heavy on the rather modest decline. The July contract accounted for loss of 4,001 of open interest. As this report is being compiled on May 29, wheat is trading 9.75 cents higher. As we stated in yesterday's report, any advance in wheat should find resistance at $7.28. Writing calls in the July option make sense, but keep in mind if corn begins to rally, wheat will likely follow to one degree or another.

Cotton:

July cotton lost 7 points on volume of 23,428 contracts. Open interest increased by a massive 1,370 contracts, which relative to volume is approximately 120% above average, meaning that new shorts were entering the market and driving prices somewhat lower. On May 28, cotton made a high of 82.93 in the evening session, but could not hold the gains and closed fractionally lower. As this report is being compiled, July cotton is trading 61 points lower. Our downside target is 80 cents, and looks like this will be achieved in short order. Bearish positions that were initiated based upon our May 19 recommendation should continue to be held. Do not initiate new bearish positions at current levels.

By. Garry Stern




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